-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O9l+gkM0fVrlqw3O8u09IeZ4aVBHIjBV5V0EFFqC58yYq4XgsUNwFExkqEp5/8On U4q7WzOi+J6Cht0JH+050w== 0000845613-97-000006.txt : 19970813 0000845613-97-000006.hdr.sgml : 19970813 ACCESSION NUMBER: 0000845613-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN SELECT REALTY TRUST CENTRAL INDEX KEY: 0000845613 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 943095938 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12708 FILM NUMBER: 97657097 BUSINESS ADDRESS: STREET 1: 1800 GATEWAY DR - STE 200 CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153122000 MAIL ADDRESS: STREET 1: P O BOX 7777 CITY: SAN MATEO STATE: CA ZIP: 94403-7777 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN SELECT REAL ESTATE INCOME FUND DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA REAL ESTATE FUND DATE OF NAME CHANGE: 19890307 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997 ----------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the transition period from TO ----------------- ------------------------------ Commission file number 1-12708 FRANKLIN SELECT REALTY TRUST - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-3095938 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (650) 312-2000 ------------------------------ N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock Shares Outstanding as of June 30, 1997, Series A: 12,250,378 Common Stock Shares Outstanding as of June 30, 1997, Series B: 745,584 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRANKLIN SELECT REALTY TRUST CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997 AND DECEMBER 31, 1996 Unaudited (In thousands, except per share amounts) 1997 1996 - ------------------------------------------------------------------------------- ASSETS Rental property: Land $40,142 $38,286 Buildings and improvements 110,140 103,339 ---------------------- 150,282 141,625 Less: accumulated depreciation 19,397 17,583 ---------------------- 130,885 124,042 Cash and cash equivalents 3,864 2,558 Land held for development 4,077 - Mortgage-backed securities, available for sale 557 578 Deferred rent receivable 1,899 1,916 Deferred costs and other assets 2,318 2,204 ---------------------- Total assets $143,600 $131,298 ====================== - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Notes and bonds payable $35,453 $22,745 Tenant deposits, accounts payable and accrued expenses 1,318 1,197 Advance rents 10 26 Distributions payable 1,386 1,348 ----------------------- Total liabilities 38,167 25,316 ----------------------- Minority interest 9,293 9,329 ----------------------- Commitments and contingencies (Notes 3 and 4) Stockholders' equity: Common stock, Series A, without par value; stated value $10 per share; 110,000 shares authorized; 12,250 issued and outstanding 103,161 103,161 Common stock, Series B, without par value; stated value $10 per share; 2,500 shares authorized; 746 shares issued and outstanding 6,294 6,294 Unrealized loss on mortgage-backed securities (28) (36) Accumulated distributions in excess of net income (13,287) (12,766) ----------------------- Total stockholders' equity 96,140 96,653 ----------------------- Total liabilities and stockholders' equity $143,600 $131,298 ======================= The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, (In thousands, except per share amounts) 1997 1996 1997 1996 - -------------------------------------------------------------------------------------- REVENUE: Rent $4,450 $3,447 $8,546 $6,732 Interest, dividends, and other 52 166 88 355 ---------------------------------------- Total revenue 4,502 3,613 8,634 7,087 ---------------------------------------- EXPENSES: Interest 733 153 1,325 314 Depreciation and amortization 982 830 1,954 1,655 Operating 1,019 854 1,848 1,684 Related party 372 310 709 560 Consolidation expense - 244 - 706 General and administrative 140 144 302 337 Minority interest 161 - 322 - ---------------------------------------- Total expenses 3,407 2,535 6,460 5,256 ---------------------------------------- NET INCOME $1,095 $1,078 $2,174 $1,831 ======================================== Net income per share, based on the weighted average shares outstanding of Series A common stock of 12,250 and 14,145 for the three- and six-month periods ended June 30, 1997, and 1996, respectively $ .09 $ .08 $ .18 $ .13 ======================================== Distributions per share, based on the weighted average shares outstanding of Series A common stock of 12,250 and 13,651 for the three-month periods ended and 12,250 and 13,898 for the six-month periods ended June 30, 1997 and 1996, respectively $.11 $ .11 $ .22 $ .22 ========================================
The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 Unaudited (In thousands) 1997 1996 - ----------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $2,174 $1,831 ---------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,036 1,655 Minority interest 322 - Decrease in deferred rent receivable 17 29 Increase in other assets (143) (76) Increase (decrease) in tenant deposits, accounts payable and accrue expenses 61 (128) Decrease in advance rents (16) (16) ---------------------- 2,277 1,464 ---------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,451 3,295 ---------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of rental property (12,613) - Improvements to rental property (121) (275) Leasing commissions paid (190) (210) Disposition of mortgage-backed securities 29 615 ---------------------- Net cash (used in) provided by INVESTING ACTIVITIES (12,895) 130 ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes and bonds payable 15,178 - Repayment of notes and bonds payable (2,470) (36) Payoff of seller carryback note - (480) Payment of loan costs (3) - Dissenting shareholders' interest paid - (8) Distributions paid to limited partners (298) - Distributions paid to stockholders (2,657) (4,032) ---------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,750 (4,556) ---------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,306 (1,131) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,558 6,186 ---------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $3,864 $5,055 ====================== The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 Unaudited NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements of Franklin Select Realty Trust (the "Company") have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation have been included. The Company presumes that users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure which would substantially duplicate the disclosure contained in the Company's 1996 Annual Report on Form 10-K has been omitted. NOTE 2 - NET INCOME PER SHARE On May 7, 1996 Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage") merged into the Company (the "Merger"). On November 1, 1996 in connection with the merger, the Company repurchased shares of FREIF and Advantage common stock, equivalent to approximately 1.9 million shares of the Company's common stock, which was held by certain FREIF and Advantage shareholders who dissented from the merger. For purposes of calculating net income per share for the periods ended June 30, 1996, the weighted average shares outstanding of Series A common stock has been calculated assuming the shares attributable to dissenting shareholders (equivalent to approximately 1.9 million shares of the Company's common stock) were converted into the Company's common stock and were outstanding for the period. NOTE 3 - LITIGATION On December 2, 1996, two stockholders, for themselves and purportedly on behalf of certain other minority stockholders of Advantage, filed a purported class action complaint in the California Superior Court for San Mateo County against Advantage, its directors, the Advisor, Franklin Resources, Inc. and the Massachusetts State Teachers' and Employees' Retirement Systems Trust ("MASTERS"). The complaint alleges that defendants breached fiduciary duties to plaintiffs and other minority stockholders in connection with the purchase by Franklin Resources, Inc. in August 1994 of MASTERS' 46.6% interest in Advantage and in connection with the Merger of Advantage into the Company in May 1996, which was approved by a majority of the outstanding shares of each of the three companies. Plaintiffs also allege that defendants misstated certain material facts or omitted to state material facts in connection with these transactions. The complaint includes a variety of additional claims, including claims relating to the investment of Advantage assets, the suspension of the dividend reinvestment program, the allocation of merger-related expenses, revisions to the investment policies of Advantage, and the restructuring of the contractual relationship with the Advisor. Plaintiffs seek damages in an unspecified amount and certain equitable relief. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. No discovery has yet been propounded in the case. As a result of the pleadings filed by the various defendants, including the Company, several of the plaintiffs' claims may be removed from the action, and the plaintiffs will be filing an amended complaint to address the court's anticipated response to such filings. FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 Unaudited NOTE 3 - LITIGATION (Continued) On June 3, 1997, Herbert S. Hodge, Jr., on behalf of himself and certain other shareholders of FREIF, filed an alleged class action complaint in the California Superior Court for San Mateo County against the Company, certain of its directors, the Company's advisor, Franklin Properties Inc., Franklin Resources Inc., certain of the Company's directors and Bear Stearns Co. Inc. The complaint alleges that defendants breached fiduciary duties to plaintiff and certain other shareholders in connection with the merger of FREIF into Franklin Select Realty Trust in May 1996. Plaintiff also alleges that defendants misstated certain material facts or omitted to state material facts in connection with this transaction. Plaintiff seeks damages in an unspecified amount. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. All defendants, including the Company, have challenged the complaint. Those filings have been consolidated for hearing in front of the same judge who was assigned by the court to hear pre-trial matters in the case stated above. Management does not believe that the outcome of these matters will have a material adverse affect on the Company's financial condition or results of operations. NOTE 4 - PURCHASE OF REAL PROPERTY On June 25, 1997, the Company acquired a 12.5 acre parcel of undeveloped land located in Rancho Cordova, California for $4.08 million. The acquisition was financed by a $4.1 million draw under the Company's line of credit with Bank of America. The Company intends to enter into a development agreement with the seller, who is a Sacramento, California area developer, to develop the land with a five story office building containing approximately 162,000 square feet. The land purchase agreement provides that if the parties do not execute a development agreement by September 23, 1997, then the seller has the option, for the following 90 days, to repurchase the parcel from the Company at a price equal to the sum of the Company's purchase price, its closing costs, interest expense at an annual rate of 10%, and $100,000. On April 1, 1997, FSRT, L.P., a majority-owned subsidiary of the Company, acquired an industrial R&D building located in Fremont, California, for $8.51 million. The acquisition was financed by a $8.6 million draw under the Company's line of credit with Bank of America. On July 30, 1997, the Company refinanced $5.1 million of the borrowings under the line of credit with a fixed rate loan provided by First Nationwide Life Insurance Company in the amount of $5.16 million. The new debt is collateralized by the R&D building and bears monthly principal and interest payments at 8.47% per annum, based on a 25-year amortization schedule, with the remaining principal maturing on August 1, 2004. NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("FAS 128") and No. 129 "Disclosure of Information About Capital Structure" ("FAS 129"). FAS 128 specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. In summary, FAS 128 would require the Company to present its earnings per share on a basic and diluted basis effective for financial statements issued for periods ending after December 15, 1997. The Company has not yet determined what effect, if any, this pronouncement will have on the Company's consolidated financial statements. FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 Unaudited NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (Continued) FAS 129 consolidates the existing disclosure requirements regarding an entity's capital structure and becomes effective for financial statements issued for periods ending after December 15, 1997. The Company has not yet determined what effect, if any, this pronouncement will have on the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS 130") and No. 131 "Disclosures of Segment Information" ("FAS 131"). FAS 130 establishes the disclosure requirements for reporting comprehensive income in an entity's annual and interim financial statements and becomes effective for the Company for the fiscal year ending December 31, 1998. Comprehensive income includes unrealized gains and losses on securities currently reported by the Company as a component of stockholders' equity which the Company would be required to include in a financial statement and display the accumulated balance of other comprehensive income seperately in the equity section of the consolidated balance sheet. The Company has not yet determined what effect, if any, this pronouncement will have on the Company's results of operations. FAS 131 establishes standards for determining an entity's operating segments and the type and level of financial information to be disclosed. FAS 131 becomes effective for financial statements issued for periods ending after December 15, 1997. The Company has not yet determined what effect, if any, this pronouncement will have on the Company's consolidated financial statements. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion is based primarily on the consolidated financial statements of the Company for the period ended June 30, 1997. The information should be read in conjunction with the accompanying consolidated financial statements and the notes thereto. When used in the following discussion, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the section entitled "Potential Factors Affecting Future Operating Results," below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS COMPARISON OF THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 Total revenue for the three- and six-month periods ended June 30, 1997 increased $889,000, or 25%, and $1,547,000, or 22%, compared to the same periods in 1996. These increases were primarily due to rental revenue provided by the LAM Research Buildings and the Tanon Building acquired in October, 1996, and April, 1997, respectively. The increase in rental revenue for the periods reported was also due to an increase in the average portfolio occupancy rate of the other seven properties from 92.1% to 97.8% and from 92.3% to 96.9%, respectively. The increase in rental revenue was partially offset by a decrease in interest revenue due to the sale of mortgage-backed securities in the fourth quarter of 1996. Total expenses for the three- and six-month periods ended June 30, 1997, increased $872,000, or 34%, and $1,204,000, or 23%, respectively, when compared to the same periods in 1996. The increases for the periods reported were primarily as a result of increases in interest, depreciation and amortization, and minority interest expenses related to the LAM Research Buildings. These increases were partially offset by a decrease in non-recurring expenses related to the Merger. Related party expense for the three- and six-month periods ended June 30, 1997 increased 20% and 27%, respectively, compared to the same periods in 1996, primarily as a result of an increase in advisory fees as a result of the acquisition of the LAM Research Buildings, and the Tanon Building and the adoption of the Company's advisory agreement by the two REITs that merged with the Company in May, 1996. Prior to the Merger, the REITs operated under advisory agreements containing different methods of compensation to the Advisor. The decrease in general and administrative expense for the three- and six-month periods ended June 30, 1997 as compared to the same periods in 1996 was a result of decreases in legal fees and directors' and officers' insurance premiums and due to merger related expenses reported in 1996 of $33,000 and $72,000, respectively. These decreases were partially offset by increases in transfer agent expense and accounting expense. Net income increased during the 1997 periods primarily as a result of an increase in rental income and a decrease in consolidation expenses, partially offset by increased property operating expenses and interest expense relating to recently acquired properties. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, cash and cash equivalents aggregated $3,864,000 which the Company believes is adequate to meet its short-term operating cash requirements. The Company also has access to a revolving line of credit in the amount of $25 million and holds $557,000 in mortgage-backed securities. At June 30, 1997, the outstanding balance under the Company's credit facility was $12.7 million. On April 1, 1997, the Company acquired an R&D building located in Fremont, California and on June 25, 1997, the Company acquired a 12.5 acre parcel of undeveloped land located in Rancho Cordova, California. The Company acquired the properties for a purchase price of $8.51 million and $4.08 million, respectively, utilizing a portion of the line of credit facility available to the Company. Borrowings under the line of credit bear interest at the London Interbank Offered Rate plus 1.90%, or at Bank of America's Reference rate at the Company's option. At June 30, 1997 the weighted average interest rate of borrowings under the line of credit was 7.72%. On July 30, 1997, the Company refinanced $5.1 million of the borrowings under the line of credit with a fixed rate loan provided by First Nationwide Life Insurance Company in the amount of $5.16 million. The new debt is collateralized by the R&D building and bears monthly principal and interest payments at 8.47% per annum, based on a 25-year amortization schedule, with the remaining principal maturing on August 1, 2004. Management continues to evaluate properties for acquisition by the Company. The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, and development of properties from (i) cash flow from operations, (ii) borrowings under its credit facility and, if available, other indebtedness (which may include indebtedness assumed in acquisitions), (iii) proceeds from the sale of the Company's equity securities, and (iv) the issuance of partnership interests in connection with acquisitions. The Company's operating cash flow has been its principal source of capital for minor property improvements, leasing costs and the payment of quarterly distributions. Net cash provided by operating activities for the six-month period ended June 30, 1997 was $4,451,000, or $1,156,000 more than the same period in 1996. The increase in cash flow provided by operating activities is primarily attributable to the acquisition of the Lam Research Buildings and the Tanon Building, and a decrease in consolidation expense. Net cash used in investing activities and financing activities increased $13,025,000 and $14,306,000, respectively, when compared to the same period in 1996 primarily as a result of the acquisition of the Tanon Building and the undeveloped land. On July 1, 1997, the Company entered into an agreement to sell the Carmel Mountain Shopping Center in San Diego, the Glen Cove Shopping Center in Vallejo, California, and the Mira Loma Shopping Center in Reno, Nevada to an unrelated third party. The transaction was subsequently terminated by the purchaser as allowed by the contract. The offer from the buyer was unsolicited, however, management believed that the terms of the agreement to purchase the properties were attractive and warranted the sale of the assets. Management is not actively marketing the retail assets for sale. Management does not believe that the outcome of the litigation described in Note 3 to the accompanying financial statements will have a material adverse affect on the Company's financial condition or results of operations. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) Management believes that the Company's sources of capital as described under Liquidity and Capital Resources are adequate to meet its liquidity needs in the foreseeable future. IMPACT OF INFLATION The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. CASH DISTRIBUTION POLICY Distributions are declared quarterly at the discretion of the Board of Directors. The Company's present distribution policy is to at least annually evaluate the current distribution rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a distribution rate which: i) provides a stable distribution which is sustainable despite short-term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as distributions consistent with the above listed objective; and iii) complies with the Internal Revenue Code requirement that a REIT annually pay out as distributions not less than 95% of its taxable income. During the six month period ended June 30, 1997, the Company declared distributions totaling $2,695,000. FUNDS FROM OPERATIONS The Company considers funds from operations to be a useful measure of the operating performance of an equity REIT because, together with net income and cash flows, Funds from operations provides investors with an additional basis to evaluate the ability of a REIT to support general operating expense and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Funds from operations should not be considered an alternative to net income or any other GAAP measurement of performance, as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, funds from operations is net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company reports funds from operations in accordance with the revised NAREIT definition. The measure of funds from operations as reported by the Company may not be comparable to similarly titled measures of other companies that follow different definitions. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) FUNDS FROM OPERATIONS (Continued) For the Six Months Ended Funds from Operations June 30, (In thousands) 1997 1996 - ------------------------------------------------------------------------- Net income $2,174 $1,831 Add: Depreciation and amortization 1,954 1,655 - ------------------------------------------------------------------------- Funds from Operations $4,128 $3,486 ========================================================================= The primary difference between the periods reflects the changes in net income as discussed under "Results of Operations". POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS DECLINE IN INTEREST INCOME, LOSS ON SALE OF MORTGAGE-BACKED SECURITIES In prior years, net income has been positively affected by interest income that the Company earned on its investments in mortgage-backed securities. In addition, the Company periodically incurred losses upon the sale of certain of the securities. Late in 1996, the Company liquidated substantially all of its mortgage-backed securities in order to provide funds to repurchase a portion of its outstanding common stock. Therefore, the Company does not anticipate generating significant amounts of interest income, or losses on the sale of mortgage-backed securities, in future years. The repurchase of the Company's common stock was not detrimental to the Company's operating results in 1996 calculated on a per share basis, due to the related decline in the number of shares outstanding. LEASING TURNOVER In connection with any lease renewal or new lease, the Company typically incurs costs for tenant improvements and leasing commissions which will be funded first from operating cash flow and, if necessary, from cash reserves or the line of credit. In addition, while the Company has historically been successful in renewing and releasing space, the Company will be subject to the risk that leases expiring in the future may be renewed or released at terms that are less favorable than current lease terms. LEASING TURNOVER - CONTINENTAL CASUALTY COMPANY The Company completed the renewal of the Continental Casualty Company's ("CNA") lease at Fairway Center. The CNA lease, which covers 74,500 square feet, has been renewed for a period of five years commencing November 1, 1997. Annual rental income to be received under the new lease will decline approximately $430,000 compared to the existing lease due to lower market rental rates. Management believes the rental rates of the other tenants at the Fairway Center are substantially at market rates. The Company will incur costs for tenant improvements and leasing commissions related to the CNA lease totaling approximately $970,000 which the Company expects to fund from its cash reserves during the third and fourth quarters of 1997. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS (Continued) LEASING TURNOVER - DATA GENERAL BUILDING Over the next two years, the Company's leasing exposure at the Data General Building consists of two leases each covering approximately 48,000 square feet, which expire in November, 1997 and January 1999. The Company believes that the effective rental rate that is provided by the lease expiring in 1997 is substantially at the current market rate. However, the lease expiring in 1999 carries a triple net rental rate that is equivalent to approximately $28.00 per square foot on a full service basis. Compared to the estimated current market rate of $19.80 per square foot, this lease provides overmarket rent of approximately $394,000 annually, or 2% of the Company's current annual revenue based on annualizing the total revenue for the quarter ended June 30, 1997. It is impossible to predict the market rental rate in 1999; however, the Company expects that when this lease expires, the rental income related to this space will be less than $28.00 per square foot regardless of whether the lease is renewed or new leases are signed. The Company will also incur costs for tenant improvements and leasing commissions related to both spaces upon the renewal or re-leasing of the spaces, however, the amounts are unknown at this time. FRANKLIN SELECT REALTY TRUST PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Not applicable (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN SELECT REALTY TRUST By: /S/ DAVID P. GOSS David P. Goss Chief Executive Officer Date: AUGUST 11, 1997 EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1997 3,864 557 1,899 0 0 0 150,282 19,397 143,600 0 0 0 0 109,455 (13,315) 143,600 0 8,634 0 5,135 0 0 1,325 0 0 0 0 0 0 2,174 0 0
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