UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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) October 31, 2006
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 No.) |
| 525 Market Street, 4th Floor, San Francisco, CA | 94105-2712 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (415) 445-6530
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| ITEM 2.02. | Results of Operations and Financial Condition. |
On October 31, 2006, BRE Properties, Inc. issued a press release and supplemental financial data with respect to its financial results for the quarter ended September 30, 2006. Copies of the press release and supplemental financial data are furnished as Exhibit 99.1 and Exhibit 99.2 to this report, respectively. The information contained in this Item 2.02 and the attached Exhibit 99.1 and Exhibit 99.2 are furnished to, and not filed with, the Securities and Exchange Commission.
| ITEM 8.01. | Other Events |
On October 31, 2006 we reported operating results for the quarter ended September 30, 2006.
Third Quarter 2006
Funds from operations (FFO), the generally accepted measure of operating performance for real estate investment trusts, totaled $30.6 million, or $0.58 per share, during third quarter 2006, as compared with $27.3 million, or $0.51 per share for the quarter ended September 30, 2005. (A reconciliation of net income available to common shareholders to FFO is provided at the end of this release.)
Net income available to common shareholders for the third quarter totaled $11.5 million, or $0.22 per share, as compared with $6.9 million, or $0.13 per share, for the same period 2005.
Total revenues from continuing operations for the quarter were $84.5 million, as compared with $76.8 million a year ago. Adjusted EBITDA for the quarter totaled $56.2 million, as compared with $52.2 million in third quarter 2005. (A reconciliation of net income available to common shareholders to Adjusted EBITDA is provided at the end of this release.)
Nine Months Ended September 30, 2006
For the year-to-date period, FFO totaled $109.1 million, or $2.05 per share, as compared with $80.4 million, or $1.53 per share for the nine-month period in 2005. FFO for the nine months ended September 30, 2006 includes two nonroutine income items totaling $23.0 million, or $0.43 per share: (i) recoveries from a litigation settlement, totaling $19.5 million, or $0.36 per share; and (ii) income from gains on sales of excess land in Bellevue, Washington and Anaheim, California, totaling $3.5 million, or $0.07 per diluted share.
Net income available to common shareholders for the nine-month period totaled $89.5 million, or $1.71 per share, as compared with $49.2 million, or $0.95 per share, for the same period 2005. In addition to the two nonroutine income items referenced above, the 2006 year-to-date results
also include a net gain on sales totaling $38.3 million, or $0.73 per share. Results for the nine-month period in 2005 include a net gain on sales totaling $26.9 million, or $0.52 per share.
Total revenues from continuing operations for the nine months ended September 30, 2006 were $245.4 million, as compared with $220.0 million for the same period in 2005. Adjusted EBITDA for the nine-month period totaled $162.2 million, as compared with $151.7 million for the same period in 2005.
Our positive year-over-year earnings and FFO results were driven primarily by improved same-store property-level operating results, and income from acquisitions and newly developed properties. Positive overall net operating income (NOI) growth was offset by higher interest expense.
Year-over-year same-store NOI growth was 6.2% and 6.0% for the quarter and year-to-date periods, respectively. (A reconciliation of net income available to common shareholders to NOI is provided at the end of this release.) For the third quarter, same-store NOI increased $3.1 million relative to the same period in the prior year. Acquisition activities during 2005 increased third quarter 2006 NOI by $1.2 million, as compared with the same period in the prior year. Lease-up properties generated $1.4 million in additional NOI during the quarter, as compared with third quarter 2005.
Interest expense increased to $20.4 million during third quarter 2006, from $19.5 million in third quarter 2005; and to $60.8 million, from $55.9 million in the respective nine-month periods. The year–over-year increase reflects the issuance of $460 million in convertible senior notes in August 2006 as well as a rising short-term interest rate environment.
Other Expenses recorded during third quarter 2006 totaled $576,000, or $0.01 per share, reflect the prepayment charges associated with the early retirement of $150 million of senior unsecured notes scheduled to mature March 2007.
Same-Store Property Results
We define same-store properties as stabilized apartment communities that we have owned for at least five full quarters. Of the 22,166 apartment units we own directly, same-store units totaled 20,633 for the quarter, and 19,352 for the year-to-date period.
On a year-over-year basis, overall same-store NOI growth was driven by revenue growth of 6.3% for the quarter and 6.7% for the year-to-date period. In addition, NOI growth was supported by 69% operating margins for the quarter and 68% operating margins for the nine-month period. Average same-store market rent for third quarter 2006 increased 7.7% to $1,353 per unit, from $1,257 per unit in third quarter 2005. Same-store physical occupancy levels averaged 94.4% during third quarter 2006, as compared with 95.1% in the same period 2005. Rent concessions in the same-store portfolio remain small, totaling $380,728, or 1.7 days rent, for third quarter 2006 as compared with $568,008, or 2.7 days rent, for the prior year.
For the third quarter and year-to-date periods, property-level operating expense increased 6.5% and 8.2%, respectively. As reported during the year, items contributing to greater than normalized expense growth include resident turnover costs, payroll and property insurance. Resident turnover costs primarily comprise flooring, carpet and appliance replacements, paint and labor charges. Turnover-related expenses have increased approximately 15% on a year-over-year basis, driven by oil prices and the impact to petroleum based products, such as carpet and paint.
Development Activity
During third quarter 2006, we had three Southern California communities in the lease-up phase: The Heights, with 208 units, in Chino Hills; Bridgeport Coast, with 188 units, in Santa Clarita; and Galleria at Towngate, with 268 units, in Moreno Valley. At the end of the quarter, all units were delivered at The Heights, 189 of which were occupied. At Bridgeport Coast, all units were delivered, 169 of which were occupied. At Galleria at Towngate, 246 units were delivered, 206 of which were occupied.
Including Galleria at Towngate, we currently have six communities under construction, with a total of 1,744 units, for an aggregate projected investment of $486.5 million and an estimated balance to complete totaling $234.3 million. Expected first delivery dates for these units range from first quarter 2007 through third quarter 2008. Five development communities are in Southern California; the other is located in Northern California.
We own four land parcels representing 718 units of future development, and an estimated aggregate investment of $208.4 million upon completion. Expected construction starts for the four parcels are expected to occur during 2007. The land parcels are located in Southern California, Northern California and the Seattle, Washington metro area.
Financial and Other Information
At September 30, 2006, our combination of debt and equity resulted in a total market capitalization of approximately $4.9 billion, with a debt-to-total market capitalization ratio of 32%. Our outstanding debt of $1.6 billion carried a weighted average interest rate of 5.74% for the nine-month period. Our coverage ratio of Adjusted EBITDA to interest expense was 2.8 times for the quarter. The weighted average maturity for outstanding debt is 5.10 years. At September 30, 2006, outstanding borrowings under our unsecured and secured lines of credit totaled $75.0 million, with a weighted average interest cost of 6.20%.
For third quarter 2006, cash dividend payments to common shareholders totaled $25.9 million, or $0.5125 per share, which represents an increase of 2.5% over prior year per share dividend levels.
During the quarter, we completed a private offering of $460 million aggregate principal amount of 4.125% convertible senior notes due 2026. The net proceeds from the offering were used to redeem $150 million of senior unsecured indebtedness, repurchase concurrently with the closing approximately 1,342,883 shares of our common stock at a price of $55.85 per share, and reduce borrowings under the unsecured credit facility.
BRE Properties, Inc.
Consolidated Balance Sheets
Third Quarter 2006
(Unaudited, dollar amounts in thousands except per share data)
| September 30, 2006 |
September 30, 2005 |
|||||||
| ASSETS |
||||||||
| Real estate portfolio: |
||||||||
| Direct investments in real estate: |
||||||||
| Investments in rental properties |
$ | 2,680,948 | $ | 2,478,781 | ||||
| Construction in progress |
215,650 | 142,045 | ||||||
| Less: accumulated depreciation |
(383,870 | ) | (312,269 | ) | ||||
| 2,512,728 | 2,308,557 | |||||||
| Equity interests in and advances to real estate joint ventures: |
||||||||
| Investments in rental properties |
38,617 | 10,183 | ||||||
| Real estate held for sale, net |
— | 195,047 | ||||||
| Land under development |
47,333 | 77,184 | ||||||
| Total real estate portfolio |
2,598,678 | 2,590,971 | ||||||
| Cash |
13,649 | 4,291 | ||||||
| Other assets |
62,345 | 51,382 | ||||||
| TOTAL ASSETS |
$ | 2,674,672 | 2,646,644 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Liabilities: |
||||||||
| Unsecured senior notes |
$ | 1,290,000 | $ | 980,000 | ||||
| Unsecured line of credit |
— | 226,000 | ||||||
| Secured line of credit |
75,000 | 75,000 | ||||||
| Mortgage loans |
202,344 | 215,690 | ||||||
| Accounts payable and accrued expenses |
61,681 | 54,733 | ||||||
| Total liabilities |
1,629,025 | 1,551,423 | ||||||
| Minority interests |
60,044 | 61,675 | ||||||
| Shareholders’ equity: |
||||||||
| Preferred Stock, $0.01 par value; 20,000,000 shares authorized: 10,000,000 shares with $25 liquidation preference issued and outstanding at September 30, 2006 and September 30, 2005, respectively. |
100 | 100 | ||||||
| Common stock, $0.01 par value, 100,000,000 shares authorized. Shares issued and outstanding: 50,282,869 and 51,186,459 at September 30, 2006 and 2005, respectively. |
503 | 512 | ||||||
| Additional paid-in capital |
985,000 | 1,032,934 | ||||||
| Total shareholders’ equity |
985,603 | 1,033,546 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 2,674,672 | $ | 2,646,644 | ||||
BRE Properties, Inc.
Consolidated Statements of Income
Quarters and Nine Months Ended September 30, 2006 and 2005
(Unaudited, dollar and share amounts in thousands)
| Quarter ended 09/30/2006 |
Quarter ended 9/30/2005 |
Nine months ended 09/30/2006 |
Nine months ended 9/30/2005 |
|||||||||||||
| REVENUE |
||||||||||||||||
| Rental income |
$ | 80,344 | $ | 73,461 | $ | 234,192 | $ | 210,014 | ||||||||
| Ancillary income |
4,141 | 3,387 | 11,216 | 9,937 | ||||||||||||
| Total revenue |
84,485 | 76,848 | 245,408 | 219,951 | ||||||||||||
| EXPENSES |
||||||||||||||||
| Real estate expenses |
$ | 26,535 | $ | 24,366 | $ | 77,860 | $ | 69,576 | ||||||||
| Depreciation |
18,353 | 18,893 | 55,860 | 52,722 | ||||||||||||
| Interest expense |
20,372 | 19,512 | 60,842 | 55,949 | ||||||||||||
| General and administrative |
3,972 | 4,045 | 13,157 | 12,853 | ||||||||||||
| Other expenses |
576 | 759 | 1,137 | 1,488 | ||||||||||||
| Total expenses |
69,808 | 67,575 | 208,856 | 192,588 | ||||||||||||
| Other income |
1,472 | 446 | 25,501 | 2,146 | ||||||||||||
| Income before minority interests, partnership income and discontinued operations |
16,149 | 9,719 | 62,053 | 29,509 | ||||||||||||
| Minority interests |
(897 | ) | (915 | ) | (2,702 | ) | (2,620 | ) | ||||||||
| Partnership income |
711 | 155 | 1,289 | 402 | ||||||||||||
| Income from continuing operations |
15,963 | 8,959 | 60,640 | 27,291 | ||||||||||||
| Discontinued operations: |
||||||||||||||||
| Discontinued operations, net (1) |
— | 2,379 | 3,961 | 8,425 | ||||||||||||
| Net gain on sales |
— | — | 38,302 | 26,897 | ||||||||||||
| Total discontinued operations |
— | 2,379 | 42,263 | 35,322 | ||||||||||||
| NET INCOME |
$ | 15,963 | $ | 11,338 | $ | 102,903 | $ | 62,613 | ||||||||
| Dividends attributable to preferred stock |
4,468 | 4,468 | 13,404 | 13,404 | ||||||||||||
| NET INCOME AVAILABLE TO COMMON SHAREHOLDERS |
$ | 11,495 | $ | 6,870 | $ | 89,499 | $ | 49,209 | ||||||||
| Net income per common share - basic |
$ | 0.23 | $ | 0.13 | $ | 1.75 | $ | 0.97 | ||||||||
| Net income per common share - assuming dilution |
$ | 0.22 | $ | 0.13 | $ | 1.71 | $ | 0.95 | ||||||||
| Weighted average shares outstanding - basic |
50,875 | 51,065 | 51,065 | 50,830 | ||||||||||||
| Weighted average shares outstanding - assuming dilution |
52,090 | 51,990 | 52,285 | 51,640 | ||||||||||||
| (1) | Details of net earnings from discontinued operations. For 2006 includes seven properties held for sale and contributed to a joint venture in April 2006. For 2005 also includes results from three properties sold during the first six months of 2005. |
| Quarter ended 09/30/2006 |
Quarter ended 9/30/2005 |
Nine months ended 09/30/2006 |
Nine months ended 9/30/2005 |
||||||||||||
| Rental and ancillary income |
$ | 0 | $ | 5,184 | $ | 6,646 | $ | 18,090 | |||||||
| Real estate expenses |
— | (1,990 | ) | (2,685 | ) | (6,424 | ) | ||||||||
| Depreciation |
— | (815 | ) | — | (3,241 | ) | |||||||||
| Income from discontinued operations, net |
$ | 0 | $ | 2,379 | $ | 3,961 | $ | 8,425 | |||||||
BRE Properties, Inc.
Non-GAAP Financial Measure Reconciliations and Definitions
(Dollar amounts in thousands)
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 may, therefore, 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 used by industry analysts and investors as a supplemental performance measure of an equity REIT. FFO is defined by the National Association of Real Estate Investment Trusts as net income or loss (computed in accordance with accounting principles generally accepted in the United States) excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated real estate assets, plus depreciation and amortization of real estate assets and adjustments for unconsolidated partnerships and joint ventures. We calculate FFO in accordance with the NAREIT definition.
We believe that FFO is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation. Because real estate values have historically risen or fallen with market conditions, management considers FFO an appropriate supplemental performance measure because it excludes historical cost depreciation, as well as gains or losses related to sales of previously depreciated property, from GAAP net income. By excluding depreciation and gains or losses on sales of real estate, management uses FFO to measure returns on its investments in real estate assets. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited.
Management also believes that FFO, combined with the required GAAP presentations, is useful to investors in providing more meaningful comparisons of the operating performance of a company’s real estate between periods or as compared to other companies. FFO does not represent net income or cash flows from operations as defined by GAAP and is not intended to indicate whether cash flows will be sufficient to fund cash needs. It should not be considered an alternative to net income as an indicator of the REIT’s operating performance or to cash flows as a measure of liquidity. Our FFO may not be comparable to the FFO of other REITs due to the fact that not all REITs use the NAREIT definition.
| Quarter Ended 9/30/06 |
Quarter Ended 9/30/05 |
Nine Months Ended 9/30/06 |
Nine Months Ended 9/30/05 |
|||||||||||||
| Net income available to common shareholders |
$ | 11,495 | $ | 6,870 | $ | 89,499 | $ | 49,209 | ||||||||
| Depreciation from continuing operations |
18,353 | 18,893 | 55,860 | 52,722 | ||||||||||||
| Depreciation from discontinued operations |
— | 815 | — | 3,241 | ||||||||||||
| Minority interests |
897 | 915 | 2,702 | 2,620 | ||||||||||||
| Depreciation from unconsolidated entities |
244 | 209 | 582 | 627 | ||||||||||||
| Net gain on investments |
— | — | (38,302 | ) | (26,897 | ) | ||||||||||
| Less: Minority interests not convertible to common |
(406 | ) | (405 | ) | (1,217 | ) | (1,091 | ) | ||||||||
| Funds from operations |
$ | 30,583 | $ | 27,297 | $ | 109,124 | $ | 80,431 | ||||||||
| Diluted shares outstanding - EPS |
52,090 | 51,990 | 52,285 | 51,640 | ||||||||||||
| Net income per common share - diluted |
$ | 0.22 | $ | 0.13 | $ | 1.71 | $ | 0.95 | ||||||||
| Diluted shares outstanding - FFO |
53,050 | 53,010 | 53,260 | 52,660 | ||||||||||||
| FFO per common share - diluted |
$ | 0.58 | $ | 0.51 | $ | 2.05 | $ | 1.53 | ||||||||
BRE Properties, Inc.
Non-GAAP Financial Measure Reconciliations and Definitions
(Dollar amounts in thousands)
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA
EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined by BRE as EBITDA, excluding minority interests, gains or losses from sales of investments, preferred stock dividends and other expenses. We consider EBITDA and Adjusted EBITDA to be appropriate supplemental measures of our performance because they eliminate depreciation, interest, and, with respect to Adjusted EBITDA, gains (losses) from property dispositions, nonroutine items, and other charges, which permits investors to view income from operations without the impact of noncash depreciation or the cost of debt, or with respect to Adjusted EBITDA, other non-operating items described above.
Because EBITDA and Adjusted EBITDA exclude depreciation and amortization and capture neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations, the utility of EBITDA and Adjusted EBITDA as measures of our performance is limited. Below is a reconciliation of net income available to common shareholders to EBITDA and Adjusted EBITDA:
| Quarter ended 9/30/06 |
Quarter ended 9/30/05 |
Nine Months Ended 9/30/06 |
Nine Months Ended 9/30/05 |
|||||||||||
| Net income available to common shareholders |
$ | 11,495 | $ | 6,870 | $ | 89,499 | $ | 49,209 | ||||||
| Interest |
20,372 | 19,512 | 60,842 | 55,949 | ||||||||||
| Depreciation |
18,353 | 19,708 | 55,860 | 55,963 | ||||||||||
| EBITDA |
50,220 | 46,090 | 206,201 | 161,121 | ||||||||||
| Minority interests |
897 | 915 | 2,702 | 2,620 | ||||||||||
| Net gain on sales |
— | — | (38,302 | ) | (26,897 | ) | ||||||||
| Gain on sales of land |
— | — | (3,485 | ) | — | |||||||||
| Dividends on preferred stock |
4,468 | 4,468 | 13,404 | 13,404 | ||||||||||
| Other expenses |
576 | 759 | 1,137 | 1,488 | ||||||||||
| Red Hawk Settlement |
— | — | (19,500 | ) | — | |||||||||
| Adjusted EBITDA |
$ | 56,161 | $ | 52,232 | $ | 162,157 | $ | 151,736 | ||||||
Net Operating Income (NOI)
We consider community level and portfolio-wide NOI to be an appropriate supplemental measure to net income because it helps both investors and management to understand the core property operations prior to the allocation of general and administrative costs. This is more reflective of the operating performance of the real estate, and allows for an easier comparison of the operating performance of single assets or groups of assets. In addition, because prospective buyers of real estate have different overhead structures, with varying marginal impact to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or groups of assets.
Because NOI excludes depreciation and does not capture the change in the value of our communities resulting from operational use and market conditions, nor the level of capital expenditures required to adequately maintain the communities (all of which have real economic effect and could materially impact our results from operations), the utility of NOI as a measure of our performance is limited. Other equity REITs may not calculate NOI consistently with our definition and, accordingly, our NOI may not be comparable to such other REITs’ NOI. Accordingly, NOI should be considered only as a supplement to net income as a measure of our performance. NOI should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. NOI also should not be used as a supplement to or substitute for cash flow from operating activities (computed in accordance with GAAP).
| Quarter ended 9/30/06 |
Quarter ended 9/30/05 |
Nine Months Ended 9/30/06 |
Nine Months Ended 9/30/05 |
|||||||||||
| Net income available to common shareholders |
$ | 11,495 | $ | 6,870 | $ | 89,499 | $ | 49,209 | ||||||
| Interest |
20,372 | 19,512 | 60,842 | 55,949 | ||||||||||
| Depreciation |
18,353 | 19,708 | 55,860 | 55,963 | ||||||||||
| Minority interests |
897 | 915 | 2,702 | 2,620 | ||||||||||
| Net gain on sales |
— | — | (38,302 | ) | (26,897 | ) | ||||||||
| Dividends on preferred stock |
4,468 | 4,468 | 13,404 | 13,404 | ||||||||||
| General and administrative expense |
3,972 | 4,045 | 13,157 | 12,853 | ||||||||||
| Other expenses |
576 | 759 | 1,137 | 1,488 | ||||||||||
| NOI |
$ | 60,133 | $ | 56,277 | $ | 198,299 | $ | 164,589 | ||||||
| Less Non Same-Store NOI |
6,499 | 5,766 | 54,378 | 28,845 | ||||||||||
| Same-Store NOI |
$ | 53,634 | $ | 50,511 | $ | 143,921 | $ | 135,744 | ||||||
| ITEM 9.01 | Financial Statements and Exhibits. |
| (d) | Exhibits. |
| Exhibit Number |
Description | |
| 99.1 | Press release of BRE Properties, Inc. dated October 31, 2006, including attachments. | |
| 99.2 | Supplemental Financial data dated October 31, 2006, including attachments. | |
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 hereunto duly authorized.
| BRE Properties, Inc. (Registrant) | ||||
| Date: November 1, 2006 |
/s/ Edward F. Lange, Jr. | |||
| Name: Edward F. Lange, Jr. | ||||
Exhibit Index
| 99.1 | Press release of BRE Properties, Inc. dated October 31, 2006, including attachments. | |
| 99.2 | Supplemental Financial data dated October 31, 2006, including attachments. | |