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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-5305
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BRE PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-1722214
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
44 MONTGOMERY STREET
36TH FLOOR
SAN FRANCISCO, CALIFORNIA 94104-4809
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(Address of principal executive (Zip Code)
offices)
(415) 445-6530
------------------------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, $.01 par value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
</TABLE>
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
At March 12, 1999, the aggregate market value of the registrant's shares of
Common Stock, par value $.01 per share, held by nonaffiliates of the
registrant was approximately $1,009,000,000. At that date 44,329,290 shares
were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders of
BRE Properties, Inc. (the "Company") to be filed within 120 days of December
31, 1998 (the "Proxy Statement") are incorporated by reference in Part III of
this report.
FORWARD-LOOKING STATEMENTS
In addition to historical information, we have made forward-looking
statements in this Annual Report on Form 10-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 and you should not rely on such statements as
predictions of future events since there can be no assurance that the events
or circumstances reflected in these statements will be achieved or will occur.
Certain such forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "pro forma,"
"estimates," or "anticipates" or the negative thereof or other variations
thereof or comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and they may
be incapable of being realized. The following factors, among others, could
cause actual results and future events to differ materially from those set
forth or contemplated in the forward-looking statements: 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 generally, including interest rates, income
tax laws, governmental regulation, legislation, population changes and other
factors. You are cautioned not to place undue reliance on forward-looking
statements, which reflect management's analysis only. We assume no obligation
to update forward-looking statements.
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BRE PROPERTIES, INC.
PART I
ITEM 1. BUSINESS
CORPORATE PROFILE
BRE Properties, Inc. ("BRE" or the "Company"), a Maryland corporation, is a
fully integrated real estate investment trust which owns, develops,
rehabilitates, manages and acquires apartment communities in 12 targeted
metropolitan markets in the Western United States. At December 31, 1998, BRE's
multifamily portfolio included 85 completed multifamily communities
aggregating 21,858 units in California, Nevada, Arizona, Washington, Utah, New
Mexico, Oregon and Colorado and six apartment communities under development
aggregating an estimated 1,539 units. On that date, BRE also owned one
commercial property and held limited partnership interests in two shopping
centers. Founded in 1970, the Company has paid 113 consecutive quarterly
dividends to shareholders since it commenced operations.
The Company's business objective is to become the preeminent owner,
developer and operator of apartment communities in key growth markets of the
Western United States. To further this objective, the Company implemented a
strategic plan in 1996, many goals of which have been achieved, including
establishment of internal property management, disposition of substantially
all non-apartment assets and increased liquidity of the Company's common
stock. Further, the Company established an in-house development capability in
1997 and 1998. Additionally, BRE increased the number of multifamily units in
nine of the twelve markets to at least 1,000, a level at which the Company
believes certain administrative and operational economies are reached.
The Company believes that its future growth will be supported by the
continued implementation of its strategic plan. Key characteristics of the
plan are:
. A research-driven investment focus which includes:
- The development and acquisition of apartment communities in defined
Western United States markets;
- The balancing of its multifamily portfolio across Western
metropolitan markets with diverse economic and employment
characteristics to reduce individual market risk;
- The selective sale of properties which management believes have
reached maximum cash flow potential;
. Utilization of the Company's fully integrated multifamily operations to
continue to achieve operating efficiencies through internal property
management and to target attractive investment opportunities--
development, acquisition or rehabilitation--in each of its markets; and
. The maintenance of a strong balance sheet to enhance financial
flexibility.
EVENTS DURING 1998
During 1998, the Company completed the construction and development of eight
communities which were under construction as of December 31, 1997 and seven of
these were ready for occupancy at year-end. The Company also purchased seven
other multifamily communities located in Denver, Seattle, Portland, Los
Angeles and San Diego totaling 1,597 units and five land sites for development
of an estimated additional 1,215 units. Three multifamily communities and four
commercial and retail properties were sold and the proceeds reinvested in
multifamily communities.
In February 1998, the Company issued $130 million in unsecured notes due
2013, at an effective yield of 7.3%, taking advantage of what it considered a
favorable interest rate. In October 1998, the Company's $300 million lines of
credit were replaced with one $400 million line of credit and the maturity was
extended by
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more than one year. Also, the Company issued a total of 2,119,515 shares of
common stock for net proceeds of $56 million, further enhancing the Company's
financial flexibility.
In addition to completing seven of the eight properties under construction,
BRE also completed the integration of the personnel and assets purchased from
Trammell Crow Residential-West in November 1997 as described below.
EVENTS DURING 1997
The following event in 1997 had a significant impact on the results of
operations and financial condition of BRE in both 1997 and 1998:
Transaction with Trammell Crow Residential-West
On November 18, 1997, the Company completed the acquisition of certain
assets and operations of Trammell Crow Residential-West ("TCRW") (the
"Transaction"), which further advanced significant objectives of BRE's
strategic plan. As a result of the Transaction, BRE:
. Increased the number of completed multifamily units owned on the
acquisition date from 13,543 to 18,329;
. Acquired eight apartment communities under development (the "Development
Communities") aggregating approximately 2,445 units, seven of which were
completed and ready for occupancy at December 31, 1998;
. Added development, construction and third-party management capabilities,
creating fully integrated multifamily real estate operations;
. Further strengthened and deepened the senior management team; and
. Significantly increased the geographic diversification of the portfolio
by expanding from nine Western markets to 12, establishing a critical
mass of at least 1,000 multifamily units in seven markets, which the
Company believes will enable it to achieve additional administrative and
operational efficiencies.
BRE acquired these assets and operations of TCRW pursuant to a definitive
agreement (the "Contribution Agreement"). The consideration for the
Transaction included the payment to certain entities of approximately $160
million in cash and $100 million in common stock based on a stock price of
$26.93 per share as provided in the Contribution Agreement. Further, certain
entities received 2,824,587 operating company units ("OC Units") (valued at
$76 million assuming a stock price of $26.93 per share) in BRE Property
Investors LLC (the "Operating Company") and Blue Ravine Investors, LLC,
limited liability companies and subsidiaries of BRE. The Operating Company
also assumed approximately $120 million in debt. The Operating Company and
Blue Ravine Investors, LLC are majority-owned subsidiaries of BRE and BRE is
the sole managing member of each. On December 31, 1998, Blue Ravine Investors,
LLC was merged into the Operating Company; at that time, BRE owned an
approximate 74% interest in the Operating Company.
The OC Units are held by members representing the minority interest. The OC
Units held by holders other than the Company are exchangeable, at the option
of the holders thereof, into common stock of the Company on a 1:1 basis or, at
the option of the Company, cash in an amount equal to the market value of such
common stock at the time of the exchange. As of December 31, 1998 no OC Units
have been exchanged.
In connection with the acquisition of the Development Communities, the
Contribution Agreement also provides for an additional issuance of between
209,198 and 627,594 OC Units (valued at between $6 million and $17 million
using the assumed value pursuant to the Contribution Agreement of $26.93 per
share), based on the completion of certain budget and schedule objectives
relating to the Development Communities. As of December 31, 1998, 164,096 OC
units have been issued for three Development Communities; a total of between
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127,465 and 382,395 OC Units remain to be issued for the remaining five
Development Communities. All of the Development Communities have received
certificates of occupancy as of December 31, 1998. As nearly all of the
objectives have been met, the Company has recorded a liability of approximately
$7 million at December 31, 1998 for its estimate of actual additional OC Units
to be issued. This amount will be reclassified to minority interest once the OC
Units are actually issued.
The Company also acquired TCRW's development, construction and third-party
management operations in the Transaction, including approximately 600 new
associates and three regional offices located in Arizona, California and Utah.
Prior to the Transaction, the Company was not engaged in the management of
properties owned by third parties.
COMPETITION
All of the Company's communities are located in developed areas that include
other multifamily communities. There are numerous other multifamily properties
and real estate companies within these areas that compete with the Company for
tenants and development and acquisition opportunities. Such competition could
have a material effect on the Company's ability to lease apartment homes at its
communities or at any newly developed or acquired communities and on the rents
charged. The Company may be competing with others that have greater resources
than the Company. In addition, other forms of residential properties including
single family housing provide housing alternatives to potential residents of
upscale apartment communities.
STRUCTURE, TAX STATUS AND INVESTMENT POLICY
BRE is a real estate investment trust ("REIT") under Sections 856-860 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the
Company generally will not be subject to Federal income tax to the extent it
distributes 95% of its taxable income to its shareholders. REITs are subject to
a number of complex organizational and operational requirements; if the Company
fails to qualify as a REIT, its taxable income may be subject to income tax at
regular corporate rates. See "Risk Factors--Tax Risks."
The Company's long-range investment policy emphasizes the development,
construction and acquisition of multifamily communities located in the Western
United States. As circumstances warrant, certain properties may be sold and the
proceeds reinvested into multifamily communities which management believes
offer better growth potential. Among other items, this policy is intended to
enable management to monitor developments in local real estate markets and to
take an active role in managing the Company's properties and improving their
performance. The policy is subject to ongoing review by the Board of Directors
and may be modified in the future to take into account changes in business or
economic conditions, as circumstances warrant.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,000 employees. None
of the employees is covered by collective bargaining agreements.
INVESTMENT PORTFOLIO
See Items 2 and 7 of this report for a description of the Company's
individual investments and certain developments during the year with respect to
these investments. See Item 14(d), Schedule III (financial statement schedule),
for additional information about the Company's portfolio, including location,
costs and encumbrances.
Additionally, see Item 8 of this report for the Company's consolidated
financial statements.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were executive officers of the Company as of March 12,
1999:
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<CAPTION>
AGE AT
MARCH 12,
NAME 1999 POSITION(S)
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<S> <C> <C>
Frank C. McDowell....... 50 President, Chief Executive Officer and Director
LeRoy E. Carlson........ 53 Executive Vice President, Chief Financial Officer and Secretary
Bruce C. Ward........... 38 Executive Vice President, Development and Acquisitions
</TABLE>
Mr. McDowell was appointed to his current position in June, 1995. Mr. Carlson
joined the Company in March, 1996. Mr. Ward was appointed in connection with
the Transaction in November, 1997. Set forth below is information regarding the
business experience of each of the executive officers:
From 1992 to 1995, Mr. McDowell was Chief Executive Officer and Chairman of
Cardinal Realty Services, Inc., a Columbus, Ohio-based apartment management
company and owner of multifamily housing. From 1988 to 1992, Mr. McDowell was
Senior Vice President, Head of Real Estate of First Interstate Bank of Texas.
Mr. McDowell holds a Bachelor of Business Administration Degree and a Master of
Business Administration Degree, both from the University of Texas, Austin.
Mr. Carlson served as Vice President and Chief Financial Officer of Real
Estate Investment Trust of California from 1980 to 1996. Prior to joining RCT,
Mr. Carlson was the Chief Financial Officer of the William Walters Company, a
large asset management company based in Los Angeles, California. He is a
licensed Certified Public Accountant in the State of California. Mr. Carlson
holds a Bachelor's Degree from the University of Southern California.
Mr. Ward served as group managing partner of TCRW, one of the nation's
leading multi-family companies, prior to the acquisition of TCRW by BRE. While
with TCRW, Mr. Ward served on the management board which is responsible for
TCRW's strategic planning and governance. As the group managing partner of
TCRW, Mr. Ward oversaw the development and acquisition of 9,000 multifamily
units and the management of over 18,000 units in the Western United States.
Prior to 1987, Mr. Ward held the position of Vice President and Regional
Manager of Lomas Management, Inc. located in Dallas, Texas. Mr. Ward holds a
degree in Business Administration from the University of Texas, Austin.
There is no family relationship among any of the Company's executive officers
or Directors.
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RISK FACTORS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual
Report in Form 10-K. In this section, "we" or "us" refers to the Company and
"you" refers to the Company's shareholders.
Risks Due to Investment in Real Estate
Decreased Yields from an Investment in Real Property Due to Factors Which May
Cause a Decrease in Revenues or an Increase in Operating Expenses
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend upon the amount of
revenues generated and expenses incurred. If properties do not generate
revenues sufficient to meet operating expenses, including debt service and
capital expenditures, our results of operations and ability to make
distributions to you and to pay amounts due on our debt will be adversely
affected. The performance of the economy in each of the areas in which the
properties are located affects occupancy, market rental rates and expenses.
These factors consequently can have an impact on the revenues from the
properties and their underlying values. The financial results of major local
employers also may have an impact on the revenues and value of certain
properties.
Other factors may further adversely affect revenues from properties. These
factors include the general economic climate, local conditions in the areas in
which properties are located such as an oversupply of apartment units or a
reduction in the demand for apartment units, the attractiveness of the
properties to residents, competition from other multifamily communities and
our ability to provide adequate facilities maintenance, services and
amenities. Our revenues would also be adversely affected if residents were
unable to pay rent or we were unable to rent apartments on favorable terms. If
we were unable to promptly relet or renew the leases for a significant number
of apartment units, or if the rental rates upon such renewal or reletting were
significantly lower than expected rates, then our funds from operations would,
and our ability to make expected distributions to you and to pay amounts due
on our debt may, be adversely affected. There is also a risk that as leases on
the properties expire, residents or users will vacate or enter into new leases
on terms that are less favorable to us. Operating costs, including real estate
taxes, insurance and maintenance costs, and mortgage payments, if any, do not,
in general, decline when circumstances cause a reduction in income from a
property. We could sustain a loss as a result of foreclosure on the property,
if a property is mortgaged to secure payment of indebtedness and we were
unable to meet our mortgage payments. In addition, applicable laws, including
tax laws, interest rate levels and the availability of financing also affect
revenues from properties and real estate values.
Investments in Newly Acquired Properties May Not Perform in Accordance with
Expectations
In the normal course of business, we typically evaluate potential
acquisitions, enter into non-binding letters of intent, and may, at any time,
enter into contracts to acquire and may acquire additional properties.
However, no assurance can be given that we will have the financial resources
to make suitable acquisitions or that properties that satisfy our investment
policies will be available for acquisition. Acquisitions of properties entail
risks that investments will fail to perform in accordance with expectations.
Such risks may include construction costs exceeding original estimates,
possibly making a project uneconomical. Other risks may include financing not
being available on favorable terms or at all and construction and lease-up may
not be completed on schedule. Estimates of the costs of improvements to bring
an acquired property up to standards established for the market position
intended for that property might prove inaccurate. In addition, there are
general real estate investment risks associated with any new real estate
investment. Although we undertake an evaluation of the physical condition of
each new investment before it is acquired, certain defects or necessary
repairs may not be detected until after the investment is acquired. This could
significantly increase our total acquisition costs, which could have a
material adverse effect on us and our ability to make distributions to you and
pay amounts due on our debt.
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Illiquidity of Real Estate and Reinvestment Risk May Reduce Economic Returns
to Investors
Real estate investments are relatively illiquid and, therefore, tend to
limit our ability to adjust our portfolio in response to changes in economic
or other conditions. Additionally, the Code places certain limits on the
number of properties a REIT may sell without adverse tax consequences. To
effect our current operating strategy, we have in the past raised, and will
seek to continue to raise additional acquisition funds, both through outside
financing and through the orderly disposition of assets which no longer meet
our investment criteria. Depending upon interest rates, current acquisition
opportunities and other factors, generally we will reinvest the proceeds in
multifamily properties. In this respect, in the markets we have targeted for
future acquisition of multifamily properties, there is considerable buying
competition from other real estate companies, many of whom may have greater
resources, experience or expertise than we. In many cases, this competition
for acquisition properties has resulted in an increase in property prices and
a decrease in property yields. Due to the relatively low capitalization rates
currently prevailing in the pricing of potential acquisitions of multifamily
properties which meet our investment criteria, no assurance can be given that
the proceeds realized from the disposition of assets which no longer meet our
investment criteria can be reinvested to produce economic returns comparable
to those being realized from the properties disposed of, or that we will be
able to acquire properties meeting our investment criteria. To the extent that
we are unable to reinvest proceeds from the assets which no longer meet our
investment criteria, or if properties acquired with such proceeds produce a
lower rate of return than the properties disposed of, such results may have a
material adverse effect on us. In addition, a delay in reinvestment of such
proceeds may have a material adverse effect on us.
We may seek to structure future dispositions as tax-free exchanges, where
appropriate, utilizing the nonrecognition provisions of Section 1031 of the
Code to defer income taxation on the disposition of the exchanged property.
For an exchange of such properties to qualify for tax-free treatment under
Section 1031 of the Code, certain technical requirements must be met. For
example, both the property exchanged and the property acquired must be held
for use in a trade or business or for investment, and the property acquired
must be identified within 45 days, and must be acquired within 180 days, after
the transfer of the exchanged property. If the technical requirements of
Section 1031 of the Code are not met, then the exchanged property will be
treated as sold in a taxable transaction for a sales price equal to the fair
market value of the property received, in which event a distribution of cash
to the shareholders may be required to avoid a corporate-level income tax on
the resulting capital gain. Given the competition for properties meeting our
investment criteria, it may be difficult for us to identify suitable
properties within the foregoing time frames in order to meet the requirements
of Section 1031. Even if we can structure a suitable tax-deferred exchange, as
noted above, we cannot assure that we will reinvest the proceeds of any of
these dispositions to produce economic returns comparable to those currently
being realized from the properties which were disposed of.
Substantial Competition Among Multifamily Properties and Real Estate
Companies May Adversely Affect Our Rental Revenues and Development and
Acquisition Opportunities
All of the properties currently owned by us are located in developed areas.
There are numerous other multifamily properties and real estate companies,
many of which have greater financial and other resources than we have, within
the market area of each of the properties which will compete with us for
tenants and development and acquisition opportunities. The number of
competitive multifamily properties and real estate companies in such areas
could have a material effect on (1) our ability to rent the apartments and the
rents charged and (2) development and acquisition opportunities. The
activities of these competitors could cause us to pay a higher price for a new
property than we otherwise would have paid or may prevent us from purchasing a
desired property at all, which could have a material adverse effect on us and
our ability to make distributions to you and to pay amounts due on our debt.
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Potential Effect on Operations Due to Geographic Concentration of Properties
and Economic Conditions; Dependence on Western United States Regions
Our portfolio is principally located in the San Francisco Bay Area, San
Diego, Phoenix, Los Angeles/Orange County, Seattle, Sacramento, Las Vegas,
Tucson, Portland, Albuquerque, Salt Lake City and the Denver area. Our
performance could be adversely affected by economic conditions in, and other
factors relating to, these geographic areas, including supply and demand for
apartments in these areas, zoning and other regulatory conditions and
competition from other properties and alternative forms of housing. In that
regard, certain of these areas have in the recent past experienced economic
recessions and depressed conditions in the local real estate markets. To the
extent general economic or social conditions in any of these areas deteriorate
or any of these areas experiences natural disasters, the value of the
portfolio, our results of operations and our ability to make distributions to
you and to pay amounts due on our debt could be materially adversely affected.
Development and Construction Projects May Not Be Completed or Completed
Successfully
As a general matter, property development and construction projects
typically have a higher, and sometimes substantially higher, level of risk
than the acquisition of existing properties. We intend to actively pursue
development and construction of multifamily apartment communities. There can
be no assurance that we will complete development of the properties currently
under development or any other development project that we may undertake.
Prior to the Transaction, we were not engaged in significant development and
construction projects. Risks associated with our development and construction
activities may include the following:
. development opportunities may be abandoned;
. construction costs of multifamily apartment communities may exceed
original estimates, possibly making the communities uneconomical;
. occupancy rates and rents at newly completed communities may not be
sufficient to make the communities profitable;
. financing for the construction and development of projects may not be
available on favorable terms or at all;
. construction and lease-up may not be completed on schedule; and
. expenses of operating a completed community may be higher than
anticipated.
In addition, development and construction activities, regardless of whether
or not they are ultimately successful, typically require a substantial portion
of management's time and attention. Development and construction activities
are also subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy, and other
required governmental permits and authorizations.
We also intend to continue to acquire stabilized multifamily apartment
communities to the extent we identify communities that meet our investment
criteria. However, we do not presently expect to make a significant number of
acquisitions in 1999. Acquisitions of multifamily apartment communities entail
risks that investments will fail to perform in accordance with expectations.
Estimates of the costs of improvements to bring an acquired property up to
standards established for the market position intended for that property may
prove inaccurate. In addition, there are general investment risks associated
with any new real estate investment. In that regard, we acquired the TCRW
properties on an "as is" basis. "As is" means the sellers did not warrant as
to the physical condition of the properties. Likewise, due to the competitive
nature of the bidding process for the TCRW properties, we performed a more
limited investigation of the TCRW properties prior to acquiring them. Both
these factors increased the risks associated with acquiring the TCRW
properties.
We anticipate that future developments and acquisitions will be financed, in
whole or in part, under various construction loans, lines of credit, other
forms of secured or unsecured financing or through the issuance of additional
equity by us. We expect periodically to review our financing options regarding
the appropriate mix of
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debt and equity financing. Equity, rather than debt, financing of future
developments or acquisitions could have a dilutive effect on the interests of
our existing shareholders. Similarly, there are certain risks involved with
financing future developments and acquisitions with debt, including those
described below under "Risks Due to Real Estate Financing." In addition, if
new developments are financed through construction loans, there is a risk
that, upon completion of construction, permanent financing for such properties
may not be available or may be available only on disadvantageous terms or that
the cash flow from new properties will be insufficient to cover debt service.
If a newly developed or acquired property is unsuccessful, our losses may
exceed our investment in the property. Any of the foregoing could have a
material adverse effect on us and our ability to make distributions to you and
to pay amounts due on our debt.
Inability to Implement Growth Strategy; Potential Failure to Identify,
Acquire or Integrate New Acquisitions
A substantial portion of our growth over the last several years has been
attributable to acquisitions. Our future growth will be dependent upon a
number of factors, including our ability to identify acceptable properties for
development and acquisition, complete acquisitions and developments on
favorable terms, successfully integrate acquired and newly developed
properties, and obtain financing to support expansion. There can be no
assurance that we will be successful in implementing our growth strategy, that
growth will continue at historical levels or at all, or that any expansion
will improve operating results. The failure to identify, acquire and integrate
new properties effectively could have a material adverse affect on us and our
ability to make distributions to you and to pay amounts due on our debt.
Restrictions on the Operations of the Operating Company
A substantial portion of the properties acquired in the Transaction are held
by BRE Property Investors LLC, which is referred to in this Annual Report on
Form 10-K as the "Operating Company." We are the sole managing member of the
Operating Company and, as of December 31, 1998, held approximately a 74%
equity interest in the Operating Company. The remaining equity interests in
the Operating Company are held by third parties as non-managing members.
Under the terms of the limited liability company agreement governing the
operations of the Operating Company (the "LLC Agreement"), the Operating
Company is required to maintain certain debt service coverage, debt-to-asset
and other financial ratios intended to protect the members' rights to receive
distributions. In addition, with respect to certain tax-exempt financing for
certain completed properties, the Operating Company is restricted from
repaying its debt or taking certain other specified action which could have
adverse tax consequences for the members. Further, we, as the managing member,
are restricted from taking certain other specified actions--either absolutely
or without the consent of a majority in interest of the non-managing members
(or of the non-managing members affected thereby)--including, but not limited
to, any actions:
. that would make it impossible to carry out the business of the Operating
Company
. that would subject a non-managing member to liability as a managing
member
. that would cause the Operating Company to institute bankruptcy
proceedings or permit an automatic judgment to be entered against it by
a creditor
. that would prohibit or restrict a member from exercising its rights to
exchange units in the Operating Company for BRE common stock
Any such requirement to maintain financial ratios and any such restrictions
on the actions of the Operating Company and its managing member could have a
material adverse affect on us and our ability to make distributions to you and
to pay amounts due on our debt.
Further, under the terms of the LLC Agreement, the Operating Company may
not, without the consent of a majority in interest of the non-managing
members, (i) dispose of any of the properties held by the Operating Company in
a taxable sale or exchange prior to respective dates which are specified in
the LLC Agreement for
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each of the properties, ranging from eight to ten years from November 18,
1997, or (ii) dissolve the Operating Company other than in certain limited
circumstances specified in the LLC Agreement, such as a sale of all or
substantially all of our assets, or any merger, consolidation or other
combination by us with or into another person, or reclassification,
recapitalization or change of our outstanding equity interests. These
restrictions on our ability to dispose of a significant portion of our
properties and to dissolve the Operating Company, even when such a disposition
or dissolution of the Operating Company would be in our best interest, could
have a material adverse effect on us and our ability to make distributions to
you and to pay amounts due on our debt.
The Operating Company also must distribute all Available Cash (as defined in
the LLC Agreement) on a quarterly basis: first, to members (other than us)
until each member has received, cumulatively on a per Operating Company unit
basis, distributions equal to the cumulative dividends declared with respect
to one share of BRE common stock over the corresponding period (subject to
adjustment from time to time as applicable to account for stock dividends,
stock splits and similar transactions affecting BRE common stock) (the
"Priority Distribution"); and second, the balance to us.
If the Operating Company's Available Cash in any quarterly period is
insufficient to permit distribution of the full amount of the Priority
Distribution for that quarter, we are required to make a capital contribution
to the Operating Company in an amount equal to the lesser of (i) the amount
necessary to permit the full Priority Distribution or (ii) an amount equal to
the sum of any capital expenditures made by the Operating Company plus the sum
of any payments made by the Operating Company on account of any loans to or
investments in, or any guarantees of the obligations of, BRE or our affiliates
for that quarterly period.
In addition, we may not be removed as the managing member of the Operating
Company by the non-managing members, with or without cause, other than with
our consent. We may not voluntarily withdraw from the Operating Company or
transfer all or any portion of our interest in the Operating Company without
the consent of all of the non-managing members, except in certain limited
circumstances, such as a sale of all or substantially all of our assets, or
any merger, consolidation or other combination by us with or into another
person, or any reclassification, recapitalization or change of our outstanding
equity interests. Such restrictions on our withdrawal as the managing member
of the Operating Company, and on our ability to transfer our interest in the
Operating Company, could have a material adverse effect on us and our ability
to make distributions to you and to pay amounts due on our debt.
Uninsured and Underinsured Losses; Limited Insurance Coverage
We carry comprehensive liability, fire, extended coverage and rental loss
insurance with respect to our properties with certain policy specifications,
limits and deductibles. While we currently carry flood and earthquake
insurance for our properties with an aggregate annual limit of $250 million,
subject to substantial deductibles, no assurance can be given that such
coverage will be available on acceptable terms or at an acceptable cost, or at
all, in the future, or if obtained, that the limits of those policies will
cover the full cost of repair or replacement of covered properties. In
addition, there may be certain extraordinary losses (such as those resulting
from civil unrest) that are not generally insured (or fully insured against)
because they are either uninsurable or not economically insurable. Should an
uninsured or underinsured loss occur to a property, we could be required to
use our own funds for restoration or lose all or part of our investment in,
and anticipated revenues from, the property and would continue to be obligated
on any mortgage indebtedness on the property. Any such loss could have a
material adverse effect on us and our ability to make distributions to you and
pay amounts due on our debt.
Survey Exceptions to Certain Title Insurance Policies May Result in
Incomplete Coverage in the Event of a Claim
We did not obtain updated surveys when we acquired the TCRW properties
because we believe that prior owners of the TCRW properties in the past
obtained surveys of these properties. Because updated surveys of the
properties acquired in the Transaction were not obtained, the title insurance
policies obtained by us for those
11
<PAGE>
properties contain exceptions for matters which an updated survey might have
disclosed. Such matters might include such things as boundary encroachments,
unrecorded easements or similar matters which would have been reflected on a
survey. Moreover, because no updated surveys were prepared for these
properties, there can be no assurance that the title insurance policies in
fact cover the entirety of the real property, buildings, fixtures, and
improvements which we believe they cover, any of which could have a material
adverse effect on us.
Adverse Changes in Laws May Affect Our Potential Liability Relating to the
Properties and Our Operations
Increases in real estate taxes and income, service and transfer taxes cannot
always be passed through to residents or users in the form of higher rents,
and may adversely affect our cash available for distribution and our ability
to make distributions to you and to pay amounts due on our debt. Similarly,
changes in laws increasing the potential liability for environmental
conditions existing on properties or increasing the restrictions on discharges
or other conditions, as well as changes in laws affecting development,
construction and safety requirements, may result in significant unanticipated
expenditures, which could have a material adverse effect on us and our ability
to make distributions to you and pay amounts due on our debt. In addition,
future enactment of rent control or rent stabilization laws or other laws
regulating multifamily housing may reduce rental revenues or increase
operating costs.
Potential Effect on Costs and Investment Strategy From Compliance With Laws
Benefiting Disabled Persons
A number of federal, state and local laws (including the Americans with
Disabilities Act) and regulations exist that may require modifications to
existing buildings or restrict certain renovations by requiring improved
access to such buildings by disabled persons and may require other structural
features which add to the cost of buildings under construction. Legislation or
regulations adopted in the future may impose further burdens or restrictions
on us with respect to improved access by disabled persons. The costs of
compliance with these laws and regulations may be substantial, and limits or
restrictions on construction or completion of certain renovations may limit
implementation of our investment strategy in certain instances or reduce
overall returns on our investments, which could have a material adverse effect
on us and our ability to make distributions to you and to pay amounts due on
our debt. We review our properties periodically to determine the level of
compliance and, if necessary, take appropriate action to bring such properties
into compliance. We believe, based on property reviews to date, that the costs
of such compliance should not have a material adverse effect on us. Such
conclusions are based upon currently available information and data, and no
assurance can be given that further review and analysis of our properties, or
future legal interpretations or legislative changes, will not significantly
increase the costs of compliance.
Liabilities Assumed in the Transaction May Exceed Expectations
In the Transaction, we (1) acquired the TCRW properties either by acquiring
title to the properties and related assets (plus assumption of associated
contractual obligations of the contributing parties) or, as to certain TCRW
properties, by acquiring all of the ownership interests in the partnerships or
limited liability companies which held such properties, and (2) assumed
certain specified loans secured by the TCRW properties. Under the terms of the
Transaction, we have not expressly agreed to assume any liabilities other than
the assumed loans and the contractual obligations, warranties and guarantees
referenced above. However, as a matter of law, we automatically assumed all of
the liabilities (known, unknown or contingent) of the partnerships and limited
liability companies whose ownership interests were acquired by us, potentially
including liabilities unrelated to the properties conveyed pursuant to such
transfer. Moreover, even in cases where title to the properties and related
assets (rather than ownership interests therein) were acquired by us, the
legal doctrine of successor liability may give creditors of and claimants
against the prior owners the right to hold us responsible for liabilities
which arose with respect to such properties prior to their acquisition by us,
whether or not such liabilities were expressly assumed by us under the terms
of the Transaction.
As a result of the foregoing, there can be no assurance that we will not be
subject to liabilities and claims relating to the TCRW properties arising from
events which occurred or circumstances which existed prior to our
12
<PAGE>
acquisition of those properties, which could have a material adverse effect on
us and our ability to make distributions to you and pay amounts due on our
debt. In that regard, the terms of the Transaction do not provide for us to be
indemnified against such liabilities and claims.
Limited Indemnification in the Event of Claims or Liabilities Arising out of
the Transaction
We acquired the TCRW properties on an "as is" basis, meaning that the
properties were acquired without warranty from the sellers. As a result, we
have no recourse against the sellers for matters relating to the properties or
the Transaction, except to a limited extent. This limited indemnification
relates to claims or liabilities that might arise out of the Transaction or
actions taken by the sellers before the closing. Specifically, certain
Trammell Crow Residential entities and related parties (the "TCRW Parties")
have agreed to indemnify us and our affiliates only against claims arising out
of (1) certain representations made by the TCRW Parties in the Transaction,
(2) certain breaches of fiduciary duties by the TCRW Parties and (3) certain
documents filed in connection with the Transaction.
We have no recourse against the TCRW Parties with respect to any claims
which are not within the specific coverage of the indemnity provisions. In
addition, in the event we are entitled to indemnification, the terms of the
Transaction significantly limit the amount which we would be entitled to
recover.
There can be no assurance that we will not be confronted in the future with
claims by third parties relating to the Transaction or to the activities of
the TCRW Parties or the operations of the TCRW properties and matters related
thereto prior to the closing of the Transaction. Likewise, there can be no
assurance that the properties acquired in the Transaction will meet our
expectations. Accordingly, the limited scope of the indemnification could have
a material adverse effect on us and our ability to make distributions to you
and to pay amounts due on our debt. See "Liabilities Assumed in the
Transaction May Exceed Expectations," above.
We and the Operating Company have also provided a limited indemnity to the
TCRW Parties. Notwithstanding the limit upon our indemnification obligations,
if claims within the coverage of the indemnity provisions were brought against
us, we could be required to incur costs in defending against or satisfying the
claims, which could have a material adverse effect on us and our ability to
make distributions to you and to pay amounts due on our debt.
Risks Due to Real Estate Financing
Potential Inability to Renew, Repay or Refinance Our Debt Financing
We are subject to the normal risks associated with debt financing, including
the risk that our cash flow will be insufficient to meet required payments of
principal and interest, the risk that indebtedness on our properties, or
unsecured indebtedness, will not be able to be renewed, repaid or refinanced
when due or that the terms of any renewal or refinancing will not be as
favorable as the terms of such indebtedness. If we were unable to refinance
our indebtedness on acceptable terms, or at all, we might be forced to dispose
of one or more of the properties on disadvantageous terms, which might result
in losses to us. Such losses could have a material adverse effect on us and
our ability to make distributions to you and pay amounts due on our debt.
Furthermore, if a property is mortgaged to secure payment of indebtedness and
we are unable to meet mortgage payments, the mortgagee could foreclose upon
the property, appoint a receiver and receive an assignment of rents and leases
or pursue other remedies, all with a consequent loss of our revenues and asset
value. Foreclosures could also create taxable income without accompanying cash
proceeds, thereby hindering our ability to meet the REIT distribution
requirements of the Code.
Increase in Cost of Indebtedness Due to Rising Interest Rates
We have incurred and expect in the future to incur indebtedness which bears
interest at a variable rate. Accordingly, increases in interest rates would
increase our interest costs (to the extent that the related
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<PAGE>
indebtedness was not protected by interest rate protection arrangements),
which could have a material adverse effect on us and our ability to make
distributions to you or cause us to be in default under certain debt
instruments (including our debt). In addition, an increase in market interest
rates may lead holders of our common shares to demand a higher yield on their
shares from distributions by us, which could adversely affect the market price
for BRE common stock.
Potential Incurrence of Additional Debt and Related Debt Service
We currently fund the acquisition and development of multifamily communities
partially through borrowings (including our line of credit) as well as from
other sources such as sales of properties which no longer meet our investment
criteria. Our organizational documents do not contain any limitation on the
amount of indebtedness that we may incur. Accordingly, subject to limitations
on indebtedness set forth in various loan agreements, we could become more
highly leveraged, resulting in an increase in debt service, which could have a
material adverse effect on us and our ability to make distributions to you and
to pay amounts due on our debt and in an increased risk of default on our
obligations.
Restrictive Terms of Certain Indebtedness May Cause Acceleration of Debt
Payments
At December 31, 1998, we had outstanding borrowings of $73 million under two
loan agreements with one lender which, among other things, (1) contain a
covenant which requires us to maintain our investment grade rating for our
long-term unsecured debt and (2) define "events of default" to include the
acquisition by any person of either (a) 20% or more of our outstanding shares
or securities (or other securities convertible into such securities) or (b)
10% or more of our outstanding shares or securities (or other securities
convertible into such securities) if such acquisition results in any change of
our board of directors or any change in our management or any of our assets.
In the event that we fail to maintain an investment grade rating for our long-
term unsecured debt or if such an event of default occurs, the lender may
declare all borrowings under such loan agreements to be due and payable
immediately, which could have a material adverse effect on us and our ability
to make distributions to you and to pay amounts due on our debt.
Potential Liability Under Environmental Laws
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be liable for the
costs of removal or remediation of certain hazardous or toxic substances in,
on, around or under such property. Such laws often impose such liability
without regard to whether the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. The presence of, or
failure to remediate properly, such substances may adversely affect the
owner's or operator's ability to sell or rent the affected property or to
borrow using such property as collateral. Persons who arrange for the disposal
or treatment of hazardous or toxic substances may also be liable for the costs
of removal or remediation of such substances at a disposal or treatment
facility, whether or not such facility is owned or operated by such person.
Certain environmental laws impose liability for release of asbestos-containing
materials into the air, and third parties may also seek recovery from owners
or operators of real properties for personal injury associated with asbestos-
containing materials and other hazardous or toxic substances. The operation
and subsequent removal of certain underground storage tanks are also regulated
by federal and state laws. In connection with the current or former ownership
(direct or indirect), operation, management, development and/or control of
real properties, we may be considered an owner or operator of such properties
or as having arranged for the disposal or treatment of hazardous or toxic
substances and, therefore, may be potentially liable for removal or
remediation costs, as well as certain other costs, including governmental
fines, and claims for injuries to persons and property.
Our current policy is to obtain a Phase I environmental study on each
property we seek to acquire and to proceed accordingly. No assurance can be
given, however, that the Phase I environmental studies or other environmental
studies undertaken with respect to any of our current or future properties
will reveal all or the full extent of potential environmental liabilities,
that any prior owner or operator of a property did not create any
14
<PAGE>
material environmental condition unknown to us, that a material environmental
condition does not otherwise exist as to any one or more of such properties or
that environmental matters will not have a material adverse effect on us and
our ability to make distributions to you and to pay amounts due on our debt.
We currently carry no insurance for environmental liabilities.
Certain environmental laws impose liability on a previous owner of property
to the extent that hazardous or toxic substances were present during the prior
ownership period. A transfer of the property does not relieve an owner of such
liability. Thus, we may have liability with respect to properties previously
sold by us or our predecessors.
RISKS OF THIRD PARTY MANAGEMENT BUSINESS
Possible Termination of Management Contracts.
As part of the Transaction, we also acquired third-party management
contracts. This business is conducted by two of our subsidiaries
(collectively, the "Management Company").
Risks associated with the management of properties owned by third parties
include the risk that the management contracts (which are generally cancelable
upon a sale of property or, in many cases, upon 30 days' notice) will be
terminated by the property owner or will be lost in connection with a sale of
such property, that contracts may not be renewed upon expiration or may not be
renewed on terms consistent with current terms and that the rental revenues
upon which management fees are based will decline as a result of general real
estate market conditions or market factors affecting specific properties,
resulting in decreased management fee income. As a result, there can be no
assurance that the Management Company will perform in accordance with our
expectations.
Possible Adverse Consequences of REIT Status on the Business of the
Management Company.
Certain requirements for REIT qualifications may in the future limit our
ability to increase third party management operations conducted and related
services offered by the Management Company without jeopardizing our
qualification as a REIT. See "Tax Risks."
RANKING OF SECURITIES AND SUBORDINATION OF CLAIMS
A significant portion of our operations is conducted through our
subsidiaries, including the Operating Company. Our cash flow and the
consequent ability to make distributions and other payments on our equity
securities and to service our debt, will be partially dependent upon the
earnings of such subsidiaries and the distribution of those earnings to us, or
upon loans or other payments of funds made by such subsidiaries to us. In
addition, debt or other arrangements of our subsidiaries may impose
restrictions that affect, among other things, our subsidiaries' ability to pay
dividends or make other distributions or loans to us.
Likewise, a substantial portion of our consolidated assets are owned by our
subsidiaries, effectively subordinating certain unsecured indebtedness of BRE
to all existing and future liabilities, including indebtedness, trade
payables, lease obligations and guarantees of our subsidiaries. The Operating
Company has guaranteed amounts due under our $400 million bank credit facility
(the "Credit Facility") with a syndicate of banks. Likewise, any other of our
subsidiaries with assets or net income which, when multiplied by our effective
percentage ownership interest in such subsidiary exceeds $30 million or 5% of
our consolidated net income, respectively, is required to guarantee the
repayment of borrowings under the Credit Facility. The Operating Company and
other of our subsidiaries may also, from time to time, guarantee other of our
indebtedness. Therefore, our rights and rights of our creditors, including the
holders of other unsecured indebtedness, to participate in the assets of any
subsidiary upon the latter's liquidation or reorganization will be subject to
the prior claims of such subsidiary's creditors, except to the extent that we
may ourselves be a creditor with recognized claims against the subsidiary, in
which case our claims would still be effectively subordinate to any
15
<PAGE>
security interests in or mortgages or other liens on the assets of such
subsidiary and would be subordinate to any indebtedness of such subsidiary
senior to that held by us.
Provisions Which Could Limit a Change in Control or Deter a Takeover
In order to maintain our qualification as a REIT, not more than 50% in value
of our outstanding capital stock may be owned, actually or constructively, by
five or fewer individuals (as defined in the Code to include certain
entities). In order to protect us against risk of losing our status as a REIT
due to a concentration of ownership among our shareholders, our articles of
incorporation provide, among other things, that if the Board of Directors
determines, in good faith, that direct or indirect ownership of BRE common
stock has or may become concentrated to an extent that would prevent us from
qualifying as a REIT, the Board of Directors may prevent the transfer of BRE
common stock or call for redemption (by lot or other means affecting one or
more shareholders selected in the sole discretion of the Board of Directors)
of a number of shares of BRE common stock sufficient in the opinion of the
Board of Directors to maintain or bring the direct or indirect ownership of
BRE common stock into conformity with the requirements for maintaining REIT
status. These limitations may have the effect of precluding acquisition of
control of us by a third party without consent of the Board of Directors.
In addition, certain other provisions contained in our articles of
incorporation and bylaws, as well as our shareholder rights plan, may have the
effect of discouraging a third party from making an acquisition proposal for
us and may thereby inhibit a change in control. For example, such provisions
may (i) deter tender offers for BRE common stock which offers may be
attractive to the shareholders, or (ii) deter purchases of large blocks of BRE
common stock, thereby limiting the opportunity for shareholders to receive a
premium for their shares of BRE common stock over then-prevailing market
prices.
Tax Risks
Tax Liabilities as a Consequence of Failure to Qualify as a REIT
Although management believes that we are organized and are operating so as
to qualify as a REIT under the Code, no assurance can be given that we have in
fact operated or will be able to continue to operate in a manner so as to
qualify or remain so qualified. Qualification as a REIT involves the
application of highly technical and complex Code provisions for which there
are only limited judicial or administrative interpretations and the
determination of various factual matters and circumstances not entirely within
our control. For example, in order to qualify as a REIT, at least 95% of our
taxable gross income in any year must be derived from qualifying sources and
we must make distributions to shareholders aggregating annually at least 95%
of our REIT taxable income (excluding net capital gains). Thus, to the extent
Third Party Management Income represents more than 5% of our gross income in
any taxable year, we will not satisfy the 95% income test and may fail to
qualify as a REIT, unless certain relief provisions apply, and, even if those
relief provisions apply, a tax would be imposed with respect to excess net
income, any of which could have a material adverse effect on us and our
ability to make distributions to you and to pay amounts due on our debt.
Additionally, to the extent the Operating Company or certain other
subsidiaries are determined to be taxable as a corporation, we would not
qualify as a REIT, which could have a material adverse effect on us and our
ability to make distributions to you and to pay amounts due on our debt.
Finally, no assurance can be given that new legislation, new regulations,
administrative interpretations or court decisions will not change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification.
If we fail to qualify as a REIT, we will be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
corporate rates, which would likely have a material adverse effect on us and
our ability to make distributions to you and to pay amounts due on our debt.
In addition, unless entitled to relief under certain statutory provisions, we
would also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce funds available for investment or distributions to you because of the
additional tax liability to us for the year or years involved.
16
<PAGE>
In addition, we would no longer be required to make distributions to you. To
the extent that distributions to you would have been made in anticipation of
qualifying as a REIT, we might be required to borrow funds or to liquidate
certain investments to pay the applicable tax.
POTENTIAL FAILURE BY THIRD-PARTIES TO BE YEAR 2000 COMPLIANT MAY AFFECT OUR
FINANCIAL CONDITION
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software, including
embedded processors, may recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including among other things, a temporary
inability to process transactions or engage in other normal business
activities.
The Company has assessed the software used in its computer systems and
believes that the Year 2000 matter will not pose significant operational
problems for its computer systems. However, at this time, no estimates can be
made as to any potential adverse impact resulting from the failure of third
parties, including tenants, vendors and financial institutions, to address
Year 2000 issues. For example, to the extent payments, deposits and other
transactions are not processed on a timely basis by financial institutions,
the Company's ability to collect payments from tenants and/or make payments to
its creditors could be adversely affected. The Company is dependent on such
third parties to assess the impact of the Year 2000 issue on their systems and
to take any necessary corrective action. However, as a component of its Year
2000 project, the Company is in the ongoing process of discussing Year 2000
compliance issues with its key vendors and service providers and is developing
contingency plans, although there can be no assurance that these contingency
plans will successfully avoid service interruption.
Due to the complexity and pervasiveness of the Year 2000 issue, and in
particular, the uncertainty regarding the compliance programs of third
parties, no assurance can be given that the Company's assessments and
conclusions on Year 2000 issues will be achieved, and actual results could
differ materially from those anticipated.
ITEM 2. PROPERTIES
GENERAL
In addition to the information set forth in this Item 2, information on the
Company's portfolio is set forth in Schedule III (financial statement
schedule) under Item 14(d).
MULTIFAMILY PROPERTY DATA
As reflected in the following table, during the five years ended December
31, 1998, multifamily properties have increased as an approximate percentage
of the Company's portfolio of income producing properties and revenues:
<TABLE>
<CAPTION>
MULTIFAMILY PROPERTIES 1998 1997 1996 1995 1994
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Percentage of portfolio at cost, as of December 31... 100% 99% 87% 72% 65%
Percentage of total revenue, for the year ended
December 31......................................... 97% 89% 77% 76% 71%
</TABLE>
During 1997 and 1996, multifamily revenues as a percentage of total revenues
did not increase in proportion to the increase in the relative size of the
multifamily portfolio due to the timing of purchases of multifamily properties
and the sales of commercial properties. No single multifamily property
accounted for more than 10% of revenues in 1998.
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The following table reflects certain operating data for the Company's
multifamily properties for each year-end presented:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Total available units..................... 21,858 18,569 12,212 5,475 5,067
Occupancy percent (1)..................... 94% 95% 96% 93% 95%
Average monthly rate per unit............. $ 877 $ 817 $ 755 $ 699 $ 794
Total number of properties................ 85 74 54 25 21
</TABLE>
The following table reflects certain operating data as of and for the year
ended December 31, 1998 of stabilized multifamily properties in the 12
metropolitan markets in which the Company operates:
<TABLE>
<CAPTION>
Average
Percentage Number of Rent
Market of NOI (2) Units Communities Occupancy (3) (4)
- ------ ---------- ------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
San Francisco Bay Area.... 24% 2,960 9 93% $1,338
Phoenix................... 14 3,508 13 95% 773
Seattle................... 12 2,316 9 94% 896
San Diego................. 11 2,219 10 95% 907
Los Angeles/Orange
County................... 10 2,396 9 95% 768
Sacramento................ 7 1,783 8 93% 841
Salt Lake City............ 6 1,517 5 93% 754
Tucson.................... 5 1,836 9 93% 607
Albuquerque............... 4 1,241 4 96% 749
Portland.................. 3 780 3 88% 691
Las Vegas................. 3 814 4 94% 806
Denver.................... 1 488 2 98% 828
--- ------ ---
Total/Weighted Average.. 100% 21,858 85 94% $ 877
=== ====== === === ======
</TABLE>
- --------
(1) Portfolio occupancy is calculated by dividing the total occupied units by
the total units in the portfolio. Apartment units are generally leased to
residents for rental terms which do not exceed one year.
(2) Represents the aggregate net operating income of all properties in each
market divided by the total net operating income of multifamily properties
for the year ended December 31, 1998, and includes the results of 14
completed properties acquired during 1998 from the date of acquisition.
Accordingly, these results do not reflect a full year of operations for
properties acquired or completed in 1998 and 6 communities under
construction where units were leased while under construction.
(3) Represents physical occupancy at December 31, 1998. The total is a
weighted average by units for all communities.
(4) Represents total gross potential rent divided by total units as of
December 31, 1998. The total is a weighted average by units for all
communities shown.
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<PAGE>
COMPLETED PROPERTIES
The following is a list of communities completed in 1998 which were
previously under construction at December 31, 1997 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
OCCUPANCY AT
NUMBER OF DECEMBER 31,
PROPERTY NAME LOCATION UNITS TOTAL COST 1998
- ------------- --------------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Pinnacle Towne Center........ Phoenix, AZ 350 $ 34,319 100%
Pinnacle Canyon View......... Orem, UT 288 25,976 97%
Pinnacle Terrace............. Chandler, AZ 300 23,354 65%
Pinnacle Estates............. Albuquerque, NM 294 25,752 63%
Pinnacle at High Resort...... Rio Rancho, NM 301 25,678 35%
Pinnacle at Hunters Glen..... Thornton, CO 264 22,295 66%
Pinnacle Mountain View....... Clearfield, UT 324 25,714 56%
----- --------
2,121 $183,088
===== ========
</TABLE>
PROPERTIES UNDER DEVELOPMENT
The following tables set forth certain data with respect to the Company's
six multifamily properties which were under development or construction at
December 31, 1998. Completion of the these properties is subject to a number
of risks and uncertainties, including construction delays and cost overruns.
No assurance can be given that these properties will be completed or, if
completed, that they will be completed by the estimated dates or for the
estimated amounts set forth in the table below or that they will contain the
number of proposed units set forth in the table below (dollar amounts in
millions):
<TABLE>
<CAPTION>
COSTS
INCURRED
PROPOSED TO DATE- ESTIMATED ESTIMATED ESTIMATED
NUMBER DECEMBER 31, COST TO TOTAL COMPLETION
PROPERTY NAME LOCATION OF UNITS 1998 COMPLETE COST DATE
- ------------- ------------- -------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pinnacle Flamingo West
(5).................... Las Vegas, NV 324 $27.2 $ 0.0 $ 27.2 1Q/1999
Pinnacle at Blue
Ravine................. Folsom, CA 260 10.5 12.5 23.0 2Q/1999
Pinnacle Sonata (6)..... Bothell, WA 268 11.9 28.9 40.8 2Q/2000
--- ----- ----- ------
Total................. 852 $49.6 $41.4 $ 91.0
=== ===== ===== ======
<CAPTION>
PRE-CONSTRUCTION SITES
OWNED
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
114 W. Adams (6)........ Phoenix, AZ 93 $ 5.4 $ 8.1 $ 13.5 3Q/1999
Pinnacle at MacArthur
Place (6)(7)........... Santa Ana, CA 346 15.3 40.0 55.3 1Q/2000
Pinnacle Bellevue
(6)(7)................. Bellevue, WA 248 12.7 24.6 37.3 4Q/2000
--- ----- ----- ------
Total................. 687 $33.4 $72.7 $106.1
=== ===== ===== ======
</TABLE>
- --------
(5) This property was acquired by the Company on November 18, 1997 in the TCRW
Transaction.
(6) As of December 31, 1998, the Company had not committed to significant
construction contract obligations for these properties except for Pinnacle
Sonata, where contracts have been executed for preliminary site
preparation work.
(7) These projects consist of land owned by the Company where construction is
ready to commence subject only to obtaining certain construction plans and
permits and required financing. The Company expects to finance the
development and construction of these communities through joint venture
arrangements, or through its line of credit facility or other debt or
equity sources, although there can be no assurance that such financing
will be obtained.
19
<PAGE>
COMMERCIAL AND RETAIL PROPERTY DATA
The following table reflects certain operating data for the Company's
commercial and retail properties for each year end presented:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
JULY 31,
1998 1997 1996 1995 1994
---- ---- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Total available square feet (in
thousands)................................ 31 157 1,194 1,135 1,543
Occupancy percent (8)...................... 100% 93% 93% 96% 69%
Average minimum annual rent per square foot
(9)....................................... $12 $10 $13 $11 $9
Total number of properties................. 1 5 15 11 13
</TABLE>
- --------
(8) For commercial and retail properties, portfolio occupancy is calculated by
dividing the total occupied square footage by the total rentable square
footage in the portfolio.
(9) Average minimum annual rent per square foot is calculated by dividing the
reported minimum rental income for commercial and retail properties by
total rentable square feet. The changes in the amounts shown are due to
variances in occupancy levels and the changing composition of the
properties due to acquisitions and dispositions.
During 1997 and 1998, BRE substantially completed its disposition of
commercial and retail properties. At December 31, 1998, BRE owned only one
commercial property (plus two investments held in partnerships in which the
Company is a limited partner and excluded from the above table). Tenants in
these properties consist generally of various smaller enterprises and such
properties included industrial, professional and medical centers. These leases
generally provide for reimbursement of certain expenses such as property
taxes, insurance and common area costs in addition to minimum rentals and in
some cases percentage rents in excess of stipulated minimums. For additional
information regarding leases on the commercial and retail properties, see Note
3 to Notes to Consolidated Financial Statements. No single tenant accounted
for more than 10% of revenues for the year ended December 31, 1998.
INSURANCE, PROPERTY TAXES AND INCOME TAX BASIS
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to its properties with certain policy
specifications, limits and deductible. In addition, the Company currently
carries flood and earthquake coverage with an annual aggregate limit of
$250,000,000 (after policy deductibles ranging from 2%-5% of damages). In the
opinion of management, the properties are adequately covered by such
insurance.
Property taxes on portfolio properties are assessed on asset values based on
the valuation method and tax rate used by the respective jurisdictions; such
rates ranged from approximately 1% to 2% of assessed values for 1998. The
gross carrying value of the Company's rental properties was $1,612,475,000 as
of December 31, 1998; at that date BRE's assets had an underlying federal
income tax basis approximately $146,000,000 lower which reflects, among other
factors, the carryover of basis on tax deferred exchanges.
HEADQUARTERS
The Company maintains its corporate headquarters at 44 Montgomery Street,
36th Floor, San Francisco, California, 94104-4809, pursuant to a lease with
OTR, an Ohio general partnership. The lease has an 8-year term, and covers
15,142 rentable square feet at annual per square foot rents which begin at
$37.00 and rise to $44.00 in the eighth year of the lease. The lease term ends
on January 31, 2006. The Company also maintains regional offices in
Metropolitan Seattle, Washington, Sacramento, Long Beach, Newport Beach and
San Diego, California, Phoenix and Tucson, Arizona, Denver, Colorado and Salt
Lake City, Utah.
20
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is defending various claims and legal actions that arise from
its normal course of business, including certain environmental actions. While
it is not feasible to predict or determine the ultimate outcome of these
matters, in the opinion of management, none of these actions will have a
material adverse effect on the Company. In the third quarter of 1998, the
Company recorded a provision for litigation loss of $2,400,000 in connection
with a jury award and related legal expenses. The judgment is subject to
appeal and stems from the separation of a former senior executive from the
Company in 1996.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "BRE". As of March 12, 1999, there were approximately
6,900 recordholders of the Company's common stock and the last reported sales
price on the NYSE was $23.00. The number of holders does not include persons
whose shares are held of record by a broker or clearing agency, but does
include each such broker or clearing agency as one recordholder. As of March
12, 1999, there were approximately 36,000 beneficial holders of the Company's
common stock.
The following table sets forth, for the calendar quarters indicated, the
high and low sales prices of the common stock as reported on the NYSE
Composite Tape, and the dividends paid by the Company per common share for
each such calendar quarter.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
----------------------- -----------------------
STOCK PRICE STOCK PRICE
------------- DIVIDENDS ------------- DIVIDENDS
HIGH LOW PAID HIGH LOW PAID
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter................... $28.63 $26.19 $.360 $27.25 $23.75 $.345
Second Quarter.................. $28.69 $24.63 $.360 $25.38 $23.50 $.345
Third Quarter................... $28.63 $21.50 $.360 $28.56 $24.31 $.345
Fourth Quarter.................. $25.25 $22.31 $.360 $30.00 $26.75 $.345
</TABLE>
Since 1970, the year BRE was founded, the Company has made regular and
uninterrupted distributions to shareholders on a quarterly basis. However, the
payment of distributions by the Company has been and will continue to be at
the discretion of the Board of Directors and will depend on numerous factors,
including the cash flow of the Company, its financial condition, capital
requirements, the annual distribution requirement under the REIT provisions of
the Code and other factors that the Board of Directors may deem relevant.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report. The 1998 and 1997 results were
significantly impacted by the transaction with Trammell Crow Residential-West
in 1997, the merger with Real Estate Investment Trust of California in 1996
and numerous acquisitions and dispositions as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." As
such, the consolidated financial statements and notes thereto included
elsewhere in this report are not directly comparable to prior years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues................ $ 203,245 $ 137,761 $ 101,651 $ 65,387 $ 56,970
========== ========== ========= ======== ========
Net income.............. $ 60,644 $ 76,197 $ 89,839 $ 22,010 $ 24,212
Less:
Net (loss) gain on
sales of
investments.......... (1,859) 27,824 52,825 221 1,646
Plus:
Depreciation and
amortization......... 27,763 17,938 13,283 7,864 7,080
Provision for
litigation loss...... 2,400 -- -- -- --
Provision for
investment losses.... -- -- -- 2,000 --
Minority interest in
income............... 4,126 972 -- -- --
---------- ---------- --------- -------- --------
Funds from operations
(10)................... $ 96,792 $ 67,283 $ 50,297 $ 31,653 $ 29,646
========== ========== ========= ======== ========
Net cash flows generated
from operating
activities............. $ 97,081 $ 67,564 $ 47,887 $ 27,068 $ 31,063
Net cash flows used in
investing activities... $ (290,297) $ (235,293) $(132,082) $ (3,820) $(66,740)
Net cash flows from
financing activities... $ 191,057 $ 171,761 $ 68,322 ($11,077) $ 25,821
Dividends to common
shareholders and
distributions to
minority members....... $ 66,327 $ 52,035 $ 39,849 $ 27,596 $ 26,210
Weighted average number
of shares outstanding.. 42,940 35,750 30,520 21,905 21,840
Weighted average number
of operating company
units.................. 2,840 290 -- -- --
Weighted average number
of shares outstanding
assuming dilution...... 46,110 36,610 30,790 21,940 21,870
Shares outstanding at
end of period.......... 44,220 41,740 32,880 21,940 21,850
Operating company units
outstanding at end of
period................. 2,990 2,820 -- -- --
PER SHARE DATA:
Income excluding (loss)
gain on sales of
investments............ $ 1.45 $ 1.35 $ 1.21 $ 1.00 $ 1.03
Net (loss) gain on sales
of investments......... (0.04) 0.78 1.73 0.01 0.08
---------- ---------- --------- -------- --------
Net income.............. $ 1.41 $ 2.13 $ 2.94 $ 1.01 $ 1.11
========== ========== ========= ======== ========
PER SHARE DATA--ASSUMING
DILUTION:
Income excluding (loss)
gain on sales of
investments............ $ 1.45 $ 1.35 $ 1.20 $ 0.99 $ 1.03
Net (loss) gain on sales
of investments......... (0.04) 0.76 1.72 0.01 0.08
---------- ---------- --------- -------- --------
Net income assuming
dilution............... $ 1.41 $ 2.11 $ 2.92 $ 1.00 $ 1.11
========== ========== ========= ======== ========
Dividends paid to common
shareholders........... $ 1.44 $ 1.38 $ 1.33 $ 1.26 $ 1.20
========== ========== ========= ======== ========
FINANCIAL POSITION
Total assets............ $1,630,916 $1,341,898 $ 783,714 $354,895 $343,853
Real estate portfolio,
before depreciation.... $1,678,433 $1,346,923 $ 816,389 $371,438 $373,676
Cash and short-term
investments............ $ 2,057 $ 4,216 $ 184 $ 16,057 $ 3,887
Long-term debt.......... $ 752,146 $ 541,367 $ 311,985 $112,290 $ 97,169
Minority interest....... $ 87,432 $ 76,066 -- -- --
Shareholders' equity.... $ 765,005 $ 707,495 $ 464,114 $239,248 $243,436
</TABLE>
23
<PAGE>
- --------
(10) Management considers Funds from Operations ("FFO") to be an appropriate
supplemental measure of the performance of an equity REIT because it is
predicated on cash flow analyses which facilitate an understanding of the
operating performances of the Company's properties without giving effect
to non-cash items such as depreciation. FFO is defined by the National
Association of Real Estate Investment Trusts as net income or loss
(computed in accordance with generally accepted accounting principles)
excluding gains or losses from debt restructuring and sales of property,
plus depreciation and amortization of real estate assets. FFO does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles, and therefore should not be
considered a substitute for net income as a measure of results of
operations or for cash flow from operations as a measure of liquidity.
Additionally, the application and calculation of FFO by other REITs may
vary materially from that of the Company, and therefore the Company's FFO
and the FFO of other REITs may not be directly comparable.
24
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
BRE Properties, Inc. ("BRE" or the "Company") is a real estate investment
trust which owns and internally manages a portfolio of 85 apartment
communities (aggregating 21,858 units) in 12 major markets of the Western
United States. The Company's revenues consist largely of rental income (94% of
total revenues in 1998, 93% in 1997 and 92% in 1996) derived primarily from
its portfolio of multifamily properties. The policy of the Company is to
emphasize cash flows from operations rather than the realization of capital
gains through property dispositions.
The Company's strategic plan emphasizes equity investments in apartment
communities located across Western markets. In 1998, the Company acquired
seven apartment communities in Denver, Seattle, Portland, Los Angeles and San
Diego, for a total of 1,597 units. Pursuant to the Company's strategy, in
November 1997 the Company acquired certain assets and operations of Trammell
Crow Residential-West ("TCRW") (the "Transaction") which added 17 completed
properties totaling 4,786 units, eight properties under development comprising
approximately 2,445 units (seven of which were completed by December 31, 1998)
and management experience in development and construction. Further, the
Company merged with Real Estate Investment Trust of California in 1996 (the
"Merger) which added 22 apartment communities (totaling 3,581 units) and 18
commercial and retail properties to the portfolio. The Transaction and the
Merger also provided increased depth in management and other resources. The
Company started its in-house development and construction function with
personnel and resources from the Transaction; the Merger allowed the Company
to internalize property management during 1996. As planned, in keeping with
its investment focus, the Company had divested all but one of its commercial
and retail properties (i.e., non-apartment investments) at December 31, 1998.
During the years ended December 31, 1998, 1997 and 1996, the Company acquired
a total of 59 multifamily properties, in part using proceeds from the
dispositions of commercial and retail properties.
In addition to historical information, we have made forward-looking
statements in this Annual Report on Form 10-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 and you should not rely on such statements as
predictions of future events since there can be no assurance that the events
or circumstances reflected in these statements will be achieved or will occur.
Certain such forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "pro forma,"
"estimates," or "anticipates" or the negative thereof or other variations
thereof or comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and they may
be incapable of being realized. The following factors, among others, could
cause actual results and future events to differ materially from those set
forth or contemplated in the forward-looking statements: 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 (the "Code"), 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 generally,
including interest rates, income tax laws, governmental regulation,
legislation, population changes and other factors. You are cautioned not to
place undue reliance on forward-looking statements, which reflect management's
analysis only. We assume no obligation to update forward-looking statements.
25
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Years ended December 31, 1998, 1997 and 1996
General
The results of operations for the three years ended December 31, 1998 were
significantly affected by acquisitions of apartment communities, including the
Transaction and the Merger, and the repositioning of the Company's portfolio
through the sale of commercial and retail properties. The 1998 results include
revenue and expense for an entire year for 17 stabilized apartment communities
that were acquired in the Transaction, while the 1997 results included those
properties only from November 18, 1997. In addition, the 1998 results include
a full year of operations from five other acquisitions in 1997, and a partial
year for 1998 acquisitions and seven completed communities previously under
development that were acquired in the Transaction. The 1997 results include an
entire year of revenue and expense from the assets acquired in the Merger,
while the 1996 results include such items only from March 15, 1996. The 1997
results also include a full year of revenue and expense for eight other
properties acquired in 1996, and the partial year of 1997 acquisitions,
including the Transaction. During 1997 and continuing in 1998, the Company
substantially completed the strategic repositioning of its portfolio to
concentrate on apartment communities and disposed of nearly all of its
commercial and retail assets, which significantly reduced the revenues
received from such properties in 1997 and 1998.
Revenues
Total revenues (excluding net gain on sales of investments in rental
properties) were $203,245,000 in 1998, $137,761,000 in 1997 and $101,651,000
in 1996. Revenues increased in 1998 primarily as a result of revenues derived
from 17 stabilized apartment communities acquired in the Transaction. Revenues
in 1997 increased from 1996 primarily as a result of the Merger and new
multifamily property acquisitions and were offset in part by the disposition
of most retail and commercial properties. A summary of revenues for the years
ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 % of Total 1997 % of Total 1996 % of Total
Total Revenues Total Revenues Total Revenues
(Dollars in thousands) -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Multifamily rental...... $189,810 93% $122,936 89% $ 77,834 77%
Commercial and retail
rental................. 996 1 5,742 4 15,301 15
Other income............ 12,439 6 9,083 7 8,516 8
-------- --- -------- --- -------- ---
Total revenue......... $203,245 100% $137,761 100% $101,651 100%
======== === ======== === ======== ===
</TABLE>
<TABLE>
<CAPTION>
% Change from
Prior Year
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Multifamily rental.......................................... 54% 58% 56%
Commercial and retail rental................................ (83%) (62%) 18%
Other income................................................ 37% 7% 238%
Total revenue............................................... 48% 36% 55%
</TABLE>
Multifamily rental revenues have increased in each of the last three years
primarily due to property acquisitions. During 1998, the 17 apartment
communities acquired in the Transaction and five other communities acquired in
1997 added an aggregate of $59,100,000 to multifamily rental revenues,
compared to $15,400,000 in 1997. In addition, the seven development properties
acquired in the Transaction and completed in 1998 and seven apartment
communities acquired in 1998 added $15,400,000 to 1998 multifamily rental
revenues. On a same-store basis (i.e., multifamily communities owned by the
Company and stabilized for all of 1998 and 1997 and comprising 11,722 of the
Company's 21,858 units at December 31, 1998), rental revenues increased by
$6,660,000 or 6% due to average rents per unit increasing approximately 5% and
decreased use of rental concessions which were partially offset by lower
occupancy in 1998. During 1997, the 17 assets acquired in the Transaction and
five other acquisitions added an aggregate of $15,400,000 to multifamily
rental revenues.
26
<PAGE>
Properties acquired in 1996 and held for all of 1997 added $27,100,000 to 1997
multifamily rental revenues incrementally. On a same-store basis (i.e., those
properties owned by BRE for all of 1997 and 1996 comprising 5,235 of BRE's
18,569 units at December 31, 1997) revenues increased by $3,300,000, or
approximately 8%, due largely to an increase in average rental rates of 6% and
higher occupancy rates.
Revenues from commercial and retail properties decreased 83% in 1998
compared to 1997 due to the sale of four such properties, and decreased 62% in
1997 compared to 1996 due to the sale of 10 such properties. Commercial and
retail revenues as a percentage of total revenues have declined in each of the
last three years as a result of the Company's strategy emphasizing
redeployment of these investments into apartment communities.
Portfolio occupancy rates as of December 31, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Multifamily...................................................... 94% 95% 96%
Number of properties........................................... 85 74 54
Commercial and retail............................................ 100% 99% 93%
Number of properties........................................... 1 5 15
</TABLE>
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 rentable square footage in the portfolio.
The following table summarizes by property classification the acquisitions
and dispositions for the years ended December 31, 1998, 1997 and 1996 (dollar
amounts are gross acquisition costs in the case of acquisitions, total
delivered cost in the case of completed development communities and gross
sales prices in the case of property sales):
Acquisition/Disposition Summary
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Dollar amounts in thousands) # $ # $ # $
- ----------------------------- --- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C>
Multifamily:
Property acquisitions (11)............. 7 $162,700 22 $537,700 30 $446,412
Development properties completed....... 7 183,088 -- -- -- --
Property dispositions.................. 3 19,200 2 12,550 1 58,000
Commercial and retail:
Property acquisitions (12)............. -- -- -- -- 18 56,443
Property dispositions.................. 4 10,500 10 97,300 14 49,600
</TABLE>
- --------
(11) Includes, for 1997, 17 properties acquired in the Transaction with an
aggregate cost of approximately $386,000,000, held by consolidated
subsidiaries of BRE. The 1996 amounts include 22 properties acquired in
the Merger with an aggregate cost of $216,612,000. Both the Transaction
and the Merger were accounted for under the purchase method of
accounting.
(12) Represents, for 1996, 18 properties acquired in the Merger with an
aggregate cost of $56,443,000, as determined under the purchase method of
accounting.
27
<PAGE>
Other Income
Other income (which consists primarily of recurring non-rental income
derived from apartment communities and includes, among other items,
partnership, interest and third-party property management income) was
$12,439,000, $9,083,000 and $8,516,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The increase in 1998 over 1997 is due largely to
other income generated by communities held for all of 1998, including those
acquired in the Transaction. The increase in 1997 over 1996 is due primarily
to other income from communities acquired in the Merger and other
acquisitions, and was offset in part by reduced percentage rent from
commercial and retail properties which were disposed of in 1997.
Expenses
Real Estate Expenses
A summary of real estate expenses for the years ended December 31, 1998,
1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Multifamily............. $ 64,566,000 $44,049,000 $29,310,000
Commercial and retail... 58,000 522,000 1,720,000
------------ ----------- -----------
Total................... $ 64,624,000 $44,571,000 $31,030,000
============ =========== ===========
Real estate expenses for multifamily rental properties (which include
maintenance and repairs, utilities, on-site staff payroll, property taxes,
insurance, advertising and other direct operating expenses) increased by
$20,517,000 (47%) in the year ended December 31, 1998 as compared to the year
ended December 31, 1997. This increase is due largely to acquisitions in 1998
and communities completed in 1998 which were previously under development and
the expenses for an entire year for properties acquired in 1997, including
those from the Transaction. Real estate expenses for the year ended December
31, 1997 increased 44% to $44,571,000 from 1996 primarily due to expenses of
properties acquired in the Merger and other multifamily property acquisitions.
Multifamily real estate expenses as a percentage of multifamily rental
revenues decreased from 37.6% in 1996 to 35.8% in 1997 and to 34.0% in 1998.
Although not measurable with precision, management believes that this decrease
resulted in part from the internalization of property management (completed
during 1996) 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 $9,825,000 for
the year ended December 31, 1998 as compared to 1997 and increased $4,655,000
for the year ended December 31, 1997 from that of 1996. The increase in these
years resulted from additional depreciation on property acquisitions
(including those properties acquired in the Transaction and the Merger) and to
a lesser extent, depreciation on development properties completed in 1998.
Further, during 1997 and 1996, dispositions of commercial and retail
properties generally resulted in a higher depreciable base (and related
depreciation expense) as the original cost basis plus the realized gain was
reinvested.
Interest expense
Interest expense for the years ending December 31, 1998, 1997 and 1996
follows:
<CAPTION>
Interest expense on
debt: 1998 1997 1996
------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Interest on line of
credit................. $ 12,550,000 $ 5,750,000 $ 3,551,000
Interest on unsecured
senior notes........... 17,672,000 7,331,000 4,191,000
Interest on mortgage
loans payable.......... 17,982,000 9,703,000 8,852,000
Capitalized interest.... (12,606,000) (1,178,000) (269,000)
------------ ----------- -----------
Total interest expense.. $ 35,598,000 $21,606,000 $16,325,000
============ =========== ===========
</TABLE>
28
<PAGE>
Year-end debt balances for the years ending December 31, 1998, 1997 and 1996
follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
Debt: 1998 1997 1996
----- ------------ ------------ ------------
<S> <C> <C> <C>
Unsecured line of credit......... $264,000,000 $186,000,000 $124,000,000
Unsecured senior notes........... 253,000,000 123,000,000 73,000,000
Mortgage loans payable........... 235,146,000 232,367,000 114,985,000
------------ ------------ ------------
Total debt....................... $752,146,000 $541,367,000 $311,985,000
============ ============ ============
Weighted average interest rate
for all debt at end of period... 6.98% 7.24% 7.16%
============ ============ ============
</TABLE>
Interest expense increased $13,992,000 to $35,598,000 in 1998 due to
interest on the $130 million unsecured senior notes due 2013 issued in
February 1998, borrowings on the line of credit to fund acquisitions of
stabilized properties, a full year of interest on debt assumed and incurred in
the Transaction of approximately $280,000,000 and a full year of interest on
the $50 million unsecured notes due 2007 issued in June 1997. This amount was
offset in part by a paydown of balances on the Company's credit facilities
from the net proceeds of equity offerings in 1998 totaling approximately
$56,000,000 and net proceeds from property sales of approximately $31,000,000.
Further, the 1998 amount is net of capitalized interest related to
construction in progress for eight communities acquired in the Transaction and
five other properties purchased for development. The 1997 amount included a
full year of interest on debt totaling $95,400,000 assumed in the Merger and
interest on subsequent borrowings on the Company's line of credit used to fund
the acquisition of stabilized multifamily properties. The 1997 interest
expense was partially offset by the paydown of balances on the Company's line
of credit using net proceeds from equity offerings in 1997 totaling
approximately $109,900,000 and net proceeds from sales of investments in
rental properties of approximately $105,318,000.
General and administrative
General and administrative costs were as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
General and administrative expenses..... $6,133,000 $4,301,000 $3,999,000
As a percentage of total revenues....... 3.0% 3.1% 3.9%
</TABLE>
General and administrative expenses as a percentage of total revenues
decreased .1% in 1998 as compared to 1997, although total revenues increased
approximately 48%. This relatively small decrease is due to the efficiencies
of administering a larger portfolio being offset in part by start-up costs in
establishing new regional offices (the Company added new regions in connection
with the Transaction) and the relocation of its corporate office. No such
costs were incurred in 1997. The decrease in general and administrative costs
as a percentage of revenues in 1997 compared to 1996 is due primarily to
efficiencies in the administration of a larger portfolio with revenues 36%
higher in 1997 compared to 1996.
Provision for Litigation Loss
In the third quarter of 1998, the Company recorded a provision for
litigation loss of $2,400,000 in connection with a jury award and related
legal expenses. The judgment is subject to appeal and stems from the
separation of a former senior executive from the Company approximately two
years prior. There was no such amount in 1997 or 1996.
Net (Loss) Gain on Sales of Investments in Rental Properties
In 1998, the net loss on sales of investments in rental properties was
$1,859,000, primarily from the sale of the Park Glenn apartment community and
three commercial and retail properties: Hawthorne Del Amo, Valencia Medical
Center and Vista Village Shopping Center for a total gross sale price of
approximately $17,300,000.
29
<PAGE>
The net gain on sales in 1997 was $27,824,000, primarily due to the sale of
the Villa Serra, Central, Santa Fe Springs and Hub properties for a total
gross sale price of approximately $80,500,000. The net gain on sales in 1996
of approximately $52,825,000 was primarily due to the sale of the Westlake
Village land-leased property and the 525 Almanor industrial warehouse property
for a total sale price of approximately $64,300,000. Certain of these sales
were structured as tax-deferred exchanges, with the proceeds applied toward
new investments in apartment communities. As of December 31, 1998, the Company
had gains on sales totaling approximately $146,000,000 which have been
deferred for federal and state income tax purposes since the Company's
organization in 1970.
Minority Interest in Income
Minority interest in income was $4,224,000 for the year ended December 31,
1998 due to the earnings attributable to the minority members of the Company's
consolidated subsidiaries, up from $972,000 for the year ended December 31,
1997. This increase is primarily due to a full year of allocation of income to
minority members in connection with the Transaction. There were no minority
members in consolidated subsidiaries in the year ended December 31, 1996.
Net Income
Net income was $60,644,000, $76,197,000 and $89,839,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The decrease in the year ended
1998 as compared to 1997 and 1996 is due largely to the loss on the sale of
investments in rental properties in 1998 and lower gains on sales of
investments in rental properties in 1997. This decrease was offset in part by
contributions to net income from properties acquired, primarily in the
Transaction and the Merger.
Construction in Progress
Transfers from Construction in Progress to Investments in Rental Properties
Land acquisition, development, direct construction general and
administrative overhead and carrying costs of properties under construction
(or for which land was acquired for development) are capitalized and reported
on the balance sheet line item "Construction in progress." The Company
transfers the capitalized costs for each building in a community under
construction to the balance sheet line item "Investments in rental
properties-- Multifamily" once the building receives a final certificate of
occupancy and is ready to lease. During the year, the following communities
met these criteria for all buildings within the community (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Amount
Community Name Location Units Transferred
- -------------- --------------- ----- -----------
<S> <C> <C> <C>
Pinnacle Towne Center......................... Phoenix, AZ 350 $ 34,319
Pinnacle Canyon View.......................... Orem, UT 288 25,976
Pinnacle Terrace.............................. Chandler, AZ 300 23,354
Pinnacle Estates.............................. Albuquerque, NM 294 25,752
Pinnacle at High Resort....................... Rio Rancho, NM 301 25,678
Pinnacle at Hunters Glen...................... Thornton, CO 264 22,295
Pinnacle Mountain View........................ Clearfield, UT 324 25,714
----- --------
Total Transfers............................... 2,121 $183,088
===== ========
</TABLE>
Construction in Progress
The following table sets forth data with respect to the Company's six
multifamily properties included in construction in progress at December 31,
1998. Completion of these properties is subject to a number of risks and
uncertainties, including construction delays and cost overruns. No assurance
can be given that these
30
<PAGE>
properties will be completed or, if completed, that they will be completed by
the estimated dates or for the estimated amounts set forth in the table below
or that they will contain the number of proposed units set forth in the table
below (dollar amounts in millions):
<TABLE>
<CAPTION>
Investment
Proposed to Date Estimated Estimated
Property Name and Number December 31, Cost to Estimated Completion
Location of Units 1998 Complete Total Cost Date
- ----------------- -------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Pinnacle at Flamingo
West, (13)
Las Vegas, NV........... 324 $27.2 $0.0 $27.2 1Q/1999
Pinnacle at Blue Ravine,
Folsom, CA.............. 260 10.5 12.5 23.0 2Q/1999
114 W. Adams, (14)
Phoenix, AZ............. 93 5.4 8.1 13.5 3Q/1999
Pinnacle at MacArthur
Place, (14)(15)
Santa Ana, CA........... 346 15.3 40.0 55.3 1Q/2000
Pinnacle Sonata, (14)
Bothell, WA............. 268 11.9 28.9 40.8 2Q/2000
Pinnacle Bellevue,
(14)(15)
Bellevue, WA............ 248 12.7 24.6 37.3 4Q/2000
----- ----- ------ ------
Total.................... 1,539 $83.0 $114.1 $197.1
===== ===== ====== ======
</TABLE>
- --------
(13) As of December 31, 1998, 312 of these units had been completed and the
related costs are included in the balance sheet line item "Investments in
rental properties-multifamily."
(14) As of December 31, 1998, the Company had not committed to significant
construction contract obligations for these properties except for
Pinnacle Sonata, where contracts have been executed for preliminary site
preparation work.
(15) These projects consist of land owned by the Company where construction is
ready to commence subject only to obtaining certain construction plans
and permits and required financing. The Company expects to finance the
development and construction of these communities through joint venture
arrangements, or through its line of credit facility or other debt or
equity sources, although there can be no assurance that such financing
will be obtained.
Impact of Inflation
Over 97% of the Company's total revenues for 1998 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 mitigate
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 also
fluctuate due to short-term leases that permit apartment residents to leave at
the end of each lease term at minimal cost to the resident.
Year 2000 Considerations
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in other
normal business activities.
As of December 31, 1998, the Company had completed a project which replaced
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost for the Company's systems was approximately $200,000 and such
costs were expensed
31
<PAGE>
according to the Company's existing policy. The Company completed the
necessary software replacement largely using existing employees. The Company
believes that with the conversions to new software, the Year 2000 issue will
not pose significant operational problems for its computer systems.
At this time, no estimates can be made as to any potential adverse impact
resulting from the failure of third parties, including tenants, vendors and
financial institutions, to address Year 2000 issues. For example, to the
extent payments, deposits and other transactions are not processed on a timely
basis by financial institutions, the Company's ability to collect payments
from tenants and/or make payments to its creditors could be adversely
affected. The Company is dependent on such third parties to assess the impact
of the Year 2000 issue on their systems and to take any necessary corrective
action. However, as a component of its Year 2000 project, the Company is in
the ongoing process of discussing Year 2000 compliance issues with its key
vendors and service providers and is developing contingency plans, although
there can be no assurance that these contingency plans will successfully avoid
service interruption.
Due to the complexity and pervasiveness of the Year 2000 issue and, in
particular, the uncertainty regarding the compliance programs of third
parties, no assurance can be given that these estimates will be achieved, and
actual results could differ materially from those anticipated.
Liquidity and Capital Resources
At December 31, 1998, the Company's cash and cash equivalents totaled
$2,057,000, down from $4,216,000 at the end of 1997. Borrowings under the
Company's line of credit totaled $264,000,000 at December 31, 1998, compared
to $186,000,000 at December 31, 1997. Drawings on the line of credit are
available to pay dividends to shareholders and distributions to minority
members, to fund capital improvements and operating expenses, as well as to
fund property acquisitions and development. The Company typically reduces its
outstanding balance on the line of credit with available cash balances.
Borrowings of up to $400,000,000 are available under the Company's line of
credit, with $136,000,000 available at December 31, 1998. The line of credit
matures in August 2001 and bears interest at the lower of LIBOR plus .70% or a
rate based on bids of the participating banks. Cost of the line of credit is
0.15% per annum on the total commitment amount.
The Company had a total of $253,000,000 in unsecured indebtedness other than
the line of credit at December 31, 1998, consisting of the following:
- $73,000,000 of unsecured senior notes with an interest rate of 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;
- $50,000,000 principal amount of unsecured senior notes due 2007,
with an effective interest rate of approximately 7.8%; and
- $130,000,000 principal amount of unsecured notes due 2013 issued in
February 1998 with an effective interest rate of 7.3%.
In addition, at December 31, 1998, the Company also had mortgage
indebtedness totaling $235,146,000 at interest rates ranging from 5.5% to
9.3%, with remaining terms of from less than one to 30 years.
For additional information regarding the Company's line of credit, unsecured
senior notes payable and mortgage loans payable, including scheduled principal
payments over the next five years, see Notes 5 and 6 to Notes to the
Consolidated Financial Statements. 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 financial covenants during the year
ended December 31, 1998.
32
<PAGE>
The Company purchased seven completed apartment communities and one addition
to an existing community totaling 1,597 units during the year ended December
31, 1998 for a gross purchase price of approximately $163 million. During this
period, the Company also purchased five sites for development of an estimated
1,215 units for a gross purchase price of approximately $42 million. Further,
the Company funded approximately $150 million for construction of communities
under development in the year ended December 31, 1998. These acquisition and
construction costs were funded by borrowings on the line of credit, the
issuance of the $130 million of unsecured senior notes, equity offerings,
proceeds from the sale of properties, the issuance of minority interest and
the assumption of secured debt. Because of higher prices and corresponding
declining rates of return on completed apartment communities in its targeted
Western markets, the Company presently does not anticipate significant
acquisitions of completed apartment communities in 1999.
The Company intends to meet its short-term liquidity requirements through
cash balances and cash flows provided by operations, borrowings on the
unsecured line of credit and to a lesser extent, proceeds from asset sales.
The Company believes that its cash flow and cash available from its line of
credit will be sufficient to meet its liquidity needs during 1999, which
include normal recurring expenses, debt service requirements, budgeted
expenditures for improvements to certain properties, funding ongoing
construction in progress and distributions required to maintain the Company's
real estate investment trust qualification under the Code.
However, the Company anticipates that it will continue to require outside
sources of financing to meet its long-term liquidity needs beyond 1999, such
as scheduled debt repayments, construction funding and property acquisitions.
At December 31, 1998, the Company had committed to purchase approximately $65
million of multifamily communities (estimated to fund in the year 2000) and
had an estimated cost of $114 million to complete existing construction in
progress (funding estimated during 1999 and 2000). To facilitate the
acquisition of public capital, the Company filed a universal shelf
registration statement in March 1998 providing for the issuance of up to $750
million in equity, debt, preferred or convertible securities, of which
approximately $700 million remains unused at December 31, 1998. In January
1999, the Company issued $50 million of 8% Series A Cumulative Redeemable
Preferred Stock, reducing the amount available on the universal shelf
registration to approximately $650 million. The proceeds from this issuance
were used initially to pay down outstanding balances on the line of credit.
The Company believes that public capital markets will not be, for the
foreseeable future, as significant a source of funding as they have in the two
years ended December 31, 1998. The Company is actively searching for other
sources of possible funding, including joint ventures and secured construction
debt. Further, the Company owns unencumbered real estate assets which could be
sold or used as collateral for financing purposes (subject to certain lender
restrictions) and has encumbered assets with significant equity which could be
further encumbered should other sources of capital not be available.
Substantially all of the properties acquired in the Transaction were held
through BRE Property Investors LLC (the "Operating Company") and Blue Ravine
Investors, LLC ("Blue Ravine"). Both the Operating Company and Blue Ravine are
consolidated subsidiaries of the Company and Delaware limited liability
companies. On December 31, 1998, Blue Ravine was merged into the Operating
Company, whereupon the operating company units of Blue Ravine became operating
company units ("OC Units") in the Operating Company. BRE is the sole managing
member of the Operating Company and as of December 31, 1998 held approximately
74% of the outstanding OC Units. The remaining OC Units of the Operating
Company are held by third parties as non-managing members. The OC Units held
by holders other than the Company are exchangeable, at the option of the
holders thereof, into common stock of the Company or, at the option of the
Company, cash in an amount equal to the market value of such common stock at
the time of the exchange. As of December 31, 1998, no OC Units have been
exchanged. In connection with the Transaction, the Company, through the
Operating Company, also acquired eight communities comprising approximately
2,445 units in various stages of construction. Between 209,198 and 627,594 OC
Units (valued at between $6 million and $17 million using a value of $26.93
per OC Unit as provided for in the Contribution Agreement which governs the
Transaction) are issuable in connection with the completion of certain budget
and schedule objectives relating to these communities. As of December 31,
1998, 164,096 OC Units have been issued for three communities; a total of
between 127,465 and 382,395 OC Units remain to be issued for the remaining
five communities. Upon
33
<PAGE>
issuance, these OC Units will also be exchangeable into common shares of the
Company on the same basis as other OC Units. There can be no assurance that
these communities will be completed within the budget and time frame
established.
Under the terms of the limited liability company agreement governing the
operations of the Operating Company (the "LLC Agreement"), the non-managing
members are entitled to receive certain distributions of cash prior to the
Company. If the Operating Company's cash available for distribution is not
sufficient to permit such priority distributions, the Company is required to
make certain capital contributions to the Operating Company. The Operating
Company is also required to maintain certain debt service coverage, debt-to-
asset and other financial ratios intended to protect the members' rights to
receive priority distributions, and under the terms of the LLC Agreement,
among other items, the properties owned by the Operating Company may not be
sold in a taxable transaction without the consent of the non-managing members
for up to ten years from the closing of the Transaction. The Operating Company
has also guaranteed repayment of borrowings under the Company's $400 million
line of credit.
DIVIDENDS
A cash dividend has been paid to shareholders each quarter since the
Company's inception in 1970. Dividends per share were $1.44 in 1998, $1.38 in
1997, and $1.33 in 1996. Total dividends paid to shareholders for the three
years ended December 31, 1998, 1997 and 1996 were $62,138,000, $51,063,000 and
$39,849,000, respectively. Distributions to minority members were $4,189,000
in 1998 and $972,000 in 1997 respectively; there were no minority members in
1996.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in short-term LIBOR interest rates. The Company does not have any
direct foreign exchange or other significant market risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's unsecured line of credit. The Company primarily
enters into fixed and variable rate debt obligations to support general
corporate purposes, including acquisitions, capital expenditures and working
capital needs. The Company continuously evaluates its level of variable rate
debt with respect to total debt and other factors, including its assessment of
the current and future economic environment. The Company did not have any
derivative financial instruments at December 31, 1998, but has in previous
years. In each of 1997 and 1998, the Company closed out treasury rate lock
agreements in conjunction with the issuance of its $50 million unsecured
senior notes due 2007 issued in June 1997 and $130 million unsecured senior
notes due 2013 issued in February 1998. The purpose of these treasury rate
lock agreements was to obtain what the Company considered advantageous pricing
for future anticipated debt issuance.
The fair values of BRE's financial instruments (including such items in the
financial statement captions as cash and short-term investments, other assets,
mortgage loans, accounts payable and other liabilities and unsecured line of
credit) approximate their carrying or contract values based on their nature,
terms, and interest rates which approximate current market rates. The fair
value of mortgage loans payable and unsecured senior notes is estimated using
discounted cash flow analyses with an interest rate similar to that of current
market borrowing arrangements. The fair value of the Company's mortgage loans
payable and unsecured senior notes approximates their carrying value at
December 31, 1998.
The Company had $297,000,000 and $223,000,000 in variable rate debt
outstanding at December 31, 1998 and 1997, respectively. A hypothetical 10%
adverse change in interest rates would have had an annualized unfavorable
impact of approximately $1,800,000 and $1,400,000, respectively, on the
Company's earnings and cash flows based upon these year-end debt levels. The
Company cannot predict the effect of adverse changes in interest rates on its
variable rate debt and therefore its exposure to market risk, nor can there be
any assurance that fixed rate long term debt will be available to the Company
at advantageous pricing. Consequently, future results may differ materially
from the estimated adverse changes discussed above.
34
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements. Such Financial Statements and
Schedules are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers. See "Executive Officers of the Registrant" in Part I of
this report.
(b) Directors. The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement, relating to the Company's 1998
Annual Meeting of Shareholders, under the headings "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance," to be filed
with the Securities and Exchange Commission within 120 days of December
31, 1998. A summary of the directors and their principal business for the
last five years follows:
<TABLE>
<C> <S>
John McMahan Chairman of the Board of the Company. Managing
Principal, The McMahan Group, real estate strategic
management consultants, since 1996. President,
John McMahan Associates, Inc., a management consulting
firm, and McMahan Real Estate Securities, Inc., a real
estate investment firm, 1994 to 1996. President and
Chief Executive Officer, Mellon/McMahan Real Estate
Advisors, Inc., a real estate advisory firm, 1990-94.
William E. Borsari Chairman or President, The Walters Management Company,
a real estate asset management company, for more than
five years.
Robert Fiddaman Former board chairman of SSR Realty Advisors, a real
estate investment and management firm from 1996 to
1997. President and Chief Executive Officer of Metric
Realty in San Francisco from 1993 to 1996.
L. Michael Foley Principal, L. Michael Foley and Associates, real estate
and corporate consulting, since 1996. Senior Vice
President and Chief Financial Officer, Coldwell Banker
Corporation, 1995-1996. Chairman and Chief Executive
Officer, Sears Savings Bank, 1989-93. Senior Executive
Vice President, Coldwell Banker Real Estate Group,
Inc., 1986-93. Executive Vice President, Homart
Development Co., 1983-1993.
Roger P. Kuppinger Financial advisor to public and private companies,
since February 1994. Senior Vice President and Managing
Director, Sutro & Co., Inc., an investment banking
company, from 1969 to February 1994. Director, Realty
Income Corporation.
Frank C. McDowell President and Chief Executive Officer of the Company,
since June 1995. Chief Executive Officer and Chairman
of Cardinal Realty Services, Inc., 1992-95. Senior Vice
President, Head of Real Estate, First Interstate Bank
of Texas, 1988-92.
Edward Mace President and Chief Executive Officer of Fairmont
Hotels based in San Francisco since 1996. Midwest
regional director for management consulting for the
Real Estate Industry Group of KPMG Peat Marwick from
1994 to 1996. President and managing partner for
Lincoln Property Company of Europe from 1990 to 1994.
Gregory M. Simon Self employed as a private investor, since 1991. Senior
Vice President, H.F. Ahmanson & Co. and Home Savings of
America, from 1983 to 1991. Officer and Director,
Golden Orange Broadcasting, a privately held
corporation.
Arthur G. von Thaden President and Chief Executive Officer of the Company
from 1970 to June 1995. Chief Executive Officer,
BankAmerica Realty Services, Inc., a real estate
investment advisory firm, from 1970 to 1987.
</TABLE>
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's Proxy Statement, relating to the Company's 1999 Annual Meeting
of Shareholders, under the headings "Executive Compensation and Other
Information" and "Board and Committee Meetings; Compensation of Directors," to
be filed with the Securities and Exchange Commission within 120 days of
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to
the Company's Proxy Statement, relating to the Company's 1999 Annual Meeting
of Shareholders, under the heading "Security Ownership of Certain Beneficial
Owners and Management" to be filed with the Securities and Exchange Commission
within 120 days of December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to
the Company's Proxy Statement, relating to the Company's 1999 Annual Meeting
of Shareholders, under the headings "Stock Loans" and "Employment Contracts
and Termination of Employment and Change in Control Arrangements--Mr.
McDowell--Stock Loan," to be filed with the Securities and Exchange Commission
within 120 days of December 31, 1998.
37
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Schedule III--Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable,
and, therefore, have been omitted.
3. See Index to Exhibits immediately following the Consolidated Financial
Statements. Each of the exhibits listed is incorporated herein by
reference.
(b) Reports on Form 8-K:
None
(c) Exhibits
See Index to Exhibits.
(d) Financial Statement Schedules
See Index to Financial Statements and Financial Statement Schedule.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Frank C. McDowell
-----------------------------------
Frank C. McDowell
President and Chief Executive
Officer
Dated March 12, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Dated
/s/ Frank C. McDowell President and Director March 12, 1998
- --------------------------------- (Principal Executive
Frank C. McDowell Officer)
/s/ LeRoy E. Carlson Executive Vice March 12, 1998
- --------------------------------- President (Principal
LeRoy E. Carlson Financial and
Accounting Officer)
/s/ John McMahan Chairman and Director March 12, 1998
- ---------------------------------
John McMahan
/s/ William E. Borsari Director March 12, 1998
- ---------------------------------
William E. Borsari
/s/ Robert A. Fiddaman Director March 12, 1998
- ---------------------------------
Robert A. Fiddaman
/s/ L. Michael Foley Director March 12, 1998
- ---------------------------------
L. Michael Foley
/s/ Roger P. Kuppinger Director March 12, 1998
- ---------------------------------
Roger P. Kuppinger
/s/ Edward E. Mace Director March 12, 1998
- ---------------------------------
Edward E. Mace
/s/ Gregory M. Simon Director March 12, 1998
- ---------------------------------
Gregory M. Simon
/s/ Arthur G. von Thaden Director March 12, 1998
- ---------------------------------
Arthur G. von Thaden
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of
BRE Properties, Inc.:
We have audited the accompanying consolidated balance sheets of BRE
Properties, Inc. and its subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, cash
flows and the related financial schedule for each of the three years in the
period ended December 31, 1998. These financial statements and the related
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
related financial schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
related financial schedule are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of BRE Properties, Inc. and its subsidiaries as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Francisco, California
January 15, 1999
40
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
ASSETS ---------- ----------
<S> <C> <C>
Investments in rental properties:
Multifamily........................................... $1,610,461 $1,248,012
Commercial and retail................................. 1,200 11,929
Construction in progress.............................. 65,958 84,202
Less: Accumulated depreciation and amortization....... (75,838) (49,721)
---------- ----------
1,601,781 1,294,422
Investments in limited partnerships.................... 814 2,780
---------- ----------
Real estate portfolio................................. 1,602,595 1,297,202
Mortgage loans, net.................................... 2,336 4,871
---------- ----------
1,604,931 1,302,073
Cash and short-term investments........................ 2,057 4,216
Funds held in escrow................................... -- 15,833
Other assets........................................... 23,928 19,776
---------- ----------
Total assets......................................... $1,630,916 $1,341,898
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Mortgage loans payable................................. $ 235,146 $ 232,367
Unsecured senior notes................................. 253,000 123,000
Unsecured line of credit............................... 264,000 186,000
Accounts payable and other liabilities................. 26,333 16,970
---------- ----------
Total liabilities.................................... 778,479 558,337
---------- ----------
Minority interest...................................... 87,432 76,066
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized.
No shares outstanding at December 31, 1998 or 1997.... -- --
Common stock, $.01 par value, 100,000,000 shares
authorized.
Shares issued and outstanding: 44,221,560 at December
31, 1998; 41,738,704 at December 31, 1997............ 443 417
Additional paid-in capital............................. 664,811 605,833
Accumulated net income in excess of cumulative
dividends............................................. 99,751 101,245
---------- ----------
Total shareholders' equity.......................... 765,005 707,495
---------- ----------
Total liabilities and shareholders' equity.......... $1,630,916 $1,341,898
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
41
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue
Rental income:
Multifamily...................................... $189,810 $122,936 $ 77,834
Commercial and retail............................ 996 5,742 15,301
Other income...................................... 12,439 9,083 8,516
-------- -------- --------
Total revenue................................... 203,245 137,761 101,651
-------- -------- --------
Expenses
Real estate expenses.............................. 64,624 44,571 31,030
Provision for depreciation and amortization....... 27,763 17,938 13,283
Interest expense.................................. 35,598 21,606 16,325
General and administrative........................ 6,133 4,301 3,999
Provision for litigation loss..................... 2,400 -- --
-------- -------- --------
Total expenses.................................. 136,518 88,416 64,637
-------- -------- --------
Income before (loss) gain on sales of investments
in rental properties and minority interest....... 66,727 49,345 37,014
Net (loss) gain on sales of investments in rental
properties....................................... (1,859) 27,824 52,825
-------- -------- --------
Income before minority interest................... 64,868 77,169 89,839
Minority interest in income....................... 4,224 972 --
-------- -------- --------
Net Income...................................... $ 60,644 $ 76,197 $ 89,839
======== ======== ========
Earnings per common share:
Income excluding net (loss) gain on sales of
investments in rental properties................ $ 1.45 $ 1.35 $ 1.21
Net (loss) gain on sales of investments in rental
properties...................................... $ (0.04) $ 0.78 $ 1.73
-------- -------- --------
Net income per common share..................... $ 1.41 $ 2.13 $ 2.94
======== ======== ========
Earnings per common share assuming dilution:
Income excluding net (loss) gain on sales of
investments in rental properties................ $ 1.45 $ 1.35 $ 1.20
Net (loss) gain on sales of investments in rental
properties...................................... $ (0.04) $ 0.76 $ 1.72
-------- -------- --------
Net income per common share--assuming dilution.. $ 1.41 $ 2.11 $ 2.92
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
42
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 60,644 $ 76,197 $ 89,839
Adjustments to reconcile net income to net
cash generated by operating activities:
Net (loss) gain on sales of investments in
rental properties......................... 1,859 (27,824) (52,825)
Provision for depreciation and
amortization.............................. 27,763 17,938 13,283
Provision for litigation loss.............. 2,400 -- --
Minority interest in income................ 4,224 972 --
Decrease (increase) in other assets........ 63 (9,074) 1,522
Increase (decrease) in accounts payable and
other liabilities......................... 128 9,355 (3,932)
--------- --------- ---------
Net cash flows generated by operating
activities.................................. 97,081 67,564 47,887
--------- --------- ---------
Cash flows from investing activities:
Multifamily communities acquired, net...... (149,638) (152,700) (230,967)
Apartments and construction in progress
purchased from TCRW....................... -- (160,544) --
Decrease (increase) in funds held in
escrow.................................... 15,833 (15,833) --
Additions to construction in progress...... (179,568) (9,813) --
Capital expenditures--multifamily.......... (3,553) (1,542) (748)
Capital expenditures--commercial and
retail.................................... (141) (446) (757)
Rehabilitation expenditures................ (6,665) (4,578) --
Mortgage loans receivable advanced......... -- (5,950) (4,268)
Mortgage loans receivable repayments....... 2,535 10,795 279
Proceeds from sales of property, net....... 30,900 105,318 104,379
--------- --------- ---------
Net cash flows (used in) investing
activities.................................. (290,297) (235,293) (132,082)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on mortgage loans
payable................................... (5,833) (2,736) (1,450)
Proceeds from issuance of unsecured senior
notes..................................... 130,000 50,000 --
Costs of issuance of unsecured senior
notes..................................... (3,787) (3,746) --
Line of credit advances.................... 386,000 240,500 127,300
Line of credit principal repayments........ (308,000) (178,500) (21,500)
Proceeds from equity offerings, net........ 56,013 109,903 --
Proceeds from exercises of stock options
and dividend reinvestment plan............ 2,991 8,375 3,821
Distributions to minority members.......... (4,189) (972) --
Dividends paid............................. (62,138) (51,063) (39,849)
--------- --------- ---------
Net cash flows generated by financing
activities.................................. 191,057 171,761 68,322
--------- --------- ---------
(Decrease) increase in cash and short-term
investments................................. (2,159) 4,032 (15,873)
Balance at beginning of period............... 4,216 184 16,057
--------- --------- ---------
Balance at end of period..................... $ 2,057 $ 4,216 $ 184
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
43
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK SHARES
Balance at beginning of year........... 41,738,704 32,879,741 21,941,730
Issuance of shares pursuant to purchase
transactions.......................... -- 3,713,331 10,684,436
Stock options exercised................ 350,415 364,752 246,451
Shares issued pursuant to dividend
reinvestment plan..................... 12,926 101,951 7,124
Issuance of shares pursuant to equity
offerings............................. 2,119,515 4,678,929 --
----------- ----------- -----------
Balance at end of year................ 44,221,560 41,738,704 32,879,741
=========== =========== ===========
COMMON STOCK
Balance at beginning of year........... $ 417 $ 329 $ 219
Issuance of shares pursuant to purchase
transactions.......................... -- 37 107
Stock options exercised................ 5 4 3
Issuance of shares pursuant to dividend
reinvestment plan..................... -- 1 --
Issuance of shares pursuant to equity
offerings............................. 21 46 --
----------- ----------- -----------
Balance at end of year................ $ 443 $ 417 $ 329
=========== =========== ===========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year........... $ 605,833 $ 387,674 $ 212,908
Issuance of shares pursuant to purchase
transactions.......................... -- 99,932 170,948
Stock options exercised................ 2,637 5,764 3,681
Issuance of shares pursuant to dividend
reinvestment plan 349 2,606 137
Issuance of shares pursuant to equity
offerings............................. 55,992 109,857 --
----------- ----------- -----------
Balance at end of year................ $ 664,811 $ 605,833 $ 387,674
=========== =========== ===========
ACCUMULATED NET INCOME IN EXCESS OF
CUMULATIVE DIVIDENDS
Balance at beginning of year........... $ 101,245 $ 76,111 $ 26,121
Net income for year.................... 60,644 76,197 89,839
Cash dividends paid: $1.44, $1.38 and
$1.3295 per share for the years ended
December 31, 1998, 1997 and 1996,
respectively.......................... (62,138) (51,063) (39,849)
----------- ----------- -----------
Balance at end of year................ $ 99,751 $ 101,245 $ 76,111
----------- ----------- -----------
Total shareholders' equity.............. $ 765,005 $ 707,495 $ 464,114
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
44
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company
BRE Properties, Inc. ("BRE" or "the Company") is a self-administered real
estate investment trust which owns and operates multifamily communities and
other income-producing properties in the Western United States. At December
31, 1998, BRE's portfolio owned directly or through subsidiaries consisted of
88 properties, including 85 multifamily communities (aggregating 21,858
units), one commercial and retail property and two properties held in
partnerships in which BRE is a limited partner. Of these properties, 37 were
located in California, 24 in Arizona, nine in Washington, four in Nevada, five
in Utah, four in New Mexico, three in Oregon and two in Colorado.
Additionally, at December 31, 1998, there were six properties under
development aggregating an estimated 1,539 units.
Transaction with Trammell Crow Residential-West
On November 18, 1997, BRE acquired 17 completed properties and eight
development properties from certain entities of Trammell Crow Residential-West
(the "Transaction") pursuant to a definitive agreement (the "Contribution
Agreement"). BRE paid a total of approximately $160 million in cash and issued
$100 million in common stock based on a stock price of $26.93 per share, as
provided for in the Contribution Agreement. Additionally, certain entities
received Operating Company Units ("OC Units") valued at $76 million in BRE
Property Investors LLC (the "Operating Company"), a Delaware limited liability
company and majority-owned subsidiary of BRE. The Operating Company also
assumed approximately $120 million in debt. BRE is the sole managing member of
the Operating Company and owned an approximate 74% interest therein at
December 31, 1998. Substantially all of the properties acquired in the
Transaction were held through the Operating Company and Blue Ravine Investors,
LLC ("Blue Ravine"), both of which were formed by the Company for the purpose
of acquiring properties in the Transaction. On December 31, 1998, Blue Ravine
was merged into the Operating Company, whereupon the operating company units
of Blue Ravine became OC Units in the Operating Company. The Operating Company
continues to hold substantially all of the properties acquired in the
Transaction.
The OC Units held by non-managing members are included in minority interest
in the Company's consolidated financial statements. After November 1998, non-
managing members of the Operating Company can exchange their units for common
stock of BRE on a 1:1 basis. The OC units held by holders other than the
Company are exchangeable, at the option of the holders thereof, into common
stock of the Company or, at the option of the Company, cash in an amount equal
to the market value of such common stock at the time of the exchange. No OC
Units have been exchanged for common stock as of December 31, 1998. The non-
managing members are entitled to priority distributions regardless of the cash
flow of the Operating Company. The Operating Company is also required to
maintain certain financial ratios in order to protect the non-managing
member's distributions. Further, the Company is restricted from selling assets
of the Operating Company in a taxable sale for a period ranging from eight to
ten years. The Operating Company has also guaranteed the repayment of the
Company's $400 million line of credit.
The Contribution Agreement also provided for an additional issuance of
between 209,198 and 627,594 OC Units (valued between $6 million and $17
million at $26.93 per unit); the actual amount of OC Units to be issued is
dependent upon the extent to which the development properties attain
completion schedules and budget objectives. As of December 31, 1998, 164,096
OC Units have been issued and between 127,465 and 382,395 additional OC Units
may be issued. All of the development properties have received certificates of
occupancy as of December 31, 1998. As nearly all of the objectives have been
met, the Company has recorded a liability of approximately $7 million at
December 31, 1998 for its estimate of actual additional OC Units to be issued.
This amount will be reclassified to minority interest once the OC Units are
actually issued.
Equity Offerings
In July 1998, the Company issued 1,750,000 shares of common stock, for net
proceeds of approximately $47 million. In April 1998, the Company issued
369,515 shares of common stock for net proceeds of approximately $9 million.
45
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt Offering
In February 1998, the Company issued $130 million in unsecured notes due
2013, with a coupon rate of 7.125% resulting, after related costs, in an
effective rate of 7.3%.
2. Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, the Operating Company and other subsidiaries which hold title to
individual properties. All significant intercompany balances and transactions
have been eliminated in consolidation. Due to the Company's ability to control
the Operating Company and other subsidiaries, such entities have been
consolidated with the Company for financial reporting purposes.
Rental property
Rental property is recorded at cost less accumulated depreciation less an
adjustment, if any, for impairment. Rental properties are evaluated for
impairment when conditions indicate that the sum of expected future cash flows
(undiscounted) from a rental property during the expected holding period may
be less than its carrying value. Upon determination that such impairment has
occurred, rental properties are reduced to fair value. There were no
properties where an adjustment for impairment in value was made in 1998 or
1997. Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets, which range from 35 to 45 years for buildings and
5 to 25 years for other property.
Development projects are considered placed in service as certificates of
occupancy are issued and the units become ready for occupancy.
Real estate held for sale
Real estate classified as held for sale is stated at the lower of its
carrying amount or estimated fair value less disposal costs. Depreciation is
not recorded on assets classified as held for sale.
In the normal course of business, BRE will receive offers for sale of its
properties, either solicited or unsolicited. For those offers that are
accepted, the prospective buyer will usually require a due diligence period
before consummation of the transaction. It is not unusual for matters to arise
which result in the withdrawal or rejection of the offer during this process.
As a result, 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 December 31, 1998 or 1997.
Rental expenses and capitalized costs
For multifamily properties, costs of replacements, such as appliances,
carpets and drapes, are expensed. For all properties, improvements and
betterments that increase the value of the property or extend its useful life
are capitalized.
Cash and short-term investments
BRE considers highly liquid short-term investments with initial maturities
of three months or less to be cash equivalents. Funds held in escrow are
designated for the completion of tax-deferred exchanges and accordingly
46
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
are not considered cash equivalents by BRE. Financial instruments that
potentially subject BRE to concentrations of credit risk include cash, short-
term investments and funds held in escrow. BRE places its cash deposits and
temporary cash investments with creditworthy, high-quality financial
institutions. Cash and cash-equivalent balances are held with various
financial institutions and may at times exceed the applicable Federal Deposit
Insurance Corporation limit of $100,000.
Deferred costs
Included in Other assets are costs incurred in obtaining debt financing that
are deferred and amortized over the terms of the respective debt agreements.
Related amortization expense is included in interest expense (non-cash) in the
accompanying consolidated statements of income. Net deferred financing costs
included in Other assets in the accompanying balance sheets are $8,713,000 and
$4,572,000 as of December 31, 1998 and 1997, respectively, the increase
primarily due to costs related to the $130 million unsecured notes issued in
1998.
Income taxes
BRE has elected to be taxed as a Real Estate Investment Trust ("REIT") under
the Internal Revenue Code of 1986, as amended ("the Code"). As a result, BRE
will not be subject to federal taxation at the corporate level to the extent
it distributes, annually, at least 95% of its REIT taxable income, as defined
by the Code, to its shareholders and satisfies certain other requirements. In
addition, the states in which BRE owns and operates real estate properties
have provisions equivalent to the federal REIT provisions. Accordingly, no
provision has been made for federal or state income taxes in the accompanying
financial statements.
Net (loss) gain on sales of investments in rental properties
Sales are generally recorded at the close of escrow or after title has been
transferred to the buyer and after appropriate payments have been received and
other criteria met.
Fair value of financial instruments
The fair values of BRE's financial instruments (including such items in the
financial statement captions as cash and short-term investments, other assets,
mortgage loans, accounts payable and other liabilities and unsecured line of
credit) approximate their carrying or contract values based on their nature,
terms, and interest rates which approximate current market rates. The fair
value of mortgage loans payable and unsecured senior notes is estimated using
discounted cash flow analyses with an interest rate similar to that of current
market borrowing arrangements. The fair value of the Company's mortgage loans
payable and unsecured senior notes approximates their carrying value at
December 31, 1998.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to conform to the presentation of the current period financial
statements.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
47
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Descriptive Information About Reportable Segments
BRE adopted Financial Accounting Standards Board Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131") in the fourth quarter of 1998. Statement 131 requires
certain descriptive information to be provided about an enterprise's
reportable segments. BRE has determined that it has one operating and
reportable segment, multifamily communities, which comprised 98% of BRE's
assets and 97% of its revenues as of and for the year ended December 31, 1998.
All multifamily communities owned by the Company are located in the Western
United States, in three general markets which it defines as Coastal, Desert
and Mountain states.
BRE's business focus is the ownership and operation of multifamily
communities and it evaluates performance and allocates resources primarily
based on the net operating income ("NOI") of an individual multifamily
community. NOI is defined by the Company (and generally by the real estate
industry) as the excess of all revenue generated by the community (primarily
rental revenue) less direct operating expenses (primarily, but not limited to,
payroll, property taxes, insurance and maintenance expense). Accordingly, NOI
excludes depreciation, capitalized expenditures and interest expense. NOI from
multifamily communities totaled $134 million, $83 million and $50 million for
the years ended December 31, 1998, 1997, and 1996, respectively. All other
segment measurements are presently disclosed in the accompanying consolidated
balance sheets and Notes to Consolidated Financial Statements.
All revenues are from external customers and there are no revenues from
transactions with other segments, as the only activity outside operating
apartments is the ownership of one parcel of commercial land. There are no
tenants which contributed 10% or more of BRE's total revenues in 1998, 1997 or
1996. Interest income is not separately reported as it is immaterial. Interest
expense on debt is not allocated to individual properties, even if such debt
is secured. Further, minority interest in consolidated subsidiaries is not
allocated to the related properties. There is no provision for income tax as
the Company is organized as a REIT under the Code.
3. Investments in Rental Properties and Construction in Progress
Investments in rental properties consist of the following:
<TABLE>
<CAPTION>
Commercial
December 31, 1998 Multifamily and Retail Total
----------------- ----------- ---------- -----
<S> <C> <C> <C>
Land........................... $ 315,505,000 $ 1,200,000 $ 316,705,000
Improvements................... 1,294,956,000 -- 1,294,956,000
-------------- ----------- --------------
Subtotal..................... 1,610,461,000 1,200,000 1,611,661,000
Accumulated depreciation....... (75,838,000) -- (75,838,000)
-------------- ----------- --------------
Total........................ $1,534,623,000 $ 1,200,000 $1,535,823,000
============== =========== ==============
<CAPTION>
Commercial
December 31, 1997 Multifamily and Retail Total
----------------- ----------- ---------- -----
<S> <C> <C> <C>
Land........................... $ 245,892,000 $ 4,599,000 $ 250,491,000
Improvements................... 1,002,120,000 7,330,000 1,009,450,000
-------------- ----------- --------------
Subtotal..................... 1,248,012,000 11,929,000 1,259,941,000
Accumulated depreciation....... (49,483,000) (238,000) (49,721,000)
-------------- ----------- --------------
Total........................ $1,198,529,000 $11,691,000 $1,210,220,000
============== =========== ==============
</TABLE>
48
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of construction in progress follows:
<TABLE>
<S> <C>
Balance, December 31, 1997.................................. $ 84,202,000
Additions to projects under construction at December 31,
1997....................................................... 124,003,000
Capitalized interest........................................ 12,606,000
Projects started in 1998.................................... 54,213,000
Transfers of construction in progress to investments in
rental properties-multifamily.............................. (209,066,000)
-------------
Balance, December 31, 1998.................................. $ 65,958,000
=============
</TABLE>
The future minimum lease payments to be received from commercial and retail
lessees under operating leases at December 31, 1998 are immaterial.
As of December 31, 1998, the Company had commitments to acquire two
multifamily communities with a total estimated acquisition cost of
approximately $65,000,000. The Company expects the commitments will be funded
in calendar year 2000. There can be no assurance that these communities will
be acquired, or will be acquired for the estimated cost indicated.
During the years ended December 31, 1998 and 1997, approximately $7,000,000
and $18,000,000, respectively, of taxable gain (unaudited) was deferred under
Section 1031 of the Code for certain properties sold. BRE's carrying value of
its assets exceeded the tax basis by approximately $146,000,000 (unaudited) at
December 31, 1998.
4. Mortgage Loans Receivable
BRE has various mortgage loans and notes receivable to be paid in monthly
installments through 2008. The notes bear interest at rates ranging from 8.0%
to 10.5%. Amounts remaining due to BRE at December 31, 1998 and 1997 aggregate
$2,628,000 and $5,960,000, respectively. The allowance for possible investment
losses was $292,000 and $1,089,000 as of December 31, 1998 and 1997,
respectively. All loans are secured by real estate.
5. Line of Credit and Unsecured Senior Notes
As of December 31, 1998, BRE had an unsecured line of credit for up to
$400,000,000, expiring in August 2001. Borrowings totaled $264,000,000 at
December 31, 1998 and $186,000,000 at December 31, 1997. The interest rate is
variable and the average interest rate was approximately 6.3% and 6.6% for the
years ended December 31, 1998 and 1997, respectively. During 1998, the Company
replaced two lines of credit totaling $300,000,000 for the current
$400,000,000 line of credit.
As of December 31, 1998, there were $253,000,000 in unsecured senior notes
outstanding with an average fixed interest rate of 7.5% with interest only due
through 1999. Included in this effective interest rate is the amortization of
the costs related to the issuance of the $50 million unsecured notes due 2007
and the $130 million unsecured notes due 2013. These unsecured notes are to be
repaid through scheduled principal payments from 2000 through 2005, 2007 and
2013.
The line of credit and unsecured senior note agreements contain various
covenants which include, among other factors, tangible net worth and
requirements to maintain certain financial ratios. BRE was in compliance with
such financial covenants as of December 31, 1998.
49
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Mortgage Loans Payable
BRE has acquired certain investments in rental properties which are subject
to existing mortgage loans payable and has obtained mortgage loans on other
investments in rental properties. The following data pertain to mortgage loans
payable at December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Mortgage loans payable........................... $235,146,000 $232,367,000
Cost of investments in real estate securing
mortgage loans payable.......................... $401,850,000 $332,392,000
Annual principal and interest payments........... $ 20,400,000 $ 24,900,000
Remaining terms of mortgage loans payable........ 1-30 years 1-31 years
Interest rates on fixed rate mortgages........... 6.5%-9.3% 6.5%-9.3%
</TABLE>
Included in the $235,146,000 mortgage loans payable is $33,172,000 of tax-
exempt debt with a variable interest rate, which was 4.2% at December 31,
1998. The effective interest rate on this debt is 5.5% which includes
amortization of related fees and costs. Interest on all other mortgage loans
is fixed.
During 1998, the Company assumed $8,612,000 in mortgages in connection with
the acquisition of two communities.
Scheduled principal payments required on the line of credit, unsecured
senior notes payable and mortgage loans payable for the next five years and
thereafter are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 7,121,000
2000............................................................ 47,054,000
2001............................................................ 277,043,000
2002............................................................ 41,104,000
2003............................................................ 28,990,000
Thereafter...................................................... 350,834,000
------------
Total......................................................... $752,146,000
============
</TABLE>
Interest expense on mortgage loans and unsecured senior notes including
amortization of related costs aggregated $35,654,000, $17,034,000 and
$13,034,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Capitalized interest was $12,606,000, $1,178,000 and $269,000
for the years ended December 31, 1998, 1997 and 1996, respectively. Excluding
capitalized interest, interest expense exceeded cash paid for interest by
approximately $1,300,000 in 1998; this difference was immaterial in 1997 and
1996.
7. Stock Option Plans
BRE has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee and non-employee director stock
options because, as discussed below, the alternative fair value accounting
provided for under Financial Accounting Standards Board Statement No. 123,
"Accounting and Disclosure of Stock-Based Compensation" ("Statement 123"),
requires the use of option valuation models that were not developed for use in
valuing employee and non-employee director stock options. Under APB 25,
because the exercise price equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
50
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Plan
The 1984 and 1992 Stock Option Plans ("Plans") provide for the issuance of
Incentive Stock Options, Non-Qualified Stock Options and Restricted Shares.
The maximum number of shares that may be issued under the Plans is 2,350,000.
The option price may not be less than the fair market value of a share on the
date that the option is granted and the options generally vest over five
years. During 1998, certain key employees were allowed to exercise options
with a reload. During 1998, 186,374 such reload grants were made. Changes in
options outstanding during the years ended December 31, 1998, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
under option price under option price under option price
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. 864,200 $20.96 752,600 $16.90 668,200 $15.62
Granted................. 852,424 $26.72 397,500 $25.87 354,000 $18.13
Exercised............... (208,095) $19.04 (236,700) $16.89 (259,100) $15.27
Canceled................ (63,350) $24.29 (49,200) $21.14 (10,500) $17.18
--------- -------- --------
Balance at end of
period............... 1,445,179 $24.29 864,200 $20.96 752,600 $16.90
========= ======== ========
Exercisable............. 266,005 $18.79 319,600 $16.59 438,766 $16.04
Shares available for
granting future
options................ 2,601 755,936 105,436
Weighted average
estimated fair value of
options granted during
the year............... $ 3.14 $ 3.23 $ 3.66
</TABLE>
At December 31, 1998, the exercise price of shares under option ranged from
$12.97 to $28.06, with a weighted average exercise price of $24.29. The
exercise price of all options granted in the years ended December 31, 1998,
1997 and 1996 was equal to the market price on the date of grant. Expiration
dates range from 1999 through 2008 and the weighted average remaining
contractual life of these options is 8.10 years. Stock options were exercised
during 1998 on options originally granted from $12.97 to $26.88. At December
31, 1998, there were 6,800 restricted shares outstanding under the Plans.
In addition to the options granted under the Plans, an option for 100,000
shares (at $15.32 per share) is held by the President and Chief Executive
Officer. During 1998, 33,334 such options were exercised for $15.32 per share
and 66,666 options remain outstanding at December 31, 1998. This option was
registered with the Securities and Exchange Commission on a Form S-8 and is
not part of the Plans. This option had a fair value of $2.28 per share in
1995, the year of the grant. In conjunction with the 1996 merger with Real
Estate Investment Trust of California ("RCT"), options on 381,900 BRE shares
equivalent to options previously granted under the RCT plan were issued to
officers with exercise prices ranging from $11.41 to $14.70. During 1998,
233,981 of these options were exercised at prices ranging from $11.41 to
$14.70 and a total of 81,919 options remain outstanding at December 31, 1998.
Broad Based Plan
On November 16, 1998, the Company adopted a "Broad Based" stock option plan
as provided for under the rules of the New York Stock Exchange. This plan is
similar to the Plans described above and provides for the issuance of up to
750,000 shares. No options have been granted under this plan as of December
31, 1998.
51
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Direct stock purchase and Dividend Reinvestment Plan
In 1996, the Company instituted a direct stock purchase and dividend
reinvestment plan (the "DRIP") in which shareholders may purchase either newly
issued or previously issued shares. The total amount of shares authorized
under the DRIP is 1,500,000; from inception through December 31, 1998, 122,001
new shares have been issued.
Non-Employee Director Stock Option Plan
The Amended and Restated Non-Employee Director Stock Option Plan provides
for the issuance of 25,000 Non-Qualified Stock Options per year to each non-
employee member of the Board of Directors and an additional 25,000 shares to
the Chairman of the Board of Directors. Additionally, up to 8,000 stock
options may be granted to each non-employee director for committee membership
and or chairmanship. This plan has a reload provision which granted an
additional 100,305 options in 1998. The maximum number of shares that may be
issued under this plan is 1,550,000 which was increased by 750,000 in 1998. As
with the Plans, the option price may not be less than the fair market value of
a share on the date the option is granted. Changes in options outstanding for
the years ended December 31, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
under option price under option price under option price
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. 600,000 $21.92 420,000 $18.71 195,000 $16.48
Granted................. 381,305 $25.25 240,000 $26.82 225,000 20.63
Exercised............... (174,349) $17.61 (60,000) $18.97 -- --
Canceled................ (10,752) $27.80 -- -- -- --
-------- ------- -------
Balance at end of
period............... 796,204 $24.38 600,000 $21.92 420,000 $18.71
======== ======= =======
Exercisable............. 527,723 $24.10 445,828 $19.94 244,999 $17.18
Shares available for
granting future
options................ 602,672 140,000 380,000
Weighted average
estimated fair value of
options granted during
the year............... $ 2.84 $ 3.64 $ 4.17
</TABLE>
At December 31, 1998, the exercise prices of shares under option ranged
between $15.25 and $27.88, with expiration dates from 2004 to 2008. The
exercise price of all options granted in the years ended December 31, 1998,
1997 and 1996 was equal to the market price on the date of grant. The options
vest ratably over one year except for options granted pursuant to a reload
which vest 100% after 18 months from the date of the grant. The weighted
average remaining contractual life of these options is 8.5 years.
52
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net income and earnings per share required
by Statement 123 has been determined as if BRE had accounted for the employee
and non-employee director stock options granted only in the years ended
December 31, 1998, 1997 and 1996 under the fair value method of that
Statement. The impact on the years ended December 31, 1998, 1997 and 1996 of
options granted prior to 1996 has been excluded from this presentation. The
fair value for these options was estimated as of the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................ 5.50% 6.12% 7.12%
Dividend yield................................. 5.70% 5.70% 5.60%
Volatility..................................... .18 .18 .26
Weighted average option life................... 7 Years 7 years 9 years
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating
the fair market value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price
volatility. Because the above stock option plans have characteristics
significantly different from those of traded options, and because, in
management's opinion, changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not
necessarily provide a reliable single measure of the fair value of the above
stock option plans.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. BRE's pro forma
information, as if the Company had adopted Statement 123 as discussed above,
follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income................... $58,474,000 $74,721,000 $88,720,000
Pro forma earnings per share........... $ 1.36 $ 2.09 $ 2.91
Pro forma earnings per share assuming
dilution.............................. $ 1.36 $ 2.07 $ 2.88
</TABLE>
The effect of the application of Statement 123 is not necessarily
representative of the effect on net income for future years.
8. Shareholder Rights
On August 14, 1989, the Directors adopted a Shareholder Rights Plan and
declared a dividend distribution of one Right for each share of BRE's Common
Stock outstanding on September 7, 1989, representing approximately 15,800,000
shares. The Rights entitle holders to purchase, under certain conditions,
shares of Common Stock at a cash purchase price of $45.00 per share, subject
to adjustment. The Rights may also, under certain conditions, entitle the
holders to receive Common Stock, or other consideration, having a value equal
to two times the exercise price of each Right. The Rights are redeemable by
BRE at a price of $.005 per Right. If not so redeemed, the Rights expire on
September 7, 1999.
53
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share with respect to income from continuing operations:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Net income.......................... $ 60,644,000 $ 76,197,000 $ 89,839,000
Less adjustment for (loss) gain on
sales of investments in rental
properties available to common
shareholders....................... 1,859,000 (27,824,000) (52,825,000)
------------ ------------ ------------
Numerator for basic earnings per
share income from continuing
operations available to common
shareholders........................ 62,503,000 48,373,000 37,014,000
Effect of dilutive securities:
Minority interest in Operating
Company............................ 4,126,000 972,000 --
------------ ------------ ------------
Numerator for diluted earnings per
share............................... $ 66,629,000 $ 49,345,000 $ 37,014,000
============ ============ ============
Denominator:
Denominator for basic earnings per
share--weighted average
shares............................. 42,940,000 35,750,000 30,520,000
Effect of dilutive securities:
Employee stock options............. 330,000 570,000 270,000
Weighted average convertible
operating company units........... 2,840,000 290,000 --
------------ ------------ ------------
Dilutive potential common shares.... 3,170,000 860,000 270,000
------------ ------------ ------------
Denominator for diluted earnings per
share adjusted for weighted average
shares and assumed conversion...... 46,110,000 36,610,000 30,790,000
============ ============ ============
Basic earnings per share excluding
(loss) gains on sale............... $ 1.45 $ 1.35 $ 1.21
============ ============ ============
Diluted earnings per share excluding
(loss) gains on sale............... $ 1.45 $ 1.35 $ 1.20
============ ============ ============
</TABLE>
10. Retirement Plan
BRE has a defined contribution retirement plan covering all employees with
more than six months of continuous full-time employment. In addition to
employee elective deferrals, in 1998, BRE contributed up to 3% of the
employee's compensation up to $4,500 per employee. From March 16, 1996 to
December 31, 1997, BRE's contribution was limited to 1.5% of the participating
employee's salary. BRE contributed an amount equal to 10% of the compensation
expense of participating employees until March 15, 1996. The amounts
contributed by BRE were $197,000, $63,000 and $78,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
11. Related Party Transactions
Certain executives of BRE have purchased stock, the consideration for which
was interest-bearing recourse loans. The loans may be forgiven in whole or in
part upon the achievement of certain performance goals for BRE related to
growth in assets, funds from operations and stock price. A portion of the
loans expected to be forgiven are expensed currently as compensation. At
December 31, 1998, the carrying amount of the loans was $2,390,000. The
amounts of such loans expected to be forgiven and treated as compensation
expense were $370,000, $151,000 and $128,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
54
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Litigation
BRE is defending various claims and legal actions that arise from its normal
course of business, including certain environmental actions. While it is not
feasible to predict or determine the ultimate outcome of these matters, in the
opinion of management, none of these actions will have a material adverse
effect on BRE's results of operations or financial position.
In the third quarter of 1998, the Company recorded a provision for
litigation loss of $2,400,000 in connection with a jury award and related
legal expenses. The judgment is subject to appeal and stems from the
separation of a former senior executive from the Company in 1996.
13. Supplemental Financial Data
Quarterly financial information (unaudited) follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
-------------------------------------------------------
Quarter ended Quarter ended Quarter ended Quarter ended
(amounts in thousands, March 31 June 30 September 30 December 31
except per share data) ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $47,413 $49,231 $52,750 $53,851
Income before (loss)
gain on sales.......... $14,967 $15,787 $14,318 $17,431
Net income.............. $14,142 $15,741 $14,116 $16,645
Net income per share:
Income before (loss)
gain on sales........ $ 0.36 $ 0.37 $ 0.33 $ 0.39
Net income............ $ 0.34 $ 0.37 $ 0.32 $ 0.38
Net income per share--
assuming dilution:
Income before (loss)
gain on sales........ $ 0.36 $ 0.37 $ 0.33 $ 0.39
Net income............ $ 0.34 $ 0.37 $ 0.32 $ 0.38
<CAPTION>
Year ended December 31, 1997
-------------------------------------------------------
Quarter ended Quarter ended Quarter ended Quarter ended
(amounts in thousands, March 31 June 30 September 30 December 31
except per share data) ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $31,727 $32,206 $33,878 $39,950
Income before (loss)
gain on sales.......... $10,942 $11,676 $12,986 $12,769
Net income.............. $10,942 $37,279 $15,543 $12,433
Net income per share:
Income before (loss)
gain on sales........ $ 0.33 $ 0.34 $ 0.35 $ 0.33
Net income............ $ 0.33 $ 1.06 $ 0.42 $ 0.32
Net income per share--
assuming dilution:
Income before (loss)
gain on sales........ $ 0.33 $ 0.34 $ 0.35 $ 0.33
Net income............ $ 0.32 $ 1.06 $ 0.41 $ 0.32
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the federal income tax
components of the Company's dividends are as follows (unaudited):
<TABLE>
<CAPTION>
28% 20% Unrecaptured
Ordinary Capital Capital Section 1250 Return of
Income Gain Gain Gain Capital
-------- ------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
December 31, 1998............ 83% -- 4% 2% 11%
December 31, 1997............ 83% 13% 2% 2% 0%
December 31, 1996............ 92% 1% -- -- 7%
</TABLE>
55
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Subsequent Event (Unaudited)
On January 29, 1999, the Company issued 2,000,000 shares of 8 1/2% Series A
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") at a
price of $25.00 per share. The net proceeds from this equity issuance were
used to pay down outstanding balances on the Company's line of credit. On
March 4, 1999, pursuant to the underwriter's overallotment option, the Company
issued an additional 150,000 shares of the Series A Preferred Stock at a price
of $25.00 per share. The net proceeds were also used to pay down outstanding
balances on the Company's line of credit.
56
<PAGE>
BRE PROPERTIES, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TO COMPANY
--------------------------------
COSTS
CAPITALIZED
DATES SUBSEQUENT DEPRECIABLE
ACQUIRED/ BUILDINGS & TO LIVES-
NAME LOCATION CONSTRUCTED LAND IMPROVEMENTS ACQUISITION YEARS
- ---- ------------------- ------------ ------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
APARTMENTS
Sharon Green Menlo Park, CA 1971/1970 $ 1,250 $ 5,770 $ 624 45
Verandas Union City, CA 1993/1989 3,233 12,932 378 40
Foster's Landing Foster City, CA 1996/1987 11,742 47,846 22 40
Promontory Point San Ramon, CA 1996/1992 8,724 34,895 195 40
Redhawk Ranch Fremont, CA 1997/1995 11,747 47,082 90 40
Lakeshore Landing San Mateo, CA 1997/1988 8,548 34,228 125 40
Deer Valley * San Rafael, CA 1997/1996 6,042 24,169 39 40
Blue Rock I * Vallejo, CA 1997/1986 3,417 13,672 129 40
Blue Rock II * Vallejo, CA 1997/1988 3,419 13,680 105 40
------- -------- ------
SAN FRANCISCO
BAY AREA $58,122 $234,274 $1,707
======= ======== ======
Montanosa San Diego, CA 1992/1989-90 $ 6,005 $ 24,065 $ 590 40
Lakeview Village Spring Valley, CA 1996/1985 3,977 15,910 293 40
Terra Nova Villas Chula Vista, CA 1994/1985 2,925 11,699 266 40
Cimmaron San Diego, CA 1993/1985 1,899 7,517 216 40
Hacienda San Diego, CA 1993/1985 1,979 8,027 28 40
Westpark San Diego, CA 1993/1985 990 3,949 72 40
Canyon Villa Chula Vista, CA 1996/1981 3,064 12,258 494 40
Winchester San Diego, CA 1994/1987 1,482 5,928 44 40
Countryside
Village El Cajon, CA 1996/1989 1,002 4,007 90 40
Cambridge Park * San Diego, CA 1998/1998 7,627 30,521 -- 40
------- -------- ------
SAN DIEGO $30,950 $123,881 $2,093
======= ======== ======
Windrush Colton, CA 1996/1985 $ 3,747 $ 14,989 $ 144 40
Village Green La Habra, CA 1972/1971 372 2,763 430 45
Candlewood North Northridge, CA 1996/1964-95 2,110 8,477 99 40
The Summit Chino, CA 1996/1989 1,839 7,354 157 40
Sycamore Valley Fountain Valley, CA 1996/1969 4,617 18,691 1,007 40
Parkside Village
* Riverside, CA 1997/1987 3,417 13,674 52 40
Parkside Court * Santa Ana, CA 1997/1987 2,013 8,632 155 40
Parkside Terrace
* Santa Ana, CA 1997/1986 3,016 12,180 82 40
The Arbors at
Warner Center Woodland Hills, CA 1998/1994 4,718 19,375 -- 40
------- -------- ------
LOS
ANGELES/ORANGE
COUNTY $25,849 $106,135 $2,126
======= ======== ======
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1998
--------------------------------------------------
BUILDINGS & ACCUMULATED ENCUMB-
NAME LAND IMPROVEMENTS TOTAL DEPRECIATION RANCES
- ---- ------- ------------ -------- ------------ -------
<S> <C> <C> <C> <C> <C>
APARTMENTS
Sharon Green $ 1,250 $ 6,394 $ 7,644 $( 3,445) $18,234
Verandas 3,233 13,310 16,543 (1,840) 11,605
Foster's Landing 11,742 47,868 59,610 (2,667)
Promontory Point 8,724 35,090 43,814 (1,747)
Redhawk Ranch 11,747 47,172 58,919 (1,960)
Lakeshore Landing 8,548 34,353 42,901 (1,140)
Deer Valley * 6,042 24,208 30,250 (680)
Blue Rock I * 3,417 13,801 17,218 (384) 12,733
Blue Rock II * 3,419 13,785 17,204 (384) 11,200
------- ------------ -------- ------------ -------
SAN FRANCISCO
BAY AREA $58,122 $235,981 $294,103 $(14,247) $53,772
======= ============ ======== ============ =======
Montanosa $ 6,005 $ 24,655 $ 30,660 $ (3,633) $16,456
Lakeview Village 3,977 16,203 20,180 (1,114)
Terra Nova Villas 2,925 11,965 14,890 (1,398) 9,240
Cimmaron 1,899 7,733 9,632 (1,006) 12,451
Hacienda 1,979 8,055 10,034 (1,048) **
Westpark 990 4,022 5,012 (524) **
Canyon Villa 3,064 12,752 15,816 (866)
Winchester 1,482 5,972 7,454 (707)
Countryside
Village 1,002 4,097 5,099 (351)
Cambridge Park * 7,627 30,521 38,148 (127)
------- ------------ -------- ------------ -------
SAN DIEGO $30,950 $125,975 $156,925 $(10,774) $38,147
======= ============ ======== ============ =======
Windrush $ 3,747 $ 15,133 $ 18,880 $ (1,049)
Village Green 372 3,193 3,565 (1,858)
Candlewood North 2,110 8,576 10,686 (602)
The Summit 1,839 7,511 9,350 (515)
Sycamore Valley 4,617 19,698 24,315 (1,110)
Parkside Village
* 3,417 13,726 17,143 (384) $ 8,957
Parkside Court * 2,013 8,787 10,800 (241) 7,983
Parkside Terrace
* 3,016 12,262 15,278 (342) 9,495
The Arbors at
Warner Center 4,718 19,375 24,093 (236)
------- ------------ -------- ------------ -------
LOS
ANGELES/ORANGE
COUNTY $25,849 $108,261 $134,110 $ (6,337) $26,435
======= ============ ======== ============ =======
</TABLE>
57
<PAGE>
BRE PROPERTIES, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Company
--------------------------------
Costs
Capitalized
Subsequent Depreciable
Dates Acquired/ Buildings & to Lives-
Name Location Constructed Land Improvements Acquisition Years
- ---- ------------------ --------------- ------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
APARTMENTS
Selby Ranch Sacramento, CA 1986/1971-74 $ 2,660 $ 18,340 $ 778 40
Hazel Ranch Fair Oaks, CA 1996/1985 2,471 9,885 159 40
Canterbury Downs Roseville, CA 1996/1993 2,297 9,190 64 40
Shaliko Rocklin, CA 1996/1990 2,049 8,198 77 40
Rocklin Gold Rocklin, CA 1996/1990 1,558 6,232 45 40
Quail Chase Folsom, CA 1996/1990 1,303 5,211 115 40
Arbor Point Rancho Cordova, CA 1997/1988 1,814 7,256 141 40
Overlook at Blue
Ravine * Folsom, CA 1997/1991 6,050 24,203 287 40
------- -------- ------
Sacramento $20,202 $ 88,515 $1,666
======= ======== ======
Scottsdale Cove Scottsdale, AZ 1991-94/1992-94 $ 3,243 $ 14,468 $ 335 40
Fairway Cross-
ings Phoenix, AZ 1996/1985 3,657 14,629 82 40
Newport Landing Glendale, AZ 1995-96/1987-96 4,467 18,171 405 40
Posada Del Este Phoenix, AZ 1996/1981 1,670 6,679 159 40
Park Scottsdale Scottsdale, AZ 1996/1979 1,320 5,279 70 40
Los Senderos Phoenix, AZ 1996/1980 1,284 5,134 110 40
Shadow Bend Scottsdale, AZ 1996/1982 1,284 5,134 135 40
Arcadia Cove Phoenix, AZ 1996/1996 4,909 19,902 241 40
Pinnacle at S.
Mountain I * Phoenix, AZ 1997/1996 7,039 28,163 60 40
Pinnacle at S.
Mountain II * Phoenix, AZ 1997/1996 4,023 16,094 35 40
Pinnacle at
Union Hills * Phoenix, AZ 1997/1996 4,626 18,507 52 40
Pinnacle at
Towne Center * Phoenix, AZ 1998/1998 6,688 27,631 -- 40
Pinnacle Terrace
* Chandler, AZ 1998/1998 4,561 18,793 -- 40
------- -------- ------
Phoenix $48,771 $198,584 $1,684
======= ======== ======
Hacienda Del Rio Tucson, AZ 1994/1983 $ 1,859 $ 7,437 $ 210 40
Springhill Tucson, AZ 1994/1987 1,733 6,933 171 40
Fountain Plaza Tucson, AZ 1994/1975 907 3,628 170 40
<CAPTION>
Gross Amount at Which Carried at December 31, 1998
--------------------------------------------------
Buildings & Accumulated Encumb-
Name Land Improvements Total Depreciation rances
- ---- ------- ------------ -------- ------------ -------
<S> <C> <C> <C> <C> <C>
APARTMENTS
Selby Ranch $ 2,660 $ 19,118 $ 21,778 $(5,852) $12,012
Hazel Ranch 2,471 10,044 12,515 (691)
Canterbury Downs 2,297 9,245 11,551 (644)
Shaliko 2,049 8,275 10,324 (573)
Rocklin Gold 1,558 6,277 7,835 (435)
Quail Chase 1,303 5,326 6,629 (365)
Arbor Point 1,814 7,397 9,211 (181)
Overlook at Blue
Ravine * 6,050 24,490 30,540 (680)
------- ------------ -------- ------------ -------
Sacramento $20,202 $ 90,181 $110,383 $(9,421) $12,012
======= ============ ======== ============ =======
Scottsdale Cove $ 3,243 $ 14,803 $ 18,046 $(2,111)
Fairway Cross-
ings 3,657 14,711 18,368 (1,024)
Newport Landing 4,467 18,576 23,043 (1,148)
Posada Del Este 1,670 6,838 8,508 (468)
Park Scottsdale 1,320 5,348 6,668 (370)
Los Senderos 1,284 5,244 6,528 (359)
Shadow Bend 1,284 5,269 6,553 (360)
Arcadia Cove 4,909 20,143 25,052 (1,133)
Pinnacle at S.
Mountain I * 7,039 28,223 35,262 (791) $15,258
Pinnacle at S.
Mountain II * 4,023 16,129 20,152 (452) 10,593
Pinnacle at
Union Hills * 4,626 18,559 23,185 (520)
Pinnacle at
Towne Center * 6,688 27,631 34,319 (157) 19,000
Pinnacle Terrace
* 4,561 18,793 23,354 (102)
------- ------------ -------- ------------ -------
Phoenix $48,771 $200,267 $249,038 $(8,995) $44,851
======= ============ ======== ============ =======
Hacienda Del Rio $ 1,859 $ 7,647 $ 9,506 $ (780) $ 5,417
Springhill 1,733 7,104 8,837 (740) 5,133
Fountain Plaza 907 3,798 4,705 (382) 3,051
</TABLE>
58
<PAGE>
BRE PROPERTIES, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Company
--------------------------------
Costs
Capitalized
Dates Subsequent Depreciable
Acquired/ Buildings & to Lives-
Name Location Constructed Land Improvements Acquisition years
- ---- ------------------ ------------ ------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
APARTMENTS
Colonia Del Rio Tucson, AZ 1994/1985 $ 1,774 $ 7,094 $ 74 40
Camino Seco
Village Tucson, AZ 1994/1984 1,335 5,360 84 40
Casas Lindas Tucson, AZ 1994/1987 1,513 6,051 83 40
Oracle Village Tucson, AZ 1994/1983 1,209 4,837 105 40
Pinnacle Heights
* Tucson, AZ 1997/1995 4,625 18,504 71 40
Pinnacle Canyon
* Tucson, AZ 1997/1996 3,218 12,876 52 40
------- -------- ------
Tucson $18,173 $ 72,720 $1,020
======= ======== ======
Ballinger
Commons Seattle, WA 1996/1989 $ 5,824 $ 23,519 $ 261 40
Shadowbrook Redmond, WA 1987-98/1986 4,776 17,415 374 40
Parkwood Mill Creek, WA 1989/1989 3,947 15,811 210 40
Thrasher's Mill Bothell, WA 1996/1988 2,031 8,223 194 40
Citywalk Seattle, WA 1988/1988 1,123 4,276 75 40
Park at
Dashpoint Federal Way, WA 1997/1989 3,074 12,411 234 40
Montebello Kirkland, WA 1998/1998 6,680 27,274 -- 40
Brentwood Kent, WA 1998/1991 1,387 5,574 -- 40
Park Highland Bellevue, WA 1998/1993 5,602 22,483 -- 40
------- -------- ------
Seattle $34,444 $136,986 $1,348
======= ======== ======
Brookdale Glen Portland, OR 1993/1985 $ 2,797 $ 11,188 $ 543 40
Berkshire Court Wilsonville, OR 1996/1996 3,284 13,200 49 40
Carriage House Vancouver, WA 1998/1993 1,827 7,579 -- 40
------- -------- ------
Portland $ 7,908 $ 31,967 $ 592
======= ======== ======
Desert Lakes Las Vegas, NV 1996/1991 $ 2,779 $ 11,116 $ 422 40
Cypress Springs Las Vegas, NV 1996/1993 1,965 7,861 29 40
Tango Las Vegas, NV 1996/1990 1,729 6,916 45 40
Talavera Las Vegas, NV 1997/1996 5,237 20,996 28 40
------- -------- ------
Las Vegas $11,710 $ 46,889 $ 524
======= ======== ======
Pinnacle Fort
Union * Salt Lake City, UT 1997/1997 $ 3,008 $ 12,034 19 40
Pinnacle Reserve
* Salt Lake City, UT 1997/1997 8,698 34,781 796 40
Pinnacle
Lakeside * Salt Lake City, UT 1997/1985 3,217 12,876 460 40
<CAPTION>
Gross Amount at Which Carried at December 31, 1998
--------------------------------------------------
Buildings & Accumulated Encumb-
Name Land Improvements Total Depreciation rances
- ---- ------- ------------ -------- ------------ -------
<S> <C> <C> <C> <C> <C>
APARTMENTS
Colonia Del Rio $ 1,774 $ 7,168 $ 8,942 $ (757) $ 5,073
Camino Seco
Village 1,335 5,444 6,779 (459) 4,074
Casas Lindas 1,513 6,134 7,647 (669)
Oracle Village 1,209 4,942 6,151 (517) 4,031
Pinnacle Heights
* 4,625 18,575 23,200 (520)
Pinnacle Canyon
* 3,218 12,928 16,146 (362) 11,568
------- ------------ -------- ------------ -------
Tucson $18,173 $ 73,740 $ 91,913 $ (5,186) $38,347
======= ============ ======== ============ =======
Ballinger
Commons $ 5,824 $ 23,780 $ 29,604 $ (1,579)
Shadowbrook 4,776 17,789 22,565 (3,823) 3,332
Parkwood 3,947 16,021 19,968 (3,626)
Thrasher's Mill 2,031 8,417 10,448 (553)
Citywalk 1,123 4,351 5,474 (1,149)
Park at
Dashpoint 3,074 12,645 15,719 (438)
Montebello 6,680 27,274 33,954 (558)
Brentwood 1,387 5,574 6,961 (69)
Park Highland 5,602 22,483 28,085 (280)
------- ------------ -------- ------------ -------
Seattle $34,444 $138,334 $172,778 $(12,075) $ 3,332
======= ============ ======== ============ =======
Brookdale Glen $ 2,797 $ 11,731 $ 14,528 ($ 1,617) --
Berkshire Court 3,284 13,249 16,533 (797) --
Carriage House 1,827 7,579 9,406 (122) 5,178
------- ------------ -------- ------------ -------
Portland $ 7,908 $ 32,559 $ 40,467 $ (2,536) $ 5,178
======= ============ ======== ============ =======
Desert Lakes $ 2,779 $ 11,538 $ 14,317 $ (794)
Cypress Springs 1,965 7,890 9,855 (549)
Tango 1,729 6,961 8,690 (483) $ 4,005
Talavera 5,237 21,024 26,261 (960)
------- ------------ -------- ------------ -------
Las Vegas $11,710 $ 47,413 $ 59,123 $ (2,786) $ 4,005
======= ============ ======== ============ =======
Pinnacle Fort
Union * $ 3,008 $ 12,053 $ 15,061 ($ 338)
Pinnacle Reserve
* 8,698 35,577 43,275 (977)
Pinnacle
Lakeside * 3,217 13,336 16,553 (362) $ 9,067
</TABLE>
59
<PAGE>
BRE PROPERTIES, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TO COMPANY
---------------------------------
COSTS
CAPITALIZED
DATES SUBSEQUENT DEPRECIABLE
ACQUIRED/ BUILDINGS & TO LIVES-
NAME LOCATION CONSTRUCTED LAND IMPROVEMENTS ACQUISITION YEARS
- ---- --------------- ----------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
APARTMENTS
Pinnacle Canyon
View * Orem, UT 1998/1998 $ 5,049 $ 20,927 -- 40
Pinnacle
Mountain View * Clearfield, UT 1998/1998 5,030 20,684 -- 40
-------- ---------- -------
SALT LAKE CITY $ 25,002 $ 101,302 $ 1,275
======== ========== =======
Pinnacle at High
Desert * Albuquerque, NM 1997/1995 $ 8,851 $ 35,415 $ 75 40
Pinnacle View * Albuquerque, NM 1997/1985 2,287 9,157 108 40
Pinnacle Estates
* Albuquerque, NM 1998/1998 5,031 20,721 -- 40
Pinnacle at High
Resort * Rio Rancho, NM 1998/1998 5,063 20,615 -- 40
-------- ---------- -------
ALBUQUERQUE $ 21,232 $ 85,908 $ 183
======== ========== =======
The Landing Bear
Creek Lakewood, CO 1998/1996 $ 3,666 $ 14,777 -- 40
Pinnacle Hunters
Glen * Thornton, CO 1998/1998 4,387 17,908 -- 40
-------- ---------- -------
DENVER $ 8,053 $ 32,685 --
======== ========== =======
Delivered units
in communities
under
construction 5,089 20,892 -- 40
-------- ---------- -------
Subtotal
Apartments $315,505 $1,280,738 $14,218
======== ========== =======
OTHER
Buena Ventura
Medical 1996/1960 $ 1,200 -- --
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1998
------------------------------------------------------
BUILDINGS & ACCUMULATED ENCUMB-
NAME LAND IMPROVEMENTS TOTAL DEPRECIATION RANCES
- ---- -------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
APARTMENTS
Pinnacle Canyon
View * $ 5,049 $ 20,927 $ 25,976 $ (113)
Pinnacle
Mountain View * 5,030 20,684 25,714 (44)
-------- ------------ ---------- ------------ --------
SALT LAKE CITY $ 25,002 $ 102,577 $ 127,579 $ (1,834) $ 9,067
======== ============ ========== ============ ========
Pinnacle at High
Desert * $ 8,851 $ 35,490 $ 44,341 $ (995)
Pinnacle View * 2,287 9,265 11,552 (257)
Pinnacle Estates
* 5,031 20,721 25,752 --
Pinnacle at High
Resort * 5,063 20,615 25,678 --
-------- ------------ ---------- ------------ --------
ALBUQUERQUE $ 21,232 $ 86,091 $ 107,323 $ (1,252) --
======== ============ ========== ============ ========
The Landing Bear
Creek $ 3,666 $ 14,777 $ 18,443 $ (350)
Pinnacle Hunters
Glen * 4,387 17,908 22,295 --
-------- ------------ ---------- ------------ --------
DENVER $ 8,053 $ 32,685 $ 40,738 $ (350) --
======== ============ ========== ============ ========
Delivered units
in communities
under
construction 5,089 20,892 25,981 (45)
-------- ------------ ---------- ------------ --------
Subtotal
Apartments $315,505 $1,294,956 $1,610,461 $(75,838) $235,146
======== ============ ========== ============ ========
OTHER
Buena Ventura
Medical $ 1,200 -- $ 1,200 --
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Subtotal Other $ 1,200 -- --
-------- ---------- -------
Total $316,705 $1,280,738 $14,218
======== ========== =======
Subtotal Other $ 1,200 -- $ 1,200
-------- ------------ ---------- ------------ --------
Total $316,705 $1,294,956 $1,611,661 $(75,838) $235,146
======== ============ ========== ============ ========
</TABLE>
* Property held by a consolidated subsidiary of the Company.
** These properties are also collateral for the loan shown on the Cimmaron
property.
60
<PAGE>
BRE PROPERTIES, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
The activity in investments in rental properties and related depreciation
for the three year period ended December 31, 1998 is as follows:
INVESTMENTS IN RENTAL PROPERTIES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Balance at beginning of year................ $1,259,941 $ 813,768 $370,116
Investments acquired in the Transaction and
the Merger (excluding partnership
investments)............................... -- 382,766 273,055
Investments purchased....................... 165,162 152,700 230,967
Transfers from (to) construction in progress
and miscellaneous capitalization........... 209,066 (764) 1,550
Investments sold............................ (32,867) (95,095) (63,425)
Capital expenditures........................ 3,694 1,988 1,505
Rehabilitation expenditures................. 6,665 4,578 --
---------- ---------- --------
Balance at end of year...................... $1,611,661 $1,259,941 $813,768
========== ========== ========
</TABLE>
ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year.................... $ 49,721 $ 49,690 $ 48,036
Depreciation expense............................ 27,763 17,938 13,283
Transfers of miscellaneous capitalization and
other.......................................... (492) (317) --
Accumulated depreciation on investments sold.... (1,154) (17,590) (11,629)
-------- -------- --------
Balance at end of year.......................... $ 75,838 $ 49,721 $ 49,690
======== ======== ========
</TABLE>
61
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Identity of Exhibit
- ----------------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.0 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit
3.1 of the Company's Current Report on Form 8-K, filed on April 1, 1996.)............
3.1 Articles of Amendment (Incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-3 (No. 333-24915) filed on April 28, 1997, as
amended.)............................................................................
3.2 By-Laws..............................................................................
4.0 Indenture dated as of June 23, 1997 between the Company and Chase Trust Company of
California relating to the $50 million principal amount of the Company's 7.2% Notes
due 2007. (Incorporated by reference to Exhibit 4.1 of the Company's Current Report
on Form 8-K, filed on June 23, 1997.)................................................
4.1 First Supplemental Indenture dated as of April 23, 1998 between the Company and Chase
Manhattan Bank and Trust Company, National Association, as successor trustee.........
(Previously filed on May 14, 1998 in the Exhibits to Form 10-Q and incorporated by
reference herein)....................................................................
4.2 Form of Note due 2007 (Incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K, dated June 23, 1997.)....................................
4.3 Form of Note due 2013 (Incorporated by reference to Exhibit 4.3 of the Company's
Current Report on Form 8-K, dated February 19, 1998.)................................
4.4 Rights Agreement between the Company and Bank of America, N.T. & S.A., dated August
14, 1989 (Incorporated by reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-3 (No. 333-24915), filed on April 10, 1997, as amended.).........
4.5 Supplement to Rights Agreement between the Company and Chemical Trust Company of
California dated July 30, 1992 (Incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-3 (No. 333-24915), filed on April 10,
1997, as amended.)...................................................................
10.1 1984 Stock Option Plan, as amended to date (Previously filed on October 19, 1992 in
the Exhibits to Form 10-K and incorporated by reference herein.).....................
10.2 1992 Employee Stock Option Plan, as amended and restated to date (Previously filed on
October 19, 1992 in the Exhibits to Form 10-K and incorporated by reference herein.).
10.3 1992 Payroll Investment Plan (Previously filed on October 19, 1992 in the Exhibits to
Form 10-K and incorporated by reference herein.).....................................
10.4 Form of Indemnification Agreement (Previously filed on September 25, 1986, as
amended, in Exhibits to Form S-4 (File No. 33-9014) and incorporated by reference
herein.).............................................................................
10.5 Employment agreement with Frank C. McDowell (Previously filed on October 23, 1995 in
the Exhibits to Form 10-K and incorporated by reference herein.).....................
10.6 BRE Properties, Inc. Retirement Plan (Previously filed on October 24, 1988 in the
Exhibits to Form 10- K and incorporated by reference herein.)........................
10.7 BRE Properties, Inc. Supplemental ERISA Retirement Plan (Previously filed on October
23, 1995 in the Exhibits to Form 10-K and incorporated by reference herein.).........
10.8 Sublease with Wells Fargo Bank on 10,142 square feet at Suite 2500, One Montgomery
Street, San Francisco, California (Previously filed on October 24, 1988 in the
Exhibits to Form 10-K and incorporated by reference herein.).........................
10.9 Form of deferred compensation agreement with Eugene P. Carver (Previously filed on
October 13, 1994 in the Exhibits to Form 10-K and incorporated by reference herein.).
10.10 Treasury Lock Swap Transaction (Previously filed on November 13, 1996 in the Exhibits
to Form 10-Q and incorporated by reference herein.)..................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.11 Employment agreement with Jay W. Pauly (Previously filed on December 22, 1995 in the
Exhibits to Form S-4 (File No. 33-65365) and incorporated by reference herein.)......
10.12 Employment agreement with LeRoy E. Carlson (Previously filed on December 22, 1995 in
the Exhibits to Form S-4 (File No. 33- 65365) and incorporated by reference herein.).
10.13 Employment agreement with John H. Nunn (Previously filed on December 22, 1995 in the
Exhibits to Form S-4 (File No. 33-65365) and incorporated by reference herein.)......
10.14 Dividend Reinvestment Plan (Previously filed on August 9, 1996 in the Exhibits to
Form S-3 (File No. 333-09945) and incorporated by reference herein.).................
10.15 1991 Stock Option Plan for Real Estate Investment Trust of California (Previously
filed in the Exhibits to Form 10-K, as amended by the Report on Form 10-K/A filed on
April 25, 1997.).....................................................................
10.16 Loan Agreement between The Prudential Insurance Company of America, as Lender and
Real Estate Investment Trust of California, as Borrower, dated as of January 31, 1994
(Previously filed in the Exhibits to Form 10-K, as amended by the Report on Form
10-K/A filed on April 25, 1997.).....................................................
10.17 First Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and Real Estate Investment Trust of California, dated July 7, 1995
(Previously filed in the Exhibits to Form 10-K, as amended by the Report on Form
10-K/A filed on April 25, 1997.).....................................................
10.18 Second Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated April 30, 1996 (Previously filed on Form 10-K, as
amended by the Report on Form 10-K/A filed on April 25, 1997.).......................
10.19 Third Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated November 20, 1996 (Previously filed in the Exhibits to
Form 10-K, as amended by the Report on Form 10-K/A filed on April 25, 1997.).........
10.20 Loan Agreement between The Prudential Insurance Company of America, as Lender and
Real Estate Investment Trust of California, as Borrower, dated as of July 7, 1995
(Previously filed in the Exhibits to Form 10-K, as amended by the Report on Form
10-K/A filed on April 25, 1997.).....................................................
10.21 First Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated July 7, 1995 (Previously filed in the Exhibits to Form
10-K, as amended by the Report on Form 10-K/A filed on April 25, 1997.)..............
10.22 Second Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated April 30, 1996 (Previously filed in the Exhibits to
Form 10-K, as amended by the Report on Form 10-K/A filed on April 25, 1997)..........
10.23 Fourth Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated February 25, 1997 (Previously filed in the Exhibits to
Form 10-Q on August 12, 1997.).......................................................
10.24 Third Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated February 25, 1997 (Previously filed in the Exhibits to
Form 10-Q on August 12, 1997.).......................................................
10.25 Fifth Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated June 30, 1997 (Previously filed in the Exhibits to
Form 10-Q on August 12, 1997.).......................................................
10.26 Fourth Amendment to Loan Agreement by and between The Prudential Insurance Company of
America and the Company, dated June 30, 1997 (Previously filed in the Exhibits to
Form 10-Q on August 12, 1997.).......................................................
10.27 Amended and Restated 1992 Employee Stock Plan (Previously filed in the Exhibits to
Form 10-Q on November 14, 1997.).....................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.28 Contribution Agreement dated as of September 29, 1997 between the Company, BRE
Property Investors LLC and the TCR Signatories (Previously filed in the Exhibits to
Form 10-Q on November 14, 1997.).....................................................
10.29 The Registration Rights Agreement among the Company, BRE Property Investors LLC and
the other signatories thereto dated November 18, 1997 (Incorporated by reference to
Exhibit 4.6 for the Company's Registration Statement on Form S-3 (No. 333-41433)
which was filed on December 3, 1997, as amended.)....................................
10.30 Amended and Restated Limited Liability Company Agreement of BRE Property Investors
LLC, dated as November 18, 1997, by and among BRE Properties, Inc., and the other
parties named therein (Previously filed in the Exhibits to the Company's Current
Report on Form 8-K on December 18, 1997.)............................................
10.31 Limited Liability Company Agreement of Blue Ravine Investors, LLC, dated as of
November 18, 1997, by and between BRE Properties, Inc., and Blue Ravine Realty
Partners (Previously filed in the Exhibits to Form 10-Q on December 18, 1997)........
10.32 Unsecured Line of Credit Loan Agreement, dated as of November 17, 1997, by and
between the Company, and Bank of America National Trust and Savings Association
(Previously filed in the Exhibits to the Company's Current Report on Form 8-K on
December 18, 1997.)..................................................................
10.33 The Registration Rights Agreement between the Company and Legg Mason Unit Investment
Trust Series 7, Legg Mason REIT Trust, December 1997 Series, dated as of December 23,
1997 (Incorporated by reference to Exhibit 4.6 of the Company's Registration
Statement on Form S-3 (No. 333-44997) which was filed on January 27, 1998, as
amended).............................................................................
10.34 Amended and Restated Credit agreement with Sanwa Bank, dated December 31, 1997
(Previously filed on March 26, 1998 in the Exhibits to Form 10-K and incorporated by
reference herein)....................................................................
10.35 Treasury rate guarantee hedge with Morgan Stanley, dated November 21, 1997
(Previously filed on March 26, 1998 in the Exhibits to Form 10-K and incorporated by
reference herein)....................................................................
10.36 Office Lease between OTR, an Ohio general partnership and the Company dated September
26, 1997 (Previously filed on March 26, 1998 in the Exhibits to Form 10-K and
incorporated by reference herein)....................................................
10.37 Loan Modification Agreement to syndicate loan to the Company made by various
financial institutions with Bank of America NT&SA as agent. (Previously filed on
March 26, 1998 in the Exhibits to Form 10-K and incorporated by reference herein)...
10.38 Employment agreement with Bruce C. Ward (Previously filed on March 26, 1998 in the
Exhibits to Form 10-K and incorporated by reference herein)..........................
10.39 Amended and Restated Non-Employee Director Stock Option Plan as amended March 2,
1998. (Previously filed on May 14, 1998 in the Exhibits to Form 10-K and incorporated
by reference herein).................................................................
10.40 First Amendment to Credit Agreement with Sanwa Bank dated June 3, 1998 (Previously
filed on August 14, 1998 in the Exhibits to Form 10-Q and incorporated by reference
herein)..............................................................................
10.41 Form of Indemnification Agreement. (Previously filed on August 14, 1998 in the
Exhibits to Form 10-Q and incorporated by reference herein)..........................
10.42 Amended and Restated Line of Credit with Bank of America dated October 21, 1998
(Previously filed on November 13, 1998 in the Exhibits to Form 10-Q and incorporated
by reference herein).................................................................
12 Statements re: computation of ratios................................................
21 Subsidiaries of the Registrant.......................................................
23.1 Consent of Ernst & Young LLP.........................................................
27 Financial Data Schedule..............................................................
</TABLE>
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
BRE PROPERTIES, INC.
ARTICLE I
DEFINITIONS
-----------
Section 1.1 Definitions. For purposes of these Bylaws, the following
-----------
terms when capitalized shall have the meanings set forth below:
(a) Advisor. "Advisor" shall mean any Person appointed,
-------
employed or contracted with by the Board of Directors under the provisions of
Article VII hereof.
(b) Affiliate. "Affiliate" shall mean, as to any Person, any
---------
other Person who owns beneficially, directly or indirectly, one percent (1%) or
more of the outstanding capital stock, shares or equity interests of such Person
or of any other Person which controls, is controlled by or is under common
control with, such Person or is an officer, retired officer, director, employee,
partner or trustee of such Person or of any other Person which controls, is
controlled by or is under common control with, such Person.
(c) Articles of Incorporation. "Articles of Incorporation"
-------------------------
shall mean the Articles of Incorporation of the Corporation, as from time to
time amended.
(d) Person. "Person" shall mean and include individuals,
------
corporations, limited partnerships, general partnerships, joint stock companies
or associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other entities and governments and
agencies and political subdivisions thereof.
(e) REIT. "REIT"shall mean a real estate investment trust as
----
described in the REIT Provisions of the Internal Revenue Code.
(f) REIT Provisions of the Internal Revenue Code. "REIT
--------------------------------------------
Provisions of the Internal Revenue Code" shall mean Part II, Subchapter M of
Chapter 1, of the Internal Revenue Code of 1986, as now enacted or hereafter
amended, or successor statutes, and regulations and rulings promulgated
thereunder.
ARTICLE II
OFFICES
-------
Section 2.1 Principal Office in Maryland. The principal office of BRE
----------------------------
Properties, Inc. (hereinafter called the "Corporation") in the State of Maryland
shall be at 711 Mayton Court in the city of Belair, and the name and address of
the registered agent at that address shall be LEXIS
1
<PAGE>
Document Services, Inc., 711 Mayton Court, Belair, Maryland, 21014. The Board of
Directors may, from time to time, designate a new agent and/or change the
location of the registered office to any place within the State of Maryland.
Section 2.2 Principal Office. The principal office of the Corporation
----------------
shall be in the City and County of San Francisco, California. The Board of
Directors may, from time to time, change such location and maintain other
offices or places of business.
ARTICLE III
MEETINGS OF STOCKHOLDERS
------------------------
Section 3.1 Place of Meetings. Meetings of the stockholders of the
-----------------
Corporation shall be held at a location selected by the Board of Directors in
the city where the principal office of the Corporation is located or at such
other location as is designated by the Board of Directors, except that any
meeting called by or at the request of holders of any class or series of
Preferred Stock of the Corporation pursuant to rights granted to such holders by
the Articles of Incorporation (which term, as used in these Bylaws, includes,
without limitation, the articles supplementary establishing the preferences,
conversion and other rights, powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of any class or series of
Preferred Stock) shall be held at such location as shall be specified in or
pursuant to the Articles of Incorporation with respect to such class or series
of Preferred Stock.
Section 3.2 Annual Meetings. The annual meeting of the stockholders for
---------------
the election of directors and for the transaction of any other proper business
shall be held after delivery of the annual report required by Section 7.4 and
within six (6) months after the end of the last full fiscal or calendar year
consisting of twelve months or the equivalent number of accounting periods, on
such date and at such time as are set by the Board of Directors and stated in
the notice of the meeting. Such annual report shall be submitted at the meeting
and placed on file at the principal office no later than twenty (20) days
following the meeting.
Section 3.3 Special Meetings. The Chairman, President or Board of
----------------
Directors may call special meetings of the stockholders. Special meetings of
stockholders shall also be called by the Secretary of the Corporation upon the
written request of the holders of shares entitled to cast not less than 25% of
all the votes entitled to be cast at such meeting, and may also be called by the
holders of any class or series of Preferred Stock on such terms and conditions
as may be set forth in the Articles of Incorporation. Such request shall state
the purpose of such meeting and the matters proposed to be acted on at such
meeting. Except as otherwise provided in the Articles of Incorporation with
respect to any class or series of Preferred Stock, the Secretary shall inform
such stockholders of the reasonably estimated cost of preparing and mailing
notice of the meeting and, upon payment to the Corporation by such stockholders
of such costs, the Secretary shall give notice to each stockholder entitled to
notice of the meeting. Unless requested by the stockholders entitled to cast a
majority of all the votes entitled to be cast at such meeting, a special meeting
need not be called to consider any matter which is substantially the same as a
matter voted on at any special meeting of the stockholders held during the
preceding twelve months, except that the provisions of this sentence
2
<PAGE>
will not apply to any meeting of stockholders called by or on behalf of the
holders of any class or series of Preferred Stock pursuant to rights set forth
in the Articles of Incorporation.
Section 3.4 Notice. Not less than ten (10) nor more than ninety (90)
------
days before each meeting of the stockholders, the secretary shall give to each
stockholder entitled to vote at such meeting and to each stockholder not
entitled to vote who is entitled to notice of the meeting, written or printed
notice stating the time and place of the meeting and, in the case of a special
meeting or as otherwise may be required by any statute, the purpose for which
the meeting is called, either by mail or by presenting it to such stockholder
personally or by leaving it at his residence or usual place of business. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the stockholder at his post office address as it
appears on the records of the Corporation, with postage thereon prepaid. The
notice shall also designate the place where the stockholders list required by
Section 3.13 is available for examination, unless the list is kept at the place
where the meeting is to be held. The notice shall be given in the manner
prescribed by Section 3.6.
Section 3.5 Record Date. For purposes of determining the stockholders
-----------
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to receive payment of any dividend or other distribution
or allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may (i) fix, in advance, a record date which shall not be
more than ninety (90) days prior to the date of any such meeting or the taking
of such other actions; or (ii) direct that the stock transfer books be closed
for a period not to exceed twenty (20) days. A record date may not precede the
date on which the record date is fixed. In the case of a meeting of
stockholders, the record date or the closing of the transfer books shall be at
least ten (10) days before the meeting. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
If the Board of Directors does not so fix a record date or close the stock
transfer books; then:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be the later of (i) at the close
of business on the day on which notice is mailed or (ii) at the close of
business on the thirtieth (30) day next preceding the day on which the meeting
is held.
(b) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto provided that the payment or allotment
may not be made more than sixty (60) days after the date on which such
resolution was adopted.
Section 3.6 Notice to Stockholders. Any notice of meeting or other
----------------------
notice, communication or report to any stockholder shall be deemed duly
delivered to such stockholder when such notice, communication or report is
delivered in person to such stockholder, left at his residence or usual place of
business, or deposited, with postage thereon prepaid, in the United States mail,
addressed to such stockholder at such stockholder's address as it appears on the
share register or theretofore given
3
<PAGE>
by the stockholder to the Corporation for purpose of notice.
Section 3.7 Waiver of Notice. The transactions of any meeting of the
----------------
stockholders, either annual, special or adjourned, however called or noticed,
shall be as valid as though conducted at a meeting duly held after regular call
and notice if a quorum is present and if, either before or after the meeting,
each stockholder entitled to vote and not present in person or by proxy signs a
written waiver of notice or a consent to the holding of such meeting or an
approval of the minutes thereof. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends the meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of business because the meeting is not lawfully called or convened.
Section 3.8 Action Without Meeting. Any action which is required or
----------------------
permitted to be taken at any annual or special meeting of shareholders may be
taken without a meeting and without prior notice, if (i) an unanimous written
consent, setting forth the action so taken, is signed by each stockholder
entitled to vote on the matter and (ii) a written waiver of any right to dissent
is signed by each stockholder entitled to notice of the meeting but not entitled
to vote at it. All such consents and waivers shall be filed with the Secretary
of the Corporation and shall be maintained with the records of the stockholders
meetings.
Section 3.9 Quorum. The presence in person or by proxy of the holders
------
of a majority of the votes entitled to be cast by the shares entitled to vote at
any meeting of stockholders shall constitute a quorum for the transaction of
business. The stockholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. If, however,
such quorum shall not be present at any meeting of the stockholders, the
stockholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from day to day or from time to time
to a date not more than 120 days after the original record date.
Section 3.10 Voting. A stockholder may vote in person or by proxy.
------
Except as otherwise provided by law, the Articles of Incorporation, or these
Bylaws, the affirmative vote of a majority of the votes entitled to be cast by
the shares entitled to vote on the subject matter and present in person or
represented by proxy at a meeting at which a quorum is present shall be the act
of the stockholders.
Section 3.11 Proxies. The appointment of a proxy or proxies shall be
-------
made by an instrument in writing executed by the stockholder or his duly
authorized agent and filed with the Secretary of the Corporation. The Board of
Directors may solicit such proxies from all of the stockholders or any of them
with respect to any matter requiring or permitting the stockholders' vote or
consent. No proxy shall be valid after the expiration of eleven (11) months
from the date of its execution unless otherwise expressly provided in the proxy.
At a meeting of the stockholders, all questions concerning the qualifications of
voters, the validity of proxies and the acceptance or rejection of votes shall
be decided by the Secretary of the Corporation unless inspectors of election are
appointed pursuant to Section 3.14, in which event such inspectors shall pass
upon all questions and shall have all other duties specified therein.
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Section 3.12 Adjourned Meetings. Any meeting of the stockholders,
------------------
whether or not a quorum is present, may be adjourned from day to day or from
time to time by the vote of the holders of a majority of the votes entitled to
be cast by the shares represented at the meeting. Unless the Board of Directors,
after the adjournment, shall fix a new record date for an adjourned meeting or
unless the adjournment is for more than 120 days, notice of an adjourned meeting
need not be given if the place, date and time to which the meeting shall be
adjourned is announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting as originally notified.
Section 3.13 List of Stockholders. The Secretary or other officer who
--------------------
has charge of the share register of the Corporation shall prepare and make
available, at least ten (10) days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 3.14 Inspectors of Election. Before any meeting of
----------------------
stockholders, the Board of Directors may appoint inspectors of election during
the meeting or any adjournment thereof. If no inspectors of election are
appointed, the Chairman of the meeting may, and on the request of any
stockholder or his proxy shall, appoint inspectors of election at the meeting.
The number of inspectors shall either be one (1) or three (3). If inspectors
are appointed at a meeting on the request of one or more stockholders or
proxies, the holders of a majority of the votes entitled to be cast by the
shares or their proxies present at the meeting shall determine whether one (1)
or three (3) inspectors are to be appointed. If any person appointed as
inspector fails to appear or fails or refuses to act, the vacancy may be filled
by appointment by the Board of Directors before the meeting, or by the Chairman
at the meeting.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine the election results; and
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(f) Do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
If there are three (3) inspectors of election, the decision, act or
certificate of a majority of the inspectors shall be effective in all respects
as the decision, act or certificate of all. On request of the Chairman of the
meeting or of a stockholder or his proxy, the inspectors shall make a report in
writing of any challenge or question or matter determined by them and execute a
certificate of any facts found by them.
Section 3.15 Voter's Rights of Preferred Stock. Anything in these
---------------------------------
Bylaws to the contrary notwithstanding, to the extent that any terms or
provisions relating to any voting rights granted to any class or series of
Preferred Stock pursuant to the Articles of Incorporation shall conflict with
any terms or provisions of these Bylaws, then, to the fullest extent permitted
by law, the terms and provisions of such class or series of Preferred Stock
shall govern.
ARTICLE IV
BOARD OF DIRECTORS
------------------
Section 4.1 Powers. Except as otherwise provided by law, the Articles of
------
Incorporation or these Bylaws, the business and affairs of the Corporation shall
be managed and all corporate powers shall be exercised by or under the direction
of the Board of Directors.
Section 4.2 Number of Directors. The Board of Directors shall consist of
-------------------
not less than three (3) and not more than fifteen (15) members. Within these
limits, the authorized number of directors may be reduced or increased from time
to time by resolution of the Board of Directors or by amendment of this Section
by the stockholders or, in the case of any directors elected or to be elected by
any class or series of Preferred Stock pursuant to rights set forth in the
Articles of Incorporation, as provided in the Articles of Incorporation with
respect to such class or series of Preferred Stock, but no such decrease may
shorten the term of an incumbent director. Until such action is taken, the
authorized number of directors shall be six (6).
Section 4.3 Qualification of Directors. A director shall be an
--------------------------
individual at least twenty-one (21) years of age who is not under legal
disability. No person shall be eligible for election, re-election or
appointment as a director after having obtained the age of seventy (70) years.
Directors need not be stockholders.
Section 4.4 Election and Term of Office of Directors. To the extent
----------------------------------------
provided in the Articles of Incorporation and except as may otherwise be
provided in the Articles of Incorporation with respect to directors elected by
any class or series of Preferred Stock, directors shall be elected by the
stockholders at each annual meeting following the end of a full calendar or
fiscal year consisting of twelve months or the equivalent number of accounting
periods. Subject to Sections 4.5 and 4.6, each director, including a director
elected or approved to fill a vacancy, shall hold office until a successor has
been elected and qualified. If directors are not elected at an annual meeting
or
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if such meeting is not held, the directors may be elected at a special
meeting. Directors may be reelected.
Section 4.5 Removal. A director may be removed as provided in the
-------
Articles of Incorporation.
Section 4.6 Resignation. Any director may resign by giving written
-----------
notice to the Board of Directors. A notice of resignation shall be effective on
the date given unless a later time is specified in the notice, in which case
such resignation shall be effective at the time specified. Unless such
resignation specifies otherwise, its acceptance by the Corporation shall not be
necessary to make it effective. A director shall be deemed to have resigned if
(i) such director is adjudicated insane or incompetent, (ii) an order for relief
or similar provision for the benefit of creditors is entered against such
director under any federal or state bankruptcy or insolvency laws, or (iii) a
receiver, guardian, or conservator is appointed for such director or such
director's affairs. The effective date of the resignation of a director deemed
to have resigned pursuant to this Section shall be as of the date of such
adjudication, order, or appointment.
Section 4.7 Vacancies. Any vacancy in the Board of Directors may be
---------
filled as provided in the Articles of Incorporation.
Section 4.8 Place of Meetings. Meetings of the Board of Directors shall
-----------------
be held at the principal office of the Corporation or at such place as is
designated by the Board of Directors.
Whenever a place other than the principal office is fixed as the place at which
meetings are to be held, written notice thereof shall be sent not later than the
third business day following such designation to all directors who did not
participate in the decision so designating such place.
Section 4.9 Organization Meetings. Immediately following each annual
---------------------
meeting of stockholders, a regular meeting of the Board of Directors shall be
held for the purpose of organizing, electing any officers, and transacting other
business. Notice of such meetings need not be given.
Section 4.10 Regular Meetings. Regular meetings of the Board of
----------------
Directors shall be held on such dates and at such places and times as the Board
of Directors determines. Notice of such regular meetings need not be given. If
any day designated for a meeting is a legal holiday at the place where the
meeting is to be held, then the meeting shall be held at the same hour and place
on the next succeeding business day that is not a legal holiday.
Section 4.11 Special Meetings. Special meetings of the Board of
----------------
Directors for any purpose or purposes may be called at any time by the Chairman
or the President (if the President is a member of the Board of Directors) and
the Chairman shall call a special meeting at any time upon the written request
of two (2) directors.
Section 4.12 Notice. Notice of any special meeting of the Board of
------
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address. Notice by personal delivery, by telephone or a facsimile transmission
shall be given at least two (2) days prior to the meeting. Notice by mail shall
be given at least five (5) days prior to the meeting and shall be deemed to be
given when deposited
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prepaid. Telephone notice shall be deemed to be given when the director is
personally given such notice in a telephone call to which he is a party.
Facsimile transmission notice shall be deemed to be given upon completion of the
transmission of the message to the number given to the Corporation by the
director and receipt of a completed answer-back indicating receipt. Neither the
business to be transacted nor the purpose of, any annual, regular or special
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 4.13 Quorum. At all meetings of the Board of Directors, a
------
majority of the authorized number of directors shall constitute a quorum for the
transaction of business. Except as otherwise provided by law, the Articles of
Incorporation or these Bylaws, the vote of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors. Common or interested directors may be counted in determining the
existence of a quorum. The directors at a duly called or held meeting at which
a quorum is present may continue to do business until adjournment
notwithstanding the withdrawal of enough directors to leave less than a quorum.
Section 4.14 Adjourned Meeting. Any meetings of the Board of Directors,
-----------------
whether or not a quorum is present, may be adjourned from day to day and from
time to time by the vote of a majority of the directors present, without notice
of the place, date and time of the adjourned meeting other than announcement
thereof at the meeting.
Section 4.15 Meetings Held Other Than in Person. Members of the Board of
----------------------------------
Directors or any committee may participate in a meeting of the Board of
Directors or committee by conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation shall constitute presence in person at the
meeting.
Section 4.16 Waiver of Notice. The transactions of a special meeting of
----------------
the Board of Directors, however called and noticed or wherever held, shall be as
valid as though taken at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to the holding
of the meeting or an approval of the minutes thereof. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except when the director attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
Section 4.17 Action Without Meeting. Any action required or permitted to
----------------------
be taken at a meeting of the Board of Directors, or any committee thereof, may
be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent in writing to such action. Such action
by written consent shall have the same force and effect as a unanimous vote of
the Board of Directors. Such written consent or consents shall be filed with
the minutes of the proceedings of the Board of Directors.
Section 4.18 Compensation of Directors. The Directors shall be entitled
-------------------------
to receive such reasonable compensation for their services as directors and/or
as members of committees of the
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Board of Directors as the Board of Directors determines from time to time. The
directors may be paid their expenses, if any, for attendance at each meeting of
the Board of Directors or a committee of directors, and each director may be
paid a fixed sum for attendance at each meeting and/or a fixed salary, as
determined from time to time by the Board of Directors. The directors, either
directly or indirectly, shall also be entitled to receive remuneration for
services rendered to the Corporation in any other capacity. Such services may
include, without limitation, services as an officer of the Corporation, legal,
accounting or other professional services, or services as a broker, transfer
agent or underwriter, whether performed by a director or any person affiliated
with a director.
Section 4.19 Interested Directors. The Corporation shall not enter into
--------------------
a contract or transaction with any director or officer, or with any Person in
which any officer or director holds a material financial interest or serves as
an officer or director, unless:
(a) The fact of such directors or officer's relationship or interest
is disclosed or known to the Board of Directors or the committee thereof
approving such contract or transaction, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or
(b) The material fact of such director's or officer's relationship or
interest is disclosed or known to the stockholders entitled to vote thereon, and
the contract or transaction is specifically approved in good faith by vote of
the holders of a majority of the outstanding shares entitled to vote thereon
other than shares held by the interested director or such other Person; or
(c) The contract or transaction is fair and reasonable to the
Corporation.
Section 4.20 Executive Committee. The Board of Directors may appoint an
-------------------
Executive Committee of three (3) or more directors to whom they may delegate any
of the powers and authorities of the Board of Directors, subject to the
limitations set forth in Section 4.22 below. The Board of Directors may
prescribe the procedures of the Executive Committee, change the membership
thereof and appoint one or more directors to act as alternate members to replace
absent or disqualified members. The Chairman shall be a member of the Executive
Committee.
Section 4.21 Audit Committee. The Board of Directors may appoint an
---------------
Audit Committee of two (2) or more directors and may establish its procedures
and determine duties. The Audit Committee shall recommend to the Board of
Directors a firm of independent certified public accountants to conduct the
annual audit of the Corporation's books and records; review with such accounting
firm the scope and results of the annual audit; review the performance by such
independent accountants of professional services in addition to those which are
related to the audit; consult with independent auditors with regard to the
adequacy of the Corporation's system of internal controls; and to perform any
other services requested by the Board of Directors in connection with audit
policies and procedures.
Section 4.22 Other Committees' Limitations on Powers. The Board of
---------------------------------------
Directors may appoint such other committees of directors, with each committee to
consist of two or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members
9
<PAGE>
of any such committee, who may replace any absent or disqualified member at any
meeting of the committee. Any such committee, to the extent provided in the
resolution of the Board of Directors or the Bylaws of the Corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it,
except that no committee, including any committee described in Section 4.20 or
Section 4.21 above, shall have the power to (i) declare dividends or
distributions on stock; (ii) recommend to the stockholders any action which
requires stockholder approval; (iii) approve any merger or share exchange which
does not require stockholder approval; or (iv) authorize the issuance of any
shares of stock except in accordance with Section 2-411 (or any successor
provisions thereto), as the same may be amended or supplemented from time to
time, of the General Corporation Law of Maryland.
ARTICLE V
OFFICERS
--------
Section 5.1 Officers. The officers of the Corporation shall be a
--------
Chairman, Vice Chairman, President, Secretary and a Treasurer. The Board of
Directors may appoint or may empower the Chairman to appoint such other officers
as the business of the Corporation may require. The terms, compensation and
duties of all officers of the Corporation shall be determined by these Bylaws or
by the Board of Directors. All officers shall serve at the pleasure of the
Board of Directors, subject to the rights, if any, of any officer under any
employment contract.
Section 5.2 Removal and Resignation of Officers. Subject to the rights,
-----------------------------------
if any, of an officer under any contract of employment any officer may be
removed, either with or without cause, by the Board of Directors if it finds
that it is in the best interest of the Corporation to do so, at any regular or
special meeting thereof, or, except in case of an officer chosen by the Board of
Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors.
Any officer may resign at any time by giving written notice to the Board of
Directors. Any such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is without prejudice to the rights, if
any, of the Corporation under any contract to which the officer is a party.
Section 5.3 Vacancies in Offices. A vacancy in any office because of
--------------------
death, resignation, removal, disqualification or any other cause shall be filled
in the manner described in these Bylaws for regular appointments to such office.
Section 5.4 Chairman. The Chairman shall preside at all meetings of the
--------
stockholders and the Board of Directors and shall exercise and perform such
other powers and duties as may from time to time be assigned to the Chairman by
the Board of Directors or prescribed by these Bylaws. Unless otherwise provided
by the Board of Directors, the Chairman shall also be the chief executive
officer of the Corporation.
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Section 5.5 Vice Chairman. In the absence or disability of the Chairman,
-------------
the Vice Chairman shall perform all of the duties of the Chairman, and when so
acting shall have all of the powers of, and be subject to all of the
restrictions upon, the Chairman. The Vice Chairman shall have such other powers
and perform such other duties as the Board of Directors may from time to time
prescribe.
Section 5.6 President. The President shall have such powers and perform
---------
such duties as the Board of Directors may from time to time prescribe.
Section 5.7 Secretary. The Secretary shall attend all meetings of the
---------
Board of Directors and all meetings of the stockholders and record all
proceedings of such meetings in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors. The Secretary shall have such other
powers and perform such other duties as the Board of Directors or the Chairman
may from time to time prescribe.
The Secretary shall have custody of the seal of the Corporation and the
Secretary or an Assistant Secretary shall have authority to affix the same to
any instrument requiring it and, when so affixed, it may be attested by the
Secretary's signature or by the signature of such Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the Corporation and to attest the affixing by such officer's signature.
Section 5.8 Assistant Secretaries. In the absence of the Secretary or in
---------------------
the event of the Secretary's inability or refusal to act, any Assistant
Secretary may perform the duties and exercise the powers of the Secretary and
shall have such other powers and perform such other duties as the Board of
Directors or the Chairman may from time to time prescribe.
Section 5.9 Treasurer. The Treasurer shall be the chief accounting and
---------
financial officer of the Corporation. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements and books belonging to the Corporation and shall
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall also disburse the funds of the Corporation as may
be ordered by the Board of Directors, and shall render to the Chairman and the
Board of Directors, at their regular meetings, or when the Board of Directors so
require, an account of all of the Treasurer's transactions and of the financial
condition of the Corporation. The Treasurer shall have such other powers and
perform such other duties as the Board of Directors or the Chairman may from
time to time prescribe.
Section 5.10 Assistant Treasurers. In the absence of the Treasurer or in
--------------------
the event of the Treasurer's inability or refusal to act, any Assistant
Treasurer may perform the duties and exercise the powers of the Treasurer and
shall have such other powers and perform such other duties as the Board of
Directors or the Chairman may from time to time prescribe.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AGENTS
-------------------------------------------------------
Section 6.1 Agents. For purposes of this Article, "Agent" means (i) any
------
person who is or was a director or officer of this Corporation, or is or was
serving at the request of this Corporation as a director, officer, employee,
trustee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including employee benefit plans, and (ii) any other
employee or agent of this Corporation (or of any such other corporation,
partnership, joint venture, trust or other enterprise) to whom the Board of
Directors, in its sole discretion, elects to extend, in whole or in part, the
benefits of this Article.
Section 6.2 Action, Etc. Other Than By or in the Right of the
-------------------------------------------------
Corporation. The Corporation shall indemnify any person who was or is a party
- -----------
or is threatened to be made a party to any threatened, pending or completed
action, suit, proceeding or investigation, whether civil, criminal or
administrative, and whether external or internal to the Corporation (other than
a judicial action or suit brought by or in the right of the Corporation), by
reason of the fact that he or she is or was an Agent, against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) actually and
reasonably incurred by the Agent in connection with such action, suit,
proceeding or investigation, or any appeal therein, unless it is established by
adjudication that (i) the act or omission of the director was material to the
matter giving rise to the proceeding; and (A) was committed in bad faith; or (B)
was the result of active and deliberate dishonesty; or (ii) the Agent actually
received an improper personal benefit in money, property or services; or (iii)
with respect to any criminal action or proceeding, had no reasonable cause to
believe that his or her conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, or its equivalent shall not
of itself, create a presumption that the Agent did not meet the standard of
conduct set forth above in this paragraph. Notwithstanding the foregoing,
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to have failed to meet the foregoing
standard of conduct but only if and to the extent that a court of appropriate
jurisdiction shall determine upon application that, despite such adjudication
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for any such expenses, liability or loss which
the court shall deem proper, provided, however, that no indemnification for any
liability or loss (other than expenses) shall in any event be made to the extent
that such person has been adjudged to have actually received an improper
personal benefit.
Section 6.3 Action, Etc. By or in the Right of the Corporation. The
--------------------------------------------------
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed judicial action or suit
brought by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that such pawn is or was an Agent, against expenses
(including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by such person in connection with the defense, settlement or
appeal of such action or suit, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that a
court of appropriate jurisdiction shall determine upon application that, despite
the adjudication of liability but
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in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 6.4 Advances of Expenses. All costs, charges and expenses
--------------------
(including attorneys' fees) incurred by an Agent in defense of any action, suit,
proceeding or investigation of the nature referred to in Sections 6.2 or 63 or
any appeal therefrom shall be paid or reimbursed by the Corporation in advance
of the final disposition of such matter upon receipt by the Corporation of (i) a
written affirmation by the Agent of his or her good faith belief that the
standard of conduct necessary for indemnification has been satisfied; and (ii)
an undertaking by or on behalf of such Agent to reimburse the Corporation for
such payment in the event that it is ultimately determined that such person is
not entitled to indemnification under this Article VI or otherwise.
Section 6.5 Determination of Right to Indemnification or Advances:
------------------------------------------------------
Procedure. Unless otherwise ordered by a court, any indemnification under
- ---------
Sections 6.2 or 6.3, or advance under Section 6.4, shall be made promptly and in
any event within ninety (90) days following written application by the Agent,
unless with respect to an application for indemnification under Sections 6.2 or
6.3 a determination that such Agent did not meet the applicable standard of
conduct set forth in Sections 6.2 and 6.3 is reasonably made within the ninety
(90) day period, either (i) by the Board of Directors acting by a majority vote
of a quorum consisting of Directors who are not parties to such action, suit or
proceeding, or, if such a quorum cannot be obtained, then by a majority vote of
a committee of the board consisting solely of two or more directors not, at the
time, parties to such proceeding and who were duly designated to act in the
matter by a majority vote of the full board in which the designated directors
who are parties may participate; (ii) special legal counsel selected by the
Board of Directors or a committee of the board by vote as set forth in clause
(i), or if the requisite quorum of the full board cannot be obtained therefor
and the committee cannot be established, by a majority vote of the full board in
which directors who are parties may participate; or (iii) the stockholders
provided that shares held by directors who are parties to the proceeding may not
be voted. Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible. However, if the determination that
indemnification is permissible is made by special legal counsel, authorization
of indemnification and determination as to reasonableness of expenses shall be
made in the manner specified in clause (ii) of this section for selection of
such counsel. The right to indemnification or advances as granted by this
Article shall be enforceable by the Agent in any court of competent jurisdiction
if the Board of Directors or independent legal counsel improperly denies the
claim, in whole or in part or if no disposition of such claim is made within
ninety (90) days. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any action, suit,
proceeding or investigation in advance of its final disposition where the
required undertaking has been tendered to the Corporation) that the Agent has
not met the standards of conduct which would require the Corporation to
indemnify the amount claimed, but the burden of proving such defense shall be on
the Corporation. The Agent's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification or advances, in
whole or in part, in any such proceeding shall also be indemnified by the
Corporation.
Section 6.6 Other Rights and Remedies. The rights to indemnification and
-------------------------
advancement of expenses provided by any provision of this Article shall not be
deemed exclusive of, and shall not affect, any other rights to which an Agent
seeking indemnification or advancement of expenses may
13
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be entitled under any provision of any law, certificate of incorporation, bylaw,
agreement, contract or by any vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while serving as an Agent, and shall continue as to a person
who has ceased to be an Agent and shall inure to the benefit of the heirs,
executors and administrators of such Agent.
Section 6.7 Contract Right. All rights to indemnification and
--------------
advancement of expenses under this Article VI shall be deemed to be provided by
a contract between the Corporation and the Agent who serves as such at any time
while these Bylaws and other relevant provisions of the General Corporation Law
of Maryland and other applicable law, if any, are in effect. Any repeal,
amendment or modification thereof shall not affect any rights or obligations
then existing.
Section 6.8 Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of any Agent against any liability asserted against or
incurred by that Agent in any capacity or arising out of the Agent's status as
such, whether or not the Corporation would have the power to indemnify the Agent
against such liability under the provisions of this Article. The Corporation
may create a trust fund, grant a security interest or use other means,
including, without limitation, a letter of credit or surety bond, to ensure the
payment of such sums as may become necessary to effect indemnification as
provided herein.
Section 6.9 Constituent Corporations. For purposes of this Article,
------------------------
references to "the Corporation" include all constituent corporations (including
any constituent of a constituent) absorbed in a consolidation or merger as well
as the resulting or surviving corporation, so that any person who is or was an
Agent of the constituent corporation shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
corporation as the Agent would if he or she had served the resulting or
surviving corporation in the same capacity.
Section 6.10 Employee Benefit Plan. The Corporation shall be deemed to
---------------------
have requested an Agent to serve an employee benefit plan where the performance
of the Agent's duties to the Corporation also imposes duties on, or otherwise
involves services by, the Agent to the plan or participants or beneficiaries of
the plan. Action taken or omitted by the Agent with respect to an employee
benefit plan in the performance of the Agent's duties for a purpose reasonably
believed by the Agent to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the Corporation.
Section 6.11 Severability; Statutory Indemnification. If this Article or
---------------------------------------
any portion hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each Agent as to
all expenses (including attorneys' fees), liability and loss reasonably incurred
by such Agent in connection with any action, suit, proceeding or investigation
referred to in Section 6.2 or 6.3 to the fullest extent permitted by any portion
of this Article that shall not have been invalidated, or by any other applicable
law. Notwithstanding any other provision of this Article but subject to the
provisions of Section 6.7 regarding contract rights, the Corporation shall
indemnify any Agent and advance expenses incurred by such Agent in any action,
suit or proceeding of the nature referred to in Sections 6.2 or 6.3 to the
fullest extent permitted by the General Corporation Law of Maryland, as the same
may be amended from time to time.
14
<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
Section 7.1 Maintenance and Inspection of Corporate Records. The annual
-----------------------------------------------
reports, these bylaws, the minutes of proceedings of the stockholders and any
copies of any voting trust agreements on file at the principal office of the
Corporation shall be open to inspection at the principal office by any
stockholder or holder of a voting trust certificate during normal business
hours.
Section 7.2 Right of Inspection - Shareholders of Five Percent of Stock.
-----------------------------------------------------------
In addition to any rights which may be granted to any class or series of capital
stock by the Articles of Incorporation, one or more persons who together are and
for at least six months have been stockholders of record or holders of voting
trust certificates of at least 5 percent of the outstanding stock of any class
of the Corporation may (i) in person or by agent, on written request, inspect
and copy during usual business hours the corporation's books of account; (ii)
present to any officer or agent of the Corporation a written request for a
statement of its affairs and a list of its stockholders. Within 20 days after
such request for information is made, the Corporation shall prepare and have
available on file at its principal office; (iii) in the case of a request for a
statement of affairs, a statement verified under oath by the Chairman, Vice
Chairman, President or Treasurer which sets forth in reasonable detail the
corporation's assets and liabilities as of a reasonably current date; and (iv)
in the case of a request for a list of stockholders, a list verified under oath
by one of its officers or its stock transfer agent or registrar which sets forth
the name and address of each stockholder and the number of shares of each class
which the stockholder holds.
Section 7.3 Scope of Right to Inspect. The right of inspection created
-------------------------
by this Article shall extend to the records of each subsidiary of the
Corporation. Any inspection authorized by this Article may be made in person by
the stockholder or holder of a voting trust certificate or by agent or attorney,
and the right of inspection includes the right to copy and make extracts.
Section 7.4 Reports to Stockholders. The Board of Directors shall cause
-----------------------
an annual report to be sent to the stockholders not later than one hundred
twenty (120) days after the close of the fiscal year adopted by the Board of
Directors. The annual report shall contain a balance sheet as of the end of
such fiscal year and an income statement and statement of changes in financial
position of such fiscal year, accompanied by a report thereon of an independent
certified accountant. A manually signed copy of the accountant's report shall
be filed with the Board of Directors.
At least quarterly the Board of Directors shall send interim reports to the
stockholders, having such form and content as the Board of Directors deems
proper.
15
<PAGE>
ARTICLE VIII
STOCK AND CERTIFICATES
----------------------
Section 8.1 Stock Certificates. Every holder of stock of the
------------------
Corporation shall be entitled to have a certificate signed by or in the name of
the Corporation by the President, the Chairman or any Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation, certifying the number of shares owned by such stockholder in
the Corporation. Where a certificate is countersigned by a transfer agent other
than the Corporation or its employee, or by a registrar other than the
Corporation or its employee, the signatures of the officers of the Corporation
or the transfer agent or registrar may be facsimiles. In case any officer,
transfer agent or registrar who was signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or a registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such officer, transfer agent or registrar
was holding such position at the date of issue.
Except as otherwise provided by law or these Bylaws, certificates shall be
issued, listed and transferred in accordance with procedures established by the
Board of Directors. Stock certificates shall contain such legends or other
statements as the Board of Directors determine may be necessary or desirable to
carry out any agreement or the provisions of the Articles of Incorporation or
Section 8.3, or to conform with the REIT Provisions of the Internal Revenue Code
or any other law or regulation.
Section 8.2 Share Register. A share register shall be kept by or on
--------------
behalf of and under the direction of the Board of Directors containing the names
and addresses of the stockholders, the number of shares held by them
respectively, the numbers of the certificates representing the shares, and a
record of all transfers of shares. The Persons in whose name certificates are
registered on the records of the Corporation shall be deemed the absolute owners
of the shares represented thereby, but nothing herein shall be deemed to
preclude the Board of Directors or officers, or their agents or representatives
from inquiring as to the actual ownership of shares. The receipt of dividends
or distributions by the Person in whose name any shares are registered on the
records of the Corporation or of the duly authorized agent of such Person, or if
such shares are so registered in the names of more than one Person, the receipt
of any one of such Persons, or of the duly authorized agent of such Person,
shall be a sufficient discharge for all dividends or distributions payable or
deliverable in respect of such shares and from all liability to see to the
application thereof.
Section 8.3 Transfer of Shares. Until a transfer is duly effected on
------------------
the records of the Corporation, the Board of Directors shall not be affected by
any notice of such transfer, either actual or constructive. Shares shall be
transferable on the records of the Corporation only by the record holder thereof
or by such holder's agent thereunto duly authorized in writing upon delivery to
the Board of Directors or a transfer agent of the certificate or certificates
properly endorsed or accompanied by duly executed instruments of transfer. Such
delivery of certificates shall be accompanied by all necessary documentary
stamps together with such evidence of the genuineness of each such endorsement,
execution or authorization and of other matters as may reasonably be required by
the Board of Directors or such transfer agent. Upon such delivery, the
16
<PAGE>
transfer shall be recorded in the records of the Corporation and a new
certificate for the shares so transferred shall be issued to the transferee. In
case of a transfer of only a part of the shares represented by any certificate,
a new certificate for the balance shall be issued to the transferor.
Any Person becoming entitled to any shares in consequence of the death of a
stockholder or otherwise by operation of law shall be recorded as the holder of
such shares and shall receive a new certificate therefor but only upon delivery
to the Board of Directors or a transfer agent of instruments and other evidence
required by the Board of Directors or the transfer agent to demonstrate such
entitlement, the existing certificate for such shares and any necessary releases
from applicable governmental authorities.
Nothing herein shall impose upon the Board of Directors or a transfer agent
a duty or limit their rights to inquire into adverse claims.
Section 8.4 Transfer Restrictions. The Board of Directors may require
---------------------
a statement or affidavit from each stockholder or proposed transferee of shares
setting forth the number of shares already owned by such stockholder or
transferee, or any related Person, in the form prescribed by the Board of
Directors if the Board of Directors determines that such action is reasonably
necessary to protect the Corporation's tax status as a REIT. If, in the opinion
of the Board of Directors, which shall be conclusive upon any proposed
transferor or proposed transferee of shares, any proposed transfers would
jeopardize the status of the Corporation as a REIT under the REIT Provisions of
the Internal Revenue Code, the Board of Directors may refuse to permit such
transfer. Any attempted transfer that the Board of Directors has refused to
permit shall be void and of no effect as to transfer any legal or beneficial
interest in the shares. All contracts for the sale or for the transfer of
shares shall be subject to this provision.
Section 8.5 Lost Certificates. Except as provided in this Section, no
-----------------
new certificate for shares shall be issued in lieu of an old certificate unless
the latter is surrendered to the Corporation and canceled at the same time. The
Board of Directors may, in case any share certificate is lost, stolen or
destroyed authorize the issuance of a new certificate in lieu thereof, upon such
terms and conditions as the Board of Directors, in its sole discretion, may
require, including provision for indemnification of the Corporation and/or a
bond sufficient to protect the Corporation from any claim or liability on
account of the alleged loss, theft or destruction of such certificate or the
issuance of such new certificate.
Section 8.6 Transfer Agent, Dividend Disbursing Agent and Registrar.
-------------------------------------------------------
The Board of Directors shall have power to employ one or more transfer agents,
dividend disbursing agents and registrars and to authorize them on behalf of the
Corporation to keep records, to hold and disburse any dividends and
distributions and to have and perform in respect of all original issues and
transfers of shares, dividends and distributions and reports and communications
to stockholders, the powers and duties usually had and performed by transfer
agents, dividend disbursing agents and registrars of a Maryland corporation.
17
<PAGE>
ARTICLE IX
GENERAL CORPORATE MATTER
------------------------
Section 9.1 Tax Status. It is intended that the Corporation shall
----------
qualify as a REIT under the REIT Provisions of the Internal Revenue Code during
such period as the Board of Directors shall deem advisable to qualify the
Corporation. The failure of the Corporation to qualify as a REIT or the loss of
such status shall not render the Board of Directors liable to the stockholders
or to any other Person or operate in any manner to dissolve the Corporation.
Section 9.2 Reliance. Each director, officer, employee and agent of the
--------
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
Section 9.3 Checks, Drafts, Evidences of Indebtedness. All checks,
-----------------------------------------
drafts or other orders for payment of money, notes or other evidence of
indebtedness, issued in the name of or payable to the Corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the Board of Directors.
Section 9.4 Corporate Contracts and Instrument; How Executed. Except as
------------------------------------------------
otherwise provided by law, the Articles of Incorporation or these Bylaws, the
Board of Directors may authorize any officer or officers, agent or agents, to
enter into any contract or execute any instrument in the name of and on behalf
of the Corporation, and such authority may be general or confined to specific
instances; and, unless so authorized or ratified by the Board of Directors or
within the agency power of any officer, no officer, agent or employee shall have
any power or authority to bind the Corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or to any amount.
Section 9.5 Representation of Shareholdings. The Chairman, Vice-Chairman
-------------------------------
and the Secretary or Assistant Secretary or any person authorized by resolution
of the Board of Directors is authorized to vote, represent and exercise on
behalf of the Corporation all rights incident to any and all shares of any other
corporation, business trust or other entities, foreign or domestic, standing in
the name of the Corporation. The authority herein granted may be exercised in
person or by proxy.
Section 9.6 Construction and Definition. Unless the context requires
---------------------------
otherwise, the general provisions, rules of construction and definitions in the
Maryland Corporation Law shall govern the construction of these Bylaws.
Section 9.7 Seal. The Corporation's seal shall be in such form as is
----
required by law and as shall be approved by the Board of Directors.
18
<PAGE>
ARTICLE X
AMENDMENTS
----------
Section 10.1 Amendments. The power to adopt, amend, repeal or rescind in
----------
whole or part these Bylaws is solely and exclusively vested in the Board of
Directors. The stockholders shall have no power to adopt, amend, repeal or
rescind any part of the Bylaws of the Corporation.
19
<PAGE>
EXHIBIT 12
BRE PROPERTIES, INC.
STATEMENT RE:
COMPUTATION OF RATIOS OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
(dollar amounts in thousands) 1998 1997 1996 1995 1994
------------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net income before (loss) gains on sales
of investments in rental properties
and minority interest in income $ 66,727 $49,345 $37,014 $21,789 $22,566
Provision for litigation and investment
loss 2,400 - - 2,000 -
Minority interest not convertible into
common stock (98) - - - -
-------- ------- ------- ------- -------
$ 69,029 $49,345 $37,014 $23,789 $22,566
======== ======= ======= ======= =======
Fixed charges:
Interest $ 35,598 $21,606 $16,325 $ 7,973 $ 5,599
Capitalized interest 12,606 1,178 269 - -
Other 112 112 108 105 101
-------- ------- ------- ------- -------
$ 48,316 $22,896 $16,702 $ 8,078 $ 5,700
======== ======= ======= ======= =======
Net income before (loss) gains on sales
of investments in rental properties
and minority interest in income and
provision for litigation and investment
loss and fixed charges, excluding
capitalized interest $104,739 $71,063 $53,447 $31,867 $28,266
======== ======= ======= ======= =======
Divided by fixed charges $ 48,316 $22,896 $16,702 $ 8,078 $ 5,700
======== ======= ======= ======= =======
Ratio of earnings to fixed charges 2.2 3.1 3.2 4.0 5.0
======== ======= ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 21
BRE PROPERTIES, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name State of Jurisdiction
---- ---------------------
<S> <C>
Wholly owned subsidiaries:
BRE Hacienda del Rio, Inc. Delaware
BRE Fountain Plaza, Inc. Delaware
BRE Camino Seco, Inc. Delaware
BRE Colonia del Rio, Inc. Delaware
BRE Springhill, Inc. Delaware Delaware
BRE Oracle Village Inc. Delaware
BRE Builders, Inc. Delaware
Alliance Property Management Company, Inc. Delaware
Other subsidiaries:
BRE Property Investors LLC Delaware
Blue Ravine Investors, LLC Delaware
Cambridge Park LLC California
BRE/Alliance Services Maryland
Indirect Subsidiaries:
ITCR Villa Verde Limited Partnership Texas
Palm Shadows LLC California
Riverview LLC California
Vallejo Highlands Associates L.P. California
Vallejo Somerset L.P. Texas
Woodlake Holdings LLC Arizona
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-47469) and in the related Prospectus pertaining to the registration
of $750,000,000 in Debt Securities, Preferred Shares, Depositary Shares, Common
Stock Warrants and Common Stock, the Registration Statement (Form S-3 No. 333-
65833) pertaining to the registration of 3,452,181 Shares of Common Stock, the
Registration Statement (Form S-3 No. 333-41433) pertaining to the registration
of 3,713,331 Shares of Common Stock, the Registration Statement (Form S-3 No.
333-44997) pertaining to the registration of 728,929 Shares of Common Stock, the
Registration Statement (Form S-3 No. 333-09945) pertaining to the BRE
Properties, Inc. Dividend Stock Purchase and Dividend Reinvestment Plan, the
Registration Statement (Form S-8 No. 333-69217) pertaining to the Amended and
Restated 1992 Employee Stock Plan, the Amended and Restated Non-Employee
Director Stock Option Plan, and the Consultancy Stock Option Agreement dated
March 2, 1998, the Registration Statement (Form S-8 No. 333-02257) pertaining to
the Amended and Restated Non-Employee Director Stock Option Plan of BRE
Properties, Inc. and the Assumed Real Estate Investment Trust of California 1991
Officer Stock Option Plan, the Registration Statement (Form S-8 No. 33-61209)
pertaining to the BRE Properties, Inc. 1994 Non-Employee Director Stock Plan and
Chief Executive Officer Stock Option Plan, the Registration Statement (Form S-8
No. 33-60082) pertaining to the BRE Properties, Inc. 1992 Employee Stock Option
Plan, and the Registration Statement (Form S-8 No. 33-5389) pertaining to the
BRE Properties, Inc. 1984 Stock Option Plan, of our report dated January 15,
1999, with respect to the consolidated financial statements and related
financial schedule of BRE Properties, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG
San Francisco, California
March 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,057
<SECURITIES> 0
<RECEIVABLES> 27,078
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,135
<PP&E> 1,677,619
<DEPRECIATION> (75,838)
<TOTAL-ASSETS> 1,630,916
<CURRENT-LIABILITIES> 26,333
<BONDS> 752,146
0
0
<COMMON> 443
<OTHER-SE> 851,994<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,630,916
<SALES> 203,245
<TOTAL-REVENUES> 203,245
<CGS> 64,624
<TOTAL-COSTS> 138,621
<OTHER-EXPENSES> 33,896<F2>
<LOSS-PROVISION> 2,400
<INTEREST-EXPENSE> 35,598
<INCOME-PRETAX> 66,727
<INCOME-TAX> 0
<INCOME-CONTINUING> 66,727
<DISCONTINUED> 0
<EXTRAORDINARY> 6,083<F3>
<CHANGES> 0
<NET-INCOME> 60,644
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
<FN>
<F1>INCLUDES $87,432 OF MINORITY INTEREST.
<F2>INCLUDES $27,763 OF DEPRECIATION, A NON-CASH CHARGE.
<F3>INCLUDES LOSS ON SALE OF ($1,859) AND MINORITY INTEREST OF $4,224.
</FN>
</TABLE>
