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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 8-K

 

Current Report

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

 

Date of Report (date of earliest event reported): July 15, 2003

 

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BRE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland		1-14306		94-1722214
(State or other jurisdiction of Incorporation)		(Commission File Number)		(I.R.S. Employer Identification Number)

 

44 Montgomery Street, 36th Floor, San Francisco, CA 94104-4809

(Address of principal executive offices, including zip code)

 

415-445-6530

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name or former address, if changed since last report)

 

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ITEM 5.

OTHER EVENTS

 

On July 15, 2003, BRE Properties, Inc. reported operating results for the quarter ended June 30, 2003, as follows:

 

Net income available to common shareholders for the second quarter totaled $27.3 million, or $0.59 per diluted share, as compared with $19.4 million, or $0.42 per diluted share, for the same period 2002. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter totaled $45.6 million, as compared with $47.0 million in second quarter 2002. (A reconciliation of net income available to common shareholders to EBITDA is provided at the end of this release.) For second quarter 2003, revenues totaled $68.1 million, as compared with $64.8 million a year ago, excluding revenues from discontinued operations of $0.2 million and $3.9 million, respectively. Net income for the current quarter included a gain on the sale of one property totaling $13.5 million. There were no gains or losses on the sale of properties in 2Q 2002.

 

Net income available to common shareholders for the six-month period totaled $52.0 million, or $1.12 per diluted share, as compared with $39.6 million, or $0.86 per diluted share, for the same period 2002. EBITDA for the six-month period totaled $91.7 million, as compared with $93.1 million for the same period 2002. For the six months ended June 30, 2003, revenues totaled $135.2 million, as compared with revenues of $127.5 million for the same period 2002, excluding revenues from discontinued operations of $2.0 million and $7.8 million, respectively. Net income for the six months ended June 30, 2003 included a gain on the sales of properties totaling $23.1 million. There were no gains or losses on the sale of properties in the year ago period.

 

For the second quarter, funds from operations (FFO), the generally accepted measure of operating performance for real estate investment trusts, totaled $27.7 million, or $0.58 per diluted share, as compared with $32.2 million, or $0.67 per diluted share, for the same period 2002. For the six-month period, FFO totaled $56.7 million, or $1.19 per diluted share, compared with $64.3 million, or $1.34 per diluted share, in the same period 2002. (A reconciliation of net income available to common shareholders to FFO is provided at the end of this release.)

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BRE’s overall operating results were influenced by property-level same-store performance, disposition activities during 2002 and 2003, and increased interest expense. For second quarter 2003, same-store net operating income (NOI) decreased 5% as compared with second quarter 2002 results. For the six months ended June 30, 2003, same-store NOI decreased 7%, as compared with the same period 2002. On a sequential basis, same-store NOI increased 2% over first quarter 2003. (A reconciliation of net income available to common shareholders to NOI is provided at the end of this release.)

 

Net Operating Income by Region

Three Months Ended June 30, 2003

 

Region		# of Units		Book Cost			% of Book Cost			NOI			% of NOI
Southern California		7,826		$	770,123		36	%		$	19,270		40	%
Northern California		5,644			575,708		27	%			14,747		30	%
Mountain/Desert		5,324			482,229		22	%			8,021		17	%
Pacific Northwest		3,149			323,177		15	%			5,874		12	%
Discontinued operations		—			—		—				229		0	%
Partnership and other income		—			—		—				388		1	%
($ amounts in 000s) Total		21,943		$	2,151,237		100	%		$	48,529		100	%

 

Disposition activities during 2003 and 2002 reduced second quarter 2003 NOI $2.2 million, as compared with second quarter 2002. For the six months ended June 30, 2003, sales of apartment communities effectively reduced NOI by $3.6 million, as compared with the same period in 2002. On a sequential basis, asset sales completed during the first four months of 2003 reduced second quarter NOI by $784,000. The reduction in NOI attributed to disposition activities has been partially offset by NOI derived from acquisitions and development communities added to BRE’s portfolio during the past 12 months. These communities contributed NOI totaling $2.3 million during second quarter 2003, and $4.3 million during the year-to-date period.

 

For second quarter 2003, interest expense was $15.3 million, compared with $13.4 million in the same period 2002. For the six months ended June 30, 2003, interest expense was $29.7 million, compared with $26.3 million in the same period 2002. This increase is the result of reduced levels of capitalized interest and a shift from variable rate debt to fixed rate debt. On

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a sequential basis, interest expense increased $865,000 from first quarter 2003. The increase is attributed to a reduction of capitalized interest as development communities reach the end of construction.

 

Same-Store Property Results

 

BRE defines same-store properties as stabilized apartment communities owned by the company for at least five full quarters. Of the 21,943 apartment units owned by BRE, same-store units totaled 18,836 for the quarter, and 18,656 for the year-to-date period.

 

Same-Store % Growth Results Q2 2003 Compared with Q2 2002
		# of Units		% of NOI			% Change Revenue			% Change Expenses			% Change NOI
San Francisco		3,488		25	%		-10	%		0	%		-13	%
San Diego		2,923		19	%		2	%		-1	%		3	%
L.A./Orange County		3,186		18	%		5	%		1	%		7	%
Seattle		2,881		12	%		-5	%		-5	%		-5	%
Sacramento		1,896		9	%		-2	%		2	%		-4	%
Phoenix		2,214		8	%		-5	%		2	%		-8	%
Salt Lake City		1,264		5	%		-5	%		-6	%		-5	%
Denver		984		4	%		-9	%		4	%		-15	%
Total		18,836		100	%		-4	%		-1	%		-5	%

 

Same-Store % Growth Results Six Months Ended 6/30/2003 Compared with Six Months Ended 6/30/2002
		# of Units		% of NOI			% Change Revenue			% Change Expenses			% Change NOI
San Francisco		3,488		26	%		-12	%		1	%		-15	%
San Diego		2,923		19	%		2	%		-1	%		3	%
L.A./Orange County		3,186		18	%		5	%		1	%		7	%
Seattle		2,701		11	%		-8	%		-4	%		-10	%
Sacramento		1,896		9	%		-4	%		2	%		-6	%
Phoenix		2,214		8	%		-8	%		1	%		-12	%
Salt Lake City		1,264		5	%		-6	%		-3	%		-7	%
Denver		984		4	%		-10	%		3	%		-15	%
Total		18,656		100	%		-5	%		0	%		-7	%

 

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On a year-over-year basis, same-store operating results were affected by continued declines in market rents. Average market rents for the second quarter decreased 6% to $1,064 per unit, from $1,135 per unit in the second quarter 2002. Physical occupancy levels averaged 95% during second quarter 2003 and 94% during second quarter 2002. Annualized resident turnover averaged 66% during the six months ended June 30, 2003, as compared with 65% in the same period last year. The modest increase in annualized turnover was attributed primarily to higher turnover activity in the company’s San Diego, Sacramento and Seattle markets.

 

On a sequential basis, same-store revenue increased 1%, which combined with flat real estate expenses generated a 2% increase in NOI. Average market rents in the same-store portfolio during the second quarter were flat compared with the first quarter. Average occupancy levels improved to 95% in the second quarter from 94% in the first quarter 2003.

 

Same-Store Average Occupancy and Turnover Rates
		Occupancy Levels									Turnover Ratio
		Q2 2003			Q1 2003			Q2 2002			YTD 2003			YTD 2002
San Francisco		95	%		95	%		95	%		69	%		69	%
San Diego		95	%		95	%		96	%		65	%		60	%
L.A./Orange County		96	%		95	%		95	%		52	%		52	%
Sacramento		95	%		93	%		95	%		85	%		77	%
Seattle		94	%		94	%		94	%		61	%		58	%
Salt Lake City		92	%		92	%		93	%		72	%		80	%
Denver		95	%		93	%		93	%		72	%		77	%
Phoenix		92	%		92	%		92	%		67	%		68	%
Average		95	%		94	%		94	%		66	%		65	%

 

Disposition Activity

 

During second quarter 2003, BRE sold one community with 354 units: Brookdale Glen, located in Portland, Oregon. The community was sold for an aggregate sales price of approximately $25.9 million, resulting in a gain on sale of $13.5 million. This sale completed the company’s exit of the Portland metro market.

 

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Acquisition and Development Activity

 

During second quarter 2003, BRE delivered one community and transferred this community from construction-in-progress to investments in real estate: Pinnacle at Talega, with 252 units, located in San Clemente, California. At June 30, 2003, the company had two communities with 672 units in the lease-up phase. Average occupancy for these lease-up communities was 68% of total units at the end of Q2 2003.

 

Lease-Up Communities at June 30, 2003
		Cost			Total Units		Delivered Units		Occupancy
Pinnacle at Denver Tech Center		$	53,662		420		420		60	%
Pinnacle at Talega I		$	44,747		252		252		82	%
Total/ Average		$	98,409		672		672		68	%

 

BRE currently has three communities with a total of 536 units in development, at a total estimated cost of $106.9 million. Expected delivery dates for these communities range from first to second quarter 2004. All development communities are located in Southern California. At June 30, 2003, the company also owned two parcels of land in Southern California, representing 408 units of future development.

 

Financial Information

 

At June 30, 2003, BRE’s combination of debt and equity resulted in a total market capitalization of approximately $2.8 billion, with a debt-to-total market capitalization ratio of 40%. BRE’s outstanding debt of $1.1 billion carried a weighted average interest rate of 5.80% for the six months ended June 30, 2003. BRE’s coverage ratio of EBITDA to interest expense was 3.0 times for the quarter, and 3.1 times for the six-month period. The weighted average maturity for BRE’s debt is six years. At June 30, 2003, outstanding borrowings under the company’s unsecured line of credit totaled $125 million, with an average interest cost of 2.7%.

 

In April 2003, the company amended and restated its revolving credit facility. The company extended the maturity date of the facility to April 2006 from December 2003, with an option to extend the term one year beyond the maturity date. At its election, the company reduced the

 

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borrowing capacity to $350 million from $450 million. Borrowings under the credit facility bear interest at 70 basis points over LIBOR.

 

Also during second quarter 2003, the company established a $100 million Fannie Mae credit facility maturing in 2008. The credit facility is secured by five multifamily communities, which are held by a bankruptcy-remote special purpose subsidiary of BRE. Initial borrowings under the facility will bear interest at variable rates with maturities from one to nine months, plus a facility fee of up to 0.65%. The initial all-in rate on borrowings, including interest, margin and fees, is 1.87%. The company also has the option to convert variable-rate borrowings to fixed-rate borrowings. Subject to the terms of the facility, BRE has the option to increase its size to $250 million. Drawings on the line of credit are available to fund investment activities and for general corporate purposes.

 

During third quarter 2001, BRE’s board of directors authorized the purchase of the company’s common stock in an amount up to $60 million. The timing of repurchase activity is dependent on the market price of the company’s shares, and other market conditions and factors. To date, the company has repurchased a total of $51.1 million of common stock, representing 1,785,600 total shares, at an average price of $28.64 per share.

 

For second quarter 2003, cash dividend payments to common shareholders totaled $22.6 million, or $0.4875 per share, consistent with the same period in 2002. Cash dividend payments for the six months ended June 30, 2003, reached $45.0 million, or $0.975 per share, also consistent with the same period last year.

 

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BRE Properties, Inc.

Financial Summary

June 30, 2003

 

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands)

 

		June 30, 2003				June 30, 2002
Assets
Real estate portfolio
Direct investments in real estate:
Investments in rental properties		$	2,151,237			$	2,023,196
Construction in progress			59,736				85,065
Less: accumulated depreciation			(213,733	)			(180,103	)
			1,997,240				1,928,158
Equity interests in and advances to real estate joint ventures:
Investments in rental properties			10,557				11,104
Construction in progress			—				51,247
			10,557				62,351
Land under development			16,141				19,615
Total real estate portfolio			2,023,938				2,010,124
Cash			99				4,877
Other assets			49,300				51,559
Total assets		$	2,073,337			$	2,066,560
Liabilities and shareholders’ equity
Liabilities
Unsecured senior notes		$	764,474			$	623,672
Mortgage loans			137,196				215,979
Unsecured line of credit			125,000				287,000
Secured line of credit			100,000				—
Accounts payable and accrued expenses			35,640				34,205
Total liabilities			1,162,310				1,160,856
Minority interests			44,734				51,507
Shareholders’ equity
Preferred stock, $.01 par value; $25 liquidation preference; 10,000,000 shares authorized. 2,150,000 shares 8.50% Series A cumulative redeemable issued and outstanding; 3,000,000 shares 8.08% Series B cumulative redeemable issued and outstanding			128,750				128,750
Common stock; $.01 par value, 100,000,000 shares authorized. Shares issued and outstanding: 46,234,055 and 45,990,253 at June 30, 2003 and 2002, respectively			462				460
Additional paid-in capital			737,081				724,987
Total shareholders’ equity			866,293				854,197
Total liabilities and shareholders’ equity		$	2,073,337			$	2,066,560

 

 

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BRE Properties, Inc.

Financial Summary

June 30, 2003

 

CONSOLIDATED INCOME STATEMENTS (Unaudited)

(In thousands, except per share data)

 

		Quarter ended						Six months ended
		June 30, 2003						June 30, 2003
REVENUE
Rental income		$	64,692		$	60,647		$	128,196		$	119,506
Ancillary income			2,984			2,762			5,841			5,346
Partnership and other income			388			1,357			1,132			2,647
Total revenue			68,064			64,766			135,169			127,499
EXPENSES
Real estate expenses			19,764			17,768			39,160			34,596
Depreciation			12,981			10,878			25,811			20,884
Interest expense			15,306			13,431			29,747			26,264
General and administrative			2,917			2,410			5,600			4,613
Total expenses			50,968			44,487			100,318			86,357
Income before minority interests in consolidated subsidiaries and discontinued operations			17,096			20,279			34,851			41,142
Minority interests			830			954			1,654			1,923
Income from continuing operations			16,266			19,325			33,197			39,219
Discontinued operations:
Net gain on sales			13,511			—			23,147			—
Discontinued operations, net (1)			229			1,420			936			2,866
Total discontinued operations			13,740			1,420			24,083			2,866
NET INCOME		$	30,006		$	20,745		$	57,280		$	42,085
DIVIDENDS ATTRIBUTABLE TO PREFERRED STOCK			2,657			1,308			5,314			2,450
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	27,349		$	19,437		$	51,966		$	39,635
Net income per common share—Basic		$	0.59		$	0.42		$	1.13		$	0.86
Net income per common share—Assuming dilution		$	0.59		$	0.42		$	1.12		$	0.86
Weighted average shares outstanding—Basic			46,100			45,950			46,025			45,895
Weighted average shares outstanding—Assuming dilution			47,650			48,080			47,510			47,960

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(1)

Details of net earnings from discontinued operations:

 

		Quarter ended 6/30/03				Quarter ended 6/30/02				Six months ended 6/30/03				Six months ended 6/30/02
Rental and ancillary income		$	245			$	3,929			$	1,984			$	7,827
Real estate expenses			(16	)			(1,533	)			(742	)			(2,979	)
Interest expense			—				(247	)			—				(502	)
Depreciation			—				(729	)			(306	)			(1,480	)
Income from discontinued operations, net		$	229			$	1,420			$	936			$	2,866

 

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Reconciliation and Definition of Non-GAAP Financial Measures

 

This document includes certain non-GAAP financial measures that management believes are helpful in understanding our business, as further described below. BRE’s definition and calculation of non-GAAP financial measures may differ from those of other REITs, and, therefore, may not be comparable. The non-GAAP financial measures should not be considered an alternative to net income or any other GAAP measurement of performance and should not be considered an alternative to cash flows from operating, investing or financing activities as a measure of liquidity.

 

Funds from Operations (FFO)

 

FFO is based on NAREIT’s current definition and is calculated by BRE as net income computed in accordance with GAAP, excluding gains or losses from sales of investments, plus depreciation, and after adjustments for unconsolidated joint ventures and minority interests convertible to common shares. We consider FFO to be an appropriate supplemental measure of the operating performance of an equity REIT because, by excluding gains or losses and depreciation, FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. Below is a reconciliation of net income available to common shareholders to FFO:

 

		Quarter ended 6/30/03				Quarter ended 6/30/02				Six months ended 6/30/03				Six months ended 6/30/02
Net income available to common shareholders		$	27,349			$	19,437			$	51,966			$	39,635
Depreciation from continuing operations			12,981				10,878				25,811				20,884
Depreciation from discontinued operations			—				729				306				1,480
Minority interests			830				954				1,654				1,923
Depreciation from unconsolidated entities			285				337				576				733
Net gain on investments			(13,511	)			—				(23,147	)			—
Less: Minority interests not convertible to common			(250	)			(166	)			(493	)			(336	)
Funds from operations		$	27,684			$	32,169			$	56,673			$	64,319
Average shares outstanding—diluted			47,650				48,080				47,510				47,960
Net income per common share—diluted		$	0.59			$	0.42			$	1.12			$	0.86
FFO per common share—diluted		$	0.58			$	0.67			$	1.19			$	1.34

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Adjusted Funds from Operations (AFFO)

 

AFFO represents funds from operations less recurring value retention capital expenditures. We consider AFFO to be an appropriate supplemental measure of the performance of an equity REIT because, like FFO, it captures real estate performance by excluding gains or losses on investments and depreciation. Unlike FFO, AFFO also reflects that capital expenditures are necessary to maintain the associated real estate assets. Below is a reconciliation of net income available to common shareholders to AFFO:

 

		Quarter ended 6/30/03				Quarter ended 6/30/02				Six months ended 6/30/03				Six months ended 6/30/02
Net income available to common shareholders		$	27,349			$	19,437			$	51,966			$	39,635
Depreciation from continuing operations			12,981				10,878				25,811				20,884
Depreciation from discontinued operations			—				729				306				1,480
Minority interests			830				954				1,654				1,923
Depreciation from unconsolidated entities			285				337				576				733
Net gain on investments			(13,511	)			—				(23,147	)			—
Less: Minority interests not convertible to common			(250	)			(166	)			(493	)			(336	)
Less: Capital expenditures			(2,562	)			(2,111	)			(5,110	)			(3,784	)
Adjusted funds from operations		$	25,122			$	30,058			$	51,563			$	60,535
Average shares outstanding—diluted			47,650				48,080				47,510				47,960
Net income per common share—diluted		$	0.59			$	0.42			$	1.12			$	0.86
AFFO per common share—diluted		$	0.53			$	0.63			$	1.09			$	1.26

 

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

 

EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and excludes gains or losses from sales of investments and preferred stock dividends. We consider EBITDA to be an appropriate supplemental measure of our performance because it eliminates depreciation, interest, and the gain or loss from property dispositions, which permits investors to view income from operations unclouded by non-cash depreciation or the cost of debt. Below is a reconciliation of net income available to common shareholders to EBITDA:

 

		Quarter ended 6/30/03				Quarter ended 6/30/02			Six months ended 6/30/03				Six months ended 6/30/02
Net income available to common shareholders		$	27,349			$	19,437		$	51,966			$	39,635
Interest			15,306				13,678			29,747				26,766
Depreciation			12,981				11,607			26,117				22,364
Minority interests			830				954			1,654				1,923
Net gains on investments			(13,511	)			—			(23,147	)			—
Dividends on preferred stock			2,657				1,308			5,314				2,450
EBITDA		$	45,612			$	46,984		$	91,651			$	93,138

 

Net Operating Income (NOI)

 

NOI is defined as total revenues less real estate expenses (including such items as repairs and maintenance, payroll, utilities, property taxes and insurance, advertising

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and management fees.) We consider NOI to be an appropriate supplemental measure of our performance because it reflects the operating performance of our real estate portfolio at the property level and is used to make decisions about resource allocations and assessing regional property level performance. Below is a reconciliation of net income available to common shareholders to net operating income:

 

		Quarter ended 6/30/03				Quarter ended 6/30/02			Six months ended 6/30/03				Six months ended 6/30/02
Net income available to common shareholders		$	27,349			$	19,437		$	51,966			$	39,635
Interest			15,306				13,678			29,747				26,766
Depreciation			12,981				11,607			26,117				22,364
Minority interests			830				954			1,654				1,923
Net (gain) on investments			(13,511	)			—			(23,147	)			—
Dividends on preferred stock			2,657				1,308			5,314				2,450
General and administrative expense			2,917				2,410			5,600				4,613
NOI		$	48,529			$	49,394		$	97,251			$	97,751

 

FORWARD LOOKING STATEMENTS

 

In addition to historical information, we have made forward-looking statements in this report on Form 8-K. 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, as well as those factors set forth in the section entitled “Risk Factors” contained in our most recent annual report on Form 10-K, 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. For more details, please refer to our SEC filings, including our most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q.

 

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ITEM 7.

FINANCIAL STATEMENTS AND EXHIBITS

 

(c)

Exhibits: None.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: July 17, 2003						By:		/s/    EDWARD F. LANGE, JR.
								Edward F. Lange, Jr. Executive Vice President, Chief Financial Officer and Secretary