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BRE > SEC Filings for BRE > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for BRE PROPERTIES INC /MD/

Form 10-Q for BRE PROPERTIES INC /MD/


7-Nov-2012

Quarterly Report


ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 communities to acquire and in effecting acquisitions, failure to successfully integrate acquired communities and operations, risks and uncertainties affecting community 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 ownership, operation, development, and acquisition of apartment communities. Our operating and investment activities are primarily focused on the major metropolitan markets within the state of California, and in the metropolitan area of Seattle, Washington. Our segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing such segments' performance.

This table summarizes information about our 2012 operating communities:

                                                  Same-store Communities1                                                   Total Communities 2
                                                                              % of               % of                                                % of           % of
                                           # of              # of          Same-store         Same-store             # of              # of          Total         Total
Regions                                Communities           Homes          Revenue              NOI              Communities         Homes         Revenue         NOI
San Diego                                         13           4,056                21 %               21 %                  13         4,056             19 %         20 %
Inland Empire                                      5           1,173                 5 %                5 %                   5         1,173              5 %          5 %
Orange County                                     11           3,349                17 %               17 %                  12         3,789             17 %         17 %
Los Angeles                                       13           3,047                17 %               17 %                  14         3,267             17 %         17 %
San Francisco                                     12           3,495                21 %               22 %                  15         4,197             24 %         25 %

California                                        54          15,120                81 %               82 %                  59        16,482             82 %         84 %
Seattle                                           13           3,456                15 %               14 %                  13         3,456             14 %         13 %
Phoenix                                            2             902                 3 %                2 %                   2           902              3 %          2 %
Sacramento                                         1             400                 1 %                2 %                   1           400              1 %          1 %

Non-Core                                           3           1,302                 4 %                4 %                   3         1,302              4 %          3 %

70 19,878 100 % 100 % 75 21,240 100 % 100 %


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(1) We define"same-store" communities as communities that have been completed, stabilized and owned by us for at least two twelve month periods. The term "stabilized" refers to communities that have reached a physical occupancy of at least 93%.

(2) Includes communities acquired, in lease up phase or being rehabilitated that have been stabilized for less than two twelve month periods.

For the nine months ended September 30, 2012, same-store communities totaled 19,878 homes. For the nine months ended September 30, 2012, our non same-store pool is comprised of 270 homes in lease up, 440 homes moved from same-store into rehabilitation and 652 acquired homes.

At September 30, 2012, our portfolio had real estate assets with a net book value of approximately $3.3 billion that included 75 wholly or majority-owned apartment communities, aggregating 21,240 homes; 8 multifamily communities owned in joint ventures, comprised of 2,864 apartment homes; and eight (six in Northern California, one in Southern California, one in Seattle, Washington) wholly or majority-owned apartment communities in various stages of construction and development, totaling 2,393 homes. We earn revenue and generate cash primarily by collecting monthly rent from our community residents.

Results of Operations

Comparison of the Three Months Ended September 30, 2012 and 2011

Rental and ancillary income

A summary of the components of revenues for the quarters ended September 30,
2012 and 2011 follows (dollar amounts in thousands):



                                        Three months ended                Three months ended
                                        September 30, 2012                September 30, 2011
                                                    % of Total                        % of Total        $ change from       % change from
                                     Revenues        Revenues         Revenues         Revenues         2011 to 2012        2011 to 2012
Rental income                      $     96,431            96.1 %    $    91,035             96.3 %    $         5,396                 5.9 %
Ancillary income                          3,919             3.9 %          3,532              3.7 %                387                11.0 %

Total revenues                     $    100,350             100 %    $    94,567              100 %    $         5,783                 6.1 %

The total increase in revenues for the three months ended September 30, 2012, as compared with the three months ended September 30, 2011, was generated from an increase in same-store and non same-store revenue as follows (dollar amounts in thousands):

                                                                             % Change
                                                              2012           from 2011
                                                             Change          to  2012
Same-store communities                                       $ 4,630                5.3 %
Non same-store communities                                     1,153               17.3 %

Total increase in rental and ancillary revenues
(excluding revenues from discontinued operations)            $ 5,783                6.1 %

The increase in same-store revenue was primarily due to a 5.5% increase in average monthly revenue earned per home in the same-store portfolio from $1,542 per home in the third quarter of 2011 to $1,626 per home in the third quarter of 2012. Average monthly revenue is comprised of rental and ancillary income earned on occupied homes during the period and concession of $3 on revenues per occupied home during the period. Financial occupancy levels averaged 95.4% during the third quarter of 2012 down from 95.6% during the third quarter of 2011. The 17.3% increase in revenue from non same-store communities is primarily due to recently completed development communities and communities acquired in 2011.


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Real estate expenses

A summary of the categories of real estate expenses for the quarters ended September 30, 2012 and 2011 follows (dollar amounts in thousands):

                                       Three months ended                  Three months ended
                                       September 30, 2012                  September 30, 2011
                                                    % of Total                          % of Total         $ change from        % change from
                                   Expenses          Expenses          Expenses          Expenses          2011 to 2012         2011 to 2012
Same-store                        $    28,941              91.3 %     $    28,271              91.9 %     $           670                  2.4 %
Non same-store                          2,749               8.7 %           2,500               8.1 %                 249                 10.0 %

Total revenues                    $    31,690               100 %     $    30,771               100 %     $           919                  3.0 %

Same-store expenses increased approximately $670,000, or 2.4% from the quarter ended September 30, 2011, which is due to increases in administrative costs, payroll and lease commissions and property taxes. The increase is due to general operating activity in our same-store communities. Non same-store increased $249,000 or 10.0% from the quarter ended September 30, 2011, which is primarily due to recently completed development communities and communities acquired in 2011.

Provision for depreciation

The provision for depreciation totaled $25,097,000 and $25,414,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease of $317,000 or 1.3% is due to short lived assets that were held during the three months ended September 30, 2011 but were fully depreciated by the three months ended September 30, 2012.

Interest expense

Interest expense was $16,998,000 (net of $5,806,000 of interest capitalized to the cost of apartment communities under development and construction) for the three months ended September 30, 2012, a decrease of $1,376,000 or 7.5% from the same period in 2011. Interest expense was $18,374,000 for the three months ended September 30, 2011 (net of $3,915,000 of interest capitalized to the cost of apartment communities under development and construction). Interest expense decreased year over year due to increased development activity during 2012 resulting in higher amounts of capitalized interest as compared to the prior year and lower average debt levels outstanding.

General and administrative expenses

General and administrative expenses totaled $5,093,000 and $5,678,000 for the three months ended September 30, 2012 and 2011, respectively. The general and administrative expenses decreased $585,000, or 10.3%, primarily as a result of decreased compensation related expenses and legal fees.

Other income

Other income for the three months ended September 30, 2012 and 2011 totaled $740,000 and $677,000, respectively, and is comprised of the following:

                                          Three Months ended
                                             September 30,
                                          2012          2011
                      Management Fees   $ 438,000     $ 494,000
                      Interest Income      94,000        91,000
                      Other               208,000        92,000

                      Total             $ 740,000     $ 677,000

Other expenses

During the quarter ended September 30, 2012 a $15,000,000 non-cash impairment charge was recorded in other expenses in conjunction with the decision to sell land in Anaheim, CA that we previously intended to develop. The charge was a result of a change in our future plans from developing the land to where we now intend to sell the land in the near term. The net fair value of the land of approximately $23,000,000 has been transferred from Land under development to Other assets.

Other expenses for the three months ended September 30, 2011 totaled $149,000 and was comprised of costs related to the acquisitions of operating communities.

                                            Three Months ended
                                              September 30,
                                            2012           2011
                    Impairment Charge   $ 15,000,000            -
                    Acquisition fees              -      $ 149,000

                    Total               $ 15,000,000     $ 149,000


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Income from unconsolidated entities and gain on sale of unconsolidated entities

Income from unconsolidated entities totaled $669,000 and $791,000 for the three months ended September 30, 2012 and September 30, 2011, respectively. The total represents our share of net income from the joint ventures we own. The decrease is due to the sales of joint ventures during 2011 and three months ended September 30, 2012.

On September 12, 2012, we sold the joint venture asset Calvera Point, a 276 home community located in Westminister, Colorado. We had a 15% equity ownership in the community and received gross proceeds of approximately $5,600,000 and recognized a net gain on sale of approximately $900,000.

On September 25, 2012, we sold the joint venture asset Pinnacle at the Creek, a 216 home community located in Centennial, Colorado. We had a 15% equity ownership in the community and received gross proceeds of approximately $4,800,000 and recognized a net gain on sale of approximately $1,800,000.

On September 26, 2012, we sold the joint venture asset Pinnacle at Galleria, a 236 home community, located in Roseville, California. We had a 35% equity ownership in the community and received gross proceeds of approximately $16,600,000 and recognized a net gain on sale of approximately $3,300,000.

On August 10, 2011, we sold the joint venture asset Landing at Bear Creek, a 224 joint venture community, located in Lakewood, Colorado. We had a 15% equity ownership in the communities and as a result received gross proceeds of $4,500,000 and recognized a net gain of $2,248,000.

On December 22, 2011, we sold the joint venture asset The Pinnacle at Hunters Glen, a 264 unit joint venture community located in Thornton, Colorado. We had a 15% equity ownership in the communities and as a result received gross proceeds of $4,800,000 and recognized a net gain on the sale of $2,022,000.

Discontinued operations

We classify the results of operations for communities 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 community-specific components of net earnings that are classified as discontinued operations include all community-related revenues and operating expenses, depreciation expense recognized prior to the classification as held for sale and community-specific interest expense to the extent there is secured debt on the community. In addition, the net gain or loss on the eventual disposal of communities held for sale is reported as discontinued operations.

At September 30, 2012, we had no assets classified as held for sale.

In the fourth quarter of 2011, we sold two communities totaling 634 homes:
Galleria at Towngate, with 268 homes located in Moreno Valley, California; and Windrush Village, with 366 homes located in Colton, California. The approximate gross proceeds from sale of the two communities were $65,175,000, resulting in a net gain of $14,489,000.

For the quarter ended September 30, 2011, the net income from the three communities sold was included in the discontinued operations line on the consolidated statement of income and totaled approximately $799,000.

Dividends attributable to preferred stock

Dividends attributable to preferred stock for the third quarter of 2012 represent the dividends on our outstanding 6.75% Series D Cumulative Redeemable Preferred Stock. All of our current outstanding shares of Series D Cumulative Redeemable preferred stock have a $25.00 per share liquidation preference. As of September 30, 2012, 2,159,715 shares of 6.75% Series D Cumulative Redeemable Preferred Stock remain outstanding. For the three months ended September 30, 2012, we paid $911,000 in dividends on our 6.75% Series D Cumulative Redeemable Preferred Stock.


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Dividends attributable to preferred stock for the third quarter of 2011 represent the dividends on our 6.75% Series C and 6.75% Series D Cumulative Redeemable Preferred Stock. For the three months ended September 30, 2011, we paid $1,138,000 in aggregate on our 6.75% Series C and 6.75% Series D Cumulative Redeemable Preferred Stock.

On August 15, 2011, we repurchased 840,285 shares of our 6.75% Series D Cumulative Redeemable Preferred Stock at a price of $24.33 per share on the open market, a $0.67 discount to par resulting in a non cash return from preferred shareholders of $563,000. In addition, the initial issuance costs associated with these shares totaling $718,000 were charged to retained earnings during the third quarter of 2011. The net effect of the activity was a $155,000 charge to retained earnings for the three months ending September 30, 2011.

On June 13, 2011, we redeemed all 4,000,000 shares of our 6.75% Series C Cumulative Redeemable Preferred Stock at a redemption price of $25.34688 per share. The redemption price was equal to the original issuance price of $25.00 per share, plus accrued and unpaid dividends to the redemption date. The initial issuance costs totaling approximately $3,616,000 associated with this series of perpetual preferred stock were charged to retained earnings during the second quarter of 2011.

Net income available to common shareholders

As a result of the various factors mentioned above, net income available to common shareholders for the quarter ended September 30, 2012, was $12,890,000, or $0.17 per diluted share, as compared with $17,071,000, or $0.23 per diluted share, for the same period in 2011.

Results of Operations

Comparison of the Nine Months Ended September 30, 2012 and 2011

Rental and ancillary income

A summary of the components of revenues for the nine months ended September 30,
2012 and 2011 follows (dollar amounts in thousands):



                                       Nine months ended                Nine months ended
                                      September 30, 2012                September 30, 2011
                                                  % of Total                        % of Total        $ change from       % change from
                                   Revenues        Revenues         Revenues         Revenues         2011 to 2012        2011 to 2012
Rental income                        283,632             96.1 %    $   264,267             96.3 %    $        19,365                 7.3 %
Ancillary income                      11,460              3.9 %         10,155              3.7 %    $         1,305                12.9 %

Total revenues                    $  295,092           100.00 %    $   274,422            100.0 %    $        20,670                 7.5 %

The total increase in revenues for the nine months ended September 30, 2012, as compared with the nine months ended September 30, 2011, was generated from an increase in same-store and non same-store revenue as follows (dollar amounts in thousands):

                                                                             % Change
                                                              2012           from 2011
                                                             Change           to 2012
Same-store communities                                      $ 13,961                5.4 %
Non same-store communities                                     6,709               42.8 %

Total increase in rental and ancillary revenues
(excluding revenues from discontinued operations)           $ 20,670                7.5 %

The increase in same-store revenue was primarily due to a 5.5% increase in average monthly revenue earned per home in the same-store portfolio from $1,517 per home for the nine months ended September 30, 2011 to $1,600 per home for the nine months ended September 30, 2012. Average monthly revenue is comprised of rental and ancillary income earned on occupied homes during the period and concessions of $4 on revenues per occupied home during the period. Financial occupancy levels averaged 95.3% during the nine months ended September 30, 2012 and 2011, respectively. The 42.8% increase in revenue from non same-store communities is primarily due to recently completed development communities and communities acquired in 2011.


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Real estate expenses

A summary of the categories of real estate expenses for the nine months ended September 30, 2012 and 2011 follows (dollar amounts in thousands):

                                             For the Nine months                   For the Nine months
                                          ended September 30, 2012              ended September 30, 2011
                                                           % of Total                            % of Total         $ change from        % change from
                                         Expenses           Expenses           Expenses           Expenses          2011 to 2012         2011 to 2012
Same-store                             $      85,426              91.4 %     $      82,598              93.2 %     $         2,828                  3.4 %
Non same-store                                 7,989               8.6 %             5,997               6.8 %               1,992                 33.2 %

Total real estate expenses             $      93,415             100.0 %     $      88,595             100.0 %     $         4,820                  5.4 %

Same-store expenses increased approximately $2,828,000, or 3.4% from the nine months ended September 30, 2011, which is due to increases in administrative costs, payroll and lease commissions, and property taxes. Non same-store expenses increased approximately $1,992,000, or 33.2% from the nine months ended September 30, 2011, which is primarily due to recently completed development communities and communities acquired in 2011.

Provision for depreciation

The provision for depreciation totaled $74,922,000 and $76,724,000 for the nine months ended September 30, 2012 and 2011, respectively. The decrease of $1,802,000 or 2.3% is due to short lived assets that were held during the nine months ended September 30, 2011 but were fully depreciated by the nine months ended September 30, 2012.

Interest expense

Interest expense was $50,488,000 (net of $16,023,000 of interest capitalized to the cost of apartment communities under development and construction) for the nine months ended September 30, 2012, a decrease of $6,373,000 from the same period in 2011. Interest expense was $56,861,000 for the nine months ended September 30, 2011 (net of $10,202,000 of interest capitalized to the cost of apartment communities under development and construction). Interest expense decreased year over year due to increased development activity during 2012 resulting in higher amounts of capitalized interest as compared to the prior year and lower average debt levels outstanding.

General and administrative expenses

General and administrative expenses totaled $17,151,000 and $16,071,000 for the nine months ended September 30, 2012 and 2011, respectively. The general and administrative expenses increased $1,080,000, or 6.7%, primarily as a result of increased compensation related costs.

Other income

Other income for the nine months ended September 30, 2012 and 2011 totaled $1,966,000 and $1,878,000, respectively, and is comprised of the following:

                                           Nine Months ended
                                             September 30,
                                         2012            2011
                    Management fees   $ 1,289,000     $ 1,397,000
                    Interest income       274,000         278,000
                    Other                 403,000         203,000

                    Total             $ 1,966,000     $ 1,878,000

Other expenses

During the nine months ended September 30, 2012 a $15,000,000 non-cash impairment charge was recorded in other expenses in conjunction with the decision to sell land in Anaheim, CA that we previously intended to develop. The charge was a result of a change in our future plans from developing the land to where we now intend to sell the land in the near term. The net fair value of the land of approximately $23,000,000 has been transferred from Land under development to Other assets.

Other expenses for the nine months ended September 30, 2011 totaled $402,000 and was comprised of costs related to the acquisitions of operating communities.

                                            Nine Months ended
                                              September 30,
                                            2012           2011
                    Impairment charge   $ 15,000,000            -
                    Acquisition fees              -      $ 402,000

                    Total               $ 15,000,000     $ 402,000


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