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 September 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 of (I.R.S. Employer
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
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Number of shares of common stock
outstanding as of October 26, 2001 45,607,595
BRE PROPERTIES, INC.
INDEX TO FORM 10-Q
September 30, 2001
Page No.
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Part I FINANCIAL INFORMATION
ITEM 1:
Consolidated balance sheets (unaudited) - September 30, 2001 and
December 31, 2000 2
Consolidated statements of operations (unaudited) - three months
ended September 30, 2001 and 2000 3
Consolidated statements of operations (unaudited) - nine months
ended September 30, 2001 and 2000 4
Consolidated statements of cash flows (unaudited) - nine months
ended September 30, 2001 and 2000 5-6
Notes to consolidated financial statements (unaudited) 7-8
ITEM 2:
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-19
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk 19
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 20
ITEM 2 Changes in Securities and Use of Proceeds 20
ITEM 3 Defaults Upon Senior Securities 20
ITEM 4 Submission of Matters to a Vote of Security Holders 20
ITEM 5 Other Information 20
ITEM 6 Exhibits and Reports on Form 8-K 21
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)
September 30, December 31,
2001 2000
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Assets
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Real estate portfolio:
Direct investments in real estate:
Investments in rental properties $ 1,703,884 $ 1,646,486
Construction in progress 66,809 57,961
Less: accumulated depreciation (148,902) (124,618)
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1,621,791 1,579,829
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Equity interests in and advances to real estate joint ventures:
Investments in rental properties 30,189 27,477
Construction in progress 44,457 34,439
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74,646 61,916
Land under development 25,310 30,144
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Total real estate portfolio 1,721,747 1,671,889
Cash 3,671 262
Other assets 52,905 45,978
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Total assets $ 1,778,323 $ 1,718,129
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Unsecured senior notes $ 483,000 $ 243,000
Mortgage loans 211,243 214,253
Unsecured line of credit 194,000 368,000
Accounts payable and accrued expenses 29,758 22,048
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Total liabilities 918,001 847,301
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Minority interest 59,190 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: 46,279,096 at September 30, 2001
and 45,895,281 at December 31, 2000. 463 459
Additional paid-in capital 705,346 699,264
Accumulated net income in excess of cumulative dividends 44,110 50,476
Stock purchase loans to executives (2,537) (2,833)
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Total shareholders' equity 801,132 801,116
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Total liabilities and shareholders' equity $ 1,778,323 $ 1,718,129
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See notes to consolidated financial statements
2
Consolidated Statements of Operations (unaudited)
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(Amounts in thousands, except per share data)
For the Three Months Ended
September 30,
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2001 2000
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Revenues
Rental income $ 61,926 $ 60,298
Partnership and ancillary income 4,267 3,247
Other income 595 1,068
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Total revenues 66,788 64,613
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Expenses
Real estate 17,867 18,537
Depreciation 10,426 9,881
Interest 12,000 11,154
General and administrative 2,212 2,042
Losses from Internet business - 1,258
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Total expenses 42,505 42,872
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Income before net gain (loss) on sales of investments in rental
properties, minority interest and dividends attributable to
preferred stock 24,283 21,741
Net gain (loss) on sales of investments in rental properties (327) (32,711)
Minority interest (1,048) (1,220)
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Net income (loss) $ 22,908 ($12,190)
Dividends attributable to preferred stock 1,142 1,142
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Net income (loss) available to common shareholders $ 21,766 ($13,332)
============ =============
Net income (loss) per outstanding common share:
Income before net gain (loss) on sales of investments in rental
properties less minority interest $ 0.48 $ 0.43
Net gain (loss) on sales of investments in rental properties (0.01) (0.72)
------------ -------------
Net income (loss) per share - basic $ 0.47 ($0.29)
============ =============
Income before net gain on sales of investments in rental
properties and minority interest $ 0.47 $ 0.42
Net gain (loss) on sales of investments in rental properties (0.01) (0.71)
------------ -------------
Net income (loss) per share - assuming dilution $ 0.46 ($0.29)
============ =============
Weighted average common shares outstanding - basic 46,470 45,250
============ =============
Weighted average common shares outstanding - assuming dilution 48,810 48,510
============ =============
Dividends declared and paid per common share $ 0.465 $ 0.425
============ =============
See notes to consolidated financial statements
3
Consolidated Statements of Operations (unaudited)
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(Amounts in thousands, except per share data)
For the Nine Months Ended
September 30,
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2001 2000
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Revenues
Rental income $ 182,883 $ 178,028
Partnership and ancillary income 11,898 9,711
Other income 3,590 3,913
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Total revenues 198,371 191,652
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Expenses
Real estate 52,808 55,155
Depreciation 29,585 28,541
Interest 36,207 34,882
General and administrative 7,127 5,999
Losses from Internet business 7,163 3,076
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Total expenses 132,890 127,653
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Income before net gain (loss) on sales of investments in rental
properties, minority interest and dividends attributable to
preferred stock 65,481 63,999
Net gain (loss) on sales of investments in rental properties (327) (32,711)
Minority interest (3,143) (4,002)
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Net income 62,011 27,286
Dividends attributable to preferred stock 3,426 3,426
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Net income available to common shareholders $ 58,585 $ 23,860
=========== ===========
Net income per outstanding common share:
Income before net gain (loss) on sales of investments in rental
properties less minority interest $ 1.27 $ 1.26
Net gain (loss) on sales of investments in rental properties ($0.01) ($0.73)
----------- -----------
Net income per share - basic $ 1.26 $ 0.53
=========== ===========
Income before net gain (loss) on sales of investments in rental
properties and minority interest $ 1.27 $ 1.25
Net gain (loss) on sales of investments in rental properties ($0.01) ($0.72)
----------- -----------
Net income per share - assuming dilution $ 1.26 $ 0.53
=========== ===========
Weighted average common shares outstanding - basic 46,360 44,990
=========== ===========
Weighted average common shares outstanding - assuming dilution 48,720 48,160
=========== ===========
Dividends declared and paid per common share $ 1.40 $ 1.28
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See notes to consolidated financial statements
4
Consolidated Statements of Cash Flows (unaudited)
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(Dollar amounts in thousands)
For the Nine Months Ended
September 30,
------------------------------
2001 2000
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Cash flows from operating activities:
Net income $ 62,011 $ 27,286
Adjustments to reconcile net income to net cash flows generated by
operating activities:
Depreciation 29,585 28,541
Minority interest 3,143 4,002
Losses from Internet business 7,163 -
Net loss on sales of investments in rental properties 327 32,711
Increase in other assets (3,187) (6,970)
Increase in accounts payable and accrued expenses 5,536 6,798
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Net cash flows generated by operating activities 104,578 92,368
----------- -----------
Cash flows from investing activities:
Multifamily properties purchased (21,628) (27,894)
Proceeds from sales of investments in rental property, net 20,535 255,730
Rehabilitation and other expenditures (15,285) (17,947)
Capital expenditures (3,683) (3,465)
Additions to direct investment construction in progress (43,764) (42,963)
Advances to joint ventures-construction in progress (37,056) (56,094)
Reimbursements of construction in progress from joint ventures 30,221 31,445
Additions to land under development (7,553) (48,271)
Investment in other joint ventures (2,386) (11,288)
Distributions from joint ventures, net 1,003 -
Investment in and advances to Internet business (1,719) (11,631)
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Net cash flows (used in) generated by investing activities (81,315) 67,622
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Cash flows from financing activities:
Issuance of unsecured senior notes, net 246,586 -
Principal payments on unsecured senior notes and mortgage loans (20,551) (41,416)
Proceeds from new mortgage loans 7,541 35,000
Line of credit:
Advances 214,000 266,000
Repayments (388,000) (372,500)
Renewal fees (3,770) -
Dividends paid (68,376) (60,687)
Repurchase of common shares (8,873) -
Proceeds from exercises of stock options, net 4,805 3,499
Distributions to minority members (3,216) (6,172)
Contributions from minority members - 3,356
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Net cash flows used in financing activities (19,854) (172,920)
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Increase (decrease) in cash 3,409 (12,930)
Balance at beginning of period 262 13,812
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Balance at end of period $ 3,671 $ 882
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5
Consolidated Statements of Cash Flows (unaudited) (continued)
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(Dollar amounts in thousands)
For the Nine Months Ended
September 30,
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2001 2000
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Supplemental disclosure of non cash activity:
Transfers of direct investments in real estate-construction in
progress to investment in rental properties $ 40,405 $ 41,553
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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
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Minority interest unit conversions to common shares $ 10,449 $ 18,218
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Distribution of 87% of Internet business to shareholders $ -- $ 8,892
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See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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September 30, 2001
NOTE A - BASIS OF PRESENTATION
------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
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 99% of BRE's
revenues for the three months ended September 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 $48,326,000 and $45,008,000 for the three months ended September 30,
2001 and 2000, respectively.
All BRE revenues are from external customers. There are no tenants that
contributed 10% or more of BRE's total consolidated revenues in the three months
ended September 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.
7
NOTE C - COMMITMENTS AND CONTINGENCIES
--------------------------------------
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 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. During the quarter ended
September 30, 2001, VelocityHSI filed for bankruptcy protection. Under the
terms of BRE's funding arrangements with VelocityHSI, VelocityHSI was to 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 September 30,
2001, which had been written down to zero. BRE's investment in VelocityHSI was
recorded under the equity method of accounting, with losses being recorded on a
90-day lag basis. BRE was required to record 100% of VelocityHSI's losses to
the extent of its investment and advances until VelocityHSI secured an
independent source of financing or BRE's investment was reduced to zero. As of
June 30, 2001, BRE's investment, including advances, in VelocityHSI had been
reduced to zero under the equity method of accounting. BRE 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. No losses related to VelocityHSI were recorded in the quarter ended
September 30, 2001. The $3,076,000 loss for the nine months ended September 30,
2000 relates to losses incurred prior to the spinoff.
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.
NOTE D - SUBSEQUENT EVENT
-------------------------
During the third quarter of 2001, BRE's board of directors authorized the
purchase of BRE's common stock in an amount up to $60 million. The timing of
repurchase activity is dependent upon the market price of BRE's shares, and
other market conditions and factors. As of October 26, 2001, BRE has
repurchased a total of $28,946,000 million of common stock representing
1,003,000 shares, at an average purchase price of $28.86 per share.
8
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
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September 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 nine metropolitan markets of the Western United States.
At September 30, 2001, our portfolio had real estate assets with a book value of
approximately $1.7 billion that included 71 wholly or majority-owned apartment
communities, aggregating 19,959 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.
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.
9
Liquidity and Capital Resources
At September 30, 2001, BRE's net real estate investments totaled approximately
$1,722,000,000, which included 71 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 $194,000,000 at September 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.
At September 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
2002 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 September 30, 2001, BRE had
mortgage indebtedness totaling $211,243,000 at interest rates ranging from 4.4%
to 9.3%, with remaining terms of less than one to 16 years.
As of September 30, 2001, BRE had total outstanding debt balances of
approximately $888,000,000 and total outstanding shareholders' equity and
minority interest of approximately $860,000,000, representing a debt to total
book capitalization ratio of 51%.
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
September 30, 2001.
10
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 September 30,
2001, BRE had an estimated cost of $119,400,000 to complete existing direct
investment and joint venture construction in progress and land under
development, with funding estimated from 2001 through 2003. A portion of the
land under development may be contributed to joint ventures, which may lower
BRE's required funding.
During the third quarter 2001, BRE updated its shelf registration statement.
BRE now has an effective shelf registration on file with the Securities and
Exchange Commission under which we may issue up to $700,000,000 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.
During the third quarter of 2001, BRE's board of directors authorized the
purchase of BRE's common stock in an amount up to $60 million. The timing of
repurchase activity is dependent upon the market price of BRE's shares, and
other market conditions and factors. As of September 30, 2001 BRE had
repurchased a total of $8.9 million of common stock representing 312,400 shares,
at an average purchase price of $28.36 per share.
11
Results of Operations
Comparison of the Quarters Ended September 30, 2001 and 2000
Revenues
Total revenues were $66,788,000 for the three months ended September 30, 2001,
compared to $64,613,000 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 19,959 apartment units owned by BRE, same-store
units totaled 17,974 for the quarter ended September 30, 2001. Multifamily
rental revenues from same-store communities increased $2,986,000, or 6%, for the
three months ended September 30, 2001 compared to the same period in 2000. The
increase in same-store revenues was due primarily to an increase in average
monthly rental rates, which was offset by a reduction in average occupancy in
certain markets. Most notably, in the San Francisco Bay Area, which represents
approximately 30% of our NOI, average occupancy for the quarter dropped from 98%
in third quarter 2000 to 93% for the same quarter 2001.
Same-store revenue growth for the quarter ended September 30, 2001 as compared
to the quarter ended September 30, 2000 was offset by a decrease of $338,000 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. Over the past 12 months, we have sold 22 apartment communities in
our Desert markets for $280 million. As of September 30 2001, we have only
reinvested approximately $162 million of the proceeds derived from the sale in
our targeted markets. As a result, non-same store and partnership income has
decreased 3% as compared with the prior period in 2000, which included revenues
from the communities sold. Additionally, non-recurring development fees
recorded as other income have decreased below the prior year due to the stage of
completion of our joint venture development pipeline.
A summary of the components of revenue for the quarters ended September 30, 2001
and 2000 follows (dollars in thousands):
Three months ended Three months ended
September 30, 2001 September 30, 2000
------------------------------- -------------------------------
% of Total % of Total % Change from
Revenues Revenues Revenues Revenues 2000 to 2001
---------------- ------------- ------------ --------------- -------------
Same-store $56,859 85% $53,873 83% 6%
Non same-store and
partnership income 9,334 14% 9,672 15% (3%)
Other income 595 1% 1,068 2% (44%)
---------------- ------------- ------------ ---------------
Total revenue $66,788 100% $64,613 100% 3%
================ ============= ============ ===============
Multifamily communities' average physical occupancy rates for the quarter ended
September 30, 2001 and 2000 were as follows:
2001 2000
---------- -----------
Multifamily: Same-store 95% 96%
Multifamily: All 95% 96%
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.
12
Expenses
Real Estate Expenses
Real estate expenses for multifamily properties for the quarter ended September
30, 2001 decreased 4% to $17,867,000 from $18,537,000 in the comparable period
in 2000. Same-store expenses increased only 1%, while non same-store expenses
decreased 26%. The third quarter 2000 non same-store number includes expenses
from the 22 communities we sold in the past twelve months, while the third
quarter 2001 non same-store number includes expenses from the 10 communities we
have acquired or developed in the past 12 months.
A summary of the categories of real estate expenses for the quarters ended
September 30, 2001 and 2000 follows (dollars in thousands):
Three months ended Three months ended
September 30, 2001 September 30, 2000
-------------------------------- -------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 2000 to 2001
------------ ---------------- ------------ --------------- ----------------
Same-store $15,410 $15,204 1%
Non same-store 2,457 3,333 (26%)
------------ ------------
Total real estate expense $17,867 26.8% $18,537 28.7% (4%)
============ ============
Depreciation Expense
Depreciation expense increased by $545,000 to $10,426,000 for the quarter ended
September 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 $12,000,000 (net of interest capitalized to the cost of
apartment communities under development of $3,473,000) for the quarter ended
September 30, 2001, an increase of $846,000 or 8% from the comparable period in
2000. Interest expense was $11,154,000 for the same period in 2000 and was net
of $3,755,000 of interest capitalized to the cost of apartment communities under
construction. The increase in interest expense was due to higher fixed rate
debt balances in 2001 and a slightly lower level of capitalized interest. The
proceeds from our portfolio sale in 2000 were used in the short term to pay down
variable rate debt.
General and Administrative
General and administrative costs were $2,212,000 or approximately 3.3% of total
revenues for the third quarter in 2001 and $2,042,000 or approximately 3.2% of
total revenues, for the third quarter in 2000. The slight 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.
13
Net Gain (Loss) on Sales of Investments in Rental Properties
During the third quarter 2001, BRE sold two Tucson communities with 445 units
for an aggregate sales price of $11,000,000, pursuant to an agreement with G&I
III Residential One, LLC, an affiliate of DRA Advisors, Inc. The Tucson sale
completes a $280,000,000 portfolio sale of apartment communities we initiated in
the third quarter of 2000. In addition, BRE sold its minority interest in a
nonmultifamily asset for $1,115,000. The transactions resulted in an aggregate
net loss of $327,000.
Minority Interest
Minority interest was $1,048,000 and $1,220,000 for the quarters ended September
30, 2001 and 2000, respectively. The decrease in the third 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 12 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 September 30, 2001, was
$21,766,000, or $0.46 per diluted share, as compared with a net loss of
($13,332,000), or ($0.29) per diluted share, for the comparable period in 2000.
14
Results of Operations
Comparison of the Nine Months Ended September 30, 2001 and 2000
Revenues
Total revenues were $198,371,000 for the nine months ended September 30, 2001
compared to $191,652,000 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
seven full quarters. Of the 19,959 apartment units owned by BRE, same-store
units totaled 17,782 for the nine months ended September 30, 2001. Multifamily
rental revenues from same-store communities increased $11,891,000, or 8%, for
the nine months ended September 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.
Same-store revenue growth for the nine months ended September 30, 2001 as
compared to the nine months ended September 30, 2000 was offset by a decrease of
$4,849,000 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. Over the past 12 months, we have sold 22
apartment communities in our Desert markets for $280 million. To date, we have
only reinvested approximately $162 million of the proceeds derived from the sale
in our targeted markets. As a result, non same-store and partnership income has
decreased 15% as compared with the prior period in 2000, which included revenues
from the communities sold.
A summary of the components of revenue for the nine months ended September 30,
2001 and 2000 follows (dollars in thousands):
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
----------------------------------- ---------------------------------
% of Total % of Total % Change from
Revenues Revenues Revenues Revenues 2000 to 2001
---------------- --------------- -------------- --------------- ---------------
Same-store $166,635 84% $154,744 81% 8%
Non same-store and
partnership income 28,146 14% 32,995 17% (15%)
Other income 3,590 2% 3,913 2% (8%)
---------------- --------------- -------------- ---------------
Total revenue $198,371 100% $191,652 100% 4%
================ =============== ============== ===============
Expenses
Real Estate Expenses
Real estate expenses for multifamily properties for the nine months ended
September 30, 2001 decreased 4% to $52,808,000 from $55,155,000 in the
comparable period in 2000. Same-store expenses increased by only 3%, while non
same-store expenses decreased 32%. The nine months ended September 30, 2000 non
same-store number includes expenses from the 22 communities we sold in the past
twelve months, while the nine months ended September 30, 2001 number includes
expenses from the 11 communities we acquired or developed after January 1, 2000.
15
A summary of the categories of real estate expenses for the nine months ended
September 30, 2001 and 2000 follows (dollars in thousands):
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
------------------------------- -------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 2000 to 2001
----------- -------------- ------------ --------------- -------------
Same-store $ 45,022 $ 43,654 3%
Non same-store 7,786 11,501 (32%)
----------- ------------
Total real estate expense $ 52,808 26.6% $ 55,155 28.8 % (4%)
=========== ============
Depreciation Expense
Depreciation expense increased by $1,044,000 to $29,585,000 for the nine months
ended September 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 $36,207,000 (net of interest capitalized to the cost of
apartment communities under development of $10,271,000) for the nine months
ended September 30, 2001, an increase of $1,325,000 or 4% from the comparable
period in 2000. Interest expense was $34,882,000 for the same period in 2000
and was net of $11,885,000 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
during 2001.
General and Administrative
General and administrative costs were $7,127,000 or approximately 3.6% of total
revenues for the nine months ended September 30, 2001 and $5,999,000 or
approximately 3.1% of total revenues, for the nine months ended September 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.
Losses from Internet business
Losses from Internet business total $7,163,000 during the first nine months of
2001 and represent the net losses of VelocityHSI, Inc., our non real-estate
investment, which was spun off on August 15, 2000, including a $2,400,000
provision for potential future losses related to VelocityHSI. Subsequent to the
spin-off, VelocityHSI was recorded under the equity method of accounting, with
losses being recorded on a 90-day lag basis. We were required to record 100% of
VelocityHSI's losses to the extent of our investment, including advances, until
it secured an independent source of financing or our investment and advances
were reduced to zero. As of September 30, 2001, VelocityHSI has filed for
bankruptcy protection and BRE's investment in VelocityHSI has been reduced to
zero. The $3,076,000 loss for the nine months ended September 30, 2000 relates
to losses incurred prior to the spinoff.
16
Net Gain (Loss) on Sales of Investments in Rental Properties
During the nine months ended September 30, 2001 BRE sold three Tucson
communities with 621 units for an aggregate sales price of $19,420,000, pursuant
to an agreement with G&I III Residential One, LLC, an affiliate of DRA Advisors,
Inc. The Tucson sale completes a $280,000,000 portfolio sale of apartment
communities initiated by the company in the third quarter of 2000. In addition
BRE sold its minority interest in a nonmultifamily asset for $1,115,000. The
transactions resulted in an aggregate net loss of $327,000.
Minority Interest
Minority interest was $3,143,000 and $4,002,000 for the nine months ended
September 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 have exchanged their
operating company units for shares of BRE common stock in the last 12 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 nine months ended September 30, 2001, was
$58,585,000, or $1.26 per diluted share, as compared with $23,860,000, or $0.53
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.
17
The following table presents data with respect to properties included in
"construction in progress" and "land under development" at September 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 $ 28.2 $ 25.2 $ 3.0 1Q/2002
Pinnacle at Otay Ranch II
Chula Vista, CA 204 27.6 22.4 5.2 1Q/2002
Pinnacle at Otay Ranch I
Chula Vista, CA 160 22.1 9.4 12.7 2Q/2002
Pinnacle at Denver Tech Center
Greenwood Village, CO 420 45.2 24.4 20.8 1Q/2003
---------------------------------------------------------------
Subtotal 964 $123.1 $ 81.4 (2) $ 41.7
---------------------------------------------------------------
Joint Venture Development (3)
Pinnacle at Stone Creek
Paradise Valley, AZ 226 $ 24.4 $ 24.0 $ 0.4 4Q/2001
Pinnacle at MacArthur Place
Santa Ana, CA 253 57.6 47.3 10.3 4Q/2001
Pinnacle Galleria
Roseville, CA 236 24.9 22.9 2.0 4Q/2001
Pinnacle at the Creek
Aurora, CO 216 21.1 10.9 10.2 2Q/2002
----------------------------------------------------------------
Subtotal 931 $128.0 $105.1 (4) $ 22.9
----------------------------------------------------------------
Land Under Development (5)
Pinnacle at Fullerton
Fullerton, CA 192 $ 37.9 $ 9.7 $ 28.2 1Q/2003
Pinnacle at Talega
San Clemente, CA 252 42.2 15.6 26.6 1Q/2003
------------------------------------------------------------------
Subtotal 444 $ 80.1 $ 25.3 $ 54.8
------------------------------------------------------------------
Total 2,339 $331.2 $211.8 $119.4
==================================================================
(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 can change based on
several factors, including construction delays and the inability to obtain
necessary public approvals.
(2) Reflects all recorded and allocated costs incurred as of September 30, 2001,
consisting of $66.8 million recorded on our consolidated balance sheet as
"direct investments in real estate - construction in progress" and $14.6
million of costs for completed buildings located on listed properties,
reflected on our consolidated 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) Consists of $44.5 million recorded on our consolidated balance sheet as
"equity interest in advances to real estate joint ventures-construction in
progress" displayed net of $60.6 million in construction loan balances and
members' equity contributions.
(5) "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.
18
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 nine months ended September 30, 2001 and 2000 were
$64,950,000 and $57,478,000, respectively. In addition, we paid $3,426,000 in
dividends on our 8 1/2% Series A Cumulative Redeemable Preferred Stock in the
nine months ended September 30, 2001 and 2000.
Total distributions to minority members of our consolidated subsidiaries were
$3,216,000 and $6,172,000 for the nine months ended September 30, 2001 and 2000,
respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Information concerning market risk is incorporated herein by reference from 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.
19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
As of September 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
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
20
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Form of Indemnification Agreement
10.2 Employment Agreement of Deirdre A. Kuning
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.
21
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: November 7, 2001
---------------- /s/ Edward Lange
-------------------------------------
Edward F. Lange, Jr.
Executive Vice President,
Chief Financial Officer and Secretary
22