<PAGE>
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 AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 94-1722214
- --------------------------------- --------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
One Montgomery Street
Telesis Tower, Suite 2500
San Francisco, CA 94104-5525
- --------------------------------- --------------------------------------
(ADDRESS OF PRINCIPAL OFFICE) (ZIP CODE)
(415) 445-6530
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
--------- --------
Number of shares of Class A common stock
outstanding as of April 17, 1997 33,029,656
---------------------------------
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BRE PROPERTIES, INC.
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PART I FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments in rental properties
Multifamily $736,971 $710,240
Commercial and retail 103,678 103,528
Less: Accumulated depreciation and amortization (53,552) (49,690)
------------ ------------
787,097 764,078
Investments in limited partnerships 2,651 2,621
------------ ------------
Real estate portfolio 789,748 766,699
Mortgage loans, net 9,676 9,716
Cash and short-term investments 1,242 184
Other 9,195 7,115
------------ ------------
TOTAL ASSETS $809,861 $783,714
------------ ------------
------------ ------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans $114,575 $114,985
Unsecured notes 73,000 73,000
Unsecured lines of credit 147,000 124,000
Accounts payable and accrued expenses 9,163 7,615
------------ ------------
Total liabilities 343,738 319,600
------------ ------------
Shareholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized.
No shares outstanding at March 31, 1997 or December
31, 1996. - -
Common stock, $.01 par value, 50,000,000 shares authorized.
Shares issued and outstanding: 33,025,457 at March 31,
1997; 32,879,741 at December 1996. 330 329
Additional paid-in capital 465,793 463,785
------------ ------------
Total shareholders' equity 466,123 464,114
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $809,861 $783,714
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
2
<PAGE>
STATEMENTS OF INCOME (unaudited)
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
Quarter Ended Quarter Ended
March 31, 1997 March 31, 1996
-------------- --------------
REVENUE
Rental income:
Multifamily $26,800 $12,662
Commercial and retail 3,061 3,685
Other income 1,866 2,478
-------------- --------------
Total revenue 31,727 18,825
EXPENSES
Real estate expenses:
Multifamily 9,399 4,721
Commercial and retail 216 1,044
Depreciation and amortization 4,168 2,189
Interest expense 5,889 2,453
General and administrative 1,114 1,034
-------------- --------------
Total expenses 20,786 11,441
-------------- --------------
Net Income $10,941 $7,384
-------------- --------------
-------------- --------------
Net Income per share $.33 $.32
-------------- --------------
-------------- --------------
Weighted average shares outstanding 32,980 23,350
-------------- --------------
-------------- --------------
See notes to financial statements
3
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<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS (UNAUDITED)
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Quarter Ended Quarter Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
(Dollar amounts in thousands)
Cash flows from operating activities:
Net income $10,941 $7,384
Non-cash revenues and expenses included in income:
Provision for depreciation and amortization 4,168 2,189
Increase (decrease) in accounts payable and other liabilities 1,548 (2,508)
(Increase) decrease in other assets (1,758) 4,268
-------------- --------------
Cash flows generated by operating activities 14,899 11,333
-------------- --------------
Cash flows from investing activities:
Multifamily property purchased (26,172) (10,499)
Capital expenditures-multifamily (440) (6)
Capital expenditures-commercial and retail (132) (164)
Capital expenditures- rehabilitation (795) -
Advances on mortgage loans receivable - (2,821)
Payments on mortgage loans receivable 40 184
-------------- --------------
Net cash flows used in investing activities (27,499) (13,306)
-------------- --------------
Cash flows from financing activities:
Mortgage loans payable:
Principal payments (410) (300)
Lines of credit:
Advances 37,500 -
Principal repayments (14,500) -
Proceeds from exercises of stock options 2,460 -
Dividends paid (11,392) (7,450)
-------------- --------------
Net cash flows generated by (used in) financing activities 13,658 (7,750)
-------------- --------------
Increase (decrease)in cash and short-term investments 1,058 (9,723)
Balance at beginning of period 184 16,057
-------------- --------------
Balance at end of period $1,242 $6,334
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
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March 31, 1997
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
amended. In the opinion of management, all adjustments (consisting of normal
recurring adjustments only) have been made which are necessary for a fair
statement of the results for the interim periods presented herein.
NOTE B - NET INCOME PER SHARE
Net income per share is based upon the weighted average number of shares
outstanding during the periods. In February 1997, the Financial Accounting
Standards Board issued Statement No.128, " Earnings per share", which is
required to be adopted on December 31, 1997. The impact of the adoption of
Statement No. 128 is not expected to be material.
NOTE C - LITIGATION
BRE is defending various claims and legal actions that arise from its normal
course of business. 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 results of operations or
financial position.
NOTE D - INCREASE IN AUTHORIZED SHARES
On April 21, 1997, the number of authorized shares of the Company's common stock
was increased from 50,000,000 to 100,000,000.
NOTE E - SUBSEQUENT EVENTS
On April 1, 1997, the Company sold Elsinore Valley Shopping Center for
$1,700,000 to an unrelated purchaser. On April 4, 1997, the Company sold the
Montalvo warehouse property for $1,125,000 to an unrelated purchaser. On April
4, 1997, the Company sold three retail properties, the Hub Shopping Center,
Santa Fe Springs Shopping Center and Central Shopping Center, for $69,600,000 to
an unrelated purchaser. On April 14, 1997, the Company sold the Villa Serra
land lease property for $10,900,000 to an unrelated purchaser. On April 22,
1997, the Company sold the Vagabond property for $450,000 to an unrelated
purchaser. The net book value of these properties at March 31, 1997 was
approximately $55,000,000. Revenues from these properties for the first quarter
ended March 31, 1997 were approximately $2,199,000, depreciation was
approximately $391,000 and real estate expenses were approximately $83,000.
As of March 31, 1997, the Company was committed to purchase the Red Hawk Ranch
Apartments, a 453 unit property in Fremont, California for $58,700,000 from an
unrelated seller. On April 14, 1997, the purchase was completed using proceeds
from the sale of the Hub, Central Shopping Center and Villa Serra properties in
a tax-deferred exchange.
On April 23, 1997, the Directors declared a dividend of $.345 per share, payable
June 26, 1997 to shareholders of record June 6, 1997.
5
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ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
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March 31, 1997
Overview
BRE Properties, Inc. (the "Company") is a regionally focused, self-administered
equity real estate investment trust which primarily owns and manages a portfolio
of apartment communities in nine major markets of the Western United States. The
Company also owns 19 commercial and retail properties, including three
partnership interests and one land lease. The Company's revenues consist
primarily of rental income (94% of total revenues in the quarter ended March 31,
1997 and 87% in the quarter ended March 31, 1996) derived from its portfolio of
income-producing properties. Other income includes interest from secured notes
receivable and, to a lesser extent, income from partnership investments. The
policy of the Company is to emphasize cash flows from operations rather than the
realization of capital gains through property dispositions. As dispositions of
real estate assets are made, the Company typically seeks to reinvest net
proceeds from sales in income-producing real estate.
Although the Company has embarked upon a strategic initiative to redeploy its
real estate investments into multifamily assets, no time frame has been
established for completion of this activity and ultimate dispositions of
commercial and retail assets are dependent upon offers with acceptable prices
and terms including satisfactory completion of potential buyer due diligence
procedures. For example, it is reasonably possible that the holding period for
remaining commercial and retail assets could extend well beyond one year.
Furthermore, changes to the plan are not unlikely (which would result in
extended holding periods for the existing properties) as market conditions could
result in a lack of acceptable offers and it is possible some properties could
be held indefinitely. Real estate is not classified as "held for sale" until
it is likely, in the opinion of management, that a property will be disposed of
in the near term, even if sales negotiations for such property are currently
under way; no properties were considered "held for sale" for this purpose as of
March 31, 1997 or December 31, 1996 and therefore depreciation continues to be
provided on these assets.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this form 10-Q.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although the Company believes that the
expectations reflected in such forward-looking statements are based on
reasonable assumptions, such statements are subject to risks and uncertainties,
including those discussed under the heading "Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, as amended (the
"1996 Form 10-K"), that could cause actual results to differ materially from
those projected.
RESULTS OF OPERATIONS
Comparison of the quarters ended March 31, 1997 and 1996
Revenues
Total revenues were $31,727,000 for the three months ended March 31, 1997
compared to $18,825,000 for the same period in 1996. This increase was
primarily due to an increase in multifamily rental revenues resulting from
property acquisitions, including the 22 apartment
6
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communities acquired in the merger with Real Estate Investment Trust of
California (the "Merger") on March 15, 1996 and nine other direct apartment
investments, which contributed approximately $5,778,000 and $8,236,000,
respectively, to rental revenue for the three months ended March 31, 1997.
Multifamily rental revenue for this period also benefited from an increase in
average occupancy (calculated as shown below), and an average increase in
rental rates of approximately 5%, when compared to the earlier quarter for
properties held during both periods.
Revenues from commercial and retail properties decreased 17% in the quarter
ended March 31, 1997 when compared to the same period in 1996 due to the sale of
14 properties in these categories (which properties contributed approximately
$1,287,000 in revenues during the quarter ended March 31, 1996) offset in part
by the commercial and retail properties acquired in the Merger which were held
for the entire quarter during 1997.
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
-----------------------------------------------
% CHANGE
----------
% OF TOTAL % OF TOTAL FROM 1996
---------- ---------- ----------
REVENUES REVENUES REVENUES REVENUES TO 1997
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
REVENUES:
Multifamily $26,800 84% $12,662 67% 111%
Commercial and retail 3,061 10% 3,685 20% (17%)
Other income 1,866 6% 2,478 13% (25%)
-------------------------------------------------------------
Total revenue $31,727 100% $18,825 100% 68%
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
Portfolio physical occupancy rates as of March 31, 1997 and 1996 were as
follows:
1997 1996
- --------------------------------------------------------------------------------
Multifamily 96% 93%
- --------------------------------------------------------------------------------
Commercial and retail 93% 96%
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For multifamily properties, portfolio occupancy is calculated by dividing the
total occupied units by the total units in the portfolio. For commercial and
retail properties, portfolio occupancy is calculated by dividing the total
occupied square footage by the total square footage in the portfolio.
Expenses
REAL ESTATE EXPENSES
Real estate expenses for multifamily properties (which include maintenance and
repairs, utilities, on-site staff payroll, property taxes, insurance,
advertising and other direct operating expenses) for the quarter ended March 31,
1997 increased 99% to $9,399,000 from the comparable period in 1996 primarily
due to expenses of the 22 properties acquired in the Merger and nine new
multifamily property acquisitions. Real estate expenses for commercial and
retail properties decreased from $1,044,000 in the quarter ended March 31, 1996
to $216,000 in the same period in 1997 due to the sale of 14 such properties
during 1996. Real estate expenses in total as a percentage of rental revenues
decreased from 35% for the first quarter in 1996 to 32% for the first quarter
ended 1997. Although not measurable with precision, management believes that
this
7
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decrease resulted in part from the internalization of property management and
economies of scale derived from increased concentration of assets in the
Company's markets.
PROVISION FOR DEPRECIATION AND AMORTIZATION
The provision for depreciation and amortization increased by $1,979,000 to
$4,168,000 for the quarter ended March 31, 1997 from the comparable period of
1996. The increase in 1997 resulted from properties acquired in the Merger and
additional multifamily property acquisitions, offset in part by dispositions of
commercial and retail properties.
INTEREST EXPENSE
Interest expense was $5,889,000 for the quarter ended March 31, 1997, up from
$2,453,000 in 1996. This increase was due primarily to interest on indebtedness
assumed in the Merger totaling $95,400,000 and interest on subsequent borrowings
on the Company's lines of credit to fund multifamily property acquisitions. At
March 31, 1997, the Company's total indebtedness (including indebtedness assumed
in the Merger) was $334,575,000.
GENERAL AND ADMINISTRATIVE
General and administrative costs were $1,114,000 or 3.5% of total revenues for
the first quarter in 1997 and $1,034,000 or 5.5% of total revenues for the first
quarter in 1996. The decrease in the percent of revenue is primarily from
reductions in costs of administering the Company's day to day operations due to,
among other things, the reorganization of the Company's asset management staff
to handle direct property management duties which were previously handled by
outside property management firms and, to a lesser extent, improved efficiencies
in operating systems, computer systems and software upgrades.
IMPACT OF INFLATION
Over 80% of the Company's total revenues for the quarter ended March 31, 1997
were derived from apartment properties. Due to the short-term nature of most
apartment leases (typically one year or less), the Company may seek to adjust
rents to help counter the impact of inflation upon renewal of existing leases or
commencement of new leases, although there can be no assurance that the Company
will be able to adjust rents in response to inflation. In addition, occupancy
rates may fluctuate due to short-term leases which permit apartment residents
to leave at the end of each lease term at minimal cost to the resident.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's cash and cash equivalents totaled $1,242,000,
up from $184,000 at December 31, 1996. Borrowings under the Company's lines of
credit totaled $147,000,000 at March 31, 1997, compared to $124,000,000 at
December 31, 1996. Lines of credit are available to pay dividends to
shareholders, fund capital improvements and operating expenses and fund new
acquisitions. The Company typically reduces lines of credit with cash balances
as available.
Borrowings of up to $200,000,000 are available under the Company's lines of
credit, with $53,000,000 available at March 31, 1997. The current lines of
credit expire in August 1997 as to $50,000,000, April 1998 as to $120,000,000
and April 1999 as to $30,000,000. The lines of credit bear interest at prime or
LIBOR plus 1.0% as to $30,000,000 and LIBOR plus 1.125% as
8
<PAGE>
to $120,000,000 and $50,000,000. Costs of the lines of credit are 0.125%
per annum on the total commitment amount and an unuse fee of 0.125% per annum
as to amounts not outstanding on the $120,000,000 and $50,000,000 lines.
Pursuant to the Merger, the Company assumed $73,000,000 of unsecured
indebtedness which bears interest at 7.44% per annum as to $55,000,000 and 7.88%
per annum as to $18,000,000. This indebtedness is to be repaid through scheduled
principal payments in the years from 2000 to 2005. At March 31, 1997, the
Company also had outstanding mortgage indebtedness of $114,575,000 at interest
rates ranging from 6.5% to 8.4%, with remaining terms of from less than one to
31 years.
For additional information regarding the Company's lines of credit, unsecured
notes payable and mortgage loans payable, including scheduled principal
payments over the next five years, see Notes 5 and 6 to Notes to Financial
Statements contained in the Company's 1996 Form 10-K. Certain of the
Company's indebtedness contains financial covenants as to minimum net worth,
interest coverage ratios, maximum secured debt and total debt to capital,
among others. The Company was in compliance with all such covenants during
the quarter ended March 31, 1997.
During year ended December 31, 1996, the Company entered into an unsecured
treasury lock swap agreement in the notional amount of $50,000,000. This
transaction, which expires June 30, 1997, is intended to reduce the Company's
overall exposure to interest rate changes.
At March 31, 1997, the Company was committed to purchase one apartment community
totaling 453 units for approximately $58,700,000; this property was acquired
after the close of the quarter using proceeds from prior sales of certain
commercial and retail properties and a land lease.
The Company believes that its cash flow and cash available from lines of credit
will be sufficient to meet its short-term liquidity needs during 1997, which
include normal recurring expenses, debt service requirements, budgeted
expenditures for improvements to certain properties and distributions required
to maintain the Company's REIT qualification under the Internal Revenue Code.
However, the Company anticipates that it will continue to require outside
sources of financing to meet its long-term liquidity needs, such as scheduled
debt repayments, property acquisitions and development activities.
DIVIDENDS
A cash dividend has been paid to shareholders each quarter since the Company's
inception in 1970. On February 24, 1997, the Company increased its dividend from
$1.32 per year to $1.38 per year. Total dividends paid to shareholders for the
quarter ended March 31, 1997 and 1996 were $11,392,000 and $7,450,000,
respectively.
9
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Primary and Fully Diluted Earnings per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a current report under Item 2 of Form 8-K on January 14,
1997 concerning the purchase of Promontory Point Apartments. Financial
statements related to this purchase were filed under Item 7 of Form 8-K/A
by amendment dated February 12, 1997.
10
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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)
Date April 25, 1997 /s/LeRoy E. Carlson
---------------------- -------------------
LeRoy E. Carlson
Executive Vice President,
Chief Financial Officer and Secretary
11
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EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
STATEMENT OF EARNINGS PER SHARE
(amounts in thousands, except per share)
Average shares outstanding are computed by adding the shares outstanding at each
month end and dividing that result by the number of months elapsed in the
year-to-date period.
Primary Earnings per Share:
For the three months ended
March 31,
--------------------------
1997 1996
---- ----
Net income (a) $10,941 $7,384
------- -------
------- -------
Average shares outstanding 32,980 23,350
------- -------
------- -------
EARNINGS PER SHARE (a) $.33 $.32
------- -------
------- -------
Additional Primary Computation:
For the three months ended
March 31,
--------------------------
1997 1996
---- ----
Net income (a) $10,941 $7,384
------- -------
------- -------
Average shares outstanding 32,980 23,350
Additional adjustment for
dilutive effect of outstanding
options (as determined by the
application of the treasury
stock method) 577 186
------- -------
Weighted average number of
shares outstanding, as adjusted 33,557 23,536
------- -------
------- -------
Primary earnings per share, as
adjusted (b) $.33 $.31
------- -------
------- -------
-12-
<PAGE>
Fully Diluted Earnings per Share:
For the three months ended
March 31,
--------------------------
1997 1996
---- ----
Net income (a) $10,941 $7,384
------- -------
------- -------
Average shares outstanding 32,980 23,350
Additional adjustment for
dilutive effect of outstanding
options (as determined by the
application of the treasury
stock method) 577 186
------- -------
Weighted average number of
shares, as adjusted 33,557 23,536
------- -------
------- -------
Fully diluted earnings per
share (b) $.33 $.31
------- -------
------- -------
(a) These amounts agree with the related amounts in the Statements of Income.
(b) This calculation is submitted in accordance with Regulation S-K, item
601(b)11 although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,242
<SECURITIES> 0
<RECEIVABLES> 20,121
<ALLOWANCES> (1,250)
<INVENTORY> 0
<CURRENT-ASSETS> 20,113
<PP&E> 843,300
<DEPRECIATION> (53,552)
<TOTAL-ASSETS> 809,861
<CURRENT-LIABILITIES> 9,163
<BONDS> 334,575
0
0
<COMMON> 330
<OTHER-SE> 465,793
<TOTAL-LIABILITY-AND-EQUITY> 809,861
<SALES> 31,727<F1>
<TOTAL-REVENUES> 31,727
<CGS> 9,615<F2>
<TOTAL-COSTS> 22,112
<OTHER-EXPENSES> 5,282<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,889
<INCOME-PRETAX> 10,941
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,941
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<FN>
<F1> RENTAL AND OTHER INCOME
<F2> REAL ESTATE EXPENSE
<F3> INCLUDES $4,168 OF DEPRECIATION, A NON CASH CHARGE
</FN>
</TABLE>
