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: 4/30/07
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ITEM 1. REPORTS TO STOCKHOLDERS.
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APRIL 30, 2007
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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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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 ...................................................... 20
Notes to Financial Statements ............................................. 24
Report of Independent Registered Public Accounting Firm ................... 33
Tax Designation ........................................................... 34
Meeting of Shareholders ................................................... 35
Board Members and Officers ................................................ 38
Shareholder Information ................................................... 43
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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 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, 2007.
PERFORMANCE OVERVIEW
Franklin Real Estate Securities Fund - Class A posted a +14.97% cumulative total
return for the year under review. The Fund underperformed its narrow benchmark,
the Dow Jones Wilshire Real Estate Securities Index, which returned +26.66%,
while performing comparably to its broad benchmark, the Standard & Poor's 500
Index (S&P 500), which returned +15.23%. 2 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, 2007, the U.S. economy advanced at a
moderate but slowing pace. Although gross domestic product (GDP) grew 3.3% in
2006 on strong domestic demand and a healthy increase in exports,
1. REITs are real estate investment trust companies, usually with publicly
traded stock, that manage a portfolio of income-producing real estate
properties such as apartments, hotels, industrial properties, office
buildings or shopping centers. The Fund predominantly invests in "equity"
REITs, which also take ownership positions in real estate. Shareholders of
equity REITs generally receive income from rents received and receive
capital gains when properties are sold at a profit. REITs are generally
operated by experienced property management teams and typically
concentrate on a specific geographic region or 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.
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
the U.S. entered 2007 with a record current account deficit. Corporate profits
and government spending generally remained robust, but manufacturing activity
indicated a downturn. The struggling housing market grew more fragile with the
abrupt unraveling of the subprime mortgage market. This exacerbated already weak
housing prices and an inventory glut in most of the nation's residential real
estate markets. The economy slowed toward period-end, and GDP grew an estimated
annualized 0.6% in first quarter 2007.
The unemployment rate decreased from 4.7% to 4.5%, though overall job growth
slowed in the face of rising labor costs. 3 In the latter half of the reporting
period, jobs in vehicle manufacturing and housing-related industries experienced
declines stemming from reduced consumer demand. Even though tight labor markets
and the associated wage income growth supported consumer spending, consumer
confidence waned toward period-end, and large purchases, including those for
vehicles and homes, dropped substantially. After a welcome drop in energy costs
during the latter half of 2006, elevated gasoline prices returned in first
quarter 2007 as oil hit a six-month high in response to tight supply and high
demand, refinery maintenance issues, and ongoing geopolitical tensions in the
Middle East and Africa. Overall, the core Consumer Price Index (CPI) rose 2.3%
for the 12 months ended April 30, 2007, which was higher than the 2.2% 10-year
average. 4
At period-end, the Federal Reserve Board (Fed) was still more concerned with
relatively high inflation than an economic slowdown. The Fed raised the federal
funds target rate from 4.75% at the beginning of the period to 5.25% in June
2006, where it remained for the rest of the reporting period. In March, the Fed
indicated a change in its long-held tightening bias, easing the near-term
pressure for potential rate hikes.
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the year under review, but
was essentially flat during the first quarter of 2007 after global stock market
sell-offs in late February and mid-March. However, markets rebounded late in the
period amid generally strong corporate earnings reports. Overall, the blue chip
stocks of the Dow Jones Industrial Average posted a 12-month total return of
+17.58%, and the broader S&P 500 returned +15.23%, while the technology-heavy
NASDAQ Composite Index returned +9.51%. 5 Utilities, telecommunications and
health care stocks performed particularly well.
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
5. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 2 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 the most to Fund
performance included Boardwalk REIT, Forest City Enterprises and The Macerich
Company. Boardwalk owns and operates more than 250 multi-family rental
communities, concentrated in the Canadian provinces of Alberta, Saskatchewan,
Ontario and Quebec. Robust rent gains in Alberta drove the stock's strong
performance, and Boardwalk continued to benefit from strong spending in the
energy sector, as many of the company's apartment properties are near oil sands.
As a premier developer, Forest City Enterprises owns and operates mostly
commercial properties such as regional malls, specialty retail centers, office
buildings, hotels and mixed-use projects in urban markets across the country.
The company's large development projects and higher values in its real estate
portfolio helped its stock performance.
The Macerich Company acquires, redevelops and manages more than 70 shopping
malls and strip centers concentrated in Arizona and California. Its stock
benefited from sales and cash flow growth driven by many specialty retailer
tenants.
By contrast, the Fund had some disappointments during the fiscal year, mostly in
the homebuilding industry. Faced with weakened residential housing demand and
inventory oversupply, homebuilders suffered as home prices and earnings
expectations dropped. Significant detractors included Meritage Homes, Hovnanian
Enterprises and KB Home. Meritage Homes builds houses in Arizona, California,
Colorado, Florida, Nevada and Texas, whereas Hovnanian Enterprises operates
mainly along the eastern seaboard, California and Texas. KB Home is one of the
country's largest homebuilders and operates in many states. Consistent with our
strategy, we continued to hold these positions as we remained confident in these
companies' long-term fundamentals.
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Real Estate Investment Trusts 64.3%
Homebuilding 22.1%
Real Estate Development 5.8%
Hotels, Resorts & Cruise Lines 2.7%
Financial Conglomerates 1.0%
Finance, Rental & Leasing 0.9%
Short-Term Investments & Other Net Assets 3.2%
Annual Report | 5
TOP 10 HOLDINGS
4/30/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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M.D.C. Holdings Inc. 5.2%
HOMEBUILDING
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Forest City Enterprises Inc., A 4.4%
REAL ESTATE DEVELOPMENT
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The Macerich Co. 4.3%
REAL ESTATE INVESTMENT TRUSTS
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ProLogis 3.6%
REAL ESTATE INVESTMENT TRUSTS
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iStar Financial Inc. 3.4%
REAL ESTATE INVESTMENT TRUSTS
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Public Storage Inc. 3.3%
REAL ESTATE INVESTMENT TRUSTS
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Simon Property Group Inc. 3.2%
REAL ESTATE INVESTMENT TRUSTS
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Vornado Realty Trust 2.8%
REAL ESTATE INVESTMENT TRUSTS
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D.R. Horton Inc. 2.7%
HOMEBUILDING
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Lennar Corp., A 2.6%
HOMEBUILDING
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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, 2007, 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 4/30/07
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 4/30/07 4/30/06
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Net Asset Value (NAV) -$0.76 $ 26.19 $ 26.95
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DISTRIBUTIONS (5/1/06-4/30/07)
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Dividend Income $0.4201
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Short-Term Capital Gain $0.1072
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Long-Term Capital Gain $4.2739
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TOTAL $4.8012
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CLASS B (SYMBOL: FBREX) CHANGE 4/30/07 4/30/06
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Net Asset Value (NAV) -$0.82 $ 25.80 $ 26.62
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DISTRIBUTIONS (5/1/06-4/30/07)
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Dividend Income $0.2300
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Short-Term Capital Gain $0.1072
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Long-Term Capital Gain $4.2739
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TOTAL $4.6111
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CLASS C (SYMBOL: FRRSX) CHANGE 4/30/07 4/30/06
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Net Asset Value (NAV) -$0.84 $ 25.66 $ 26.50
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DISTRIBUTIONS (5/1/06-4/30/07)
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Dividend Income $0.2327
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Short-Term Capital Gain $0.1072
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Long-Term Capital Gain $4.2739
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TOTAL $4.6138
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ADVISOR CLASS (SYMBOL: FRLAX) CHANGE 4/30/07 4/30/06
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Net Asset Value (NAV) -$0.74 $ 26.32 $ 27.06
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DISTRIBUTIONS (5/1/06-4/30/07)
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Dividend Income $0.4838
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Short-Term Capital Gain $0.1072
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Long-Term Capital Gain $4.2739
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TOTAL $4.8649
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Annual Report | 7
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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. 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 +14.97% +129.54% +242.79%
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Average Annual Total Return 2 +8.38% +16.69% +12.44%
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Value of $10,000 Investment 3 $ 10,838 $ 21,638 $ 32,312
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Avg. Ann. Total Return (3/31/07) 4 +3.15% +16.58% +11.95%
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Total Annual Operating Expenses 5 0.92%
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CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return 1 +14.17% +121.20% +216.37%
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Average Annual Total Return 2 +10.29% +16.99% +14.83%
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Value of $10,000 Investment 3 $ 11,029 $ 21,920 $ 31,637
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Avg. Ann. Total Return (3/31/07) 4 +4.97% +16.90% +14.74%
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Total Annual Operating Expenses 5 1.67%
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CLASS C 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +14.16% +121.19% +218.67%
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Average Annual Total Return 2 +13.20% +17.21% +12.29%
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Value of $10,000 Investment 3 $ 11,320 $ 22,119 $ 31,867
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Avg. Ann. Total Return (3/31/07) 4 +7.75% +17.11% +11.80%
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Total Annual Operating Expenses 5 1.66%
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ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +15.29% +132.45% +252.06%
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Average Annual Total Return 2 +15.29% +18.38% +13.41%
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Value of $10,000 Investment 3 $ 11,529 $ 23,245 $ 35,206
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Avg. Ann. Total Return (3/31/07) 4 +9.74% +18.28% +12.92%
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Total Annual Operating Expenses 5 0.67%
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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 (5/1/97-4/30/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Real
Estate Securities Dow Jones Wilshire Real
Date Fund S&P 500 6 Estate Securities Index 6
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5/1/1997 $ 9,426 $10,000 $10,000
5/31/1997 $ 9,762 $10,608 $10,298
6/30/1997 $10,195 $11,083 $10,809
7/31/1997 $10,458 $11,965 $11,164
8/31/1997 $10,421 $11,295 $11,082
9/30/1997 $11,368 $11,913 $12,174
10/31/1997 $10,971 $11,516 $11,657
11/30/1997 $11,197 $12,048 $11,891
12/31/1997 $11,390 $12,255 $12,157
1/31/1998 $11,270 $12,391 $11,985
2/28/1998 $11,176 $13,284 $11,832
3/31/1998 $11,434 $13,963 $12,065
4/30/1998 $11,119 $14,104 $11,685
5/31/1998 $11,019 $13,862 $11,573
6/30/1998 $10,899 $14,424 $11,511
7/31/1998 $10,175 $14,271 $10,710
8/31/1998 $ 9,180 $12,210 $ 9,597
9/30/1998 $ 9,665 $12,992 $10,135
10/31/1998 $ 9,602 $14,048 $ 9,996
11/30/1998 $ 9,722 $14,899 $10,184
12/31/1998 $ 9,641 $15,757 $10,038
1/31/1999 $ 9,331 $16,416 $ 9,821
2/28/1999 $ 9,217 $15,906 $ 9,743
3/31/1999 $ 9,203 $16,542 $ 9,691
4/30/1999 $10,220 $17,183 $10,723
5/31/1999 $10,348 $16,777 $10,905
6/30/1999 $10,179 $17,708 $10,720
7/31/1999 $ 9,715 $17,156 $10,310
8/31/1999 $ 9,540 $17,071 $10,156
9/30/1999 $ 9,163 $16,603 $ 9,698
10/31/1999 $ 8,954 $17,654 $ 9,517
11/30/1999 $ 8,752 $18,012 $ 9,368
12/31/1999 $ 9,098 $19,073 $ 9,720
1/31/2000 $ 9,084 $18,114 $ 9,760
2/29/2000 $ 8,891 $17,772 $ 9,573
3/31/2000 $ 9,328 $19,509 $ 9,992
4/30/2000 $ 9,937 $18,923 $10,704
5/31/2000 $10,159 $18,535 $10,832
6/30/2000 $10,648 $18,992 $11,197
7/31/2000 $11,570 $18,696 $12,202
8/31/2000 $11,178 $19,856 $11,763
9/30/2000 $11,485 $18,808 $12,145
10/31/2000 $11,044 $18,729 $11,617
11/30/2000 $11,139 $17,253 $11,879
12/31/2000 $11,904 $17,338 $12,705
1/31/2001 $12,143 $17,952 $12,831
2/28/2001 $11,934 $16,317 $12,564
3/31/2001 $11,863 $15,284 $12,573
4/30/2001 $12,162 $16,470 $12,874
5/31/2001 $12,102 $16,581 $13,234
6/30/2001 $12,699 $16,177 $13,944
7/31/2001 $12,382 $16,018 $13,666
8/31/2001 $12,654 $15,016 $14,143
9/30/2001 $11,994 $13,804 $13,304
10/31/2001 $11,550 $14,067 $12,807
11/30/2001 $12,399 $15,146 $13,637
12/31/2001 $12,813 $15,279 $14,032
1/31/2002 $12,805 $15,056 $14,092
2/28/2002 $13,108 $14,765 $14,415
3/31/2002 $13,890 $15,321 $15,303
4/30/2002 $14,077 $14,392 $15,396
5/31/2002 $14,232 $14,287 $15,552
6/30/2002 $14,490 $13,269 $15,871
7/31/2002 $13,672 $12,235 $14,888
8/31/2002 $13,664 $12,315 $14,894
9/30/2002 $13,040 $10,978 $14,236
10/31/2002 $12,452 $11,944 $13,528
11/30/2002 $12,889 $12,646 $14,198
12/31/2002 $13,031 $11,903 $14,405
1/31/2003 $12,683 $11,592 $13,984
2/28/2003 $12,909 $11,418 $14,190
3/31/2003 $13,149 $11,528 $14,550
4/30/2003 $13,723 $12,478 $15,163
5/31/2003 $14,653 $13,134 $16,032
6/30/2003 $15,155 $13,302 $16,345
7/31/2003 $15,742 $13,537 $17,293
8/31/2003 $15,865 $13,800 $17,479
9/30/2003 $16,348 $13,654 $18,068
10/31/2003 $16,669 $14,426 $18,343
11/30/2003 $17,417 $14,553 $19,138
12/31/2003 $17,935 $15,316 $19,746
1/31/2004 $18,603 $15,597 $20,482
2/29/2004 $19,120 $15,813 $20,903
3/31/2004 $20,050 $15,575 $22,138
4/30/2004 $17,213 $15,331 $19,065
5/31/2004 $18,273 $15,541 $20,510
6/30/2004 $18,850 $15,843 $21,120
7/31/2004 $19,044 $15,318 $21,246
8/31/2004 $20,500 $15,380 $22,902
9/30/2004 $20,650 $15,546 $22,857
10/31/2004 $21,690 $15,784 $24,091
11/30/2004 $22,544 $16,422 $25,229
12/31/2004 $23,698 $16,981 $26,620
1/31/2005 $22,312 $16,567 $24,436
2/28/2005 $22,879 $16,916 $25,181
3/31/2005 $22,546 $16,616 $24,909
4/30/2005 $23,421 $16,301 $26,126
5/31/2005 $24,196 $16,820 $26,986
6/30/2005 $25,409 $16,844 $28,428
7/31/2005 $26,640 $17,470 $30,560
8/31/2005 $25,988 $17,311 $29,390
9/30/2005 $26,025 $17,451 $29,496
10/31/2005 $25,607 $17,160 $28,932
11/30/2005 $26,735 $17,808 $30,240
12/31/2005 $26,832 $17,814 $30,364
1/31/2006 $28,292 $18,286 $32,514
2/28/2006 $28,365 $18,335 $33,226
3/31/2006 $28,990 $18,564 $35,043
4/30/2006 $28,104 $18,813 $33,733
5/31/2006 $26,905 $18,272 $32,731
6/30/2006 $27,473 $18,296 $34,636
7/31/2006 $27,327 $18,409 $35,876
8/31/2006 $28,417 $18,846 $37,124
9/30/2006 $29,064 $19,332 $37,822
10/31/2006 $30,589 $19,961 $40,216
11/30/2006 $32,587 $20,340 $42,179
12/31/2006 $32,542 $20,626 $41,251
1/31/2007 $34,106 $20,937 $45,013
2/28/2007 $33,219 $20,529 $43,978
3/31/2007 $31,732 $20,758 $42,733
4/30/2007 $32,312 $21,677 $42,725
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS A 4/30/07
- --------------------------------------------
1-Year +8.38%
- --------------------------------------------
5-Year +16.69%
- --------------------------------------------
10-Year +12.44%
- --------------------------------------------
CLASS B (1/1/99-4/30/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Real
Estate Securities Dow Jones Wilshire Real
Date Fund 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
5/31/2006 $26,460 $11,596 $32,606
6/30/2006 $27,000 $11,611 $34,504
7/31/2006 $26,844 $11,683 $35,739
8/31/2006 $27,898 $11,960 $36,983
9/30/2006 $28,509 $12,268 $37,678
10/31/2006 $29,992 $12,668 $40,063
11/30/2006 $31,934 $12,909 $42,018
12/31/2006 $31,863 $13,090 $41,094
1/31/2007 $33,396 $13,287 $44,842
2/28/2007 $32,527 $13,028 $43,810
3/31/2007 $31,070 $13,174 $42,571
4/30/2007 $31,637 $13,757 $42,562
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS B 4/30/07
- --------------------------------------------
1-Year +10.29%
- --------------------------------------------
5-Year +16.99%
- --------------------------------------------
Since Inception (1/1/99) +14.83%
- --------------------------------------------
Annual Report | 9
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS C 4/30/07
- --------------------------------------------
1-Year +13.20%
- --------------------------------------------
5-Year +17.21%
- --------------------------------------------
10-Year +12.29%
- --------------------------------------------
CLASS C (5/1/97-4/30/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Real
Estate Securities Dow Jones Wilshire Real
Date Fund S&P 500 6 Estate Securities Index 6
- --------------------------------------------------------------------------
5/1/1997 $10,000 $10,000 $10,000
5/31/1997 $10,354 $10,608 $10,298
6/30/1997 $10,806 $11,083 $10,809
7/31/1997 $11,075 $11,965 $11,164
8/31/1997 $11,029 $11,295 $11,082
9/30/1997 $12,025 $11,913 $12,174
10/31/1997 $11,599 $11,516 $11,657
11/30/1997 $11,828 $12,048 $11,891
12/31/1997 $12,030 $12,255 $12,157
1/31/1998 $11,889 $12,391 $11,985
2/28/1998 $11,788 $13,284 $11,832
3/31/1998 $12,050 $13,963 $12,065
4/30/1998 $11,707 $14,104 $11,685
5/31/1998 $11,599 $13,862 $11,573
6/30/1998 $11,465 $14,424 $11,511
7/31/1998 $10,698 $14,271 $10,710
8/31/1998 $ 9,648 $12,210 $ 9,597
9/30/1998 $10,153 $12,992 $10,135
10/31/1998 $10,079 $14,048 $ 9,996
11/30/1998 $10,193 $14,899 $10,184
12/31/1998 $10,104 $15,757 $10,038
1/31/1999 $ 9,776 $16,416 $ 9,821
2/28/1999 $ 9,647 $15,906 $ 9,743
3/31/1999 $ 9,633 $16,542 $ 9,691
4/30/1999 $10,690 $17,183 $10,723
5/31/1999 $10,818 $16,777 $10,905
6/30/1999 $10,633 $17,708 $10,720
7/31/1999 $10,147 $17,156 $10,310
8/31/1999 $ 9,954 $17,071 $10,156
9/30/1999 $ 9,554 $16,603 $ 9,698
10/31/1999 $ 9,333 $17,654 $ 9,517
11/30/1999 $ 9,119 $18,012 $ 9,368
12/31/1999 $ 9,466 $19,073 $ 9,720
1/31/2000 $ 9,451 $18,114 $ 9,760
2/29/2000 $ 9,242 $17,772 $ 9,573
3/31/2000 $ 9,688 $19,509 $ 9,992
4/30/2000 $10,320 $18,923 $10,704
5/31/2000 $10,538 $18,535 $10,832
6/30/2000 $11,046 $18,992 $11,197
7/31/2000 $11,989 $18,696 $12,202
8/31/2000 $11,579 $19,856 $11,763
9/30/2000 $11,886 $18,808 $12,145
10/31/2000 $11,425 $18,729 $11,617
11/30/2000 $11,517 $17,253 $11,879
12/31/2000 $12,295 $17,338 $12,705
1/31/2001 $12,537 $17,952 $12,831
2/28/2001 $12,318 $16,317 $12,564
3/31/2001 $12,241 $15,284 $12,573
4/30/2001 $12,537 $16,470 $12,874
5/31/2001 $12,467 $16,581 $13,234
6/30/2001 $13,079 $16,177 $13,944
7/31/2001 $12,741 $16,018 $13,666
8/31/2001 $13,008 $15,016 $14,143
9/30/2001 $12,321 $13,804 $13,304
10/31/2001 $11,862 $14,067 $12,807
11/30/2001 $12,726 $15,146 $13,637
12/31/2001 $13,147 $15,279 $14,032
1/31/2002 $13,131 $15,056 $14,092
2/28/2002 $13,429 $14,765 $14,415
3/31/2002 $14,214 $15,321 $15,303
4/30/2002 $14,407 $14,392 $15,396
5/31/2002 $14,552 $14,287 $15,552
6/30/2002 $14,816 $13,269 $15,871
7/31/2002 $13,963 $12,235 $14,888
8/31/2002 $13,947 $12,315 $14,894
9/30/2002 $13,303 $10,978 $14,236
10/31/2002 $12,689 $11,944 $13,528
11/30/2002 $13,131 $12,646 $14,198
12/31/2002 $13,264 $11,903 $14,405
1/31/2003 $12,898 $11,592 $13,984
2/28/2003 $13,131 $11,418 $14,190
3/31/2003 $13,355 $11,528 $14,550
4/30/2003 $13,937 $12,478 $15,163
5/31/2003 $14,875 $13,134 $16,032
6/30/2003 $15,368 $13,302 $16,345
7/31/2003 $15,962 $13,537 $17,293
8/31/2003 $16,079 $13,800 $17,479
9/30/2003 $16,553 $13,654 $18,068
10/31/2003 $16,864 $14,426 $18,343
11/30/2003 $17,614 $14,553 $19,138
12/31/2003 $18,126 $15,316 $19,746
1/31/2004 $18,782 $15,597 $20,482
2/29/2004 $19,293 $15,813 $20,903
3/31/2004 $20,222 $15,575 $22,138
4/30/2004 $17,351 $15,331 $19,065
5/31/2004 $18,407 $15,541 $20,510
6/30/2004 $18,973 $15,843 $21,120
7/31/2004 $19,162 $15,318 $21,246
8/31/2004 $20,610 $15,380 $22,902
9/30/2004 $20,751 $15,546 $22,857
10/31/2004 $21,783 $15,784 $24,091
11/30/2004 $22,625 $16,422 $25,229
12/31/2004 $23,771 $16,981 $26,620
1/31/2005 $22,365 $16,567 $24,436
2/28/2005 $22,922 $16,916 $25,181
3/31/2005 $22,569 $16,616 $24,909
4/30/2005 $23,437 $16,301 $26,126
5/31/2005 $24,195 $16,820 $26,986
6/30/2005 $25,392 $16,844 $28,428
7/31/2005 $26,611 $17,470 $30,560
8/31/2005 $25,942 $17,311 $29,390
9/30/2005 $25,957 $17,451 $29,496
10/31/2005 $25,534 $17,160 $28,932
11/30/2005 $26,637 $17,808 $30,240
12/31/2005 $26,713 $17,814 $30,364
1/31/2006 $28,156 $18,286 $32,514
2/28/2006 $28,209 $18,335 $33,226
3/31/2006 $28,809 $18,564 $35,043
4/30/2006 $27,914 $18,813 $33,733
5/31/2006 $26,702 $18,272 $32,731
6/30/2006 $27,250 $18,296 $34,636
7/31/2006 $27,092 $18,409 $35,876
8/31/2006 $28,160 $18,846 $37,124
9/30/2006 $28,770 $19,332 $37,822
10/31/2006 $30,273 $19,961 $40,216
11/30/2006 $32,232 $20,340 $42,179
12/31/2006 $32,161 $20,626 $41,251
1/31/2007 $33,688 $20,937 $45,013
2/28/2007 $32,794 $20,529 $43,978
3/31/2007 $31,308 $20,758 $42,733
4/30/2007 $31,867 $21,677 $42,725
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
ADVISOR CLASS 4/30/07
- --------------------------------------------
1-Year +15.29%
- --------------------------------------------
5-Year +18.38%
- --------------------------------------------
10-Year +13.41%
- --------------------------------------------
ADVISOR CLASS (5/1/97-4/30/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Franklin Real Estate Dow Jones Wilshire Real
Date Securities Fund S&P 500 6 Estate Securities Index 6
- --------------------------------------------------------------------------
5/1/1997 $10,000 $10,000 $10,000
5/31/1997 $10,362 $10,608 $10,298
6/30/1997 $10,822 $11,083 $10,809
7/31/1997 $11,107 $11,965 $11,164
8/31/1997 $11,068 $11,295 $11,082
9/30/1997 $12,071 $11,913 $12,174
10/31/1997 $11,657 $11,516 $11,657
11/30/1997 $11,903 $12,048 $11,891
12/31/1997 $12,109 $12,255 $12,157
1/31/1998 $11,989 $12,391 $11,985
2/28/1998 $11,889 $13,284 $11,832
3/31/1998 $12,163 $13,963 $12,065
4/30/1998 $11,835 $14,104 $11,685
5/31/1998 $11,728 $13,862 $11,573
6/30/1998 $11,601 $14,424 $11,511
7/31/1998 $10,839 $14,271 $10,710
8/31/1998 $ 9,782 $12,210 $ 9,597
9/30/1998 $10,304 $12,992 $10,135
10/31/1998 $10,230 $14,048 $ 9,996
11/30/1998 $10,364 $14,899 $10,184
12/31/1998 $10,280 $15,757 $10,038
1/31/1999 $ 9,957 $16,416 $ 9,821
2/28/1999 $ 9,835 $15,906 $ 9,743
3/31/1999 $ 9,828 $16,542 $ 9,691
4/30/1999 $10,903 $17,183 $10,723
5/31/1999 $11,047 $16,777 $10,905
6/30/1999 $10,868 $17,708 $10,720
7/31/1999 $10,380 $17,156 $10,310
8/31/1999 $10,194 $17,071 $10,156
9/30/1999 $ 9,792 $16,603 $ 9,698
10/31/1999 $ 9,570 $17,654 $ 9,517
11/30/1999 $ 9,355 $18,012 $ 9,368
12/31/1999 $ 9,726 $19,073 $ 9,720
1/31/2000 $ 9,719 $18,114 $ 9,760
2/29/2000 $ 9,506 $17,772 $ 9,573
3/31/2000 $ 9,976 $19,509 $ 9,992
4/30/2000 $10,634 $18,923 $10,704
5/31/2000 $10,871 $18,535 $10,832
6/30/2000 $11,400 $18,992 $11,197
7/31/2000 $12,385 $18,696 $12,202
8/31/2000 $11,974 $19,856 $11,763
9/30/2000 $12,302 $18,808 $12,145
10/31/2000 $11,831 $18,729 $11,617
11/30/2000 $11,933 $17,253 $11,879
12/31/2000 $12,760 $17,338 $12,705
1/31/2001 $13,016 $17,952 $12,831
2/28/2001 $12,800 $16,317 $12,564
3/31/2001 $12,730 $15,284 $12,573
4/30/2001 $13,050 $16,470 $12,874
5/31/2001 $12,986 $16,581 $13,234
6/30/2001 $13,634 $16,177 $13,944
7/31/2001 $13,294 $16,018 $13,666
8/31/2001 $13,585 $15,016 $14,143
9/30/2001 $12,879 $13,804 $13,304
10/31/2001 $12,412 $14,067 $12,807
11/30/2001 $13,321 $15,146 $13,637
12/31/2001 $13,768 $15,279 $14,032
1/31/2002 $13,768 $15,056 $14,092
2/28/2002 $14,093 $14,765 $14,415
3/31/2002 $14,929 $15,321 $15,303
4/30/2002 $15,146 $14,392 $15,396
5/31/2002 $15,313 $14,287 $15,552
6/30/2002 $15,599 $13,269 $15,871
7/31/2002 $14,712 $12,235 $14,888
8/31/2002 $14,712 $12,315 $14,894
9/30/2002 $14,043 $10,978 $14,236
10/31/2002 $13,411 $11,944 $13,528
11/30/2002 $13,880 $12,646 $14,198
12/31/2002 $14,044 $11,903 $14,405
1/31/2003 $13,661 $11,592 $13,984
2/28/2003 $13,913 $11,418 $14,190
3/31/2003 $14,168 $11,528 $14,550
4/30/2003 $14,803 $12,478 $15,163
5/31/2003 $15,803 $13,134 $16,032
6/30/2003 $16,344 $13,302 $16,345
7/31/2003 $16,985 $13,537 $17,293
8/31/2003 $17,125 $13,800 $17,479
9/30/2003 $17,647 $13,654 $18,068
10/31/2003 $18,001 $14,426 $18,343
11/30/2003 $18,807 $14,553 $19,138
12/31/2003 $19,372 $15,316 $19,746
1/31/2004 $20,100 $15,597 $20,482
2/29/2004 $20,657 $15,813 $20,903
3/31/2004 $21,663 $15,575 $22,138
4/30/2004 $18,604 $15,331 $19,065
5/31/2004 $19,756 $15,541 $20,510
6/30/2004 $20,383 $15,843 $21,120
7/31/2004 $20,601 $15,318 $21,246
8/31/2004 $22,182 $15,380 $22,902
9/30/2004 $22,347 $15,546 $22,857
10/31/2004 $23,479 $15,784 $24,091
11/30/2004 $24,410 $16,422 $25,229
12/31/2004 $25,662 $16,981 $26,620
1/31/2005 $24,165 $16,567 $24,436
2/28/2005 $24,787 $16,916 $25,181
3/31/2005 $24,433 $16,616 $24,909
4/30/2005 $25,388 $16,301 $26,126
5/31/2005 $26,236 $16,820 $26,986
6/30/2005 $27,553 $16,844 $28,428
7/31/2005 $28,894 $17,470 $30,560
8/31/2005 $28,199 $17,311 $29,390
9/30/2005 $28,237 $17,451 $29,496
10/31/2005 $27,794 $17,160 $28,932
11/30/2005 $29,015 $17,808 $30,240
12/31/2005 $29,126 $17,814 $30,364
1/31/2006 $30,728 $18,286 $32,514
2/28/2006 $30,807 $18,335 $33,226
3/31/2006 $31,495 $18,564 $35,043
4/30/2006 $30,536 $18,813 $33,733
5/31/2006 $29,238 $18,272 $32,731
6/30/2006 $29,856 $18,296 $34,636
7/31/2006 $29,708 $18,409 $35,876
8/31/2006 $30,911 $18,846 $37,124
9/30/2006 $31,608 $19,332 $37,822
10/31/2006 $33,282 $19,961 $40,216
11/30/2006 $35,469 $20,340 $42,179
12/31/2006 $35,419 $20,626 $41,251
1/31/2007 $37,127 $20,937 $45,013
2/28/2007 $36,166 $20,529 $43,978
3/31/2007 $34,564 $20,758 $42,733
4/30/2007 $35,206 $21,677 $42,725
10 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN REAL ESTATE SECURITIES
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. Figures are as stated in the Fund's prospectus current as of the date of
this report.
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 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 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,056.30 $5.05
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.89 $4.96
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,052.70 $8.80
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.22 $8.65
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,052.70 $8.80
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.22 $8.65
- -----------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,057.80 $3.78
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.12 $3.71
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.99%; B: 1.73%; C: 1.73%; and Advisor: 0.74%), 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 2007 2006 2005 2004 2003
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 26.95 $ 25.99 $ 20.63 $ 16.97 $ 18.10
---------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.44 0.50 0.49 0.55 0.63
Net realized and unrealized gains (losses) .... 3.60 4.50 6.88 3.74 (1.11)
---------------------------------------------------------------
Total from investment operations ................. 4.04 5.00 7.37 4.29 (0.48)
---------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.42) (0.61) (0.53) (0.63) (0.65)
Net realized gains ............................ (4.38) (3.43) (1.48) -- --
---------------------------------------------------------------
Total distributions .............................. (4.80) (4.04) (2.01) (0.63) (0.65)
---------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- --
---------------------------------------------------------------
Net asset value, end of year ..................... $ 26.19 $ 26.95 $ 25.99 $ 20.63 $ 16.97
===============================================================
Total return c ................................... 14.97% 20.00% 36.07% 25.43% (2.51)%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.96% e 0.88% e 0.92% e 1.01% 0.98%
Net investment income ............................ 1.63% 1.84% 2.03% 2.64% 3.76%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $751,489 $808,892 $671,587 $550,176 $423,363
Portfolio turnover rate .......................... 15.51% 42.09% 36.90% 27.34% 29.76%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
14 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
--------------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS B 2007 2006 2005 2004 2003
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 26.62 $ 25.77 $ 20.45 $ 16.84 $ 17.99
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.24 0.30 0.31 0.39 0.50
Net realized and unrealized gains (losses) .... 3.55 4.45 6.83 3.72 (1.10)
--------------------------------------------------------------
Total from investment operations ................. 3.79 4.75 7.14 4.11 (0.60)
--------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.23) (0.47) (0.34) (0.50) (0.55)
Net realized gains ............................ (4.38) (3.43) (1.48) -- --
--------------------------------------------------------------
Total distributions .............................. (4.61) (3.90) (1.82) (0.50) (0.55)
--------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- --
--------------------------------------------------------------
Net asset value, end of year ..................... $ 25.80 $ 26.62 $ 25.77 $ 20.45 $ 16.84
==============================================================
Total return c ................................... 14.17% 19.05% 35.12% 24.43% (3.20)%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.70% e 1.63% e 1.66% e 1.76% 1.74%
Net investment income ............................ 0.89% 1.09% 1.29% 1.89% 3.00%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $57,353 $71,458 $72,841 $56,334 $40,703
Portfolio turnover rate .......................... 15.51% 42.09% 36.90% 27.34% 29.76%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 15
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
-------------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS C 2007 2006 2005 2004 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 26.50 $ 25.66 $ 20.37 $ 16.78 $ 17.91
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................ 0.24 0.30 0.31 0.39 0.51
Net realized and unrealized gains (losses) ..... 3.53 4.44 6.79 3.70 (1.10)
-------------------------------------------------------------
Total from investment operations .................. 3.77 4.74 7.10 4.09 (0.59)
-------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.23) (0.47) (0.33) (0.50) (0.54)
Net realized gains ............................. (4.38) (3.43) (1.48) -- --
-------------------------------------------------------------
Total distributions ............................... (4.61) (3.90) (1.81) (0.50) (0.54)
-------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
-------------------------------------------------------------
Net asset value, end of year ...................... $ 25.66 $ 26.50 $ 25.66 $ 20.37 $ 16.78
=============================================================
Total return c .................................... 14.16% 19.10% 35.07% 24.50% (3.27)%
RATIOS TO AVERAGE NET ASSETS
Expenses .......................................... 1.70% e 1.62% e 1.67% e 1.76% 1.70%
Net investment income ............................. 0.89% 1.10% 1.28% 1.89% 3.04%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $155,247 $192,172 $189,468 $149,656 $114,474
Portfolio turnover rate ........................... 15.51% 42.09% 36.90% 27.34% 29.76%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
16 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
--------------------------------------------------------
YEAR ENDED APRIL 30,
ADVISOR CLASS 2007 2006 2005 2004 2003
--------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 27.06 $ 26.06 $ 20.68 $ 17.02 $ 18.14
---------------------------------------------------------
Income from investment operations a:
Net investment income b ........................ 0.51 0.58 0.56 0.58 0.67
Net realized and unrealized gains (losses) ..... 3.61 4.52 6.89 3.76 (1.10)
---------------------------------------------------------
Total from investment operations .................. 4.12 5.10 7.45 4.34 (0.43)
---------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.48) (0.67) (0.59) (0.68) (0.69)
Net realized gains ............................. (4.38) (3.43) (1.48) -- --
---------------------------------------------------------
Total distributions ............................... (4.86) (4.10) (2.07) (0.68) (0.69)
---------------------------------------------------------
Redemption fees ................................... -- c -- c -- c -- --
---------------------------------------------------------
Net asset value, end of year ...................... $ 26.32 $ 27.06 $ 26.06 $ 20.68 $ 17.02
=========================================================
Total return ...................................... 15.29% 20.28% 36.46% 25.68% (2.27)%
RATIOS TO AVERAGE NET ASSETS
Expenses .......................................... 0.71% d 0.63% d 0.67% d 0.76% 0.73%
Net investment income ............................. 1.88% 2.09% 2.28% 2.89% 4.01%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $49,723 $48,368 $39,990 $41,101 $27,532
Portfolio turnover rate ........................... 15.51% 42.09% 36.90% 27.34% 29.76%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 17
Franklin Real Estate Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 96.8%
FINANCE/RENTAL/LEASING 0.9%
Centerline Holdings Co. LP ................................................................. 484,900 $ 8,689,408
--------------
FINANCIAL CONGLOMERATES 1.0%
Brookfield Asset Management Inc., A (Canada) ............................................... 183,450 10,667,618
--------------
HOMEBUILDING 22.1%
Centex Corp. ............................................................................... 202,200 9,052,494
D.R. Horton Inc. ........................................................................... 1,242,800 27,565,304
a Hovnanian Enterprises Inc., A .............................................................. 356,200 8,545,238
KB Home .................................................................................... 579,900 25,579,389
Lennar Corp., A ............................................................................ 627,000 26,779,170
M.D.C. Holdings Inc. ....................................................................... 1,029,600 52,777,296
a Meritage Homes Corp. ....................................................................... 594,400 20,691,064
a NVR Inc. ................................................................................... 28,000 23,072,000
The Ryland Group Inc. ...................................................................... 459,000 20,333,700
Standard Pacific Corp. ..................................................................... 450,400 9,390,840
--------------
223,786,495
--------------
HOTEL/RESORTS/CRUISELINES 2.7%
Starwood Hotels & Resorts Worldwide Inc. ................................................... 240,100 16,091,502
a Wyndham Worldwide Corp. .................................................................... 341,420 11,813,132
--------------
27,904,634
--------------
REAL ESTATE DEVELOPMENT 5.8%
Brookfield Properties Corp. (Canada) ....................................................... 323,760 13,296,823
Forest City Enterprises Inc., A ............................................................ 663,200 44,308,392
a,b,c NorthStar Capital Investment Corp. ......................................................... 100,000 1,245,000
--------------
58,850,215
--------------
REAL ESTATE INVESTMENT TRUSTS 64.3%
AMB Property Corp. ......................................................................... 56,400 3,435,324
Ashford Hospitality Trust .................................................................. 640,000 7,680,000
AvalonBay Communities Inc. ................................................................. 8,200 1,002,532
BioMed Realty Trust Inc. ................................................................... 450,200 12,925,242
Boardwalk REIT (Canada) .................................................................... 657,200 26,734,463
Boston Properties Inc. ..................................................................... 8,700 1,022,772
Brandywine Realty Trust .................................................................... 503,000 16,538,640
Capital Trust Inc., A ...................................................................... 172,900 8,190,273
CBL & Associates Properties Inc. ........................................................... 249,300 11,330,685
Cedar Shopping Centers Inc. ................................................................ 664,600 10,613,662
Corporate Office Properties Trust .......................................................... 329,200 15,508,612
Cousins Properties Inc. .................................................................... 57,700 1,936,989
Digital Realty Trust Inc. .................................................................. 521,900 21,110,855
a Douglas Emmett Inc. ........................................................................ 610,700 15,908,735
Eagle Hospitality Properties Trust Inc. .................................................... 308,700 4,090,275
Entertainment Properties Trust ............................................................. 170,600 10,307,652
Extra Space Storage Inc. ................................................................... 862,300 16,133,633
First Potomac Realty Trust ................................................................. 210,200 5,425,262
General Growth Properties Inc. ............................................................. 306,390 19,563,001
GMH Communities Trust ...................................................................... 1,050,200 10,544,008
Host Hotels & Resorts Inc. ................................................................. 813,636 20,861,627
18 | Annual Report
Franklin Real Estate Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
iStar Financial Inc. ....................................................................... 709,100 $ 33,980,072
Kimco Realty Corp. ......................................................................... 299,600 14,401,772
Kite Realty Group Trust .................................................................... 710,100 14,202,000
LaSalle Hotel Properties ................................................................... 260,400 12,090,372
Lexington Realty Trust ..................................................................... 420,300 8,780,067
Liberty Property Trust ..................................................................... 328,300 15,886,437
The Macerich Co. ........................................................................... 461,700 43,916,904
Newcastle Investment Corp. ................................................................. 650,400 18,998,184
Parkway Properties Inc. .................................................................... 208,000 11,024,000
ProLogis ................................................................................... 562,198 36,430,430
PS Business Parks Inc. ..................................................................... 324,600 22,364,940
Public Storage Inc. ........................................................................ 361,500 33,735,180
RAIT Financial Trust ....................................................................... 280,052 7,883,464
Ramco-Gershenson Properties Trust .......................................................... 125,300 4,636,100
Redwood Trust Inc. ......................................................................... 151,700 7,616,857
Regency Centers Corp. ...................................................................... 193,000 15,903,200
Simon Property Group Inc. .................................................................. 281,263 32,423,999
Strategic Hotels & Resorts Inc. ............................................................ 419,200 9,075,680
Tanger Factory Outlet Centers Inc. ......................................................... 234,600 9,510,684
U-Store-It Trust ........................................................................... 614,650 11,315,706
Ventas Inc. ................................................................................ 425,242 17,928,203
Vornado Realty Trust ....................................................................... 241,200 28,613,556
--------------
651,582,049
--------------
SPECIALTY INSURANCE 0.0% d
Fidelity National Financial Inc., A ........................................................ 18,600 474,114
--------------
TOTAL COMMON STOCKS (COST $644,122,199) .................................................... 981,954,533
--------------
SHORT TERM INVESTMENT (COST $33,246,922) 3.3%
MONEY MARKET FUND 3.3%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% ....................... 33,246,922 33,246,922
--------------
TOTAL INVESTMENTS (COST $677,369,121) 100.1% ............................................... 1,015,201,455
OTHER ASSETS, LESS LIABILITIES (0.1)% ...................................................... (1,389,066)
--------------
NET ASSETS 100.0% .......................................................................... $1,013,812,389
==============
SELECTED PORTFOLIO ABBREVIATIONS
LP - Limited Partnership
REIT - Real Estate Investment Trust
a Non-income producing for the twelve months ended April 30, 2007.
b See Note 8 regarding restricted securities.
c Security has been deemed illiquid because it may not be able to be sold
within seven days. At April 30, 2007, the value of this security was
$1,245,000, representing 0.12% of net assets.
d Rounds to less than 0.1% of net assets.
e See Note 7 regarding Investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 19
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2007
--------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
--------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................. $ 644,122,199
Cost - Sweep Money Fund (Note 7) ........................ 33,246,922
--------------
Total cost of investments ............................... $ 677,369,121
==============
Value - Unaffiliated issuers ............................ $ 981,954,533
Value - Sweep Money Fund (Note 7) ....................... 33,246,922
--------------
Total value of investments .............................. 1,015,201,455
Foreign currency, at value (cost $7,693) ................... 7,670
Receivables:
Investment securities sold .............................. 2,197,270
Capital shares sold ..................................... 1,253,887
Dividends ............................................... 698,461
--------------
Total assets ......................................... 1,019,358,743
--------------
Liabilities:
Payables:
Capital shares redeemed ................................. 4,247,595
Affiliates .............................................. 816,305
Unaffiliated transfer agent fees ........................ 423,164
Accrued expenses and other liabilities ..................... 59,290
--------------
Total liabilities .................................... 5,546,354
--------------
Net assets, at value .............................. $1,013,812,389
==============
Net assets consist of:
Paid-in capital ............................................ $ 641,435,682
Undistributed net investment income ........................ 1,254,331
Net unrealized appreciation (depreciation) ................. 337,832,311
Accumulated net realized gain (loss) ....................... 33,290,065
--------------
Net assets, at value .............................. $1,013,812,389
==============
20 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2007
------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
------------
CLASS A:
Net assets, at value ......................................... $751,488,531
============
Shares outstanding ........................................... 28,698,756
============
Net asset value per share a .................................. $ 26.19
============
Maximum offering price per share (net asset value per
share / 94.25%) ........................................... $ 27.79
============
CLASS B:
Net assets, at value ......................................... $ 57,353,284
============
Shares outstanding ........................................... 2,223,121
============
Net asset value and maximum offering price per share a ....... $ 25.80
============
CLASS C:
Net assets, at value ......................................... $155,247,480
============
Shares outstanding ........................................... 6,050,630
============
Net asset value and maximum offering price per share a ....... $ 25.66
============
ADVISOR CLASS:
Net assets, at value ......................................... $ 49,723,094
============
Shares outstanding ........................................... 1,889,218
============
Net asset value and maximum offering price per share a ....... $ 26.32
============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 21
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended April 30, 2007
------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
------------
Investment income:
Dividends:
Unaffiliated issuers .................................................. $ 25,637,331
Sweep Money Fund (Note 7) ............................................. 2,132,040
Interest ................................................................. 28,904
Other income (Note 9) .................................................... 36,228
------------
Total investment income ............................................ 27,834,503
------------
Expenses:
Management fees (Note 3a) ................................................ 4,941,882
Distribution fees (Note 3c)
Class A ............................................................... 1,984,234
Class B ............................................................... 632,916
Class C ............................................................... 1,693,915
Transfer agent fees (Note 3e) ............................................ 2,243,309
Custodian fees (Note 4) .................................................. 24,672
Reports to shareholders .................................................. 145,347
Registration and filing fees ............................................. 201,485
Professional fees ........................................................ 35,730
Trustees' fees and expenses .............................................. 14,759
Other .................................................................... 34,240
------------
Total expenses .................................................. 11,952,489
Expense reductions (Note 4) ..................................... (298)
------------
Net expenses ................................................. 11,952,191
------------
Net investment income ..................................... 15,882,312
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 75,807,749
Foreign currency transactions ......................................... (63,219)
------------
Net realized gain (loss) ..................................... 75,744,530
------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................... 54,803,474
Translation of assets and liabilities denominated in foreign
currencies ......................................................... (23)
------------
Net change in unrealized appreciation (depreciation) ............ 54,803,451
------------
Net realized and unrealized gain (loss) ..................................... 130,547,981
------------
Net increase (decrease) in net assets resulting from operations ............. $146,430,293
============
22 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
------------------------------------
YEAR ENDED APRIL 30,
2007 2006
------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................. $ 15,882,312 $ 17,992,789
Net realized gain (loss) from investments and foreign currency
transactions ....................................................... 75,744,530 155,633,643
Net change in unrealized appreciation (depreciation) on
investments and translation of assets and liabilities
denominated in foreign currencies .................................. 54,803,451 15,875,996
-------------------------------------
Net increase (decrease) in net assets resulting from
operations ................................................... 146,430,293 189,502,428
-------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................................ (12,005,354) (16,153,779)
Class B ............................................................ (544,827) (1,239,501)
Class C ............................................................ (1,484,947) (3,347,396)
Advisor Class ...................................................... (821,027) (973,384)
Net realized gains:
Class A ............................................................ (119,536,595) (89,736,661)
Class B ............................................................ (9,443,402) (8,805,174)
Class C ............................................................ (25,356,968) (23,769,819)
Advisor Class ...................................................... (7,226,949) (4,908,685)
-------------------------------------
Total distributions to shareholders ...................................... (176,420,069) (148,934,399)
-------------------------------------
Capital share transactions: (Note 2)
Class A ............................................................... (35,191,568) 109,569,204
Class B ............................................................... (12,502,167) (4,464,431)
Class C ............................................................... (32,263,255) (4,828,674)
Advisor Class ......................................................... 2,857,083 6,152,256
-------------------------------------
Total capital share transactions ......................................... (77,099,907) 106,428,355
-------------------------------------
Redemption fees .......................................................... 12,287 8,062
-------------------------------------
Net increase (decrease) in net assets ........................... (107,077,396) 147,004,446
Net assets
Beginning of year ........................................................ 1,120,889,785 973,885,339
-------------------------------------
End of year .............................................................. $1,013,812,389 $1,120,889,785
=====================================
Undistributed net investment income/Distributions in excess of net
investment included in net assets:
End of year .............................................................. $ 1,254,331 $ (63,753)
=====================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 23
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 amended, (the 1940 Act) 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. 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. SECURITY 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 Trust's Board of
Trustees.
24 | Annual Report
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 Trust'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 it is the Fund's policy
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.
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)
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 per share
distributions, by class, are generally due to differences in class specific
expenses.
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.
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)
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. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2007, there were an unlimited number of shares authorized ($0.01
par value). Effective May 21, 2007, shareholders approved an Amended and
Restated Declaration of Trust, which changed the authorized shares from $0.01
par value to no par value. Transactions in the Fund's shares were as follows:
----------------------------------------------------------
YEAR ENDED APRIL 30,
2007 2006
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
CLASS A SHARES:
Shares sold ............................................ 5,064,113 $ 138,119,074 7,707,962 $ 213,289,902
Shares issued in reinvestment of distributions ......... 4,638,630 122,545,335 3,788,757 98,831,145
Shares redeemed ........................................ (11,017,963) (295,855,977) (7,326,559) (202,551,843)
----------------------------------------------------------
Net increase (decrease) ................................ (1,315,220) $ (35,191,568) 4,170,160 $ 109,569,204
==========================================================
CLASS B SHARES:
Shares sold ............................................ 48,938 $ 1,322,006 109,658 $ 3,006,067
Shares issued in reinvestment of distributions ......... 343,238 8,939,653 352,731 9,102,330
Shares redeemed ........................................ (852,984) (22,763,826) (605,405) (16,572,828)
----------------------------------------------------------
Net increase (decrease) ................................ (460,808) $ (12,502,167) (143,016) $ (4,464,431)
==========================================================
CLASS C SHARES:
Shares sold ............................................ 619,910 $ 16,442,775 971,879 $ 26,538,610
Shares issued in reinvestment of distributions ......... 934,950 24,219,969 957,255 24,586,882
Shares redeemed ........................................ (2,755,307) (72,925,999) (2,061,077) (55,954,166)
----------------------------------------------------------
Net increase (decrease) ................................ (1,200,447) $ (32,263,255) (131,943) $ (4,828,674)
==========================================================
ADVISOR CLASS SHARES:
Shares sold ............................................ 103,854 $ 2,938,791 425,148 $ 11,388,149
Shares issued in reinvestment of distributions ......... 292,559 7,766,999 210,204 5,506,722
Shares redeemed ........................................ (294,458) (7,848,707) (382,465) (10,742,615)
----------------------------------------------------------
Net increase (decrease) ................................ 101,955 $ 2,857,083 252,887 $ 6,152,256
==========================================================
Annual Report | 27
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 Trust 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 Transfer agent
Services)
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 for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Fund's Class B and C compensation distribution plans, the
Fund pays Distributors for costs incurred in connection with the servicing, sale
and distribution of the Fund's shares up to the maximum annual plan rate for
each class.
28 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ............................. 0.25%
Class B ............................. 1.00%
Class C ............................. 1.00%
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:
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ............................ $276,662
Contingent deferred sales charges retained ............... $147,956
E. TRANSFER AGENT FEES
For the year ended April 30, 2007, the Fund paid transfer agent fees of
$2,243,309, of which $1,111,250 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, 2007, 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, 2007, the Fund deferred realized currency losses of
$48,152.
The tax character of distributions paid during the years ended April 30, 2007
and 2006, was as follows:
-------------------------------
2007 2006
-------------------------------
Distributions paid from:
Ordinary income ...................... $ 18,809,420 $ 62,868,472
Long term capital gain ............... 157,610,649 86,065,927
-------------------------------
$176,420,069 $148,934,399
===============================
Annual Report | 29
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
5. INCOME TAXES (CONTINUED)
At April 30, 2007, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments .......................................... $677,374,182
============
Unrealized appreciation ...................................... $395,503,653
Unrealized depreciation ...................................... (57,676,380)
------------
Net unrealized appreciation (depreciation) ................... $337,827,273
============
Undistributed ordinary income ................................ $ 10,168,713
Undistributed long term capital gains ........................ 24,462,187
------------
Distributable earnings ....................................... $ 34,630,900
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares, and pass-through entity income.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, and pass-through entity
income.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2007, aggregated $160,213,392 and $310,787,715,
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. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. 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.
30 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
8. RESTRICTED SECURITIES (CONTINUED)
Disposal of these securities may require greater effort and expense, and prompt
sale at an acceptable price may be difficult. The Fund may have registration
rights for restricted securities. The issuer generally incurs all registration
costs.
At April 30, 2007, the Fund held investments in restricted securities, excluding
144A securities deemed to be liquid, valued in accordance with procedures
approved by the Trust's Board of Trustees as reflecting fair value, as follows:
- -------------------------------------------------------------------------------------------------
ACQUISITION
SHARES ISSUER DATE COST VALUE
- -------------------------------------------------------------------------------------------------
100,000 NorthStar Capital Investment Corp. ... 1/16/98 $1,993,250 $1,245,000
==========
TOTAL RESTRICTED SECURITIES (0.12% of Net Assets)
9. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), 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 ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006, and is recorded as other income.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Following the public comment
period, and once the SEC approves the final plan of distribution, disbursements
of settlement monies will be made promptly to individuals who were shareholders
of the designated funds during the relevant period, in accordance with the terms
and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and 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.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
Annual Report | 31
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
9. REGULATORY AND LITIGATION MATTERS (CONTINUED)
The Company and fund management 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 Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Fund is
currently evaluating the impact, if any, of applying the various provisions of
FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
32 | Annual Report
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, 2007, 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, 2007 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 15, 2007
Annual Report | 33
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 $62,005,377 as a long
term capital gain dividend for the fiscal year ended April 30, 2007.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $11,929,733 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, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $4,213,010 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April
30, 2007. In January 2008, shareholders will receive Form 1099-DIV which will
include their share of qualified dividends distributed during the calendar year
2007. 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 22.79% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended April 30, 2007.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $2,132,061 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, 2007.
34 | Annual Report
Franklin Real Estate Securities Trust
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007
A Special Meeting of Shareholders of the Trust was held at the Trust's offices,
One Franklin Parkway, San Mateo, California on March 21, 2007 and reconvened on
April 11, 2007. The purpose of the meeting was to elect Trustees of the Trust
and to vote on the following Proposals and Sub-Proposals: to approve an Amended
and Restated Agreement and Declaration of Trust; to approve amendments to
certain of Franklin Real Estate Securities Fund's (the "Fund") fundamental
investment restrictions (including seven (7) Sub-Proposals); and to approve the
elimination of certain of the Fund's fundamental investment restrictions. At the
meeting, the following persons were elected by the shareholders to serve as
Independent Trustees of the Trust: Harris J. Ashton, Robert F. Carlson, Sam L.
Ginn, Edith E. Holiday, Frank W. T. LaHaye, Frank A. Olson, Larry D. Thompson
and John B. Wilson. Charles B. Johnson and Gregory E. Johnson were elected by
the shareholders to serve as Interested Trustees. Shareholders also approved the
Amended and Restated Agreement and Declaration of Trust, amendments to certain
of the Fund's fundamental investment restrictions (including seven (7)
Sub-Proposals), and the elimination of certain of the Fund's fundamental
investment restrictions. No other business was transacted at the meeting.
The results of the voting at the meeting are as follows:
Proposal 1. The election of Trustees:
- ----------------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
OUTSTANDING VOTED OUTSTANDING VOTED
NAME FOR SHARES SHARES WITHHELD SHARES SHARES
- ----------------------------------------------------------------------------------------------------------------
Harris J. Ashton ........... 23,040,914.729 54.278% 80.574% 5,555,177.940 13.087% 19.426%
Robert F. Carlson .......... 23,045,620.460 54.289% 80.590% 5,550,472.209 13.076% 19.410%
Sam L. Ginn ................ 23,056,197.771 54.314% 80.627% 5,539,894.898 13.051% 19.373%
Edith E. Holiday ........... 23,074,134.808 54.357% 80.690% 5,521,957.861 13.008% 19.310%
Frank W. T. LaHaye ......... 23,051,038.518 54.302% 80.609% 5,545,054.151 13.063% 19.391%
Frank A. Olson ............. 23,042,737.437 54.283% 80.580% 5,553,355.232 13.082% 19.420%
Larry D. Thompson .......... 23,076,306.094 54.362% 80.697% 5,519,786.575 13.003% 19.303%
John B. Wilson ............. 23,092,588.422 54.400% 80.754% 5,503,504.247 12.965% 19.246%
Charles B. Johnson ......... 23,043,881.071 54.285% 80.584% 5,552,211.598 13.080% 19.416%
Gregory E. Johnson ......... 23,080,939.671 54.373% 80.714% 5,515,152.998 12.992% 19.286%
Proposal 2. To approve an Amended and Restated Agreement and Declaration of
Trust:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,803,086.151 51.362% 76.155%
Against ............... 377,448.229 0.889% 1.320%
Abstain ............... 945,541.289 2.228% 3.306%
Broker Non-votes ...... 5,470,017.000 12.886% 19.219%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
Annual Report | 35
Franklin Real Estate Securities Trust
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007
(CONTINUED)
Proposal 3. To approve amendments to certain of the Fund's fundamental
investment restrictions (includes seven (7) Sub-Proposals):
(a) To amend the Fund's fundamental investment restriction regarding borrowing:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,547,319.800 50.760% 75.350%
Against ............... 686,413.331 1.617% 2.400%
Abstain ............... 892,342.538 2.102% 3.121%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
(b) To amend the Fund's fundamental investment restriction regarding
underwriting:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,689,408.584 51.094% 75.847%
Against ............... 524,156.339 1.235% 1.833%
Abstain ............... 912,510.746 2.150% 3.191%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
(c) To amend the Fund's fundamental investment restriction regarding lending:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,521,938.566 50.700% 75.261%
Against ............... 629,452.675 1.483% 2.201%
Abstain ............... 974,684.428 2.296% 3.409%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
(d) To amend the Fund's fundamental investment restriction regarding investments
in real estate:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,778,942.719 51.305% 76.160%
Against ............... 448,915.685 1.058% 1.569%
Abstain ............... 898,217.265 2.116% 3.142%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
36 | Annual Report
Franklin Real Estate Securities Trust
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007
(CONTINUED)
Proposal 3. To approve amendments to certain of the Fund's fundamental
investment restrictions (includes seven (7) Sub-Proposals): (CONTINUED)
(e) To amend the Fund's fundamental investment restriction regarding investments
in commodities:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,620,826.556 50.933% 75.607%
Against ............... 600,092.165 1.414% 2.098%
Abstain ............... 905,156.948 2.132% 3.166%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
(f) To amend the Fund's fundamental investment restriction regarding issuing
senior securities:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,572,622.997 50.819% 75.439%
Against ............... 555,776.362 1.310% 1.944%
Abstain ............... 997,676.310 2.350% 3.488%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
(g) To amend the Fund's fundamental investment restriction regarding industry
concentration:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,608,170.927 50.903% 75.563%
Against ............... 513,075.025 1.209% 1.795%
Abstain ............... 1,004,829.717 2.367% 3.513%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
Proposal 4. To approve the elimination of certain of the Fund's fundamental
investment restrictions:
- ------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
SHARES VOTED SHARES SHARES
- ------------------------------------------------------------------
For ................... 21,539,377.728 50.741% 75.322%
Against ............... 651,559.630 1.535% 2.278%
Abstain ............... 935,138.311 2.203% 3.271%
Broker Non-votes ...... 5,470,017.000 12.886% 19.129%
- ------------------------------------------------------------------
TOTAL ................. 28,596,092.669 67.365% 100.000%
- ------------------------------------------------------------------
Annual Report | 37
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. Generally, each board member
serves until that person's successor is elected and qualified.
- ------------------------------ -------------- ---------------- ----------------------- -----------------------------------------
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 142 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 122 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.
- ------------------------------------------------------------------------------------------------------------------------------------
SAM L. GINN (1937) Trustee Since April 2007 121 Director, Chevron Corporation (global
One Franklin Parkway energy company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC; Chairman of the Board and Chief Executive Officer,
AirTouch Communications (1993-1998) and Pacific Telesis Groups (1988-1994).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 2005 142 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation) (exploration
San Mateo, CA 94403-1906 and refining of oil and gas), H.J. Heinz
Company (processed foods and allied
products), RTI International Metals, Inc.
(manufacture and distribution 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).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------ -------------- ---------------- ----------------------- -----------------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1993 123 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).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since April 2007 141 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation)
San Mateo, CA 94403-1906 (exploration and refining of oil and
gas) and Sentient Jet (private jet
service); and FORMERLY, Director, Becton
Dickinson and Company (medical
technology), Cooper Industries, Inc.
(electrical products and tools and
hardware), Health Net, Inc. (formerly,
Foundation Health) (integrated managed
care), The Hertz Corporation (car
rental), Pacific Southwest Airlines, The
RCA Corporation, Unicom (formerly,
Commonwealth Edison), UAL
Corporation (airlines) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999));
and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Trustee Since April 2007 140 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); Senior Fellow of The Brookings
Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S.
Department of Justice (2001-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN B. WILSON (1959) Trustee Since 2006 121 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; 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); and Vice President and Partner, Bain & Company (1986-1990).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 39
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
- ------------------------------ -------------- ---------------- ----------------------- -----------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Since 1993 142 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.; Director, Templeton Worldwide, 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 41
of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since April 2007 90 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; President,
Templeton Worldwide, Inc.; Vice President and Director, 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 30 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer and Officer
Vice since 2004
President and Vice
- AML President
Compliance - AML
Compliance
since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 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 30 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, Executive
FL 33394-3091 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
40 | 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 46 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 Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton
Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; Vice President, Templeton Global Advisor Limited; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 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).
- ------------------------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. (1940) President Since 2002 Not Applicable Not Applicable
One Franklin Parkway and Chief
San Mateo, CA 94403-1906 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice Since 2006 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906 and
Secretary
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 41
- ------------------------------ -------------- ---------------- ----------------------- -----------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------ -------------- ---------------- ----------------------- -----------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, Chief
FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 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 manager or
affiliated investment managers.
** Charles B. Johnson is considered to be an interested person of the Trust
under the federal securities laws due to his position as officer and
director and major shareholder of Franklin Resources, Inc. (Resources),
which is the parent company of the Fund's investment manager and
distributor. Gregory E. Johnson is considered to be an interested person
of the Trust under the federal securities laws due to his position as
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 3: Prior to April 30, 2007, Harmon E. Burns, S. Joseph Fortunato and Gordon
S. Macklin ceased to be a trustee of the Trust.
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.
42 | 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 17, 2007, 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 material
accompanying such report was a memorandum prepared by management describing
project initiatives and capital investments relating to the services provided to
the Fund by the Franklin Templeton Investments organization, as well as a
memorandum relating to economies of scale and a comparative analysis concerning
transfer agent fees charged the Fund.
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
Annual Report | 43
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
fund complex, the adherence to fair value pricing procedures established by the
Board, and the accuracy of net asset value calculations. The Board also noted
the extent of benefits provided Fund shareholders from being part of the
Franklin Templeton family of funds, including the right to 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 continuous efforts and expenditures in establishing back-up systems
and recovery procedures to function in the event of a natural disaster, it being
noted that such systems and procedures had functioned smoothly during the
Florida hurricanes and blackouts experienced in recent years. 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 and that
a portion of such bonus was required to be invested in a pre-designated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
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, the high industry ranking given to the
Franklin Templeton website, and the firsthand experience of individual Board
members 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,
2007, as well as the previous 10 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, as well as for the previous three-, five- and ten-year
periods on an annualized basis was in the lowest quintile of such universe. In
discussing such performance, management pointed out that underweighting of the
Fund's portfolio in equity REITS, many of which were trading at unprecedented
valuations, and overweighting in home building companies, which declined during
the year, contributed to the Fund's one-year performance, which also lowered
44 | Annual Report
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
annualized performance for previous periods, and discussed action being taken to
improve performance. While intending to monitor this Fund, the Board found such
performance to be acceptable, noting that the Fund's total return during the
one-year period and on an annualized basis during the previous five-year period
exceeded 20% 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 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 contractual investment management fee that
would have been charged by other funds within its Lipper expense group assuming
they were similar in size to the Fund, as well as the actual total expenses of
the Fund in comparison with those of its Lipper expense group. The Lipper
contractual investment 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 contractual investment 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
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
the Fund. Specific attention was given to the methodology followed in allocating
costs to the Fund, it being recognized that allocation methodologies are
inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted,
while being continuously refined and reflecting changes in the Manager's own
cost accounting, 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. In reviewing and
discussing such analysis, management discussed with the Board its belief that
costs incurred in establishing the infrastructure necessary for 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
Annual Report | 45
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
as the fact that the level of profits, to a certain extent, reflected
operational cost savings and efficiencies initiated by management. The Board
also took into account management's expenditures in improving shareholder
services provided the Fund, as well as the need to meet additional regulatory
and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC
requirements. In addition, the Board considered a third-party study comparing
the profitability of the Manager's parent on an 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. 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 that financed
up-front commissions paid to brokers/dealers who sold fund Class B shares prior
to February 2005, when the offering of such shares was discontinued, as well as
potential benefits resulting from allocation of fund brokerage and the use of
"soft" commission dollars to pay for research. 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 2006 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.
46 | 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 1-954/527-7678 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 | 47
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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 FUNDS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate 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(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
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 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is open only to existing shareholders and select retirement
plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
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. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07 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?
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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 A2007 06/07
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is John B. Wilson and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(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 $30,167 for the fiscal year ended April 30, 2007 and $20,908 for the fiscal
year ended April 30, 2006.
(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.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $46,000 for the fiscal year ended
April 30, 2007 and $0 for the fiscal year ended April 30, 2006. The services for
which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended April 30, 2007
and $638 for the fiscal year ended April 30, 2006. 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 $0 for the fiscal year ended April 30, 2007
and $175,223 for the fiscal year ended April 30, 2006. 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.
(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 $46,000 for the fiscal year ended April 30, 2007 and $175,861
for the fiscal year ended April 30, 2006.
(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 27, 2007
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 27, 2007
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date June 27, 2007