-----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, HmKPjjr0l49wNRfe3BmLOyg8dnzS3z1Cy1qYTeSCj0bRiPezX4mlrSadxk5SyMZr qx10dHpTJEJIzvpPnvCQUw== 0000845613-97-000007.txt : 19971115 0000845613-97-000007.hdr.sgml : 19971115 ACCESSION NUMBER: 0000845613-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-12708 FILM NUMBER: 97717091 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 SEPTEMBER 30, 1997 ------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 September 30, 1997, Series A: 12,250,376 Common Stock Shares Outstanding as of September 30, 1997, Series B: 745,584 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRANKLIN SELECT REALTY TRUST CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 Unaudited (In thousands, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Real Estate Rental property: Land $36,635 $34,779 Buildings and improvements 105,462 98,253 ----------------------- 142,097 133,032 Less: accumulated depreciation 19,903 17,261 ----------------------- 122,194 115,771 Land held for development 4,162 - Rental property held for sale, net of accumulated depreciation 8,158 8,271 ----------------------- Real estate, net 134,514 124,042 Cash and cash equivalents 4,186 2,558 Mortgage-backed securities, available for sale 531 578 Deferred rent receivable 1,866 1,916 Deferred costs and other assets 2,431 2,204 ----------------------- Total assets $143,528 $131,298 ======================= - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Notes and bonds payable $35,417 $22,745 Accounts payable and accrued expenses 1,005 739 Distributions payable 1,463 1,348 Other liabilities 497 484 ----------------------- Total liabilities 38,382 25,316 ----------------------- Minority interest 9,276 9,329 ----------------------- Commitments and contingencies (Note 3) 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 (25) (36) Accumulated distributions in excess of net income (13,560) (12,766) ----------------------- Total stockholders' equity 95,870 96,653 ----------------------- Total liabilities and stockholders' equity $143,528 $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 NINE MONTHS ENDED SEPTEMBER September SEPTEMBER September 30, 30, 30, 30, (In thousands, except per share amounts) 1997 1996 1997 1996 ----------------------------------------------------------------------------------------- REVENUE: Rent $4,436 $3,412 $12,982 $10,144 Interest, dividends, and other 55 185 143 540 --------------------------------------------- Total revenue 4,491 3,597 13,125 10,684 --------------------------------------------- EXPENSES: Interest 674 153 1,999 467 Depreciation and amortization 1,014 836 2,968 2,491 Operating 1,092 1,006 2,940 2,690 Related party 365 304 1,074 864 Consolidation expense - (26) 2 680 General and administrative 111 137 411 474 Minority interest 161 - 483 - --------------------------------------------- Total expenses 3,417 2,410 9,877 7,666 --------------------------------------------- NET INCOME $1,074 $1,187 $3,248 $3,018 ============================================= 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 nine-month periods ended September 30, 1997 and 1996, respectively $ .09 $ .08 $ .27 $ .21 ============================================= Distributions per share, based on the weighted average shares outstanding of Series A common stock of 12,250 and 13,328 for the three-month periods ended and 12,250 and 13,710 for the nine-month periods ended September 30, 1997 and 1996, respectively $.11 $ .11 $ .33 $ .33 =============================================
The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Unaudited (In thousands) 1997 1996 - ---------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $3,248 $3,018 ---------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,091 2,491 Minority interest 483 - Decrease in deferred rent receivable 50 42 (Increase) decrease in other assets (211) 8 Increase in accounts payable, accrued expenses and other liabilities 220 185 ---------------------- 3,633 2,726 ---------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,881 5,744 ---------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of real estate (12,613) - Improvements to real estate (529) (343) Construction period interest paid (85) - Leasing commissions paid (349) (219) Disposition of mortgage-backed securities 58 878 ---------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (13,518) 316 ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes and bonds payable 20,338 - Repayment of notes and bonds payable (7,666) (54) Payoff of seller carryback note - (480) Payment of loan costs (3) - Dissenting shareholders' interest paid - (8) Distributions paid to limited partners (477) - Distributions paid to stockholders (3,927) (4,565) ---------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,265 (5,107) ---------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,628 953 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,558 6,186 ---------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $4,186 $7,139 ====================== The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 Unaudited NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Franklin Select Realty Trust (the "Company") included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. 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. In the opinion of management, all appropriate adjustments necessary to a fair presentation of the results of operations have been made for the periods shown. All adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to current year presentations. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1996. 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 September 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 - REAL ESTATE Management intends to dispose of the Carmel Mountain property and accordingly has reclassified the related net assets to "Rental property held for sale" in the accompanying balance sheet as of September 30, 1997. Management does not expect that the eventual sale of the property will result in a material gain or loss to the Company. In June, 1997 the Company acquired a 12.5 acre parcel of land in Rancho Cordova, California and shortly thereafter commenced development activities. In that regard, through September 30, 1997, the Company has capitalized interest incurred of approximately $85,000. As previously disclosed, the purchase agreement provides that if the parties did not execute a development agreement by September 23, 1997 then the seller was granted a 90 day option 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%, plus $100,000. A development agreement has not been executed by the parties, however, the parties are continuing to negotiate an agreement. NOTE 4 - 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 FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 Unaudited NOTE 4 - LITIGATION (Continued) 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. As a result of the pleadings filed by the various defendants, including the Company, the plaintiffs have filed an amended complaint to address the court's response to such filings. 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, are challenging the legal sufficiency of the complaint. Management does not believe that the outcome of these matters will have a material adverse affect on the Company's financial condition, results of operations or cash flows. 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 net income 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. 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 FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 Unaudited NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (Continued) 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. NOTE 6 - SUBSEQUENT EVENT In October, 1997 the Company filed a registration statement on Form S-3 to register 1,625,000 shares of the Company's Series A common stock to accommodate the potential conversion of a like number of limited partnership units held by the limited partners of FSRT, L.P. 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 September 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 Total revenue for the three- and nine-month periods ended September 30, 1997 increased $894,000, or 25%, and $2,441,000, or 23%, 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 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 nine-month periods ended September 30, 1997, increased $1,007,000, or 42%, and $2,211,000, or 29%, 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, operating, and minority interest expenses related to the LAM Research Buildings and the Tanon Building. These increases were partially offset by a decrease in non-recurring expenses related to the Merger. Related party expense for the three- and nine-month periods ended September 30, 1997 increased 20% and 24%, 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. General and administrative expense for the three- and nine-month periods ended September 30, 1997, decreased 19% and 13%, respectively, compared to the same periods in 1996 as a result of decreases in directors' and officers' insurance premiums, and merger related expenses. These decreases were partially offset by increases in legal fees as a result of the litigation described in Note 3, transfer agent expense and accounting expense. The decrease in net income for the three-month period under review was primarily due to an increase in interest expense as a result of an increase in the outstanding balance on the line of credit. The increase in interest expense was partially offset by an increase in net income from property operations. Net income increased during the nine-month period ended September 30, 1997 when compared to the same period in 1996 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 September 30, 1997, cash and cash equivalents aggregated $4,186,000 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 $531,000 in mortgage-backed securities. At September 30, 1997, the outstanding balance under the Company's credit facility was $7.6 million. 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. On July 30, 1997, the Company refinanced $5.1 million of 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. At September 30, 1997 the weighted average interest rate of borrowings under the line of credit was 7.68%. 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 nine-month period ended September 30, 1997 was $6,881,000, or $1,356,000 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 net cash provided by financing activities increased $14,053,000 and $13,372,000, respectively, when compared to the same period in 1996 primarily as a result of the acquisition of the Tanon Building and the undeveloped land. Management has decided to sell the Carmel Mountain Gateway Plaza. The sale of the property is not expected to result in a material gain or loss to the Company. Until a replacement property is purchased, management expects to apply the sale proceeds to the outstanding balance of the Company's line of credit, or temporarily invest the proceeds in short term securities. Any dilution to the Company's earnings during that time is not expected to be material. Management does not believe that the outcome of the litigation described in Note 4 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 nine month period ended September 30, 1997, the Company declared distributions related to the Series A common stock totaling $4,042,000. 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 Nine Months Ended Funds from Operations September 30, (In thousands) 1997 1996 - ---------------------------------------------------------------------------- Net income $3,248 $3,018 Add: Depreciation and amortization 3,091 2,491 - ---------------------------------------------------------------------------- Funds from Operations $6,339 $5,509 ============================================================================ 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. CONTINENTAL CASUALTY COMPANY LEASE 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, was 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 $740,000 which the Company expects to fund from its operating cash flow by June 30, 1998. 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 eighteen months, the Company's greatest leasing exposure consists of one lease at the Data General Building covering approximately 48,000 square feet, which expires in January 1999. The lease 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 September 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 the renewal or re-leasing of the space, however, the amounts are unknown at this time. During the current quarter, the Company renewed the lease of another significant tenant at the Data General Building that currently occupies approximately 48,000 square feet of space. The new five year lease commences on December 1, 1997 and covers approximately 33,000 square feet. The effective rental rate under the new lease is approximately 14% greater that the existing lease on a per square foot basis. The Company will incur costs for tenant improvements related to this lease totaling approximately $200,000 during 1998. The remaining 15,000 square feet of space is being actively marketed to prospective tenants. 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 September 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: NOVEMBER 11, 1997 EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 4,186 531 1,866 0 0 0 134,534 0 143,528 0 0 0 0 109,455 (13,585) 143,528 0 13,125 0 9,877 0 0 0 0 0 0 0 0 0 3,248 0 0
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