SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-5305
BRE PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
Maryland 94-1722214
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
44 Montgomery Street
36/th/ Floor
San Francisco, CA 94104-4809
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(Address of principal office) (Zip Code)
(415) 445-6530
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock
outstanding as of July 23, 2001 46,538,139
BRE PROPERTIES, INC.
INDEX TO FORM 10-Q
June 30, 2001
Page No.
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Part I FINANCIAL INFORMATION
ITEM 1:
Consolidated balance sheets - June 30, 2001 and December 31,
2000 2
Consolidated statements of income - three months ended June
30, 2001 and 2000 3
Consolidated statements of income - six months ended June 30,
2001 and 2000 4
Consolidated statements of cash flows - six months ended June
30, 2001 and 2000 5
Notes to consolidated financial statements 6-7
ITEM 2:
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-17
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk 17
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 18
ITEM 2 Changes in Securities and Use of Proceeds 18
ITEM 3 Defaults Upon Senior Securities 18
ITEM 4 Submission of Matters to a Vote of Security Holders 18
ITEM 5 Other Information 18
ITEM 6 Exhibits and Reports on Form 8-K 19
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
--------------------
BRE Properties, Inc.
Consolidated Balance Sheets (unaudited)
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(Dollar amounts in thousands, except per share data)
June 30, December 31,
2001 2000
------------ ------------
Assets
------
Real estate portfolio:
Direct investments in real estate:
Investments in rental properties $ 1,682,019 $ 1,646,486
Construction in progress 59,586 57,961
Less: accumulated depreciation (141,387) (124,618)
------------ ------------
1,600,218 1,579,829
------------ ------------
Equity interests in and advances to real estate joint ventures:
Investments in rental properties 30,288 27,477
Construction in progress 39,067 34,439
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69,355 61,916
Land under development 23,856 30,144
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Total real estate portfolio 1,693,429 1,671,889
Cash 2,000 262
Other assets 51,043 45,978
------------ ------------
Total assets $ 1,746,472 $ 1,718,129
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Unsecured senior notes $ 483,000 $ 243,000
Mortgage loans 212,711 214,253
Unsecured line of credit 154,000 368,000
Accounts payable and accrued expenses 29,560 22,048
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Total liabilities 879,271 847,301
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Minority interest 59,267 69,712
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Shareholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized,
liquidation preference $25 per share. Issued and outstanding:
2,150,000 8 1/2% Series A cumulative redeemable shares. 53,750 53,750
Common stock; $.01 par value; 100,000,000 shares authorized.
Shares issued and outstanding: 46,504,843 at June 30, 2001
and 45,895,281 at December 31, 2000. 465 459
Additional paid-in capital 713,011 699,264
Accumulated net income in excess of cumulative dividends 44,045 50,476
Stock purchase loans to executives (3,337) (2,833)
------------ ------------
Total shareholders' equity 807,934 801,116
------------ ------------
Total liabilities and shareholders' equity $ 1,746,472 $ 1,718,129
============ ============
See notes to consolidated financial statements
2
Consolidated Statements of Income (unaudited)
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(Amounts in thousands, except per share data)
For the Three Months Ended
June 30,
-----------------------------
2001 2000
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Revenues
Rental income $60,482 $60,088
Partnership and ancillary income 4,257 3,677
Other income 1,483 1,672
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Total revenues 66,222 65,437
------- -------
Expenses
Real estate 17,386 19,213
Depreciation 9,896 9,680
Interest 12,176 12,094
General and administrative 2,560 2,063
Equity in losses of Internet business 2,855 1,818
------- -------
Total expenses 44,873 44,868
------- -------
Income before net gain on sale of investments in rental
properties, minority interest and dividends attributable to
preferred stock 21,349 20,569
Net gain on sale of investments in rental properties - -
Minority interest 1,047 1,430
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Net income 20,302 19,139
Dividends attributable to preferred stock 1,142 1,142
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Net income available to common shareholders $19,160 $17,997
======= =======
Net income per outstanding common share:
Income before net gain on sale of investments in rental
properties less minority interest $ 0.41 $ 0.40
Net gain on sale of investments in rental properties - -
------- -------
Net income per share - basic $ 0.41 $ 0.40
======= =======
Income before net gain on sale of investments in rental
properties and minority interest $ 0.41 $ 0.40
Net gain on sale of investments in rental properties - -
------- -------
Net income per share - assuming dilution $ 0.41 $ 0.40
======= =======
Weighted average common shares outstanding - basic 46,430 44,780
======= =======
Weighted average common shares outstanding - assuming dilution 48,680 48,210
======= =======
Dividends declared and paid per common share $ 0.465 $ 0.425
======= =======
See notes to consolidated financial statements
3
Consolidated Statements of Income (unaudited)
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(Amounts in thousands, except per share data)
For the Six Months Ended
June 30,
-----------------------------------------
2001 2000
------------------- -----------------
Revenues
Rental income $120,957 $117,730
Partnership and ancillary income 7,631 6,464
Other income 2,995 2,846
------------------- -----------------
Total revenues 131,583 127,040
------------------- -----------------
Expenses
Real estate 34,941 36,618
Depreciation 19,158 18,660
Interest 24,207 23,729
General and administrative 4,915 3,957
Equity in losses of Internet business 7,163 1,818
------------------- -----------------
Total expenses 90,384 84,782
------------------- -----------------
Income before net gain on sale of investments in rental
properties, minority interest and dividends attributable to
preferred stock 41,199 42,258
Net gain on sale of investments in rental properties - -
Minority interest 2,095 2,782
------------------- -----------------
Net income 39,104 39,476
Dividends attributable to preferred stock 2,284 2,284
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Net income available to common shareholders $ 36,820 $ 37,192
=================== =================
Net income per outstanding common share:
Income before net gain on sale of investments in rental
properties less minority interest $ 0.79 $ 0.83
Net gain on sale of investments in rental properties - -
------------------- -----------------
Net income per share - basic $ 0.79 $ 0.83
=================== =================
Income before net gain on sale of investments in rental
properties and minority interest $ 0.79 $ 0.83
Net gain on sale of investments in rental properties - -
------------------- -----------------
Net income per share - assuming dilution $ 0.79 $ 0.83
=================== =================
Weighted average common shares outstanding - basic 46,320 44,750
=================== =================
Weighted average common shares outstanding - assuming dilution 48,680 48,000
=================== =================
Dividends declared and paid per common share $ 0.93 $ 0.85
=================== =================
See notes to consolidated financial statements
4
Consolidated Statements of Cash Flows (unaudited)
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(Dollar amounts in thousands)
For the Six Months Ended
June 30,
-------------------------------------------------
2001 2000
----------------------- --------------------
Cash flows from operating activities:
Net income $ 39,104 $ 39,476
Adjustments to reconcile net income to net cash flows generated by
operating activities:
Depreciation 19,158 18,660
Minority interest 2,095 2,782
Equity in losses of Internet business 7,163 -
Increase in other assets (1,110) (3,954)
Increase in accounts payable and accrued expenses 5,135 1,792
----------------------- --------------------
Net cash flows generated by operating activities 71,545 58,756
----------------------- --------------------
Cash flows from investing activities:
Capital expenditures (2,381) (2,370)
Rehabilitation and other expenditures (10,795) (14,250)
Multifamily properties purchased - (27,894)
Proceeds from sale of investment in rental property 7,834 -
Additions to direct investment construction in progress (27,504) (29,241)
Advances to joint ventures-construction in progress (23,858) (39,833)
Reimbursements of construction in progress from joint ventures 22,413 28,525
Additions to land under development (6,099) (20,680)
Distributions from joint ventures, net 904 -
Investment in other joint ventures (1,253) -
Advances against Internet business (1,516) (4,964)
----------------------- --------------------
Net cash flows used in investing activities (42,255) (110,707)
----------------------- --------------------
Cash flows from financing activities:
Principal payments on unsecured senior notes and mortgage loans (11,542) (25,439)
Line of credit:
Advances 129,000 183,500
Repayments (343,000) (81,000)
Renewal fees (3,770) -
Issuance of unsecured senior notes, net 246,586 -
Dividends paid (45,534) (40,518)
Proceeds from exercises of stock options, net 2,799 2,751
Contributions from minority members - 3,356
Distributions to minority members (2,091) (4,034)
----------------------- --------------------
Net cash flows (used in) provided by financing activities (27,552) 38,616
----------------------- --------------------
Increase (decrease) in cash 1,738 (13,335)
Balance at beginning of period 262 13,812
----------------------- --------------------
Balance at end of period $ 2,000 $ 477
======================= ====================
Supplemental disclosure of non cash activity:
Transfers of direct investments in real estate-construction in
progress to investment in rental properties $ 31,368 $ 8,641
======================= ====================
Transfers of land under development to direct investment in real
estate-construction in progress $ 5,489 $ -
======================= ====================
Transfers of land under development to investment in real estate
joint ventures-construction in progress $ 6,898 $ 20,196
======================= ====================
Transfers of real estate joint ventures-construction in progress
to investments in rental properties $ 3,715 $ 5,049
======================= ====================
Minority interest unit conversions to common shares $ 10,449 $ 1,174
======================= ====================
See notes to consolidated financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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June 30, 2001
NOTE A - BASIS OF PRESENTATION
------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q. Accordingly, certain
information and footnote disclosures normally included in consolidated financial
statements have been omitted. These consolidated financial statements should be
read in conjunction with the Annual Report of BRE Properties, Inc. (the
"Company" or "BRE") on Form 10-K for the year ended December 31, 2000. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments
only) necessary for a fair presentation of the Company's consolidated financial
statements for the interim periods presented.
Certain reclassifications have been made from the prior period's presentation to
conform to the current period's presentation.
NOTE B - REPORTABLE SEGMENTS
----------------------------
BRE has determined that it has one operating and reportable segment, multifamily
communities, which comprised approximately 97% of BRE's assets and 98% of BRE's
revenues for the three months ended June 30, 2001. All multifamily communities
owned by the Company are located in the Western United States, in three general
markets that it defines as Coastal, Desert and Mountain states.
BRE's business focus is the ownership and operation of multifamily communities
and it evaluates performance and allocates resources primarily based on the net
operating income ("NOI") of each individual multifamily community. NOI is
defined by the Company (and generally by the real estate industry) as the excess
of all revenue generated by the community (primarily rental revenue) less direct
operating expenses (primarily, but not limited to, payroll, property taxes,
insurance and maintenance expense). Accordingly, NOI excludes depreciation,
capitalized expenditures and interest expense. NOI from multifamily communities
totaled $47,353,000 and $44,552,000 for the three months ended June 30, 2001 and
2000, respectively. All other segment measurements are presently disclosed in
the accompanying Consolidated Financial Statements and Notes to Consolidated
Financial Statements.
All BRE revenues are from external customers. There are no tenants that
contributed 10% or more of BRE's total revenues in the three months ended June
30, 2001 or 2000. Interest income is not separately reported, as it is
immaterial. Interest expense on debt is not allocated to individual properties,
even if such debt is secured. Further, minority interest in consolidated
subsidiaries is not allocated to the related properties. There is no provision
for income tax as the Company is organized as a real estate investment trust
under the Internal Revenue Code of 1986, as amended.
6
NOTE C - COMMITMENTS AND CONTINGENCIES
As of June 30, 2001, the Company had commitments to sell two communities
pursuant to the agreement with G&I III Residential One, LLC. Although there can
be no assurance, BRE anticipates that the remaining two communities (totaling
445 units and located in Tucson) will be sold and contributed to a joint venture
in the third quarter of 2001. The remaining two communities represent
approximately $11,000,000 of a total $280,000,000 sales price for 22
communities. This third closing is subject to customary closing conditions and
loan assumptions. Because of uncertainties inherent in closing real estate
transactions, these properties are included in direct investments in real estate
and depreciated, rather than reclassified to "held for sale."
BRE agreed to provide VelocityHSI, Inc. ("VelocityHSI") with up to $10,000,000
to be used for general corporate purposes through September 30, 2001. BRE also
agreed to provide VelocityHSI with funds through September 30, 2001 (originally
expected to be $4,000,000) to finance the installation of equipment at
properties owned by BRE. Installation of equipment at the Company's apartment
communities was suspended during the fourth quarter of 2000 pending
VelocityHSI's development of a new operating and capital plan, and assessment of
strategic alternatives. VelocityHSI must repay advances on or before September
30, 2001, together with interest on periodic unpaid balances at a rate of 9% per
year. Balances under these two agreements were approximately $7,500,000 and
$1,200,000, respectively, at June 30, 2001. BRE's investment in VelocityHSI is
recorded under the equity method of accounting, with losses being recorded on a
90-day lag basis. BRE is required to record 100% of VelocityHSI's losses to the
extent of its investment until VelocityHSI secures an independent source of
financing. As of June 30, 2001, BRE's investment, including advances, in
VelocityHSI had been reduced to zero under the equity method of accounting. BRE
has reduced the funds available to VelocityHSI for general corporate purposes by
$2,400,000, to reserve against potential BRE liabilities related to VelocityHSI.
BRE provided for the $2,400,000 reserve as part of its $2,855,000 charge in the
second quarter. As a result, no losses related to VelocityHSI are expected to
be recorded subsequent to June 30, 2001.
BRE is defending various claims and legal actions. While it is not feasible to
predict or determine the ultimate outcome of these matters, in the opinion of
management, none of these actions will have a material adverse effect on BRE's
consolidated results of operations or financial position.
7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
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June 30, 2001
Overview
BRE Properties, Inc. is a self-administered equity real estate investment trust
or "REIT" focused on the acquisition, development, and management of multifamily
apartment communities in 10 metropolitan markets of the Western United States.
At June 30, 2001, our portfolio had real estate assets with a book value of
approximately $1.7 billion that included 72 wholly or majority-owned apartment
communities, aggregating 20,267 units; 3 apartment communities that we manage
and own in partnerships or other joint venture arrangements, comprised of 780
apartment units; and 10 apartment communities in various stages of construction
and development totaling 2,339 units.
During the second quarter of 2001, we began construction on one joint venture
development community, Pinnacle at the Creek, located in the Denver suburb of
Aurora, Colorado. Upon completion, this community is expected to add 216
apartment units to the portfolio, with a projected total cost of $21,100,000.
In addition to historical information, we have made forward looking statements
in this report on Form 10-Q. These forward-looking statements pertain to, among
other things, our capital resources, 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, 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 as 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.
8
Liquidity and Capital Resources
At June 30, 2001, BRE's net real estate investments totaled approximately
$1,693,000,000, which included 72 wholly or majority-owned apartment
communities, three apartment communities that we manage and own in partnerships
or other joint venture arrangements, and 10 apartment communities under various
stages of construction and development.
Depending upon the availability and cost of external capital, BRE anticipates
making additional investments in apartment communities. New investments are
funded from temporary borrowings under our revolving line of credit, internally
generated cash and the proceeds derived from asset sales. Permanent financing
for future investments, which replaces funds drawn under the revolving line of
credit, is expected to be provided through a combination of public and private
offerings of debt and equity securities and the assumption of secured debt. BRE
believes its liquidity and various sources of available capital are sufficient
to fund operations, meet debt service and dividend requirements, and finance
future investments.
In December 2000, we amended and restated our unsecured line of credit, which
was scheduled to mature in August 2001. The new unsecured credit facility
funded on January 12, 2001, matures in December 2003, and expands the credit
capacity to $450,000,000, with an option to expand the credit facility to
$500,000,000. Borrowings under the line of credit bear interest at LIBOR plus
0.70% plus a fee of 0.20% payable on the unused portion of the credit facility.
Borrowings under our line of credit totaled $154,000,000 at June 30, 2001,
compared to $368,000,000 at December 31, 2000. Drawings on the line of credit
are available to fund our investment activities and general corporate purposes.
BRE typically reduces its outstanding balance on the line of credit with
available cash balances.
On January 12, 2001, we issued $250,000,000 of 10-year senior unsecured notes,
under our shelf registration, at a 7.45% coupon to yield 7.5%. The net proceeds
from the sale of notes were used to repay a portion of the borrowings under our
existing credit facility.
As of June 30, 2001, BRE had total outstanding debt balances of $850,000,000 and
total outstanding shareholders' equity and minority interest of $867,000,000,
representing a debt to total book capitalization ratio of approximately 49%.
At June 30, 2001, senior unsecured indebtedness totaled $483,000,000, consisting
of the following: (i) $53,000,000 of unsecured senior notes with an interest
rate of 7.44% per annum on $35,000,000 and 7.88% per annum on $18,000,000, to be
repaid through scheduled principal payments annually from 2001 to 2005; (ii)
$50,000,000 principal amount of unsecured senior notes due 2007, with an
effective interest rate of approximately 7.8%, (iii) $130,000,000 principal
amount of unsecured notes due 2013, with an effective interest rate of 7.3%.,
and (iv) $250,000,000 principal amount of unsecured notes due 2011, with a 7.45%
coupon rate to yield 7.5%. In addition, at June 30, 2001, BRE had mortgage
indebtedness totaling $212,711,000 at interest rates ranging from 4.4% to 9.3%,
with remaining terms of less than one to 27 years.
Our indebtedness contains financial covenants as to minimum net worth, interest
coverage ratios, maximum secured debt and total debt to capital, among others.
BRE was in compliance with all such financial covenants during the quarter ended
June 30, 2001.
9
BRE anticipates that it will continue to require outside sources of financing to
meet its long-term liquidity needs beyond 2001, such as scheduled debt
repayments, construction funding and property acquisitions. At June 30, 2001,
BRE had an estimated cost of $145,900,000 to complete existing direct investment
and joint venture construction in progress and land under development, with
funding estimated from 2001 through 2002. A portion of the land under
development may be contributed to joint ventures, which may significantly lower
BRE's required funding.
As of June 30, 2001, BRE has an effective shelf registration on file with the
Securities and Exchange Commission under which we may issue up to $390,000,000
of securities including debt, convertible debt, common and preferred stock.
Depending upon market conditions, we may issue securities under such shelf
registration to invest in additional multifamily communities and to repay
borrowings under our line of credit.
BRE continues to consider other sources of possible funding, including further
joint ventures and additional secured construction debt. BRE owns unencumbered
real estate assets that could be sold, contributed to joint ventures or used as
collateral for financing purposes (subject to certain lender restrictions) and
has encumbered assets with significant equity that could be further encumbered
should other sources of capital not be available.
Results of Operations
Comparison of the Quarters Ended June 30, 2001 and 2000
Revenues
Total revenues were $66,222,000 for the three months ended June 30, 2001,
compared to $65,437,000 for the same period in 2000. This increase was
primarily due to increases in average monthly rental rates from "same-store"
properties as compared with the same period in 2000. We define same-store
properties as stabilized apartment communities owned by the company for at least
five full quarters. Of the 20,267 apartment units owned by BRE, same-store
units totaled 18,227 for the quarter ended June 30, 2001. Multifamily rental
revenues from same-store communities increased $3,723,000, or 7%, for the three
months ended June 30, 2001 compared to the same period in 2000. This increase
in same-store revenues was due primarily to an increase in average monthly
rental rates. The increase in rental revenues was offset by a reduction in
average occupancy in certain markets. In the San Francisco Bay Area, average
occupancy for the quarter dropped to 93% though physical occupancy recovered to
96% by June 30, 2001. In our remaining markets, economic and physical occupancy
levels were consistent with historical operating levels.
Revenue growth for the quarter ended June 30, 2001 as compared to the quarter
ended June 30, 2000 was offset by a decrease of $2,749,000 in non same-store and
partnership income, due to our continued efforts to reinvest proceeds received
from a strategic portfolio sale that occurred in the third quarter 2000. In
September 2000, we sold a portfolio of apartment communities in Southwestern/
Desert markets totaling $260 million. During fourth quarter 2000, we reinvested
approximately $140 million of the proceeds derived from the sale in coastal
California markets. As we still have approximately $120 million left to
reinvest, non-same store and partnership income has decreased 24% as compared
with the prior period in 2000, which included revenues from the communities
sold.
10
A summary of the components of revenue for the quarters ended June 30, 2001 and
2000 follows (dollars in thousands):
Three months ended Three months ended
June 30, 2001 June 30, 2000
------------------------------------- ---------------------------------
% of Total % of Total % Change from
Revenues Revenues Revenues Revenues 2000 to 2001
------------------ --------------- -------------- --------------- ---------------
Same-store $56,182 85% $52,459 80% 7%
Non same-store and
partnership income 8,557 13% 11,306 17% (24%)
Other income 1,483 2% 1,672 3% (11%)
------------------ --------------- -------------- ---------------
Total revenue $66,222 100% $65,437 100% 1%
================== =============== ============== ===============
Multifamily communities' physical occupancy rates as of June 30, 2001 and 2000
were as follows:
2001 2000
---------- ------------
Multifamily: Same-store 96% 97%
Multifamily: All 95% 97%
Portfolio occupancy is calculated by dividing the total occupied units by the
total units in the portfolio. Apartment units are generally leased to residents
for rental terms that do not exceed one year.
Expenses
Real Estate Expenses
Real estate expenses for multifamily properties for the quarter ended June 30,
2001 decreased 10% to $17,386,000 from $19,213,000 in the comparable period in
2000. Same store expense increased only 2%, while non same-store expense
decreased 49%. The second quarter 2000 non same-store number includes expenses
from the 20 communities we sold in the past twelve months, while the second
quarter 2001 non same-store number includes expenses from the 10 communities we
acquired or developed in the past twelve months.
A summary of the categories of real estate expenses for the quarters ended June
30, 2001 and 2000 follows (dollars in thousands):
Three months ended Three months ended
June 30, 2001 June 30, 2000
---------------------------------- -------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 2000 to 2001
-------------- ---------------- ------------ --------------- ----------------
Same-store $15,231 $14,947 2%
Non same-store 2,155 4,266 (49%)
-------------- ------------
Total real estate expense $17,386 26.3% $19,213 29.4 % (10%)
============== ============
Depreciation Expense
Depreciation expense increased by $216,000 to $9,896,000 for the quarter ended
June 30, 2001 from the comparable period in 2000. The increase in 2001 resulted
primarily from an increased depreciable basis on newly developed and acquired
properties.
11
Interest Expense
Interest expense was $12,176,000 (net of interest capitalized to the cost of
apartment communities under development of $3,292,000) for the quarter ended
June 30, 2001, an increase of $82,000 or 1% from the comparable period in 2000.
Interest expense was $12,094,000 for the same period in 2000 and was net of
$5,192,000 of interest capitalized to the cost of apartment communities under
construction. The change in interest expense was due to a greater level of
fixed rate debt and a reduced level of capitalized interest.
General and Administrative
General and administrative costs were $2,560,000 or approximately 3.9% of total
revenues for the second quarter in 2001 and $2,063,000 or approximately 3.2% of
total revenues, for the second quarter in 2000. The increase in general and
administrative costs as a percentage of total revenues is primarily the result
of the additions of new positions in senior management and increased office
rent.
Equity in losses of Internet business
Equity in losses of Internet business totaled $2,855,000 during the quarter
ended June 30, 2001 and represents the net losses of VelocityHSI, Inc., our non
real-estate investment, which was spun off on August 15, 2000. Subsequent to the
spin-off, VelocityHSI is recorded under the equity method of accounting, with
losses being recorded on a 90-day lag basis. The loss recognized in the second
quarter includes the provision for a reserve of $2,400,000, which the company
believes represents the full extent of all future expenditures and losses
related to its investment in VelocityHSI.
Minority Interest
Minority interest was $1,047,000 and $1,430,000 for the quarters ended June 30,
2001 and 2000, respectively. The decrease in the second quarter of 2001 is due
to lower distributions paid to BRE Property Investors LLC operating company unit
holders as several members of the limited liability company exchanged their
operating company units for shares of BRE common stock over the past twelve
months.
Dividends Attributable to Preferred Stock
Dividends attributable to preferred stock represent the dividends on BRE's 8
1/2% Series A 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 three months ended June 30, 2001, was $19,160,000,
or $0.41 per diluted share, as compared with $17,997,000, or $0.40 per diluted
share, for the comparable period in 2000.
12
Results of Operations
Comparison of the Six Months Ended June 30, 2001 and 2000
Revenues
Total revenues were $131,583,000 for the six months ended June 30, 2001 compared
to $127,040,000 for the same period in 2000. This increase was primarily due to
increases in average monthly rental rates from "same-store" properties as
compared with the same period in 2000. We define same-store properties as
stabilized apartment communities owned by the company for at least five full
quarters. Of the 20,267 apartment units owned by BRE, same-store units totaled
18,227 for the six months ended June 30, 2001. Multifamily rental revenues from
same-store communities increased $9,037,000, or 9%, for the six months ended
June 30, 2001 compared to the same period in 2000. This increase in same-store
revenues was due primarily to an average increase in monthly rental rates.
Physical occupancy on a same store basis was 96% at June 30, 2001 and 97% at
June 30, 2000.
Revenue growth for the six months ended June 30, 2001, as compared to the six
months ended June 30, 2000, was offset by a decrease of $4,643,000 in non same-
store and partnership income, due to our continued efforts to reinvest proceeds
received from a strategic portfolio sale that occurred in the third quarter
2000. In September 2000, we sold a portfolio of apartment communities in
Southwestern/ Desert markets totaling $260 million. During fourth quarter 2000,
we reinvested approximately $140 million of the proceeds derived from the sale
in coastal California markets. As we still have approximately $120 million left
to reinvest, non same-store and partnership income has decreased 22% as compared
with the prior period in 2000, which included revenues from the communities
sold.
A summary of the components of revenue for the six months ended June 30, 2001
and 2000 follows (dollars in thousands):
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------------------------------- ---------------------------------
% of Total % of Total % Change from
Revenues Revenues Revenues Revenues 2000 to 2001
------------------ --------------- -------------- --------------- ---------------
Same-store $111,942 85% $102,905 81% 9%
Non same-store and
partnership income 16,646 13% 21,289 17% (22%)
Other income 2,995 2% 2,846 2% 5%
------------------ --------------- -------------- ---------------
Total revenue $131,583 100% $127,040 100% 4%
================== =============== ============== ===============
Expenses
Real Estate Expenses
Real estate expenses for multifamily properties for the six months ended June
30, 2001 decreased 5% to $34,941,000 from $36,618,000 in the comparable period
in 2000. Same-store expense increased by 4%, while non same-store expenses
decreased 38%. The six months ended June 30, 2000 number includes expenses from
the 20 communities we sold in the past twelve months, while the six months ended
June 30, 2001 number includes expenses from the 10 communities we acquired or
developed in the past twelve months.
13
A summary of the categories of real estate expenses for the six months ended
June 30, 2001 and 2000 follows (dollars in thousands):
Six months ended Six months ended
June 30, 2001 June 30, 2000
---------------------------------- -------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 2000 to 2001
-------------- ---------------- ------------ --------------- ----------------
Same-store $30,468 $29,386 4%
Non same-store 4,473 7,232 (38%)
-------------- ------------
Total real estate expense $34,941 26.6% $36,618 28.8 % (5%)
============== ============
Depreciation Expense
Depreciation expense increased by $498,000 to $19,158,000 for the six months
ended June 30, 2001 from the comparable period in 2000. The increase in 2001
resulted primarily from an increased depreciable basis on newly developed and
acquired properties.
Interest Expense
Interest expense was $24,207,000 (net of interest capitalized to the cost of
apartment communities under development of $6,798,000) for the six months ended
June 30, 2001, an increase of $478,000 or 2% from the comparable period in 2000.
Interest expense was $23,729,000 for the same period in 2000 and was net of
$8,130,000 of interest capitalized to the cost of apartment communities under
construction. The change in interest expense was due to a greater level of
fixed rate debt and a reduced level of capitalized interest.
General and Administrative
General and administrative costs were $4,915,000 or approximately 3.7% of total
revenues for the six months ended June 30, 2001 and $3,957,000 or approximately
3.1% of total revenues, for the six months ended June 30, 2000. The increase in
general and administrative costs as a percentage of total revenues is primarily
the result of the additions of new positions in senior management and increased
office rent.
Equity in losses of Internet business
Equity in losses of Internet business totals $7,163,000 during the first six
months of 2001 and represents the net losses of VelocityHSI, Inc., our non real-
estate investment, which was spun off on August 15, 2000, combined with a
$2,400,000 provision for potential future losses related to VelocityHSI.
Subsequent to the spin-off, VelocityHSI is recorded under the equity method of
accounting, with losses being recorded on a 90-day lag basis. We are required
to record 100% of VelocityHSI's losses to the extent of our investment,
including advances, until it secures an independent source of financing. As of
June 30, 2001 BRE's investment in VelocityHSI has been reduced to zero. The
$1,818,000 loss for the six months ended June 30, 2000 relates to losses
incurred prior to the spin off.
Minority Interest
Minority interest was $2,095,000 and $2,782,000 for the six months ended June
30, 2001 and 2000, respectively. The decrease is due to lower distributions
paid to BRE Property Investors LLC operating company unit holders as several
members of the limited liability company exchanged their operating company units
for shares of BRE common stock over the past twelve months.
14
Dividends Attributable to Preferred Stock
Dividends attributable to preferred stock represent the dividends on BRE's 8
1/2% Series A 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 six months ended June 30, 2001, was $36,820,000, or
$0.79 per diluted share, as compared with $37,192,000, or $0.83 per diluted
share, for the comparable period in 2000.
Construction in progress and land under development
Land acquired for development is capitalized and reported as "land under
development" until the development plan for the land is formalized. Once the
development plan is determined, the costs are transferred to the balance sheet
line item, "construction in progress." Land acquisition, development and
carrying costs of properties under construction are capitalized and reported as
"direct investments in real estate" or "equity interests in and advances to real
estate joint ventures", as appropriate, in "construction in progress." BRE
transfers the capitalized costs for each building in a community under
construction to the balance sheet line item, "investments in rental properties,"
once the building receives a final certificate of occupancy and is ready to
lease.
15
The following table presents data with respect to properties included in
"construction in progress" and "land under development" at June 30, 2001, for
both direct investment and equity interest properties. Completion of these
properties is subject to a number of risks and uncertainties, including
construction delays and cost overruns. No assurance can be given that these
properties will be completed or, if completed, that they will be completed by
the estimated dates or for the estimated amounts or that they will contain the
number of units proposed in the table below.
---------------------------------------------------------------------------------------------------------------------------
Number of Estimated Cost Balance to Estimated
COMMUNITIES Units Cost Incurred Complete Completion (1)
---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions)
Directly Owned Development
Pinnacle on Lake Washington
Renton, WA 180 $ 27.5 $ 21.0 $ 6.5 4Q/2001
Pinnacle at Otay Ranch II
Chula Vista, CA 204 27.1 16.6 10.5 1Q/2002
Pinnacle at Otay Ranch I
Chula Vista, CA 160 22.1 7.5 14.6 2Q/2002
Pinnacle at Denver Tech Center
Greenwood Village, CO 420 43.9 20.0 23.9 4Q/2002
-----------------------------------------------------------------------
Subtotal 964 $120.6 $ 65.1 /(2)/ $ 55.5
-----------------------------------------------------------------------
Joint Venture Development (3)
Pinnacle at Stone Creek
Paradise Valley, AZ 226 $ 23.5 $ 23.5 $ - 3Q/2001
Pinnacle at MacArthur Place
Santa Ana, CA 253 56.9 42.3 14.6 4Q/2001
Pinnacle Galleria
Roseville, CA 236 24.9 19.1 5.8 4Q/2001
Pinnacle at the Creek (4)
Aurora, CO 216 21.1 6.9 14.2 1Q/2002
---------------------------------------------------------------------
Subtotal 931 $126.4 $ 91.8 /(5)/ $ 34.6
---------------------------------------------------------------------
Land Under Development (6)
Pinnacle at Fullerton
Fullerton, CA 192 $ 37.5 $ 9.0 $ 28.5 1Q/2003
Pinnacle at Talega
San Clemente, CA 252 42.2 14.9 27.3 4Q/2002
---------------------------------------------------------------------
Subtotal 444 $ 79.7 $ 23.9 $ 55.8
---------------------------------------------------------------------
Total 2,339 $326.7 $180.8 $145.9
=====================================================================
(1) "Completion" is defined as our estimate of when an entire project will have
a final certificate of occupancy issued and be ready for occupancy.
Completion dates have been updated to reflect our current estimates of
receipt of final certificates of occupancy, which are dependent on several
factors, including construction delays and the inability to obtain
necessary public approvals.
(2) Reflects all recorded and allocated costs incurred as of June 30, 2001,
consisting of $59.6 million recorded on our balance sheet as "direct
investments in real estate - construction in progress" and $5.5 million of
costs for completed buildings located on listed properties, reflected on
our balance sheet as "direct investments in real estate-investments in
rental properties."
(3) With respect to our aggregated joint ventures, we currently expect to
maintain 35-40% leverage and contribute approximately 30% of the remaining
equity.
(4) Pinnacle at the Creek has been transferred from directly owned land under
development to "equity interests in and advances to real estate joint
ventures-construction in progress." Accordingly, the budget has been
adjusted to support development fees, additional contingency and other
costs.
(5) Consists of $39.1 million recorded on our consolidated balance sheet as
"equity interest in advances to real estate joint ventures-construction in
progress" displayed net of $52.7 million in construction loan balances.
(6) "Land under development" represents projects in various stages of
predevelopment, development and initial construction, for which
construction or supply contracts have not yet been finalized. As these
contracts are finalized, projects are moved to construction in progress.
16
DIVIDENDS AND DISTRIBUTIONS TO MINORITY MEMBERS
A cash dividend has been paid to common shareholders each quarter since our
inception in 1970. On February 20, 2001, we increased our annual dividend on
our common shares to $1.86 per share from $1.70 per share. Total dividends paid
to common shareholders for the six months ended June 30, 2001 and 2000 were
$43,250,000 and $38,234,000, respectively. In addition, we paid $2,284,000 in
dividends on our 8 1/2% Series A Cumulative Redeemable Preferred Stock in the
six months ended June 30, 2001 and 2000.
Total distributions to minority members of our consolidated subsidiaries were
$2,091,000 and $4,034,000 for the six months ended June 30, 2001 and 2000,
respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Information concerning market risk is incorporated herein by reference to Item
7A of our Form 10-K for the year ended December 31, 2000. There has been no
material change in the quantitative and qualitative disclosure about market risk
since December 31, 2000.
17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
As of June 30, 2001, there were no pending legal proceedings to which
we are a party or of which any of our properties is the subject, the
adverse determination of which we anticipate would have a material
adverse effect upon our consolidated financial condition and results
of operations.
ITEM 2. Changes in Securities and Use of Proceeds
During the three months ended June 30, 2001, an aggregate of 2,500
limited partnership units in BRE Property Investors LLC were exchanged
for shares of our common stock. The exchange of limited partnership
units for shares of our common stock was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 15, 2001, the
Shareholders elected three directors for three-year terms, and
approved two other corporate actions by the following votes:
---------------------------------------------------------------------------------------------------
FOR AGAINST WITHHELD BROKER NON-VOTE
---------------------------------------------------------------------------------------------------
% of shares
Voted for this % of No. of No. of No. of
No. of Shares item outstanding Shares Shares Shares
--------------------------------------------------------------------------------------------------
Item No. I (Election of Directors)
Class I
Robert A. Fiddaman 39,426,110 99% 85% - 504,758 -
Roger P.Kuppinger 39,420,489 99% 85% - 510,379 -
Arthur G. von Thaden 37,016,994 93% 80% - 2,913,874 -
Item No. II
(Approval of increasing
maximum shares issuable
under the 1999 BRE
Stock Incentive Plan to
3,500,000) 35,240,422 88% 76% 4,337,352 353,090 4
Item No. III
(Ratification of the
Accountants) 37,699,072 94% 81% 2,083,703 148,093 -
ITEM 5. Other Information
None.
18
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Statement Re Computation of Per Share Earnings
99.1 Other Exhibits -Statement of Computation of Ratio of Earnings to
Fixed Charges
(b) Reports on Form 8-K:
None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRE PROPERTIES, INC.
(Registrant)
Dated: July 23, 2001 /s/ Edward F. Lange, Jr.
------------- --------------------------------------
Edward F. Lange, Jr.
Executive Vice President,
Chief Financial Officer and Secretary
20