-----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, T9C0QqS7GQBk7kTvYcR1fcmREEfdzteR4hdgg+IfVCqUiO60kls25XrDUeJlxy/W HLSjOl3h0TPMHqcKK4nfiA== 0000853183-98-000017.txt : 19981026 0000853183-98-000017.hdr.sgml : 19981026 ACCESSION NUMBER: 0000853183-98-000017 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981023 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON REAL ESTATE SECURITIES FUND CENTRAL INDEX KEY: 0000853183 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05844 FILM NUMBER: 98729461 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 3055277500 MAIL ADDRESS: STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 FORMER COMPANY: FORMER CONFORMED NAME: TEMPLETON REAL ESTATE TRUST DATE OF NAME CHANGE: 19900313 N-30D 1 ANNUAL REPORT DTD 8/31/98 ANNUAL REPORT AUGUST 31, 1998 TEMPLETON GLOBAL REAL ESTATE FUND [PHOTO] [LOGO] FRANKLIN TEMPLETON PAGE [FRANKLIN TEMPLETON 50-YEAR LOGO] Thank you for investing with Franklin Templeton. We encourage our investors to maintain a long-term perspective and remember that all securities markets move both up and down, as do mutual fund share prices. We appreciate your past support and look forward to serving your investment needs in the years ahead. In 1992, Sir John Templeton retired after a 50-year career of helping investors manage their money. Currently he devotes all of his time and efforts to the John Templeton Foundation. A major portion of his assets remain invested in the Templeton funds which are managed by many of the investment professionals he selected and trained. [PHOTO OF JEFFREY A. EVERETT] JEFFREY A. EVERETT, CFA Portfolio Manager Templeton Global Real Estate Fund PAGE SHAREHOLDER LETTER Your Fund's Objective: Templeton Global Real Estate Fund seeks long-term capital growth, with current income as a secondary objective, by investing primarily in securities of issuers throughout the world which are principally engaged in or related to the real estate industry or which own significant real estate assets. Dear Shareholder: This annual report for Templeton Global Real Estate Fund covers the fiscal year ended August 31, 1998. During this period, global equity markets experienced extreme volatility, and many stocks dropped appreciably in value. Real estate stocks were no exception, and Templeton Global Real Estate Fund-Class I produced a one-year cumulative total return of -19.94%, as discussed in the Performance Summary on page 6. The universe of real estate stocks has continued to grow and develop as an asset class, yielding an increasing number of opportunities for the Fund. Over the past eight years, we have witnessed the equity market capitalization of U.S. Real Estate Investment Trusts increase from about $9 billion to over $134 billion.(1) The European listed real estate market has also 1. Source: National Association of Real Estate Investment Trusts. You will find a complete listing of the Fund's portfolio holdings, including dollar value and number of shares or principal amount, beginning on page 16 of this report. CONTENTS Shareholder Letter ............ 1 Performance Summaries Class I .................... 6 Class II ................... 10 Financial Highlights & Statement of Investments ...... 14 Financial Statements .......... 20 Notes to Financial Statements .................... 23 Independent Auditor's Report .. 27 Tax Designation ............... 28
[PYRAMID GRAPH] PAGE GEOGRAPHIC DISTRIBUTION Based on Total Net Assets 8/31/98 UNITED STATES 50.0% EUROPE 18.9% ASIA 12.3% CANADA 6.4% LATIN AMERICA 4.1% OTHER 3.8% SHORT-TERM INVESTMENTS & OTHER NET ASSETS 4.5%
grown. Although as of August 31, 1998, the publicly traded European real estate market makes up only 3% of the total estimated European real estate market, this percentage could double by 2002. However, such rapid growth and increasing liquidity does not come without dislocations, which can cause wide swings in market performance. In contrast to the past several years, when a strong U.S. real estate market helped make the performance of many real estate investment trusts (REITs)(2) resemble that of "growth" stocks, prices of the Fund's U.S. REITs generally declined during the period under review. However, we believe that the industry has begun a period of consolidation, during which time a few companies will establish themselves as leaders. Although we did not purchase additional REITs during this reporting period, we maintained our positions in several, including Crescent Real Estate Equities Company. Management of the firm has purchased property allowing it significant leeway in establishing rent levels. It also has established a dominant position in the market, and, in our opinion, could deliver value as an industry consolidator. We also continued to hold stock in regional companies, such as Summit Properties Inc. and Highwood Properties Inc., which we believe have the potential to command premium stock prices during this consolidation phase. As the U.S. market matured, the European real estate market entered a period of expansive growth. Historically, there have been few publicly traded European real estate companies, and their stocks have typically had limited liquidity. In our opinion, however, this situation 2. A REIT is a company that owns and manages large real estate investments, providing investors with potential benefits from owning real estate on a scale that most individuals could not achieve. 2 PAGE should change as large financial and industrial institutions realize the benefits of more liquid real estate holdings and spin off their real estate assets into separate, publicly traded companies. We also believe rental income may grow as a result of increased demand for office space from companies requiring a presence in cities across the continent. Furthermore, unprecedented low interest rates necessary for admission to the European Monetary Union should provide many European real estate companies access to inexpensive capital for growth and expansion. In our opinion, the general price declines in European real estate stocks during the reporting period reflected a lack of understanding by investors that this asset class can provide strong defensive characteristics for a portfolio. We therefore maintained existing holdings such as Union du Credit Bail Immobilier Unibail, which owns premier office properties in Paris. We also attempted to identify undervalued companies that could benefit from imminent economic changes in Europe, and added positions to the Fund in companies with assets in the central business districts of several major European cities. One such purchase was Prima Inmobiliaria SA, which owns and acquires office and industrial buildings in Madrid and Barcelona. As of August 31, 1998, our European holdings comprised 18.9% of total net assets, up from 13.6% one year earlier. An extremely difficult macroeconomic environment in Asia during the reporting period caused property prices there to decline dramatically. In Hong Kong, prices of real estate and real estate stocks plunged, as TOP 10 HOLDINGS 8/31/98
COMPANY % OF TOTAL INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------- Revenue Property Ltd. Real Estate, Canada 4.9% Equity Residential Properties Real Estate, U.S. 4.6% Rouse Co. Real Estate, U.S. 4.3% CBL & Associates Properties Inc. Real Estate, U.S. 3.8% LTC Properties Inc. Real Estate, U.S. 3.6% General Growth Properties Real Estate, U.S. 3.6% Weeks Corp. Real Estate, U.S. 3.6% Highwood Properties Inc., REIT, Real Estate, U.S. 3.1% Union du Credit Bail Immobilier Unibail Real Estate, France 3.0% Crescent Real Estate Equities Co. Real Estate, U.S. 2.5%
3 PAGE developers who had been enjoying huge profit margins saw demand for their properties shrink. Adding to the pressure on Hong Kong property stocks was the fact that these stocks comprise a significant portion of Hong Kong's Hang Seng Index, (3) and many investors purchase them as proxies for the entire market rather than for their value as real estate stocks. This can cause their prices to decline due to technical factors affecting the broader Hong Kong market rather than as a result of stock-specific fundamentals. Of course, we focus on stock-specific fundamentals and shall seek, as always, to acquire stock in companies we believe have strong balance sheets and management for a fraction of what we consider to be their potential value. Even under our worst-case scenario, we believe companies such as Cheung Kong Holdings Ltd. and New World Development Co. Ltd. should weather this period and may eventually outperform other stocks. Looking forward, we're confident about the future of real estate stocks. The road may not always be smooth, but, in our opinion, many of today's undervalued stocks have the potential to create value over the long term. Please remember that this discussion reflects our views, opinions and portfolio holdings as of August 31, 1998, the end of the reporting period. However, market and economic conditions are changing constantly, which can be expected to affect our strategies and the Fund's portfolio composition. Although historical performance is no guarantee of future results, these insights may help you better understand our investment and management philosophy. 3. An index is an unmanaged group of securities that is used to measure market performance. One cannot invest directly in an index. 4 PAGE Also, there are special risks involved with global investing related to market, currency, economic, social, political and other factors. Emerging markets involve similar but heightened risks, in addition to those associated with their relatively small size and lesser liquidity. Investing in any emerging market means accepting a certain amount of volatility and, in some cases, severe market corrections. Since the Fund concentrates on the real estate industry, its share price may experience greater volatility than those of more broadly diversified investments. While short-term volatility can be disconcerting, declines of as much as 40% to 50% are not unusual in emerging markets. For example, the Hong Kong equity market has increased 785% in the last 15 years, but has suffered six declines of more than 20% during that time. (4) The special risks associated with these types of investments, as well as other considerations, are discussed in the Fund's prospectus. We thank you for your participation in Templeton Global Real Estate Fund and look forward to serving you in the future. Please feel free to contact us with any questions or comments you may have. Sincerely, /s/JEFFREY A. EVERETT Jeffrey A. Everett, CFA Portfolio Manager Templeton Global Real Estate Fund, Inc. 4. Source: Bloomberg. Based on quarterly percentage price change over 15 years ended June 30, 1998. Market returns are measured in Hong Kong dollars. 5 PAGE PERFORMANCE SUMMARY CLASS I Templeton Global Real Estate Fund - Class I produced a cumulative total return of -19.94% for the one-year period ended August 31, 1998. Cumulative total return measures the change in value of an investment, assuming reinvestment of all distributions, and does not include the initial sales charge. While we expect market volatility in the short term, we have always maintained a long-term perspective when managing the Fund, and we encourage shareholders to view their investments in a similar manner. As you can see from the table on page 9, the Fund's Class I shares delivered a cumulative total return of slightly more than 65% since inception on September 12, 1989. The Fund's share price, as measured by net asset value, decreased $3.63, from $16.33 on August 31, 1997, to $12.70 on August 31, 1998. During the reporting period, shareholders received per-share distributions of 33 cents ($0.33) in income dividends and 13 cents ($0.13) in long-term capital gains. Distributions will vary depending on income earned by the Fund and any profits realized from the sale of securities in the portfolio, as well as the level of the Fund's operating expenses. The graph on page 8 compares the performance of the Fund's Class I shares since their inception and the unmanaged Morgan Stanley Capital International(R) (MSCI) World Index, which includes approximately 1,500 Past performance is not predictive of future results. 6 PAGE companies representing the stock markets of 23 countries, including the U.S., Canada, the United Kingdom, and Japan. It also shows the Fund's performance versus the Consumer Price Index (CPI), a commonly used measure of inflation. Please remember, the Fund's performance differs from that of an index because an index is not managed according to any investment strategy, does not contain cash (the Fund generally carries a certain percentage of cash at any given time), and includes no initial sales charge or management or operating expenses. Of course, one cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Past performance is not predictive of future results. 7 PAGE CLASS I Total Return Index Comparison $10,000 Investment (9/12/89 - 8/31/98) [LINE GRAPH] The following line graph compares the performance of Templeton Global Real Estate Fund's Class I shares to that of the Morgan Stanley Capital International World Index and to the Consumer Price Index, based on a $10,000 investment from 9/12/89 to 8/31/98.
MSCI Templeton Global Real World Estate Fund - Class I* Index CPI 9/12/89 $9,425 $10,000 $10,000 Sep-89 $9,425 $10,418 $10,019 Oct-89 $9,369 $10,072 $10,068 Nov-89 $9,369 $10,476 $10,091 Dec-89 $9,435 $10,814 $10,106 Jan-90 $9,102 $10,311 $10,210 Feb-90 $9,093 $9,870 $10,258 Mar-90 $9,150 $9,276 $10,315 Apr-90 $8,827 $9,144 $10,331 May-90 $9,368 $10,109 $10,355 Jun-90 $9,549 $10,038 $10,411 Jul-90 $9,596 $10,131 $10,451 Aug-90 $8,437 $9,185 $10,547 Sep-90 $7,800 $8,218 $10,635 Oct-90 $7,767 $8,987 $10,699 Nov-90 $7,905 $8,841 $10,723 Dec-90 $8,200 $9,028 $10,723 Jan-91 $8,984 $9,360 $10,787 Feb-91 $9,567 $10,228 $10,803 Mar-91 $10,009 $9,928 $10,819 Apr-91 $10,281 $10,007 $10,835 May-91 $10,381 $10,236 $10,866 Jun-91 $10,029 $9,605 $10,899 Jul-91 $10,230 $10,061 $10,915 Aug-91 $10,110 $10,030 $10,947 Sep-91 $10,311 $10,295 $10,996 Oct-91 $10,139 $10,464 $11,011 Nov-91 $10,003 $10,010 $11,043 Dec-91 $11,022 $10,740 $11,052 Jan-92 $11,423 $10,543 $11,068 Feb-92 $11,296 $10,363 $11,108 Mar-92 $11,127 $9,877 $11,164 Apr-92 $11,264 $10,016 $11,180 May-92 $11,634 $10,416 $11,195 Jun-92 $11,433 $10,069 $11,236 Jul-92 $11,264 $10,096 $11,260 Aug-92 $10,969 $10,344 $11,292 Sep-92 $11,085 $10,251 $11,323 Oct-92 $11,197 $9,975 $11,364 Nov-92 $11,143 $10,156 $11,379 Dec-92 $11,479 $10,240 $11,372 Jan-93 $11,905 $10,276 $11,428 Feb-93 $12,352 $10,521 $11,468 Mar-93 $13,029 $11,133 $11,509 Apr-93 $13,149 $11,651 $11,540 May-93 $13,302 $11,922 $11,556 Jun-93 $13,193 $11,823 $11,572 Jul-93 $13,313 $12,069 $11,572 Aug-93 $13,825 $12,624 $11,604 Sep-93 $14,033 $12,393 $11,628 Oct-93 $14,437 $12,736 $11,677 Nov-93 $14,448 $12,018 $11,685 Dec-93 $15,265 $12,608 $11,684 Jan-94 $15,842 $13,442 $11,717 Feb-94 $15,708 $13,270 $11,757 Mar-94 $14,943 $12,700 $11,798 Apr-94 $14,921 $13,095 $11,813 May-94 $15,010 $13,131 $11,821 Jun-94 $14,410 $13,097 $11,861 Jul-94 $14,921 $13,348 $11,892 Aug-94 $15,154 $13,752 $11,941 Sep-94 $14,965 $13,393 $11,973 Oct-94 $14,666 $13,776 $11,982 Nov-94 $14,152 $13,182 $11,997 Dec-94 $14,090 $13,312 $11,997 Jan-95 $13,639 $13,115 $12,045 Feb-95 $13,808 $13,308 $12,093 Mar-95 $13,706 $13,952 $12,133 Apr-95 $13,819 $14,441 $12,173 May-95 $14,473 $14,567 $12,197 Jun-95 $14,586 $14,566 $12,221 Jul-95 $14,902 $15,298 $12,221 Aug-95 $14,891 $14,959 $12,254 Sep-95 $15,094 $15,398 $12,277 Oct-95 $14,673 $15,159 $12,317 Nov-95 $14,685 $15,688 $12,308 Dec-95 $14,936 $16,150 $12,300 Jan-96 $15,365 $16,444 $12,373 Feb-96 $15,435 $16,547 $12,413 Mar-96 $15,331 $16,826 $12,477 Apr-96 $15,551 $17,224 $12,525 May-96 $15,830 $17,242 $12,549 Jun-96 $15,784 $17,333 $12,557 Jul-96 $15,400 $16,724 $12,581 Aug-96 $16,004 $16,919 $12,605 Sep-96 $16,376 $17,585 $12,645 Oct-96 $16,658 $17,710 $12,685 Nov-96 $17,178 $18,706 $12,709 Dec-96 $17,992 $18,410 $12,709 Jan-97 $18,327 $18,634 $12,749 Feb-97 $18,315 $18,852 $12,787 Mar-97 $18,123 $18,483 $12,819 Apr-97 $17,729 $19,090 $12,834 May-97 $18,662 $20,272 $12,826 Jun-97 $19,080 $21,285 $12,842 Jul-97 $19,906 $22,269 $12,857 Aug-97 $19,535 $20,783 $12,882 Sep-97 $20,540 $21,915 $12,914 Oct-97 $18,651 $20,765 $12,946 Nov-97 $18,784 $21,136 $12,938 Dec-97 $18,940 $21,397 $12,923 Jan-98 $18,768 $21,997 $12,946 Feb-98 $19,654 $23,488 $12,972 Mar-98 $20,073 $24,483 $12,998 Apr-98 $19,703 $24,726 $13,021 May-98 $19,014 $24,420 $13,045 Jun-98 $18,300 $25,003 $13,060 Jul-98 $17,536 $24,966 $13,076 Aug-98 $15,640 $21,641 $13,092
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS I SHARES. THE FUND OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT ITS PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS. *Performance figures represent the change in value of an investment over the period shown and have been restated to include the current, maximum 5.75% initial sales charge, assuming reinvestment of distributions at net asset value. Prior to July 1, 1992, Fund shares were offered at a higher initial sales charge; thus, actual total returns would have been lower. On January 1, 1993, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. Past performance is not predictive of future results. **Source: Morgan Stanley Capital International. Index is unmanaged and includes reinvested dividends. One cannot invest directly in an index. ***Source: Bureau of Labor Statistics (8/31/98). Past performance is not predictive of future results. 8 PAGE CLASS I Periods ended 8/31/98
SINCE INCEPTION 1-YEAR 5-YEAR (9/12/89) - -------------------------------------------------------------------------------- Cumulative Total Return(1) -19.94% 13.20% 65.94% Average Annual Total Return(2) -24.56% 1.29% 5.11% Value of $10,000 Investment(3) $7,544 $10,669 $15,640 8/31/94 8/31/95 8/31/96 8/31/97 8/31/98 - -------------------------------------------------------------------------------- One-Year Total Return(4) 9.69% -1.74% 7.48% 22.06% -19.94%
1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include the sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and has been restated to include the current, maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares were offered at a higher sales charge; thus, actual total returns would have been lower. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and have been restated to include the current, maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares were offered at a higher sales charge; thus, actual total returns would have been lower. 4. One-year total return represents the change in value of an investment over the periods ended on the dates indicated and does not include the sales charge. On January 1, 1993, the Fund's Class I shares implemented a Rule 12b-1 plan, which affects subsequent performance. All calculations assume reinvestment of distributions at net asset value. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, currency volatility, and the economic, social and political climates of countries where the Fund invests. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. You may have a gain or loss when you sell your shares. Past performance is not predictive of future results. 9 PAGE CLASS II Templeton Global Real Estate Fund - Class II produced a cumulative total return of -20.61% for the one-year period ended August 31, 1998. Cumulative total return measures the change in value of an investment, assuming reinvestment of all distributions, and does not include sales charges. The Fund's share price, as measured by net asset value, decreased $3.61, from $16.16 on August 31, 1997, to $12.55 on August 31, 1998. During the reporting period, shareholders received per-share distributions of 21.48 cents ($0.2148) in income dividends and 13 cents ($0.13) in long-term capital gains. Distributions will vary depending on income earned by the Fund and any profits realized from the sale of securities in the portfolio, as well as the level of the Fund's operating expenses. Past performance is not predictive of future results. 10 PAGE The graph on the following page compares the performance of the Fund's Class II shares since inception and the unmanaged Morgan Stanley Capital International(R) (MSCI) World Index, which includes approximately 1,500 companies representing the stock markets of 23 countries, including the U.S., Canada, the United Kingdom, and Japan. It also shows the Fund's performance versus the Consumer Price Index (CPI), a commonly used measure of inflation. Please remember that the Fund's performance differs from that of an index because an index is not managed according to any investment strategy, does not contain cash (the Fund generally carries a certain percentage of cash at any given time), and includes no sales charges or management or operating expenses. Of course, one cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Past performance is not predictive of future results. 11 PAGE CLASS II Total Return Index Comparison $10,000 Investment (5/1/95 - 8/31/98) [LINE GRAPH] The following line graph compares the performance of Templeton Global Real Estate Fund's Class II shares to that of the Morgan Stanley Capital International World Index and to the Consumer Price Index, based on a $10,000 investment from 5/1/95 to 8/31/98.
Templeton Global Real Estate Fund - MSCI World Class II* Index CPI 5/1/95 $9,903 $10,000 $10,000 May-95 $10,364 $10,088 $10,020 Jun-95 $10,437 $10,086 $10,040 Jul-95 $10,663 $10,593 $10,040 Aug-95 $10,639 $10,359 $10,067 Sep-95 $10,784 $10,663 $10,086 Oct-95 $10,471 $10,497 $10,119 Nov-95 $10,479 $10,863 $10,112 Dec-95 $10,652 $11,183 $10,105 Jan-96 $10,952 $11,387 $10,164 Feb-96 $10,993 $11,458 $10,197 Mar-96 $10,910 $11,651 $10,250 Apr-96 $11,060 $11,927 $10,289 May-96 $11,251 $11,940 $10,309 Jun-96 $11,209 $12,002 $10,316 Jul-96 $10,935 $11,581 $10,335 Aug-96 $11,359 $11,716 $10,355 Sep-96 $11,616 $12,177 $10,388 Oct-96 $11,804 $12,264 $10,421 Nov-96 $12,167 $12,953 $10,441 Dec-96 $12,736 $12,748 $10,441 Jan-97 $12,966 $12,904 $10,473 Feb-97 $12,958 $13,054 $10,505 Mar-97 $12,813 $12,799 $10,531 Apr-97 $12,524 $13,219 $10,544 May-97 $13,171 $14,038 $10,537 Jun-97 $13,460 $14,739 $10,550 Jul-97 $14,031 $15,421 $10,563 Aug-97 $13,758 $14,392 $10,583 Sep-97 $14,456 $15,175 $10,609 Oct-97 $13,120 $14,379 $10,636 Nov-97 $13,197 $14,636 $10,629 Dec-97 $13,290 $14,816 $10,617 Jan-98 $13,168 $15,232 $10,636 Feb-98 $13,777 $16,265 $10,657 Mar-98 $14,064 $16,954 $10,678 Apr-98 $13,803 $17,122 $10,697 May-98 $13,298 $16,910 $10,717 Jun-98 $12,794 $17,314 $10,730 Jul-98 $12,254 $17,288 $10,742 Aug-98 $10,922 $14,985 $10,755
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS II SHARES. THE FUND OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT ITS PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS. *Performance figures represent the change in value of an investment over the periods shown and include all sales charges, assuming reinvestment of distributions at net asset value. Past performance is not predictive of future results. **Source: Morgan Stanley Capital International. Index is unmanaged and includes reinvested dividends. One cannot invest directly in an index. ***Source: Bureau of Labor Statistics (8/31/98). Past performance is not predictive of future results. 12 PAGE CLASS II Periods ended 8/31/98
SINCE INCEPTION 1-YEAR 3-YEAR (5/1/95) - -------------------------------------------------------------------------------- Cumulative Total Return(1) -20.61% 2.59% 10.29% Average Annual Total Return(2) -22.18% 0.52% 2.68% Value of $10,000 Investment(3) $7,782 $10,156 $10,922 8/31/96 8/31/97 8/31/98 - -------------------------------------------------------------------------------- One-Year Total Return(4) 6.69% 21.12% -20.61%
1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the 1.0% initial sales charge and the 1.0% contingent deferred sales charge, applicable to shares redeemed within 18 months of investment. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include all sales charges. 4. One-year total return represents the change in value of an investment over the periods ended on the dates indicated and does not include sales charges. All calculations assume reinvestment of distributions at net asset value. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, currency volatility and the economic, social and political climates of countries where the Fund invests. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. You may have a gain or loss when you sell your shares. Past performance is not predictive of future results. 13 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Financial Highlights
CLASS I -------------------------------------------------------- YEAR ENDED AUGUST 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (For a share outstanding throughout the year) Net asset value, beginning of year......................... $16.33 $13.78 $13.20 $13.66 $12.66 -------------------------------------------------------- Income from investment operations: Net investment income..................................... .46 .39 .31 .39 .22 Net realized and unrealized gains (losses)................ (3.63) 2.58 .64 (.64) 1.00 -------------------------------------------------------- Total from investment operations........................... (3.17) 2.97 .95 (.25) 1.22 -------------------------------------------------------- Less distributions from: Net investment income..................................... (.33) (.42) (.37) (.21) (.22) Net realized gains........................................ (.05) -- -- -- -- In excess of net realized gains........................... (.08) -- -- -- -- -------------------------------------------------------- Total distributions........................................ (.46) (.42) (.37) (.21) (.22) -------------------------------------------------------- Net asset value, end of year............................... $12.70 $16.33 $13.78 $13.20 $13.66 -------------------------------------------------------- -------------------------------------------------------- Total Return*.............................................. (19.94)% 22.06% 7.48% (1.74)% 9.69% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's)............................ $97,823 $151,777 $125,875 $130,149 $131,544 Ratios to average net assets: Expenses.................................................. 1.45% 1.45% 1.51% 1.55% 1.58% Net investment income..................................... 2.70% 2.55% 2.73% 3.05% 1.97% Portfolio turnover rate.................................... 23.18% 24.03% 20.07% 38.69% 32.34%
*Total return does not reflect sales commissions. 14 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Financial Highlights (continued)
CLASS II ----------------------------------------------- YEAR ENDED AUGUST 31, ----------------------------------------------- 1998 1997 1996 1995+ ----------------------------------------------- PER SHARE OPERATING PERFORMANCE (For a share outstanding throughout the year) Net asset value, beginning of year.......................... $16.16 $13.67 $13.17 $12.25 ----------------------------------------------- Income from investment operations: Net investment income...................................... .30 .31 .33 .03 Net realized and unrealized gains (losses)................. (3.57) 2.52 .52 .89 ----------------------------------------------- Total from investment operations............................ (3.27) 2.83 .85 .92 ----------------------------------------------- Less distributions from: Net investment income...................................... (.21) (.34) (.35) -- Net realized gains......................................... (.05) -- -- -- In excess of net realized gains............................ (.08) -- -- -- ----------------------------------------------- Total distributions......................................... (.34) (.34) (.35) -- ----------------------------------------------- Net asset value, end of year................................ $12.55 $16.16 $13.67 $13.17 ----------------------------------------------- ----------------------------------------------- Total Return*............................................... (20.61)% 21.12% 6.69% 7.51% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's)............................. $6,869 $8,917 $5,275 $1,823 Ratios to average net assets: Expenses................................................... 2.20% 2.20% 2.26% 2.26%** Net investment income...................................... 1.97% 1.74% 2.20% 1.71%** Portfolio turnover rate..................................... 23.18% 24.03% 20.07% 38.69%
*Total return does not reflect sales commissions or the contingent deferred sales charge and is not annualized. **Annualized. +For the period May 1, 1995 (effective date) to August 31, 1995. See Notes to Financial Statements. 15 PAGE TEMPLETON GLOBAL REAL ESTATE FUND STATEMENT OF INVESTMENTS, AUGUST 31, 1998
COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS 89.1% BANKING 2.7% Bangkok Bank Public Co. Ltd., fgn. ......................... Thailand 291,000 $ 204,881 Banque Nationale de Paris BNP............................... France 9,936 679,044 Development Bank of Singapore Ltd., fgn. ................... Singapore 43,000 148,902 HSBC Holdings Plc. ......................................... Hong Kong 79,916 1,696,457 National Australia Cap Sec Plc. ............................ Australia 3,400 92,225 *Shinhan Bank Co. Ltd. ..................................... South Korea 7,224 16,957 ------------ 2,838,466 ------------ BUILDING MATERIALS & COMPONENTS 1.8% Suez Cement Co. ............................................ Egypt 88,000 1,369,147 Unione Cementi Marchino Emiliane (Unicem), di Risp.......... Italy 139,580 546,755 ------------ 1,915,902 ------------ CONSTRUCTION & HOUSING 2.2% Daito Trust Construction Co. Ltd. .......................... Japan 101,800 814,746 ++*Sundance Homes Inc. ..................................... United States 640,600 1,281,200 Toda Corp. ................................................. Japan 70,000 243,431 ------------ 2,339,377 ------------ ENERGY SOURCES 1.0% Societe Elf Aquitaine SA.................................... France 10,317 1,054,394 ------------ FINANCIAL SERVICES .6% Housing Development Finance Corp. Ltd. ..................... India 6,100 367,370 Lend Lease Corp. Ltd. ...................................... Australia 16,000 302,605 *Security Capital Group, wts. .............................. United States 13,795 296 ------------ 670,271 ------------ FOREST PRODUCTS & PAPER 1.2% St. Joe Co. ................................................ United States 60,000 1,203,750 ------------ LEISURE & TOURISM 2.4% Grand Hotel Holdings Ltd. .................................. Hong Kong 2,469,000 382,336 Mandarin Oriental Intl. Ltd. ............................... Singapore 1,501,000 705,470 Oriental Hotel (Thailand) Public Co. Ltd., fgn. ............ Thailand 76,200 378,272 Rank Group Plc.............................................. United Kingdom 224,500 1,067,633 ------------ 2,533,711 ------------ MERCHANDISING .7% Li & Fung Ltd. ............................................. Hong Kong 70,000 82,202 Wessel & Vett AS, C......................................... Denmark 12,000 645,299 ------------ 727,501 ------------
16 PAGE TEMPLETON GLOBAL REAL ESTATE FUND STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) METALS & MINING 1.9% Anglo American Platinum Corp. Ltd. ......................... South Africa 1,208 $ 15,041 Boehler Uddeholm AG......................................... Austria 9,500 453,342 Industrias Penoles SA....................................... Mexico 391,100 937,589 RGC Ltd. ................................................... Australia 447,522 551,883 ------------ 1,957,855 ------------ MISC MATERIALS & COMMODITIES .3% De Beers/Centenary Linked Units, Reg. ...................... South Africa 27,600 333,764 ------------ MULTI-INDUSTRY 5.1% Cheung Kong Holdings Ltd. .................................. Hong Kong 618,000 2,392,505 First Pacific Co. .......................................... Hong Kong 1,952,667 604,759 Hutchison Whampoa Ltd. ..................................... Hong Kong 210,000 910,546 *Metro Pacific Corp. MDI.................................... Philippines 21,431,777 318,051 Swire Pacific Ltd., B....................................... Hong Kong 800 359 Wheelock and Company Ltd. .................................. Hong Kong 2,086,000 1,096,945 ------------ 5,323,165 ------------ REAL ESTATE 62.4% +American Health Properties Inc. ........................... United States 64,300 1,430,675 Bail Investissement......................................... France 8,700 1,193,858 +Boston Properties Inc. .................................... United States 65,000 1,856,563 *Canlan Investment Corp. ................................... Canada 293,000 299,716 +Carramerica Realty Corp. .................................. United States 65,000 1,462,500 *Catellus Development Corp. ................................ United States 90,000 1,130,625 +CBL & Associates Properties Inc. .......................... United States 160,000 3,980,000 +Charles E. Smith Residential Realty Inc. .................. United States 80,000 2,380,000 China Resources Beijing Land Ltd. .......................... China 2,000,000 281,319 China Resources Beijing Land Ltd., 144A..................... China 480,300 67,559 +Crescent Real Estate Equities Co. ......................... United States 113,500 2,610,500 +Equity Residential Properties.............................. United States 100,000 3,993,750 +Federal Realty Investment Trust............................ United States 33,000 664,125 +General Growth Properties.................................. United States 104,000 3,750,500 +Highwood Properties Inc., REIT............................. United States 127,800 3,250,913 Inversiones y Representacion SA............................. Argentina 338,051 811,485 Inversiones y Representacion SA, GDR........................ Argentina 832 19,760 +LTC Properties Inc. ....................................... United States 226,000 3,771,375 +Nationwide Health Properties Inc. ......................... United States 122,000 2,493,375 New Asia Realty and Trust Co. Ltd., A....................... Hong Kong 388,000 240,334 New World Development Co. Ltd. ............................. Hong Kong 761,109 820,118 +*Northstar Capital Investment Corp. ....................... United States 95,000 1,947,500 +Omega Healthcare Investors................................. United States 57,183 1,636,863 *Prima Inmobiliaria SA...................................... Spain 95,500 637,028 +Prologis Trust............................................. United States 93,808 1,876,160 Revenue Property Ltd. ...................................... Canada 3,294,739 5,160,701 Rouse Co. .................................................. United States 156,300 4,493,625
17 PAGE TEMPLETON GLOBAL REAL ESTATE FUND STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) REAL ESTATE (CONT.) Ryoden Development Ltd. .................................... Hong Kong 3,270,000 $ 198,330 *Security Capital US Realty................................. Luxembourg 232,000 2,343,200 +Summit Properties Inc., REIT............................... United States 91,300 1,529,275 Taylor Woodrow Plc. ........................................ United Kingdom 315,802 727,118 Union du Credit Bail Immobilier Unibail..................... France 26,850 3,184,746 +Weeks Corp. ............................................... United States 135,000 3,729,375 Westfield Trust, units...................................... Australia 784,365 1,391,442 ------------ 65,364,413 ------------ TELECOMMUNICATIONS .9% +++Receipts of Telebras Stock............................... Brazil 6,664,000 339,740 Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 15,700 560,294 ------------ 900,034 ------------ TRANSPORTATION 3.0% East Japan Railway Co. ..................................... Japan 180 863,092 Florida East Coast Industries Inc. ......................... United States 44,000 1,028,500 Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 104,961 1,212,731 ------------ 3,104,323 ------------ UTILITIES ELECTRICAL & GAS 2.9% National Grid Group Plc. ................................... United Kingdom 199,070 1,439,215 National Power Plc. ........................................ United Kingdom 192,378 1,604,251 ------------ 3,043,466 ------------ TOTAL COMMON STOCKS (COST $94,530,882)...................... 93,310,392 ------------ PREFERRED STOCKS 3.1% Banco Itau SA, pfd. ........................................ Brazil 1,117,000 474,552 Baumax AG, pfd. ............................................ Austria 36,907 716,797 Cia Vale do Rio Doce, A, pfd. .............................. Brazil 30,800 408,259 Cia Vale do Rio Doce, ADR, pfd. ............................ Brazil 31,200 413,561 +Equity Residential Properties Trust, G, cvt., pfd. ........ United States 40,000 860,000 Petrobras Distribuidora SA, pfd. ........................... Brazil 37,183,700 363,022 ------------ TOTAL PREFERRED STOCKS (COST $5,347,947).................... 3,236,191 ------------ PRINCIPAL AMOUNT** -------- BONDS 3.3% Government of Italy, cvt., 5.00%, 6/28/01................... Italy $1,345,000 2,177,219 Revenue Property Ltd., cvt., 6.00%, 3/01/04................. Canada 1,400,000 1,267,000 ------------ TOTAL BONDS (COST $2,750,722)............................... 3,444,219 ------------ SHORT TERM INVESTMENT (COST $222,904) .2% U.S. Treasury Bill, 5.08%, 11/05/98......................... United States 225,000 223,095 ------------ TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $102,852,455)............................................. 100,213,897 ------------
18 PAGE TEMPLETON GLOBAL REAL ESTATE FUND STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
PRINCIPAL COUNTRY AMOUNT** VALUE - ---------------------------------------------------------------------------------------------------------- (a)REPURCHASE AGREEMENT 3.4% Swiss Bank Corp., 5.75%, 9/01/98 (Maturity Value $3,541,566) (COST $3,541,000) Collateralized by U.S. Treasury Notes & Bonds..................................................... United States $3,541,000 $ 3,541,000 ------------ TOTAL INVESTMENTS (COST $106,393,455) 99.1%................. 103,754,897 OTHER ASSETS, LESS LIABILITIES .9%.......................... 937,306 ------------ TOTAL NET ASSETS 100.0%..................................... $104,692,203 ------------ ------------
*Non-income producing. **Securities traded in U.S. dollars. (a)At August 31, 1998, all repurchase agreements held by the Fund had been entered into on that date. +Real Estate Investment Trust (41.3% of total net assets). ++The Investment Company Act of 1940 defines "affiliated companies" as investments in portfolio companies in which the Fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" at August 31, 1998 were $1,281,200. +++Receipts of Telebras stock represent a basket of twelve new holding companies to be received in conjunction with the "split-up" of Telecomunicacoes Brasileiras SA (Telebras). See Notes to Financial Statements. 19 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Financial Statements STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1998 Assets: Investments in securities, at value (cost $102,852,455).... $100,213,897 Repurchase agreement, at value and cost.................... 3,541,000 Cash....................................................... 3,039 Receivables: Investment securities sold................................ 1,724,407 Fund shares sold.......................................... 70,866 Dividends and interest.................................... 469,600 ------------ Total assets.......................................... 106,022,809 ------------ Liabilities: Payables: Investment securities purchased........................... 538,943 Fund shares redeemed...................................... 584,821 To affiliates............................................. 137,461 Accrued liabilities........................................ 69,381 ------------ Total liabilities..................................... 1,330,606 ------------ Net assets, at value........................................ $104,692,203 ------------ ------------ Net assets consist of: Undistributed net investment income........................ $ 2,668,960 Net unrealized depreciation................................ (2,638,558) Distributions in excess of net realized gain............... (747,857) Beneficial shares.......................................... 105,409,658 ------------ Net assets, at value........................................ $104,692,203 ------------ ------------ CLASS I: Net asset value per share ($97,823,354 / 7,702,649 shares outstanding)............................................. $12.70 ------------ ------------ Maximum offering price per share ($12.70 / 94.25%)......... $13.47 ------------ ------------ CLASS II: Net asset value per share ($6,868,849 / 547,442 shares outstanding)*............................................ $12.55 ------------ ------------ Maximum offering price per share ($12.55 / 99.00%)......... $12.68 ------------ ------------
*Redemption price per share is equal to net asset value less any applicable sales charge. See Notes to Financial Statements. 20 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Financial Statements (continued) STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1998 Investment Income: (net of foreign taxes of $219,756) Dividends.................................................. $5,518,960 Interest................................................... 431,441 ---------- Total investment income............................... $ 5,950,401 Expenses: Management fees (Note 3)................................... 1,075,695 Administrative fees (Note 3)............................... 215,139 Distribution fees (Note 3) Class I................................................... 337,939 Class II.................................................. 82,956 Transfer agent fees (Note 3)............................... 199,773 Custodian fees............................................. 28,547 Reports to shareholders.................................... 104,200 Registration and filing fees............................... 39,000 Professional fees.......................................... 46,187 Trustees' fees and expenses................................ 14,000 Other...................................................... 1,598 ---------- Total expenses........................................ 2,145,034 ------------ Net investment income........................... 3,805,367 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments............................................... 1,456,549 Foreign currency transactions............................. (105,191) ---------- Net realized gain..................................... 1,351,358 Net unrealized depreciation on investments............ (32,063,545) ------------ Net realized and unrealized loss............................ (30,712,187) ------------ Net decrease in net assets resulting from operations........ $(26,906,820) ------------ ------------
See Notes to Financial Statements. 21 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Financial Statements (continued) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED AUGUST 31, 1998 AND 1997
1998 1997 ------------------------------- Increase (decrease) in net assets: Operations: Net investment income..................................... $ 3,805,367 $ 3,760,069 Net realized gain from investments and foreign currency transactions............................................ 1,351,358 6,263,665 Net unrealized appreciation (depreciation) on investments.............................................. (32,063,545) 19,072,168 ------------------------------- Net increase (decrease) in net assets resulting from operations............................................ (26,906,820) 29,095,902 Distributions to shareholders from: Net investment income: Class I.................................................. (3,003,171) (3,880,651) Class II................................................. (118,402) (148,294) Net realized gains: Class I.................................................. (466,731) -- Class II................................................. (28,174) -- In excess of net realized gains: Class I.................................................. (705,284) -- Class II................................................. (42,573) -- Capital share transactions (Note 2): Class I.................................................. (24,576,319) 2,081,128 Class II................................................. (154,617) 2,396,525 ------------------------------- Net increase (decrease) in net assets................... (56,002,091) 29,544,610 Net assets: Beginning of year.......................................... 160,694,294 131,149,684 ------------------------------- End of year................................................ $104,692,203 $160,694,294 ------------------------------- ------------------------------- Undistributed net investment income included in net assets End of year................................................ $ 2,668,960 $ 2,058,847 ------------------------------- -------------------------------
See Notes to Financial Statements. 22 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Notes to Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Global Real Estate Fund (the Fund) is registered under the Investment Company Act of 1940 as a diversified, open-end investment company. The Fund seeks long-term capital growth, with current income as a secondary objective, by investing primarily in securities of issuers throughout the world which are principally engaged in or related to the real estate industry or which own significant real estate assets. The following summarizes the Fund's significant accounting policies. a. SECURITY VALUATION: Securities listed or traded on a recognized national exchange or NASDAQ are valued at the latest reported sales price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices. Securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Trustees. 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 and income items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. When the Fund purchases or sells foreign securities it will customarily enter into a foreign exchange contract to minimize foreign exchange risk from the trade date to the settlement date of such transactions. 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. 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 currency denominated assets and liabilities other than investments in securities held at the end of the reporting period. c. INCOME TAXES: No provision has been made for income taxes because the Fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute all of its taxable income. 23 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.) d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Certain income from foreign securities is recorded as soon as information is available to the Fund. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. e. ACCOUNTING ESTIMATES: The preparation of financial statements in accordance with generally accepted accounting principles 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 expense during the reporting period. Actual results could differ from those estimates. 2. BENEFICIAL SHARES The Fund offers two classes of shares: Class I and Class II shares. The shares differ by their initial sales load, distribution fees, voting rights on matters affecting a single class of shares and the exchange privilege of each class. At August 31, 1998, there were an unlimited number of shares of beneficial interest authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
YEAR ENDED AUGUST 31, ------------------------------------------------------------- 1998 1997 ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- CLASS I SHARES: Shares sold................................................ 989,236 $ 15,410,679 2,014,081 $ 30,445,208 Shares issued on reinvestment of distributions............. 239,459 3,769,262 232,731 3,281,785 Shares redeemed............................................ (2,822,831) (43,756,260) (2,082,833) (31,645,865) ------------------------------------------------------------- Net increase (decrease).................................... (1,594,136) $(24,576,319) 163,979 $ 2,081,128 ------------------------------------------------------------- -------------------------------------------------------------
24 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Notes to Financial Statements (continued) 2. BENEFICIAL SHARES (CONT.)
YEAR ENDED AUGUST 31, ------------------------------------------------------- 1998 1997 ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- CLASS II SHARES: Shares sold................................................. 202,765 $ 3,004,691 301,806 $ 4,542,020 Shares issued on reinvestment of distributions.............. 10,557 164,676 9,139 128,318 Shares redeemed............................................. (217,790) (3,323,984) (144,901) (2,273,813) ------------------------------------------------------- Net increase (decrease)..................................... (4,468) $ (154,617) 166,044 $ 2,396,525 ------------------------------------------------------- -------------------------------------------------------
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES Certain officers of the Fund are also officers or directors of Templeton Global Advisors Ltd. (TGAL), Franklin Templeton Services, Inc. (FT Services), Franklin/Templeton Distributors, Inc. (Distributors) and Franklin/Templeton Investor Services, Inc. (Investors Services), the Fund's investment manager, administrative manager, principal underwriter and transfer agent, respectively. The Fund pays an investment management fee to TGAL of 0.75% per year of the average daily net assets of the Fund. The Fund pays an administrative fee to FT Services based on the Fund's average daily net assets as follows:
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS - ----------------------------------------------------------------- 0.15% First $200 million 0.135% Over $200 million, up to and including $700 million 0.10% Over $700 million, up to and including $1.2 billion 0.075% Over $1.2 billion
The Fund reimburses Distributors up to 0.25% and 1.00% per year of the average daily net assets of Class I and Class II shares, respectively, for costs incurred in marketing the Fund's Class I and Class II shares. Under the Class I distribution plan, costs exceeding the maximum may be reimbursed in subsequent periods. At August 31, 1998, unreimbursed costs were $89,940. Distributors received net commissions from sales of Fund shares, and received contingent deferred sales charges for the period of $53,103 and $6,227, respectively. Legal fees of $13,549 were paid to a law firm in which a partner is an officer of the Fund. 4. INCOME TAXES At August 31, 1998, the Fund has deferred capital losses and deferred foreign currency losses occurring subsequent to October 31, 1997 of $516,346 and $108,756, respectively. For tax purposes, such losses will be reflected in the year ending August 31, 1999. 25 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Notes to Financial Statements (continued) 4. INCOME TAXES (CONT.) At August 31, 1998, the net unrealized depreciation based on the cost of investments for income tax purposes of $103,039,496 was as follows: Unrealized appreciation..................................... $ 16,269,867 Unrealized depreciation..................................... (19,095,466) ------------ Net unrealized depreciation................................. $ (2,825,599) ------------ ------------
Net investment income and net realized capital gains differ for financial statement and tax purposes primarily due to differing treatments of passive foreign investment companies and foreign currency transactions. 5. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended August 31, 1998 aggregated $31,753,431 and $50,021,877, respectively. 26 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Independent Auditor's Report THE BOARD OF TRUSTEES AND SHAREHOLDERS TEMPLETON GLOBAL REAL ESTATE FUND We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Templeton Global Real Estate Fund as of August 31, 1998, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods indicated in the accompanying financial statements. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Templeton Global Real Estate Fund as of August 31, 1998, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. [McGladrey & Pullen, LLP] New York, New York September 29, 1998 27 PAGE TEMPLETON GLOBAL REAL ESTATE FUND Tax Designation Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby designates the following amount as a capital gain dividend for the fiscal year ended August 31, 1998: 20% Rate Gain............................................... $1,287,920 ----------
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates 11.66% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended August 31, 1998. 28 PAGE LITERATURE REQUEST For a free brochure and prospectus, which contain more complete information, including charges and expenses, call Franklin Templeton Fund Information at 1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. 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 determined by the presence of a regular beeping tone. FRANKLIN TEMPLETON GROUP GLOBAL GROWTH Franklin Global Health Care Fund Mutual Discovery Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Global Infrastructure Fund Templeton Global Opportunities Trust Templeton Global Real Estate Fund Templeton Global Smaller Companies Fund Templeton Greater European Fund Templeton Growth Fund Templeton Latin America Fund Templeton Pacific Growth Fund Templeton World Fund GLOBAL GROWTH AND INCOME Franklin Global Utilities Fund Mutual European Fund Templeton Global Bond Fund Templeton Growth and Income Fund GLOBAL INCOME Franklin Global Government Income Fund Franklin Templeton Global Currency Fund Franklin Templeton Hard Currency Fund Templeton Americas Government Securities Fund GROWTH Franklin Biotechnology Discovery Fund Franklin Blue Chip Fund Franklin California Growth Fund Franklin DynaTech Fund Franklin Equity Fund Franklin Gold Fund Franklin Growth Fund Franklin MidCap Growth Fund Franklin Small Cap Growth Fund GROWTH AND INCOME Franklin Asset Allocation Fund Franklin Balance Sheet Investment Fund* Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Franklin MicroCap Value Fund* Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Rising Dividends Fund Franklin Strategic Income Fund Franklin Utilities Fund Franklin Value Fund Mutual Beacon Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund FUND ALLOCATOR SERIES Franklin Templeton Conservative Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Growth Target Fund INCOME Franklin Adjustable Rate Securities Fund Franklin Adjustable U.S. Government Securities Fund Franklin's AGE High Income Fund Franklin Bond Fund Franklin Floating Rate Trust Franklin Investment Grade Income Fund Franklin Short-Intermediate U.S. Government Securities Fund Franklin U.S. Government Securities Fund Franklin Money Fund Franklin Federal Money Fund FRANKLIN FUNDS SEEKING TAX-FREE INCOME Federal Intermediate-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund Puerto Rico Tax-Free Income Fund Tax-Exempt Money Fund FRANKLIN STATE-SPECIFIC FUNDS SEEKING TAX-FREE INCOME Alabama Arizona** Arkansas*** California** Colorado Connecticut Florida** Georgia Hawaii*** Indiana Kentucky Louisiana Maryland Massachusetts+ Michigan** Minnesota+ Missouri New Jersey New York** North Carolina Ohio+ Oregon Pennsylvania Tennessee*** Texas Virginia Washington*** VARIABLE ANNUITIES++ Franklin Valuemark(R) Franklin Templeton Valuemark Income Plus (an immediate annuity) *These funds are now closed to new accounts, with the exception of retirement plan accounts. **Two or more fund options available: long-term portfolio, intermediate-term portfolio, a portfolio of insured municipal securities, and/or a high yield portfolio (CA) and a money market portfolio (CA and NY). ***The fund may invest up to 100% of its assets in bonds that pay interest subject to the federal alternative minimum tax. +Portfolio of insured municipal securities. ++Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by Allianz Life Insurance Company of North America or by its wholly owned subsidiary, Preferred Life Insurance Company of New York, and distributed by NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin Advisers, Inc. and its Templeton and Franklin affiliates. 09/98 PAGE PRINCIPAL UNDERWRITER Franklin/Templeton Distributors, Inc. 777 Mariners Island Blvd. San Mateo, California 94404-1585 1-800/DIAL BEN(R) www.franklin-templeton.com SHAREHOLDER SERVICES 1-800/632-2301 FUND INFORMATION 1-800/342-5236 This report must be preceded or accompanied by the current prospectus of Templeton Global Real Estate Fund, which contains more complete information including risk factors, charges and expenses. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors, as well as investment decisions by the Investment Manager, which will not always be profitable or wise. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. 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 determined by the presence of a regular beeping tone. 410 A98 10/98 [LOGO] Printed on recycled paper -----END PRIVACY-ENHANCED MESSAGE-----