---

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 14, 2003

 

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, 36^th 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)

 

---

---

Item 5:  Other Events and Required FD Disclosure.

 

On October 14, 2003, we reported our results of operations for the quarter and nine months ended September 30, 2003 as follows:

 

Net income available to common shareholders for the third quarter totaled $6.7 million, or $0.14 per diluted share, as compared with $22.4 million, or $0.48 per diluted share, for the same period 2002. Included in the company’s third quarter 2003 results were nonrecurring settlement charges totaling $7.3 million relating to the settlement of two lawsuits during the quarter. Excluding these charges, net income available to common shareholders totaled $14.0 million, or $0.30 per diluted share. Adjusted EBITDA for the quarter totaled $45.8 million, as compared with $47.9 million in third quarter 2002. (A reconciliation of net income available to common shareholders to Adjusted EBITDA is provided at the end of this report.) For third quarter 2003, revenues totaled $69.8 million, as compared with $67.5 million a year ago, excluding revenues from discontinued operations of $0 and $4.0 million, respectively. Operating results for third quarter 2002 included a net gain on investment of $4.9 million.

 

Net income available to common shareholders for the nine-month period totaled $58.7 million, or $1.27 per diluted share, as compared with $62.0 million, or $1.34 per diluted share, for the same period 2002. Excluding the nonrecurring settlement charges, net income available to common shareholders for the nine-month period totaled $66.0 million or $1.42 per diluted share. Adjusted EBITDA for the nine-month period totaled $137.4 million, as compared with $141.1 million for the same period 2002. For the nine months ended September 30, 2003, revenues totaled $205.0 million, as compared with revenues of $195.0 million for the same period 2002, excluding revenues from discontinued operations of $2.0 million and $11.8 million, respectively. Net income for the nine months ended September 30, 2003 included a net gain on sales of properties totaling $23.1 million. Operating results for the same period in 2002 included a net gain on sale of investments totaling $4.9 million.

 

---

Funds from operations (FFO), the generally accepted measure of operating performance for real estate investment trusts, totaled $21.0 million, or $0.43 per diluted share, during third quarter 2003. For the nine-month period, FFO totaled $77.6 million, or $1.63 per diluted share. Excluding the nonrecurring settlement charges previously described, FFO per share totaled $0.59 and $1.78 for the quarter and year-to-date periods, respectively. For the quarter and nine months ended September 30, 2002, FFO totaled $31.0 million, or $0.65 per diluted share, and $95.3 million, or $1.99 per diluted share, respectively. (A reconciliation of net income available to common shareholders to FFO is provided at the end of this report.)

 

BRE’s overall operating results were influenced by property-level same-store performance and disposition activities during 2002 and 2003. For the third quarter and nine months ended September 30, 2003, same-store net operating income (NOI) decreased 6% as compared with the 2002 periods. On a sequential basis, same-store NOI decreased 2% from second quarter 2003. (A reconciliation of net income available to common shareholders to NOI is provided at the end of this report.)

 

Net Operating Income by Region Three Months Ended September 30, 2003
Region		# Units		Gross Investment			% Investment			3Q ‘03 NOI			% NOI
Southern California		8,540		$	845,412		38	%		$	19,353		40	%
Northern California		5,644			577,409		26	%			14,785		31	%
Mountain/Desert		5,324			483,177		22	%			7,642		16	%
Pacific Northwest		3,149			323,880		14	%			5,675		12	%
Partnership and other		488			—		—				527		1	%
($ amounts in 000s) Total		23,145		$	2,229,878		100	%		$	47,982		100	%

 

Disposition activities during 2003 and fourth quarter 2002 reduced third quarter 2003 NOI by $2.5 million as compared with third quarter 2002. For the nine months ended September 30, 2003, sales of apartment communities effectively reduced NOI by $6.1 million as compared with the same period in 2002.

 

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 22,657 apartment units owned by BRE, same-store units totaled 20,278 for the quarter, and 18,656 for the year-to-date period.

 

Same-Store % Growth Results Q3 2003 Compared with Q3 2002
		# Units		% NOI			% Change Revenue			% Change Expenses			% Change NOI
San Francisco		3,488		24	%		-8	%		1	%		-11	%
San Diego		3,347		20	%		1	%		4	%		0	%
L.A./Orange County		3,450		17	%		5	%		10	%		2	%
Seattle		3,149		13	%		-3	%		6	%		-7	%
Sacramento		2,156		10	%		0	%		7	%		-3	%
Phoenix		2,440		8	%		-6	%		6	%		-12	%
Salt Lake City		1,264		4	%		-4	%		8	%		-9	%
Denver		984		4	%		-10	%		12	%		-20	%
Total		20,278		100	%		-2	%		6	%		-6	%

---

Same-Store % Growth Results Nine Months Ended 9/30/2003 Compared with Nine Months Ended 9/30/2002
		# Units		% NOI			% Change Revenue			% Change Expenses			% Change NOI
San Francisco		3,488		26	%		-10	%		1	%		-14	%
San Diego		2,923		19	%		1	%		0	%		2	%
L.A./Orange County		3,186		18	%		5	%		1	%		7	%
Seattle		2,701		11	%		-6	%		0	%		-9	%
Sacramento		1,896		9	%		-2	%		3	%		-5	%
Phoenix		2,214		8	%		-7	%		3	%		-12	%
Salt Lake City		1,264		5	%		-5	%		1	%		-8	%
Denver		984		4	%		-10	%		6	%		-17	%
Total		18,656		100	%		-4	%		1	%		-6	%

 

On a year-over-year basis, same-store operating results were affected by continued declines in market rents. Average market rents for the third quarter decreased 4% to $1,078 per unit, from $1,128 per unit in the third quarter 2002. Physical occupancy levels averaged 95% during third quarter 2003 and 2002. Annualized resident turnover averaged 69% during the nine months ended September 30, 2003, as compared with 66% in the same period last year.

 

On a sequential basis, same-store revenue increased 1%—which combined with a 9% increase in real estate expenses—generated a 2% decrease in NOI. During third quarter 2003, average market rents in the same-store portfolio increased 1% compared with the second quarter. Occupancy was maintained at 95%, a level consistent with second quarter results. Annualized turnover averaged 75% for third quarter 2003, up from 71% during second quarter 2003.

 

Year-to-date, same-store operating expenses increased 1% from the nine-month period in 2002. The overall level of expense and corresponding increase from 2002 is consistent with the company’s expectations. The timing associated with turnover-related expenses affects the quarterly year-over-year comparison of real estate expenses. The higher turnover expense—combined with a seasonal increase in water utility expenses—generated an aberrational increase in sequential operating expenses from second quarter 2003.

 

Same-Store Average Occupancy and Turnover Rates
		Occupancy Levels									Turnover Ratio
		Q3 2003			Q2 2003			Q3 2002			YTD 2003			YTD 2002
San Francisco		94	%		95	%		95	%		73	%		72	%
San Diego		96	%		95	%		97	%		67	%		57	%
L.A./Orange Co.		96	%		96	%		96	%		55	%		53	%
Sacramento		96	%		95	%		96	%		83	%		75	%
Seattle		93	%		94	%		92	%		67	%		60	%
Salt Lake City		95	%		92	%		94	%		75	%		82	%
Denver		95	%		95	%		92	%		79	%		82	%
Phoenix		93	%		92	%		94	%		71	%		69	%
Average		95	%		95	%		95	%		69	%		66	%

 

Acquisition and Development Activity

 

During third quarter 2003, BRE acquired one community for approximately $73 million: Corona Pointe Apartments, with 714 units, located in Riverside, California. The company also acquired a parcel of land for future development of 188 units located in Santa Clarita, California.

 

At September 30, 2003, the company had one community with 420 units in the lease-up phase: Pinnacle at Denver Tech Center, in Denver, Colorado. Occupancy for this lease-up community was 81% of total units at the end of third quarter 2003.

 

---

BRE currently has four communities with a total of 744 units in development, with a total estimated investment of $146.2 million and an estimated balance to complete totaling $66.5 million at close of 3Q 2003. Expected delivery dates for these units range from 1Q 2004 through 4Q 2005. All development communities are in Southern California. At September 30, 2003, BRE owned two parcels of land in Southern California, including the third quarter 2003 acquisition, representing 376 units of future development.

 

Legal Settlements

 

During third quarter 2003, BRE executed a settlement agreement in connection with litigation with an unrelated third party regarding the Pinnacle at MacArthur Place joint venture agreement. Under terms of the settlement agreement, BRE paid the third party $6,500,000 and retained full ownership of the asset. Pinnacle at MacArthur Place is a recently developed and stabilized, 253-unit community in Santa Ana, California. Also during third quarter 2003, BRE reached a settlement agreement regarding a class action lawsuit brought against the company with respect to application fees charged to residents from August 1998 to August 2003. Under terms of the settlement, BRE agreed to establish a $200,000 fund to reimburse prior applicants up to $5.00 per applicant, and to pay certain administration charges and legal expenses. These settlement amounts, legal fees and related expenses aggregate $7.3 million, and are reported as a nonrecurring item on the income statement.

 

Financial Information

 

At September 30, 2003, BRE’s combination of debt and equity resulted in a total market capitalization of approximately $2.9 billion, with a debt-to-total market capitalization ratio of 39%. BRE’s outstanding debt of $1.1 billion carried a weighted average interest rate of 5.75% for the nine months ended September 30, 2003. BRE’s coverage ratio of Adjusted EBITDA to interest expense was 3.1 times for the quarter and nine-month period. The weighted average maturity for BRE’s debt is six years. At September 30, 2003, outstanding borrowings under the company’s unsecured and secured lines of credit totaled $243 million, with an average interest cost of 2.40%.

 

During third quarter 2003, the company sold 3,000,000 shares of its common stock. Net proceeds to the company totaled $32.651 per share, which represented a 3.4% discount from the New York Stock Exchange closing price of $33.80 per share on September 16, 2003. Wachovia Securities was the underwriter of the offering; the shares were re-offered to the public by the underwriter at a price of $33.10 per share. Subsequent to the end of the third quarter, the underwriter exercised an over-allotment option to purchase an additional 450,000 shares. Net proceeds from the offering—after all discounts, commissions and anticipated issuance costs—totaled approximately $112.3 million.

 

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. No shares were repurchased during third quarter 2003.

 

For third quarter 2003, cash dividend payments to common shareholders totaled $22.6 million, or $0.4875 per share. Cash dividend payments for the nine months ended September 30, 2003 reached $67.6 million, or $1.4625 per share.

 

---

BRE Properties, Inc.

Financial Summary

September 30, 2003

 

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollar amounts in thousands)

 

		Sept. 30, 2003				Sept. 30, 2002
Assets
Real estate portfolio
Direct investments in real estate:
Investments in rental properties		$	2,229,878			$	2,058,574
Construction in progress			79,665				84,936
Less: accumulated depreciation			(226,543	)			(191,823	)
			2,083,000				1,951,687
Equity interests in and advances to real estate joint ventures:
Investments in rental properties			10,499				55,473
Land under development			23,308				14,350
Total real estate portfolio			2,116,807				2,021,510
Cash			3,746				11,872
Other assets			45,763				51,923
Total assets		$	2,166,316			$	2,085,305
Liabilities and shareholders’ equity
Liabilities
Unsecured senior notes		$	764,205			$	774,571
Mortgage loans			133,255				216,372
Unsecured line of credit			143,000				160,000
Secured line of credit			100,000				—
Accounts payable and accrued expenses			31,007				32,349
Total liabilities			1,171,467				1,183,292
Minority interests			43,539				51,482
Shareholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized. 2,150,000 shares 8.50% Series A cumulative, redeemable, $25 liquidation preference, issued and outstanding; 3,000,000 shares 8.08% Series B cumulative, redeemable, $25 liquidation preference, issued and outstanding.			128,750				128,750
Common stock; $.01 par value, 100,000,000 shares authorized. Shares issued and outstanding: 49,343,444 and 45,928,070 at Sept. 30, 2003 and 2002, respectively.			493				459
Additional paid-in capital			822,067				721,322
Total shareholders’ equity			951,310				850,531
Total liabilities and shareholders’ equity		$	2,166,316			$	2,085,305

 

---

BRE Properties, Inc.

Financial Summary

September 30, 2003

 

CONSOLIDATED INCOME STATEMENTS (Unaudited)

(In thousands, except per share data)

 

		Quarter ended						Nine months ended
		Sept. 30, 2003			Sept. 30, 2002			Sept. 30, 2003			Sept. 30, 2002
REVENUE
Rental income		$	66,140		$	63,603		$	194,336		$	183,107
Ancillary income			3,114			2,913			8,955			8,259
Partnership and other income			527			1,027			1,659			3,675
Total revenue			69,781			67,543			204,950			195,041
EXPENSES
Real estate expenses			21,799			19,095			60,959			53,690
Depreciation			13,381			11,606			39,192			32,490
Interest expense			14,895			14,206			44,642			40,469
General and administrative			2,201			2,976			7,800			7,589
Nonrecurring legal charge			7,305			—			7,305			—
Total expenses			59,581			47,883			159,898			134,238
Income before net gains on investments, minority interests in consolidated subsidiaries and discontinued operations			10,220			19,660			45,052			60,803
Net gains on investments			—			4,862			—			4,862
Income before minority interests in consolidated subsidiaries and discontinued operations			10,200			24,522			45,052			65,665
Minority interests			823			960			2,477			2,883
Income from continuing operations			9,377			23,562			42,575			62,782
Discontinued operations:
Net gain on sales			—			—			23,147			—
Discontinued operations, net (1)			—			1,484			936			4,349
Total discontinued operations			—			1,484			24,083			4,349
NET INCOME			$9,377			$25,046			$66,658			$67,131
Dividends attributable to preferred stock			2,657			2,657			7,971			5,107
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	6,720		$	22,389		$	58,687		$	62,024
Net income per common share – Basic		$	0.14		$	0.49		$	1.27		$	1.35
Net income per common share – Assuming dilution		$	0.14		$	0.48		$	1.27		$	1.34
Weighted average shares outstanding – Basic			46,565			45,910			46,205			45,895
Weighted average shares outstanding – Assuming dilution			48,220			47,860			47,740			47,920

 

(1)	Details of net earnings from discontinued operations:

 

		Quarter ended 9/30/03			Quarter ended 9/30/02				Nine months ended 9/30/03				Nine months ended 9/30/02
Rental and ancillary income		$	—		$	3,983			$	1,984			$	11,810
Real estate expenses			—			(1,510	)			(742	)			(4,489	)
Depreciation			—			(741	)			(306	)			(2,221	)
Interest expense			—			(248	)			—				(751	)
Income from discontinued operations, net		$	—		$	1,484			$	936			$	4,349

 

---

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 9/30/03				Quarter ended 9/30/02				Nine months ended 9/30/03				Nine months ended 9/30/02
Net income available to common shareholders		$	6,720			$	22,389			$	58,687			$	62,024
Depreciation from continuing operations			13,381				11,606				39,192				32,490
Depreciation from discontinued operations			—				741				306				2,221
Minority interests			823				960				2,477				2,883
Depreciation from unconsolidated entities			282				302				858				1,035
Net (gain) on investments			—				(4,862	)			(23,147	)			(4,862	)
Less: Minority interests not convertible to common			(243	)			(172	)			(736	)			(508	)
Funds from operations		$	20,963			$	30,964			$	77,637			$	95,283
Nonrecurring legal charge			7,305				—				7,305				—
Funds from operations, excluding legal charge		$	28,268			$	30,964			$	84,942			$	95,283
Average shares outstanding – Diluted			48,220				47,860				47,740				47,920
Net income per common share – Diluted		$	0.14			$	0.48			$	1.27			$	1.34
FFO per common share – Diluted		$	0.43			$	0.65			$	1.63			$	1.99
FFO per common share, excluding legal charge – Diluted		$	0.59			$	0.65			$	1.78			$	1.99

 

 

---

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 9/30/03				Quarter ended 9/30/02				Nine months ended 9/30/03				Nine months ended 9/30/02
Net income available to common shareholders		$	6,720			$	22,389			$	58,687			$	62,024
Depreciation from continuing operations			13,381				11,606				39,192				32,490
Depreciation from discontinued operations			—				741				306				2,221
Minority interests			823				960				2,477				2,883
Depreciation from unconsolidated entities			282				302				858				1,035
Net (gain) on investments			—				(4,862	)			(23,147	)			(4,862	)
Less: Minority interests not convertible to common			(243	)			(172	)			(736	)			(508	)
Less: Capital expenditures			(2,577	)			(2,406	)			(7,687	)			(6,190	)
Adjusted funds from operations		$	18,386			$	28,558			$	69,950			$	89,093
Nonrecurring legal charge			7,305				—				7,305				—
Adjusted funds from operations, excluding legal charge		$	25,691			$	28,558			$	77,255			$	89,093
Average shares outstanding – Diluted			48,220				47,860				47,740				47,920
Net income per common share – Diluted		$	0.14			$	0.48			$	1.27			$	1.34
AFFO per common share – Diluted		$	0.38			$	0.60			$	1.47			$	1.86
AFFO per common share, excluding legal charge – Diluted		$	0.53			$	0.60			$	1.62			$	1.86

 

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 as EBITDA, excluding minority interests, gains or losses from sales of investments, nonrecurring legal charges, and preferred stock dividends. 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, nonrecurring charges and gains (losses) 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 and Adjusted EBITDA:

 

		Quarter ended 9/30/03			Quarter ended 9/30/02				Nine months ended 9/30/03				Nine months ended 9/30/02
Net income available to common shareholders		$	6,720		$	22,389			$	58,687			$	62,024
Interest			14,895			14,454				44,642				41,220
Depreciation			13,381			12,347				39,498				34,711
EBITDA		$	34,996		$	49,190			$	142,827			$	137,955
Minority interests			823			960				2,477				2,883
Net (gains) on investments			—			(4,862	)			(23,147	)			(4,862	)
Dividends on preferred stock			2,657			2,657				7,971				5,107
Nonrecurring legal charge			7,305			—				7,305				—
Adjusted EBITDA		$	45,781		$	47,945			$	137,433			$	141,083

 

---

 

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 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 9/30/03			Quarter ended 9/30/02				Nine months ended 9/30/03				Nine months ended 9/30/02
Net income available to common shareholders		$	6,720		$	22,389			$	58,687			$	62,024
Interest			14,895			14,454				44,642				41,220
Depreciation			13,381			12,347				39,498				34,711
Minority interests			823			960				2,477				2,883
Net (gain) on investments			—			(4,862	)			(23,147	)			(4,862	)
Dividends on preferred stock			2,657			2,657				7,971				5,107
General and administrative expense			2,201			2,976				7,800				7,589
Nonrecurring legal charge			7,305			—				7,305				—
NOI		$	47,982		$	50,921			$	145,233			$	148,672
Less: Non Same-Store NOI			4,375			4,644				23,698				19,208
Same-Store NOI		$	43,607		$	46,277			$	121,535			$	129,464

 

 

---

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, as amended, 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 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, as amended, and quarterly reports on Form 10-Q.

 

---

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:    October 15, 2003						By:		/s/ Edward F. Lange, Jr.
								Edward F. Lange, Jr. Executive Vice President, Chief Financial Officer and Secretary