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| BRE > SEC Filings for BRE > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Forward-Looking Statements
In addition to historical information, we have made forward-looking statements in this Quarterly Report on Form 10-Q. These forward-looking statements pertain to, among other things, our capital resources, financial liquidity, portfolio performance and results of operations. Forward-looking statements involve numerous risks and uncertainties. You should not rely on these statements as predictions of future events because there is no assurance that the events or circumstances reflected in the statements can be achieved or will occur. Forward-looking statements are identified by words such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates" or "anticipates" or in their negative form or other variations, or by discussions of strategy, plans or intentions. Forward-looking statements are based on assumptions, data or methods that may be incorrect or imprecise or incapable of being realized. The following factors, among others, could affect actual results and future events: defaults or non-renewal of leases, illiquidity of real estate and reinvestment risk, our regional focus in the Western United States, insurance coverage, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to successfully integrate acquired properties and operations, risks and uncertainties affecting property development and construction (including construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities), failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. Our success also depends upon economic trends, including interest rates, income tax laws, governmental regulation, legislation, population changes and other factors. Do not rely solely on forward-looking statements, which only reflect management's analysis. We assume no obligation to update forward-looking statements.
Executive Summary
We are a self-administered equity real estate investment trust, or "REIT," focused on the acquisition, development and management of multifamily apartment communities in eight metropolitan markets of the Western United States. At June 30, 2009, our portfolio had real estate assets with a net book value of approximately $2.9 billion that included 74 wholly or majority-owned apartment communities, aggregating 21,485 units; thirteen multifamily communities owned in joint ventures, comprised of 4,080 apartment units; and five wholly or majority-owned apartment communities in various stages of construction and development, totaling 1,526 units. We earn revenue and generate cash primarily by collecting monthly rent from our apartment residents.
We currently have two communities with a total of 566 units under construction. The total estimated investment is $176,100,000, with an estimated balance to complete totaling $51,200,000. Expected delivery dates for these units range from the fourth quarter of 2009 through the third quarter 2010. The development communities are located in Northern California and the Seattle, Washington metro area. At June 30, 2009, we owned three parcels of land for future development located in Northern and Southern California.
Our year-over-year operating results reflect increased property-level same-store performance, rental and ancillary income from acquisitions completed or stabilized during 2008, and properties in the lease-up phase of development. We define same-store properties as stabilized apartment communities owned by the company for at least five full quarters. Acquired communities and recently completed development properties are considered non-same-store communities.
Results of Operations
Comparison of the Three Months Ended June 30, 2009 and 2008
Rental and ancillary income
Total rental and ancillary revenues were $86,257,000 for the three months ended June 30, 2009, compared to $86,133,000 for the same period in 2008. We define our non same-store communities as communities acquired, developed and stabilized after March 31, 2008. During the 15 months subsequent to March 31, 2008, we completed the construction of 801 units. The increase in total rental and ancillary revenues was generated from non same-store communities. These non same-store communities increased revenue by $3,236,000 for the three months ended June 30, 2009, compared to the same period in 2008. The increase was offset by a decrease in rental and ancillary revenues of $3,112,000 or 3.8% on a same-store basis for the three months ended June 30, 2009, compared to the same period in 2008. Monthly market rents in the same-store portfolio for the second quarter of 2009 decreased 4.1% to $1,451 per unit from $1,513 per unit in the second quarter of 2008.
A summary of the components of revenues for the quarters ended June 30, 2009 and 2008 follows (dollar amounts in thousands):
Three months ended Three months ended
June 30, 2009 June 30, 2008
% Change
% of Total % of Total from 2008
Revenues Revenues Revenues Revenues to 2009
Rental income $ 82,889 96 % $ 82,606 96 % 0 %
Ancillary income 3,368 4 % 3,527 4 % (5 )%
Total revenues $ 86,257 100 % $ 86,133 100 % 0 %
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The total increase in revenues of $124,000 for the three months ended June 30, 2009, as compared with the three months ended June 30 2008, was generated from an increase in non same-store revenue offset by a decrease in same-store revenue as follows (dollar amounts in thousands):
% Change
2009 from 2008
Change to 2009
Same-store communities $ (3,112 ) (4 )%
Non same-store communities 3,236 90 %
Total increase in rental and ancillary revenues
(excluding revenues from discontinued operations) $ 124 0 %
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Real estate expenses
For the quarter ended June 30, 2009, real estate expenses totaled $27,533,000, as compared with $25,404,000 for the quarter ended June 30, 2008. The year-over-year increase in total real estate expenses was attributable to both same-store and non same-store communities. Same-store expenses increased $839,000, or 3.5%. Non same-store expenses increased $1,290,000, or 81.6% from the quarter ended June 30, 2008 which represents the increase in the year-over-year size of the portfolio from recently completed development properties.
A summary of the categories of real estate expenses for the three months ended June 30, 2009 and 2008 follows (dollar amounts in thousands):
Three months ended Three months ended
June 30, 2009 June 30, 2008
% Change
% of Total % of Total from 2008 to
Expense Revenues Expense Revenues 2009
Same-store $ 24,663 $ 23,824 4 %
Non same-store 2,870 1,580 82 %
Total real estate Expenses $ 27,533 32 % $ 25,404 29 % 8 %
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Interest expense
Interest expense was $19,421,000 (net of $3,760,000 of interest capitalized to the cost of apartment communities under development and construction) for the quarter ended June 30, 2009, a decrease of $3,833,000, or 16.5%, from the same period in 2008. Interest expense was $23,254,000 for the quarter ended June 30, 2008 (net of $5,486,000 of interest capitalized to the cost of apartment communities under development and construction). The year-over-year decrease is primarily due to lower average cost of borrowing on our floating rate debt.
General and administrative expenses
General and administrative expenses totaled $4,218,000 and $5,378,000 for the three months ended June 30, 2009 and 2008, respectively. The $1,160,000, or 21.6%, decrease in the current period is primarily due to reduction in compensation related costs and legal expenses.
Other income
Other income for the quarter ended June 30, 2009 totaled $1,196,000 and is comprised of $636,000 of insurance settlement proceeds and approximately $424,000 of management fee income and approximately $94,000 of interest income. Other income for the three months ended June 30, 2008 totaled $637,000 and is comprised of, approximately $435,000 of management fee income, approximately $112,000 of interest income and $74,000 in insurance settlement proceeds.
Net gain from extinguishment of debt
Net gain on extinguishment of debt totaled $1,958,000, and zero for the quarters ended June 30, 2009 and 2008. During the quarter ended June 30, 2009 we repurchased $40,100,000 of our convertible senior unsecured notes with a fixed coupon rate of 4.125% for approximately $35,800,000 for a net gain on extinguishment of approximately $3,358,000. The Company retired $472,265,000 of unsecured public debt due in the years 2009 to 2013 for approximately $470,465,000 for a net loss from extinguishment of approximately $1,400,000 due to the write off of unamortized discounts and fees related to the initial transaction.
Discontinued operations
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144) requires the results of operations for properties sold during the period or designated as held for sale at the end of the period and deemed a component of an entity to be classified as discontinued operations. The property-specific components of net earnings that are classified as discontinued operations include all property-related revenues and operating expenses, depreciation expense recognized prior to the classification as held for sale, and property-specific interest expense to the extent there is secured debt on the property. In addition, the net gain or loss on the eventual disposal of properties held for sale is reported as discontinued operations.
During the three months ended June 30, 2009, we reclassified three operating communities located in: Seattle (2) and the Inland Empire (1), totaling 891 units, from Real estate held for sale under the provisions of SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets" (SFAS No. 144) to Investments in rental properties. The asset values currently reflect the carrying amounts on the dates they were classified as held for sale, adjusted for depreciation expense that would have been recognized had the communities been continuously been classified as Investments in rental properties.
At June 30, 2009, the we had one operating apartment community, Arbor Pointe, a 240-unit property located in Sacramento, classified as held for sale under the provisions of SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets" (SFAS No. 144). The operating property was classified as held for sale in March 2009, and no depreciation has been recorded on the operating community since March 2009. Subsequent to the end of the quarter ended June 30, 2009, we sold the operating community. The sales price totaled approximately $16,000,000 resulting in a net gain on sale of approximately $7,200,000 to be recognized during the third quarter of 2009.
For the quarter ended June 30, 2009, the net gain on sale and combined results of operations generated by the one operating apartment community held for sale and the property sold during June 2009 were included in discontinued operations on the consolidated statements of income and totaled $15,269,000. For the quarter ended June 30, 2008, the combined results of operations generated by the one operating apartment community held for sale, the one property sold during June, 2009, and the six properties sold during 2008 were included in the discontinued operations line on the consolidated statements of income and totaled $3,968,000.
Dividends attributable to preferred stock
Dividends attributable to preferred stock for the second quarters of 2009 and 2008 represent the portion of dividends on our 6.75% Series C and 6.75% Series D Cumulative Redeemable Preferred Stock. All our current outstanding series of preferred stock have a $25.00 per share liquidation share preference.
Net Income available to common shareholders
As a result of the various factors mentioned above, net income available to common shareholders for the three months ended June 30, 2009 was $28,222,000, or $0.54 per diluted share, as compared with $14,381,000 or $0.28 per diluted share, for the same period in 2008.
Comparison of the Six Months Ended June 30, 2009 and 2008
Rental and ancillary income
Total rental and ancillary revenues were $172,638,000 for the six months ended June 30, 2009, compared to $170,412,000 for the same period in 2008. The increase in total rental and ancillary revenues was generated non same-store communities. We define our non-same-store communities as communities acquired, developed and stabilized after December 31, 2007. These non same-store communities increased revenue by $5,847,000 for the six months ended June 30, 2009, compared to the same period in 2008. During the 18 months subsequent to December 31, 2007, we completed the construction of 1,673 units. During the six months ended June 30, 2009, on a same store basis, rental and ancillary revenues decreased $3,621,000, or 2.2%, primarily due to decreases in market rents. Monthly market rents in the same-store portfolio for the six months ended June 30, 2009 decreased 2.9% to $1,461 per unit from $1,504 during the same period of 2008.
A summary of the components of revenues for the six months ended June 30, 2009 and 2008 follows (dollar amounts in thousands):
Six months ended Six months ended
June 30, 2009 June 30, 2008
% Increase
% of Total % of Total from 2008
Revenues Revenues Revenues Revenues to 2009
Rental income $ 165,939 96 % $ 163,604 96 % 1 %
Ancillary income 6,699 4 % 6,808 4 % (2 )%
Total revenues $ 172,638 100 % $ 170,412 100 % 1 %
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The total increase in revenues of $2,226,000 for the six months ended June 30, 2009 as compared with the six months ended June 30, 2008 generated from same-store and non same-store communities was as follows (dollar amounts in thousands):
% Increase
2009 from 2008
Change to 2009
Same-store communities $ (3,621 ) (2 )%
Non Same-store communities 5,847 89 %
Total increase in rental and ancillary revenues
(excluding revenues from discontinued operations) $ 2,226 1 %
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Real estate expenses
For the six months ended June 30, 2009, real estate expenses totaled $53,910,000 as compared with $50,706,000 for the six months ended June 30, 2008. The year-over-year increase in total real estate expenses was attributable to both same-store and non same-store communities. Same-store expenses increased $1,022,000, or 2.1%, Non same-store expenses increased $2,182,000 from the six months ended June 30, 2008 and represents the increase in year over year size of the portfolio.
A summary of the categories of real estate expenses for the six months ended June, 2009 and 2008 follows (dollar amounts in thousands):
Six months ended Six months ended
June 30, 2009 June 30, 2008
% Change
% of Total % of Total from 2008 to
Expense Revenues Expense Revenues 2009
Same-store $ 48,800 $ 47,778 2 %
Non same-store 5,110 2,928 75 %
Total real estate Expenses $ 53,910 31 % $ 50,706 30 % 6 %
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Interest expense
Interest expense was $40,443,000 (net of interest capitalized to the cost of apartment communities under development of $9,415,000) for the six months ended June 30, 2009, a decrease of $5,773,000, or 12%, from the comparable period in 2008. Interest expense was $46,216,000 for the same period in 2008 (net of $11,549,000 of interest capitalized to the cost of apartment communities under construction). The year-over-year decrease is primarily due to lower average cost of borrowing on our floating rate debt.
General and administrative expenses
General and administrative expenses totaled $8,544,000 and $10,033,000 for the six months ended June 30, 2009 and 2008, respectively. The $1,489,000 or 14.8% decrease in the current period is primarily due to reduction in compensation related costs and legal expenses.
Other income
Other income for the six months ended June 30, 2009 totaled $1,823,000 and is comprised of, approximately $851,000 of management fee income, $636,000 of insurance settlement proceeds, approximately $187,000 of interest income, and $120,000 related to the sale of an excess land parcel. Other income for the six months ended June 30, 2008 totaled $1,231,000 and is comprised of approximately $856,000 of management fee income, approximately $260,000 of interest income and $74,000 of insurance settlement proceeds.
Net gain from extinguishment of debt
Net gain on extinguishment of debt totaled $1,958,000, and zero for the six months ended June 30, 2009 and 2008. During the quarter ended June 30, 2009 we repurchased $40,100,000 of our convertible senior unsecured notes with a fixed coupon rate of 4.125% for approximately $35,800,000 for a net gain on extinguishment of approximately $3,358,000. The Company retired $472,265,000 of unsecured public debt due in the years 2009 to 2013 for approximately $470,465,000 for a net loss from extinguishment of approximately $1,400,000 due to the write off of unamortized discounts and fees related to the initial transaction.
Discontinued operations
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), requires the results of operations for properties sold during the period or designated as held for sale at the end of the period and deemed a component of an entity to be classified as discontinued operations. The property-specific components of net earnings that are classified as discontinued operations include all property-related revenues and operating expenses, depreciation expense recognized prior to the classification as held for sale, and property-specific interest expense to the extent there is secured debt on the property. In addition, the net gain or loss on the eventual disposal of properties held for sale is reported as discontinued operations.
During the six months ended June 30, 2009, we reclassified three operating communities located in: Seattle (2) and the Inland Empire (1), totaling 891 units, from Real estate held for sale under the provisions of SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets" (SFAS No. 144) to Investments in rental properties. The asset values currently reflect the carrying amounts on the dates they were classified as held for sale, adjusted for depreciation expense that would have been recognized had the communities been continuously been classified as Investments in rental properties.
At June 30, 2009, the we had one operating apartment community, Arbor Pointe, a 240-unit property located in Sacramento, classified as held for sale under the provisions of SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets" (SFAS No. 144). The operating property was classified as held for sale in March 2009, and no depreciation has been recorded on the operating community since March 2009. Subsequent to the end of the quarter ended June 30, 2009, we sold the operating community. The sales price totaled approximately $16,000,000 resulting in a net gain on sale of approximately $7,200,000 to be recognized during the third quarter of 2009.
In January 2009, we sold an excess parcel of land in Santa Clara, California, classified as held for sale at December 31, 2008, for gross sales proceeds totaling $17,100,000.
For the six months ended June 30, 2009, the net gain on sales and combined results of operations generated by the one operating apartment community held for sale and the property sold during the quarter ended June 30, 2009, were included in discontinued operations on the consolidated statements of income and totaled $16,571,000. For the six months ended June 30, 2008, the net gain on sales and combined results of operations generated by the one operating apartment community held for sale, the one property sold during June, 2009, and the six properties sold during 2008 were included in the discontinued operations line on the consolidated statements of income and totaled $7,288,000.
Dividends attributable to preferred stock
Dividends attributable to preferred stock for the first six months of 2009 and 2008 represent the dividends on our 6.75% Series C and 6.75% Series D Cumulative Redeemable Preferred Stock. All of our currently outstanding series of preferred stock have a $25.00 per share liquidation preference.
Net Income available to common shareholders
As a result of the various factors mentioned above, net income available to common shareholders for the six months ended June 30, 2009 was $41,215,000, or $0.79 per diluted share, as compared with $27,086,000 or $0.52 per diluted share, for the comparable period in 2008.
Liquidity and Capital Resources
During the past two years, a confluence of many factors have contributed to diminish expectations for the U.S. economy and increase market volatility for publicly traded securities, including the common shares of publicly owned companies. These factors include the availability and cost of credit, limited liquidity in the U.S. home mortgage market, declining real estate fundamentals and market valuations, declining business and consumer confidence, and increased unemployment. These conditions have combined to create an unprecedented level of market volatility, which has influenced the price of our shares.
As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Our access to funds under our credit facility is dependent on the ability of the lenders that are parties to the facility to meet their funding commitments to us. In addition, we may not be able to obtain other financing on terms satisfactory to us or at all.
In the event that we do not have sufficient cash available to us from our operations to continue operating our business as usual, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation: (a) divesting ourselves of properties at less than optimal terms; (b) issuing and selling our debt and equity in public or private transactions under less than optimal conditions; (c) entering into leases with new tenants at lower rental rates or less than optimal terms; (d) entering into lease renewals with our existing tenants without an increase in rental rates at turnover; (e) reducing the level of dividends to common shareholders to the minimum level necessary to maintain our corporate REIT status under the Internal Revenue Code; or (f) paying a portion of our dividends in stock rather than cash. Taking such measures to increase liquidity may have a materially adverse effect on us and our ability to make distributions to our shareholders and pay amounts due on our debt.
Depending upon the availability and cost of external capital, we anticipate making additional investments in multifamily apartment communities. These investments are expected to be funded through a variety of sources. These sources may include internally generated cash, temporary borrowings under our revolving unsecured line of credit, proceeds from asset sales, public and private offerings of debt and equity securities, and in some cases the assumption of secured borrowings. To the extent that these additional investments are initially financed with temporary borrowings under our revolving unsecured line of credit, we anticipate that permanent financing will be provided through a combination of public and private offerings of debt and equity securities, proceeds from asset sales and secured debt. However, permanent financing may not be available on favorable terms, or at all. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service and dividend requirements, and finance future investments. For the six months ended June 30, 2009, cash flows generated from operating activities were lower than distributions to common shareholders, preferred
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