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BRE > SEC Filings for BRE > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for BRE PROPERTIES INC /MD/


9-May-2013

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 primarily in the major metropolitan markets within the state of California and in the metropolitan area of Seattle, Washington, 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 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.


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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 2013 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                                        11         3,640                17 %               18 %                11         3,640             17 %         17 %
Inland Empire                                     5         1,173                 5 %                5 %                 5         1,173              5 %         5  %
Orange County                                    12         3,789                17 %               17 %                12         3,789             17 %         17 %
Los Angeles                                      14         3,267                18 %               17 %                14         3,267             17 %         17 %
San Francisco                                    15         4,197                25 %               26 %                16         4,533             26 %         27 %

California                                       57        16,066                82 %               83 %                58        16,402             82 %         83 %

Seattle                                          13         3,456                14 %               13 %                13         3,456             14 %         13 %

Phoenix                                           2           902                 3 %                3 %                 2           902              3 %          3 %
Sacramento                                        1           400                 1 %                1 %                 1           400              1 %          1 %

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


                                                 73        20,824               100 %              100 %                74        21,160            100 %        100 %

(1) "Same-store" communities are defined 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 a developed community in lease-up phase that has been stabilized for less than two twelve month periods.

For the three months ended March 31, 2013, same-store communities totaled 20,824 homes. For the three months ended March 31, 2013, our non same-store pool is comprised of 336 homes in lease up.

At March 31, 2013, our portfolio had real estate assets with a net book value of approximately $3.5 billion that included 74 wholly or majority-owned communities, aggregating 21,160 homes; two multifamily communities owned in joint ventures, comprised of 684 homes; and seven (four in Northern California, two in Southern California, one in Seattle, Washington) wholly or majority-owned communities in various stages of construction and development, totaling 2,054 homes. We earn revenue and generate cash primarily by collecting monthly rent from our community residents.


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Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2012

Rental and ancillary income

A summary of the components of revenues for the three months ended March 31,
2013 and 2012 is as follows (dollar amounts in thousands):



                                               For the three months ended March 31,
                                               2013                             2012
                                                    % of Total                      % of Total        $ change from       % change from
                                    Revenues         Revenues        Revenues        Revenues         2012 to  2013       2012 to  2013
Rental income                      $    97,165             96.3 %    $  91,249             96.2 %    $         5,916                 6.5 %
Ancillary income                         3,712              3.7 %        3,615              3.8 %                 97                 2.7 %

Total revenues                     $   100,877            100.0 %    $  94,864            100.0 %    $         6,013                 6.3 %

The total increase in revenues for the three months ended March 31, 2013, as compared with the three months ended March 31, 2012, was generated from an increase in same-store and non same-store revenue as follows (dollar amounts in thousands):

                                                                             % Change
                                                              2013          from  2012
                                                             Change          to 2013
Same-store communities                                       $ 4,612                4.9 %
Non same-store communities                                     1,401              369.7 %

Total increase in rental and ancillary revenues
(excluding revenues from discontinued operations)            $ 6,013                6.3 %

The increase in same-store revenue was primarily due to a 5.0% increase in average monthly revenue earned per home in the same-store portfolio from $1,587 per home in the first quarter of 2012 to $1,666 per home in the first quarter of 2013. Average monthly revenue is comprised of rental and ancillary income earned on occupied homes during the period. Financial occupancy levels averaged 95.2% during first quarter 2013, as compared with 95.3% for the same period in 2012. The 369.7% increase in revenue from 2013 non same-store communities represents the increase in the number of 2013 non same-store communities from the first quarter of 2012 to the first quarter of 2013.

Real estate expenses

A summary of the categories of real estate expenses for the three months ended March 31, 2013 and 2012 is as follows (dollar amounts in thousands):

                                               For the three months ended March 31,
                                               2013                             2012
                                                    % of Total                      % of Total        $ change from       % change from
                                    Expenses         Expenses        Expenses        Expenses         2012 to  2013       2012 to  2013
Same-store                         $   31,071              96.9 %    $  29,867             98.5 %    $         1,204                 4.0 %
Non same-store                            985               3.1 %          445              1.5 %                540               121.3 %

Total real estate expenses         $   32,056             100.0 %    $  30,312            100.0 %    $         1,744                 5.8 %


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Same-store expenses increased $1,204,000 or 4.0% from the quarter ended March 31, 2013 is primarily due to increases in property taxes, payroll and lease commissions, and administrative costs. Non same-store expenses increased approximately $540,000, or 121.3% from the quarter ended March 31, 2012, which represents the increase in number of 2013 non same-store communities from the first quarter of 2012 to the first quarter of 2013.

Provision for depreciation

The provision for depreciation totaled $25,827,000 and $24,667,000 for the three months ended March 31, 2013 and 2012, respectively. The increase of $1,160,000 or 4.7% is due to higher depreciable bases on recently completed development communities delivered in 2012.

Interest expense

Interest expense was $17,332,000 (net of $5,652,000 of interest capitalized to the cost of apartment communities under development and construction) for the three months ended March 31, 2013, an increase of $114,000 or 0.7% from the same period in 2012. Interest expense was $17,218,000 for the quarter ended March 31, 2012 (net of $4,848,000 of interest capitalized to the cost of apartment communities under development and construction). The increase is primarily due to the $300,000,000 issuance of 3.375% unsecured senior notes during the third quarter of 2012 which was offset by a reduction in the revolving credit facility balance and an increase in capitalized interest due to increased development and construction activity.

General and administrative expenses

General and administrative expenses totaled $6,382,000 and $5,847,000 for the three months ended March 31, 2013 and 2012, respectively. The general and administrative expenses increased $535,000, or 9.1%, primarily as a result of increased stock based compensation and associate benefits.

Other income

Other income for the three months ended March 31, 2013 and 2012 is comprised of the following:

                                 For the three months ended March 31,
                                     2013                    2012
             Management Fees   $         259,000       $         420,000
             Interest Income              63,000                  91,000
             Other                        41,000                   9,000

             Total             $         363,000       $         520,000

Income from unconsolidated entities and gain on sale of unconsolidated entities

Income from unconsolidated entities totaled $318,000 and $727,000 for the three months March 31, 2013 and 2012, respectively. The total represents our share of net income from the joint venture communities we own. The decrease is due to the sales of joint venture communities during 2012 and 2013.

On February 28, 2013, we sold our joint venture interest in four communities located in Denver, Colorado with a total of 1,616 homes and two communities located in Phoenix, Arizona with a total of 564 homes to our joint venture partner. We maintained a 15% equity ownership in each community. Our total gross proceeds were approximately $47,400,000. A net gain on sale of approximately $15,000,000 was recognized.

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

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


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

Discontinued operations

Accounting guidance requires the results of operations for communities sold during the period or designated as held for sale at the end of the period to be classified as discontinued operations. The property-specific components of net earnings that are classified as discontinued operation 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 communities held for sale is reported as discontinued operations.

As of March 31, 2013, there was land with a net carrying value of $23,347,000 classified as held for sale on the consolidated balance sheet. There was no land or other non-operating assets classified as held for sale for the quarter ended March 31, 2012.

There were no operating communities held for sale as of March 31, 2013.

During 2012, we sold three communities located in San Diego, California:
Countryside Village, with 96 homes in El Cajon submarket; Terra Nova Villas, with 233 homes in Chula Vista; and Canyon Villa, with 183 homes in Chula Vista. The net proceeds from the three sales were $88,236,000 resulting in a combined net gain of $62,136,000.

For the quarter ended March 31, 2012, the net income from the three operating communities sold during 2012 was included in the discontinued operations line on the consolidated statement of income and totaled $1,057,000.

Dividends attributable to preferred stock

Dividends attributable to preferred stock for the quarters ended March 31, 2013, and 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 March 31, 2013, 2,159,715 shares of 6.75% Series D Cumulative Redeemable Preferred Stock remain outstanding.

For the three months ended March 31, 2013 and 2012, we paid $911,000 in dividends on our 6.75% Series D Cumulative Redeemable Preferred Stock.

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 March 31, 2013, was $34,027,000, or $0.44 per diluted share, as compared with $18,108,000, or $0.24 per diluted share, for the same period in 2012.

Liquidity and Capital Resource

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 alternatives to fund our liquidity needs. Such alternatives may include, without limitation: (a) divesting of communities 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.

Our dividend per share amounts for the quarters ending March 31, 2013 and 2012 were $0.395 and $0.385 respectively. The quarterly common dividend payment of $0.395 is equivalent to $1.58 per common share on an annualized basis.

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 unsecured revolving credit facility, proceeds from community 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 unsecured revolving credit facility, we would anticipate raising long-term financing or permanent capital through a combination of public and private offerings


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of debt and equity securities, proceeds from community sales and secured debt. However, such 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 three months ended March 31, 2013, cash flows generated from operating activities were in excess of distributions to common shareholders, preferred shareholders and non-controlling interest members by approximately $9,300,000. Due to the timing associated with operating cash flows, there may be certain periods where cash flows generated by operating activities are less than distributions. We believe our unsecured revolving credit facility provides adequate liquidity to address temporary cash shortfalls. We expect that annual cash flows from operations will exceed annual distributions to equity holders for the year ended December 31, 2013, which is consistent with prior years. Annual cash flows from operating activities exceeded annual distributions to common shareholders, preferred shareholders and redeemable non-controlling interest members by approximately $79,200,000 and $54,000,000 for the years ended December 31, 2012 and 2011, respectively.

During the three months ended March 31, 2013 and 2012 we invested $54,199,000 and $40,227,000 respectively in capital expenditures:

                                                Three months ended
                                                    March 31,                Expected 2013 Annual Range
(amounts in thousands)                          2013           2012             Low                High
New development (including land)             $   42,357      $ 33,930      $      190,000       $  225,000
Rehab expenditures                                8,508         3,760              35,000           50,000
Capital expenditures                              3,334         2,537              22,000           25,000

Total capital expenditures                   $   54,199      $ 40,227      $      247,000       $  300,000

We had a total of $950,000,000 carrying amount in unsecured senior notes at March 31, 2013, consisting of the following:

                                          Unsecured Senior
 Maturity (amounts in thousands)            Note Balance         Interest  Rate(1)
 March 2014                               $          50,000                   4.700 %
 March 2017                                         300,000                   5.500 %
 March 2021                                         300,000                   5.200 %
 March 2023                                         300,000                   3.375 %

 Total / Weighted Average Interest Rate   $         950,000                   4.692 %

(1) Interest rate stated at coupon rate on each respective note.

On February 15, 2013, our 7.130% senior notes outstanding came due and we paid in full the aggregate principal balance of $40,018,000.

In addition, at March 31, 2013, we had mortgage indebtedness with a total principal amount outstanding of $741,636,000 at a weighted average rate of 5.59% and remaining terms ranging from one to seven years. For the periods ending March 31, 2013, and December 31, 2012, respectively, unencumbered real estate net operating income represented 72.9% and 72.5% of our total real estate net income.

As of March 31, 2013, 2,159,715 shares of 6.75% Series D Cumulative Redeemable Preferred Stock were outstanding.

As of March 31, 2013, we had total outstanding debt balances of approximately $1,692,000,000 and total outstanding consolidated shareholders' equity and redeemable noncontrolling interests of approximately $1,694,000,000, representing a debt to total book capitalization ratio of 50%.

On January 5, 2012, we entered into a new $750,000,000 unsecured revolving credit facility (the "Credit Agreement"). The unsecured revolving credit facility has an initial term of 39 months, terminates on April 3, 2015 and replaces our previous $750,000,000 unsecured revolving credit facility. Based on our current debt ratings, the revolving credit facility accrues interest at LIBOR plus 120 basis points. In addition, we pay a 0.20% annual facility fee on the capacity of the unsecured revolving credit facility. Borrowings under our unsecured revolving credit facility totaled $0 at March 31, 2013.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases or privately negotiated transactions. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.


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Our indebtedness contains financial covenants as to minimum net worth, interest coverage ratios, maximum secured debt, total debt to capital, and cash on hand among others. We were in compliance with all such financial covenants during the three months ended March 31, 2013 and 2012.

We anticipate that we will continue to require outside sources of financing to meet our long-term liquidity needs beyond 2013, such as scheduled debt repayments, construction funding and potential property acquisitions. As of March 31, 2013 scheduled debt principal payments through December 31, 2013 totaled approximately $30,175,000.

On February 24, 2010, we entered into Equity Distribution Agreements (EDAs) with each of Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC, and Wells Fargo Securities, LLC (collectively, the "sales agents") under which we may issue and sell from time to time through or to our sales agents shares of our common stock having an aggregate offering price of up to $250,000,000. No shares were issued under the EDA's during the three months ended March 31, 2013. During 2012, 815,045 shares were issued under the EDAs, with an average share price of $49.09 for total gross proceeds of approximately $40,000,000 and total commission paid to the sales agents of approximately $800,000. As of March 31, 2013, the remaining capacity under the EDAs totals $123,600,000. We intend to use any net proceeds from the sale of our shares under the EDAs for general corporate purposes, which may include reducing borrowings under our unsecured revolving credit facility, the repayment of other indebtedness, the redemption or other repurchase of outstanding debt or equity securities, funding for development activities and financing for acquisitions.

We continue to consider other sources of possible funding, including new joint ventures and additional secured construction and term debt. We own unencumbered real estate assets that could be sold, contributed to joint ventures or used as collateral for financing purposes (subject to certain lender restrictions). We also own encumbered assets with significant equity that could be further encumbered should other sources of capital not be available (subject to certain lender restrictions).

Construction in progress and land under development

The following table provides data on our multifamily communities that are currently under various stages of development and construction. Completion of the development communities is subject to a number of risks and uncertainties, including construction delays and cost overruns. We cannot provide assurance that these communities will be completed, or that they will be completed by the estimated dates, or for the estimated amounts, or will contain the number of proposed homes shown in the table below. In addition to the communities below, we have predevelopment costs on two future development projects totaling approximately $16,200,000 in Other assets on the Consolidated Balance Sheets as of March 31, 2013.

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