<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-5305
BRE PROPERTIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 94-1722214
- ---------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
44 Montgomery Street
36th Floor
San Francisco, CA 94104-4809
- ---------------------------- ----------------------------------
(Address of principal office) (Zip Code)
(415) 445-6530
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Number of shares of common stock
outstanding as of May 12, 1999 44,575,009
<PAGE>
BRE PROPERTIES, INC.
INDEX TO FORM 10-Q
March 31, 1999
<TABLE>
<CAPTION>
Page No.
-----------
<S> <C>
Part I FINANCIAL INFORMATION
ITEM 1:
Consolidated balance sheets - March 31, 1999 and December 31,
1998 2
Consolidated statements of income - three months ended March
31, 1999 and 1998 3
Consolidated statements of cash flows - three months ended
March 31, 1999 and 1998 4
Notes to consolidated financial statements 5-6
ITEM 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-14
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk 15
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 16
ITEM 2 Changes in Securities and Use of Proceeds 16
ITEM 3 Defaults Upon Senior Securities 16
ITEM 4 Submission of Matters to a Vote of Security Holders 16
ITEM 5 Other Information 16
ITEM 6 Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
BRE Properties, Inc.
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
--------------------
CONSOLIDATED BALANCE SHEETS (unaudited)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31, 1998
1999
-------------------- ---------------------
<S> <C> <C>
ASSETS
Investments in rental properties $1,622,488 $1,611,661
Construction in progress 69,483 65,958
Less: Accumulated depreciation (83,811) (75,838)
-------------------- ---------------------
1,608,160 1,601,781
Investments in limited partnerships 879 814
-------------------- ---------------------
Real estate portfolio 1,609,039 1,602,595
Mortgage loans, net 2,571 2,336
Cash 14,660 2,057
Other 26,664 23,928
-------------------- ---------------------
TOTAL ASSETS $1,652,934 $1,630,916
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage loans $ 245,370 $ 235,146
Unsecured senior notes 253,000 253,000
Unsecured line of credit 223,000 264,000
Accounts payable and other liabilities 20,132 26,333
-------------------- ---------------------
TOTAL LIABILITIES 741,502 778,479
-------------------- ---------------------
Commitments and contingencies (notes B and C) - -
MINORITY INTEREST 94,575 87,432
-------------------- ---------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized.
2,150,000 shares of Series A outstanding at March 31, 1999; no
shares outstanding at December 31, 1998 22 -
Common stock, $.01 par value, 100,000,000 shares authorized.
Shares issued and outstanding: 44,371,209 at March 31, 1999;
44,221,560 at December 31, 1998 444 443
Additional paid-in capital 718,575 664,811
Accumulated net income in excess of cumulative dividends 97,816 99,751
-------------------- ---------------------
TOTAL SHAREHOLDERS' EQUITY 816,857 765,005
==================== =====================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,652,934 $1,630,916
==================== =====================
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
BRE Properties, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------------
1999 1998
--------------- -----------------
<S> <C> <C>
REVENUE
Rental income $52,293 $44,322
Other income 3,127 3,091
--------------- -----------------
TOTAL REVENUE 55,420 47,413
--------------- -----------------
EXPENSES
Real estate expenses 16,940 14,745
Depreciation and amortization 8,184 6,485
Interest expense 9,839 8,535
General and administrative 1,696 1,665
Provision for restructuring charge 1,250 -
--------------- -----------------
TOTAL EXPENSES 37,909 31,430
--------------- -----------------
Income before net gain (loss) on sales of investments in rental
properties and minority interest 17,511 15,983
Net gain (loss) on sales of investments in rental properties - (825)
--------------- -----------------
Income before minority interest 17,511 15,158
Minority interest in income 1,415 1,016
--------------- -----------------
NET INCOME 16,096 14,142
Dividends attributable to preferred stock 756 -
--------------- -----------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $15,340 $14,142
=============== =================
Net income per outstanding common share:
Income before net gain (loss) on sales of investments in rental
properties less minority interest $ 0.35 $ 0.36
Net gain (loss) on sales of investments in rental properties - (0.02)
--------------- -----------------
Net income per share - basic $ 0.35 $ 0.34
=============== =================
Income before net gain (loss) on sales of investments in rental
properties and minority interest $ 0.35 $ 0.36
Net gain (loss) on sales of investments in rental properties - (0.02)
--------------- -----------------
Net income per share - assuming dilution $ 0.35 $ 0.34
=============== =================
Weighted average common shares outstanding - basic 44,280 41,830
Weighted average common shares outstanding - assuming dilution 47,690 45,150
--------------- -----------------
Dividends declared and paid per common share $ 0.39 $ 0.36
=============== =================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
BRE Properties, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,096 $ 14,142
Adjustments to reconcile net income to net cash generated by
operating activities:
Provision for depreciation 8,184 6,485
Provision for restructuring charge 1,250 -
Net loss on sales of investments in rental properties - 825
Minority interest 1,415 1,016
Decrease in accounts payable and other liabilities (635) (1,393)
Decrease in other assets 1,772 18
-------------------- -------------------
Net cash flows generated by operating activities 28,082 21,093
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to construction in progress (16,336) (27,900)
Multifamily properties purchased - (54,038)
Decrease in funds held in escrow - 15,833
Capital expenditures (1,191) (893)
Rehabilitation expenditures (709) (1,086)
Payments on mortgage loans receivable 57 50
Proceeds from sales of property, net - 9,293
Other (843) (59)
-------------------- -------------------
Net cash flows used in investing activities (19,022) (58,800)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred equity offering, net 51,933 -
Principal payments on mortgage loans (730) (534)
New mortgage loan 10,954 -
Issuance of unsecured senior notes - 130,000
Costs of issuance of senior unsecured notes - (3,787)
Line of credit:
Advances 41,000 71,000
Repayments (82,000) (147,000)
Proceeds from exercises of stock options, net 1,854 1,820
Distributions to minority members (1,437) (1,016)
Dividends paid (18,031) (15,082)
-------------------- -------------------
Net cash flows generated by financing activities 3,543 35,401
-------------------- -------------------
Increase (decrease) in cash 12,603 (2,306)
Balance at beginning of period 2,057 4,216
-------------------- -------------------
BALANCE AT END OF PERIOD $ 14,660 $ 1,910
==================== ===================
Transfers of construction in progress $ 12,811 -
==================== ===================
Interest capitalized $ 3,034 $ 2,026
==================== ===================
Mortgage loans assumed - $ 3,362
==================== ===================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
BRE Properties, Inc.
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
March 31, 1999
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and should be read in
conjunction with the Annual Report of BRE Properties, Inc. (the "Company" or
"BRE") on Form 10-K for the year ended December 31, 1998 (the "1998 10-K"). In
the opinion of management, all adjustments (consisting of normal recurring
adjustments only) have been made which are necessary for a fair statement of the
results for the interim periods presented herein.
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 97% of BRE's assets and 99% of its revenues as of
and for the quarter ended March 31, 1999. All multifamily communities owned by
the Company are located in the Western United 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 $37.9 million and $31.1 million for the quarters ended March 31, 1999
and 1998, 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 the quarters
ended March 31, 1999 or 1998. 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 real estate
investment trust under the Internal Revenue Code of 1986, as amended.
In the quarter ended March 31, 1999, the Company provided a restructuring charge
of $1,250,000, primarily in personnel severance benefits, in connection with a
reorganization to reduce corporate overhead costs.
Certain reclassifications have been made from the prior year's presentation to
conform to the current year's presentation.
5
<PAGE>
BRE Properties Inc.
- ------------------------------------------------------------------------------
NOTE B - LITIGATION
- -------------------
BRE is defending various claims and legal actions that arise from its normal
course of business. While it is not feasible to predict or determine the
ultimate outcome of these matters, in the opinion of management, none of these
actions will have a material adverse effect on BRE's results of operations or
financial position.
In the quarter ended September 30, 1998, the Company recognized litigation loss
of $2.4 million. During the quarter ended March 31, 1999, the Company settled
this litigation and no further expense was recognized.
NOTE C - COMMITMENTS
- --------------------
As of March 31, 1999, the Company had commitments to acquire two multifamily
communities with a total estimated acquisition cost of approximately $65
million. The Company expects to fund the commitments in calendar year 2000.
There can be no assurance that these communities will be acquired or will be
acquired for the estimated cost indicated.
6
<PAGE>
BRE Properties Inc.
- ------------------------------------------------------------------------------
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ------------------------------------------------------------------------------
March 31, 1999
OVERVIEW
BRE Properties, Inc. (the "Company" or "BRE") is a regionally focused, self-
administered equity real estate investment trust ("REIT") which primarily owns
and operates a portfolio of 85 apartment communities (aggregating 22,182 units)
in 12 major markets of the Western United States. The Company also owns a
medical office property and two properties held in partnerships in which BRE is
a minority limited partner. The Company's revenues consist primarily of rental
income (94% and 93% of total revenues in the quarters ended March 31, 1999 and
1998, respectively) derived from its portfolio of income-producing properties.
Other income includes various fees and charges to residents of multifamily
communities, and to a lesser extent, interest from notes receivable, fee
management income and income from partnership investments. The policy of the
Company is to emphasize cash flows from operations rather than the realization
of capital gains through property dispositions. As dispositions of real estate
assets are made, the Company typically seeks to reinvest net proceeds from sales
in income-producing real estate.
In addition to historical information, the information included in this report
on Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), such as those pertaining to the Company's capital resources, portfolio
performance and results of operations. Forward-looking statements involve
numerous risks and uncertainties and should not be relied upon as predictions of
future events and there can be no assurance that the events or circumstances
reflected in such forward-looking 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. Such 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,
without limitation, construction delays, cost overruns, inability to obtain
necessary permits and public opposition to such activities), failure to qualify
as a REIT 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. The success of the Company also depends upon economic
trends generally, including interest rates, income tax laws, governmental
regulation, legislation, population changes and other factors. Readers are
cautioned not to place undue reliance on forward-looking statements, which
reflect management's analysis only. The Company assumes no obligation to update
forward-looking statements. See also the Company's reports filed from time to
time with the Securities and Exchange Commission pursuant to the Securities Act.
7
<PAGE>
BRE Properties Inc.
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
REVENUES
Total revenues were $55,420,000 for the three months ended March 31, 1999
compared to $47,413,000 for the same period in 1998. This increase was
primarily due to an increase in multifamily rental revenues resulting from the
acquisition of seven multifamily communities and the completion of eight
multifamily properties previously under construction. This increase is offset in
part by the sale of three communities during or after the quarter ended March
31, 1998, but before January 1, 1999. These changes in the portfolio
contributed, on a net basis, approximately $7,322,000 to multifamily rental
revenues for the three months ended March 31, 1999 as compared to the same
period in 1998. Further, multifamily rental revenues from "same-store"
communities (multifamily communities owned by the Company and stabilized as of
January 1, 1998 and consisting of 17,712 of BRE's 22,182 total units) increased
$888,000 for the three months ended March 31, 1999 compared to the same period
in 1998. This increase in same-store communities was due primarily to an
average increase in rental rates of approximately 5% as physical occupancy was
slightly lower in the quarter ended March 31, 1999, as compared to the quarter
ended March 31, 1998.
Other income increased from $3,091,000 in the quarter ended March 31, 1998 to
$3,127,000 for the quarter ended March 31, 1999 due primarily to the portfolio
changes discussed above and offset in part by the loss of other income due to
the sale of four commercial and retail properties and one partnership
investment.
A summary of the components of revenue for the quarters ended March 31, 1999 and
1998 follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------------------------- ---------------------------------
% CHANGE
% OF TOTAL % OF TOTAL FROM 1998
REVENUES REVENUES REVENUES REVENUES TO 1999
------------------ -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Rental Revenue:
Multifamily:
Same-store $42,800 $41,912 2%
Other 9,418 2,095 349%
------------------ --------------
Total Multifamily 52,218 94% 44,007 93% 19%
Commercial and retail 75 - 315 1% (76%)
------------------ -------------- -------------- --------------
Rental revenue 52,293 94% 44,322 94% 18%
Other income 3,127 6% 3,091 6% 1%
------------------ -------------- -------------- --------------
Total revenue $55,420 100% $47,413 100% 17%
================== =============== ============== ===============
</TABLE>
Portfolio physical occupancy rates as of March 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Multifamily: Same-store 96% 97%
- --------------------------------------------------------------------------------------------
Multifamily: All 96% 97%
- --------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
BRE Properties Inc.
- ------------------------------------------------------------------------------
EXPENSES
Real Estate Expenses
Real estate expenses for multifamily properties (which include maintenance and
repairs, utilities, on-site staff payroll, property taxes, insurance,
advertising and other direct operating expenses) for the quarter ended March 31,
1999 increased 15% to $16,940,000 from the comparable period in 1998 primarily
due to expenses of seven multifamily property acquisitions and the completion of
eight multifamily properties previously under construction. This increase is
offset in part by the sale of three communities during or after the quarter
ended March 31, 1998, but before January 1, 1999. Real estate expenses as a
percentage of rental revenues were 32.4% and 33.3% for the quarters ended March
31, 1999 and 1998, respectively.
A summary of the categories of real estate expenses for the quarters ended March
31, 1999 and 1998 follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------------------------- --------------------------------
% OF % OF % CHANGE
RENTAL RENTAL FROM
EXPENSE REVENUE EXPENSE REVENUE 1998 TO 1999
-------------- ---------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Multifamily:
Same-store 13,713 13,931 (2%)
Non same-store 3,160 673 370%
Other 67 126 47%
-------------- ------------
Total Multifamily 16,940 14,730 15%
Commercial and retail - 15 -
-------------- ------------
Total real estate expense $16,940 32.4% $14,745 33.3% 15%
============== ================ ============ ===============
</TABLE>
Provision for Depreciation
The provision for depreciation increased by $1,699,000 to $8,184,000 for the
quarter ended March 31, 1999 from the comparable period of 1998. The increase
in 1999 resulted primarily from multifamily property acquisitions and the
completion of eight properties previously under construction and was offset in
part by dispositions of multifamily and commercial and retail properties in
prior periods.
Interest Expense
Interest expense was $9,839,000 (net of interest capitalized to the cost of
apartment communities under development of $3,034,000) for the quarter ended
March 31, 1999, an increase of $1,304,000 or 15%. Interest expense was
$8,535,000 for the same period in 1998 and was net of $2,026,000 of interest
capitalized to the cost of apartment communities under construction. This
increase was due largely to interest expense for a full quarter on the Company's
$130 million unsecured senior notes which were issued in February 1998.
9
<PAGE>
BRE Properties Inc.
- ------------------------------------------------------------------------------
General and Administrative
General and administrative costs were $1,696,000 or approximately 3.1% of total
revenues for the first quarter in 1999 and $1,665,000 or approximately 3.5% of
total revenues, for the first quarter in 1998. The minor change in the total
dollar cost of general and administrative expense represents, in part, the
restructuring in February 1999 which reduced corporate personnel and related
costs. The reduction in general and administrative costs as a percentage of
total revenues is a result of economies in administrating a larger portfolio,
with total revenues increasing 17% from the quarter ended March 31, 1998 to the
quarter ended March 31, 1999.
Provision for Restructuring Charge
In the first quarter of 1999, the Company recorded a restructuring charge of
$1,250,000 in connection with reductions in corporate personnel pursuant to a
restructuring plan. There was no such amount in the quarter ended March 31,
1998.
Net Gain (Loss) on Sales of Real Estate Investments
The net loss on sales of real estate investments of $825,000 for the quarter
ended March 31, 1998 was primarily due to the sale of the Park Glen apartment
community in Camirillo, CA and the partnership interest in Chateau de Ville
apartments in Anaheim, CA. There were no sales of real estate investments in
the quarter ended March 31, 1999.
Minority Interest in Income
Minority interest in income was $1,415,000 and $1,016,000 for the quarters ended
March 31, 1999 and 1998, respectively. The increase is due to the addition of
one property structured as a limited liability company whose minority members
have no conversion rights into the Company's common stock. Further, additional
Operating Company units in a consolidated subsidiary, BRE Property Investors
LLC, were granted to minority members pursuant to the performance of certain
goals with respect to communities under development.
Dividends Attributable to Preferred Stock
During the quarter ended March 31, 1999, the Company issued 2,150,000 shares of
8 1/2% Series A Cumulative Redeemable Preferred Stock for net proceeds of
approximately $52,000,000. There was no preferred stock outstanding in the
quarter ended March 31, 1998.
Net Income Available to Common Shareholders
Net income available to common shareholders was $15,340,000 and $14,142,000 for
the quarters ended March 31, 1999 and 1998 respectively, an increase of
$1,198,000. This increase is primarily due to a loss of $825,000 in 1998 where
there was no loss in 1999, the dividend on the 8 1/2% Series A Cumulative
Redeemable Preferred Stock issued in January 1999 and net earnings from the
addition of seven multifamily apartment communities and eight communities
previously under construction.
10
<PAGE>
BRE Properties Inc.
- -------------------------------------------------------------------------------
COMMUNITIES LEASE-UP
The following is a summary of communities in lease-up as of March 31, 1999. The
Company defines "lease-up" as a community which has received a final certificate
of occupancy for all buildings in the community but has not yet reached its
projected stabilized occupancy:
<TABLE>
<CAPTION>
PROPERTY NAME AND LOCATION UNITS COST OCCUPANCY
- ------------------------------------------------------ --------------------- --------------------- ------------------
<S> <C> <C> <C>
Pinnacle Flamingo West, Las Vegas, NV 324 $ 29.6 66%
Pinnacle Terrace, Chandler, AZ 300 23.4 88%
Pinnacle Estates, Albuquerque, NM 294 26.1 81%
Pinnacle at High Resort, Rio Rancho, NM 301 26.3 75%
Pinnacle Mountain View, Clearfield, UT 324 26.0 75%
--------------------- ---------------------
Total 1,543 $131.4
===================== =====================
</TABLE>
CONSTRUCTION IN PROGRESS
Transfers from Construction in Progress to Investments in Rental Properties
Land acquisition, development 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"
once the building receives a final certificate of occupancy and is ready to
lease. During the quarter, Pinnacle Flamingo West met this criteria for all of
its buildings.
The following table sets forth detailed data with respect to the Company's
properties included in construction in progress at March 31, 1999. 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
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.
11
<PAGE>
BRE Properties
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED INVESTMENT ESTIMATED ESTIMATED
NUMBER OF TO DATE COST TO ESTIMATED COMPLETION
PROPERTY NAME AND LOCATION UNITS/1/ MARCH 31, 1999 COMPLETE TOTAL COST DATE
- ---------------------------------- ------------- ------------------ ------------- -------------- --------------
(Dollar amounts in millions)
<S> <C> <C> <C> <C> <C>
Pinnacle at Blue Ravine,
Folsom, CA 260 $13.4 $13.9 $27.3 4Q/1999
Pinnacle Sonata,
Bothell, WA 268 14.0 27.2 41.2 3Q/2000
PRE-CONSTRUCTION SITES OWNED:/2/
Pinnacle Bellevue,
Bellevue, WA 248 13.3 25.0 38.3 4Q/2000
Pinnacle Carmel Creek,
San Diego, CA 348 6.8 40.9 47.7 4Q/2000
Pinnacle at MacArthur Place,
Santa Ana, CA 346 16.7 43.1 59.8 3Q/2001
Other 5.3 -- 5.3
------------- ------------------ ------------- --------------
Total 1,470 $69.5 $150.1 $219.6
============= ================== ============= ==============
</TABLE>
Year 2000 Considerations
Some of the Company's older computer programs were originally written using two
digits rather than four to define the applicable year. As a result, those
computer programs had time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. Without correction, 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 completed an assessment which will replace 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
according to the Company's policy. The project has been completed. 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. As a component of
its year 2000 project, the Company is in an ongoing process of discussing year
2000 compliance issues with its key vendors and service providers and is
developing and implementing contingency plans, including establishing multiple
vendors or service providers for critical functions such as banking and
telecommunications.
____________________
/1/ As of March 31, 1999, none of these units had been completed.
/2/ These projects consist of land owned by the Company where construction is
ready to commence subject only to obtaining certain construction plans and
permits. 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 such financing will be obtained. As of March 31, 1999, the Company
had not committed to significant construction contract obligations for these
properties.
12
<PAGE>
BRE Properties
- --------------------------------------------------------------------------------
However, 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, actual
results could differ materially from those anticipated.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's cash and cash equivalents totaled $14,660,000,
up from $2,057,000 at December 31, 1998. Borrowings under the Company's line of
credit were $223,000,000 at March 31, 1999, compared to $264,000,000 at December
31, 1998. Drawings on the line of credit are available to fund property
acquisitions, capital improvements, operating expenses and pay dividends to
shareholders. The Company typically reduces its outstanding balance on the line
of credit with cash balances as available.
At March 31, 1999, the Company's line of credit provided for borrowings of up to
$400,000,000, with $177,000,000 available at that date. The line of credit bears
interest at LIBOR plus .70% or lower based on bids of the participating banks.
Cost of the line of credit is .15% per annum on the total commitment amount.
Additionally, the Company had $73,000,000 of unsecured indebtedness at March 31,
1999, with an interest rate of 7.88% per annum as to $18,000,000 and 7.44% per
annum as to $55,000,000. This indebtedness is to be repaid through scheduled
principal payments in the years 2000 to 2005. The Company also had a
$50,000,000 issue of unsecured notes due 2007, with an effective rate of 7.8%
and a $130,000,000 issue of unsecured notes due 2013 with an effective rate of
approximately 7.3%. At March 31, 1999, the Company also had outstanding
mortgage indebtedness of $245,370,000 at interest rates ranging from 5.9% to
9.3%, with an overall average of approximately 7.4%. The remaining terms of the
mortgage indebtedness range from less than one to 29 years.
For additional information regarding the Company's line of credit, unsecured
notes payable and mortgage loans payable, including scheduled principal payments
over the next five years, see Notes 5 and 6 in the Notes to Consolidated
Financial Statements contained in the Company's 1998 Form 10-K. Certain of the
Company's indebtedness contains financial covenants as to minimum net worth,
interest coverage ratios, maximum secured debt and total debt to capital, among
others. The Company was in compliance with all such financial covenants during
the applicable periods, including the three months ended March 31, 1999.
The Company funded approximately $16 million for construction of communities
under development in the three months ended March 31, 1999. These acquisition
and construction costs were funded by borrowings on the line of credit, a
preferred equity offering and secured construction financing. Because of higher
prices and corresponding declining rates of return on completed apartment
communities in its targeted Western markets, the Company does not anticipate
significant acquisitions of completed apartment communities in the remainder of
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, cash available from its line of credit and
additional secured borrowings (including secured construction financing) will be
sufficient to meet its liquidity needs during the remainder of 1999, which
include normal
13
<PAGE>
BRE Properties
- --------------------------------------------------------------------------------
recurring expenses, debt service requirements, budgeted expenditures for
improvements to certain properties and distributions required to maintain the
Company's REIT qualification under the Code.
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 March 31,
1999, the Company had committed to the purchase of approximately $65 million of
multifamily communities and had an estimated cost of $150 million to complete
construction in progress. 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 $640 million remains unused at March 31,
1999. During the quarter ended March 31, 1999, the Company issued shares of its
8 1/2% Series A Cumulative Redeemable Preferred Stock for net proceeds of
approximately $52 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 been in the two years ended March
31, 1999. The Company is actively searching for other sources of possible
funding, including joint ventures and secured construction debt. The Company
has entered into joint venture agreements where the joint venture partner
provides significant equity upon completion of the Pinnacle at Blue Ravine and
Pinnacle Sonata communities and is reviewing other possible joint venture
opportunities. Also, 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.
DIVIDENDS AND DISTRIBUTIONS TO MINORITY MEMBERS
A cash dividend has been paid to shareholders each quarter since the Company's
inception in 1970. On February 22, 1999, the Company increased its dividend on
its common shares from $1.44 per year to $1.56 per year. Total dividends paid to
common shareholders for the three months ended March 31, 1999 and 1998 were
$17,275,000 and $15,082,000 respectively. Additionally, the Company paid
$756,000 in dividends on its 8 1/2% Series A Cumulative Redeemable Preferred
Stock in the quarter ended March 31, 1999, which was a pro-rated amount for the
actual time outstanding during the quarter.
Total distributions to minority members of the Company's consolidated
subsidiaries were $1,437,000 and $1,016,000 for the three months ended March 31,
1999 and 1998, respectively.
14
<PAGE>
BRE Properties
- --------------------------------------------------------------------------------
ITEM 3: 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 March 31, 1999, but has previously. In 1998,
the Company closed out treasury rate lock agreements in conjunction with the
issuance of $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 March
31, 1999.
The Company had $267,089,000 and $146,585,000 variable rate debt outstanding at
March 31, 1999 and 1998, respectively. A hypothetical 10% adverse change in
interest rates would have had an annualized unfavorable impact of approximately
$385,000 and $229,000 respectively, on the Company's earnings and cash flows for
the quarter based upon these quarter-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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Statement Re Computations of Per Share Earnings
27 Financial Data Schedule
99.1 Other Exhibits -Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K:
Current Report Form 8-K, filed on January 29, 1999, pursuant to Item 5
reporting the public offering of the Company's 8 1/2% Series A
Cumulative Redeemable Preferred Stock, with exhibits.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRE PROPERTIES, INC.
(Registrant)
Date: May 14, 1999 /s/ LeRoy E. Carlson
-------------- --------------------
LeRoy E. Carlson
Executive Vice President,
Chief Financial Officer and Secretary
17
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATIONS OF PER SHARE EARNINGS
- --------------------------------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
1999 1998
---------------------- --------------------
<S> <C> <C>
Numerator:
Net income available to common shareholders $15,340 $14,142
Less adjustment for gain (loss) on sales of investmen ts in
rental properties available to common shareholders - 825
--------------------- --------------------
Numerator for basic earnings per share income from
continuing operations available to common shareholders 15,340 14,967
Effect of dilutive securities:
Minority interest in income convertible into common
shares 1,269 1,016
---------------------- ---------------------
Numerator for diluted earnings per share $16,609 $15,983
====================== =====================
Denominator:
Denominator for basic earnings per share - weighted
average shares 44,280 41,830
Effect of dilutive securities:
Stock options 160 500
Weighted average convertible operating company units 3,250 2,820
---------------------- ---------------------
Dilutive potential commons shares 3,410 3,320
---------------------- ---------------------
Denominator for diluted earnings per share adjusted
for weighted average shares and assumed conversion 47,690 45,150
====================== =====================
Basic earnings per share excluding gains (loss) on sale $ 0.35 $ 0.36
====================== =====================
Diluted earnings per share excluding gains (loss) on
sale $ 0.35 $ 0.36
====================== =====================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,660
<SECURITIES> 0
<RECEIVABLES> 30,114
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 44,774
<PP&E> 1,691,971
<DEPRECIATION> (83,811)
<TOTAL-ASSETS> 1,652,934
<CURRENT-LIABILITIES> 20,134
<BONDS> 721,368
0
22
<COMMON> 444
<OTHER-SE> 910,966<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,652,934
<SALES> 55,420
<TOTAL-REVENUES> 55,420
<CGS> 16,940
<TOTAL-COSTS> 16,940
<OTHER-EXPENSES> 9,880<F2>
<LOSS-PROVISION> 1,250
<INTEREST-EXPENSE> 9,839
<INCOME-PRETAX> 17,511
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 2,171<F3>
<CHANGES> 0
<NET-INCOME> 15,340<F4>
<EPS-PRIMARY> 0.35<F5>
<EPS-DILUTED> 0.35
<FN>
<F1> INCLUDES $94,575 OF MINORITY INTEREST.
<F2> INCLUDES $8,184 OF DEPRECIATION, A NON CASH CHARGE.
<F3> INCLUDES $1,415 OF MINORITY INTEREST AND $756 OF DIVIDENDS TO PREFERRED
SHAREHOLDERS.
<F4> REPRESENTS NET INCOME AVAILABLE TO COMMON SHAREHOLDERS.
<F5> REPRESENTS BASIC EARNINGS PER SHARE.
</FN>
</TABLE>
<PAGE>
Exhibit 99.1
<TABLE>
<CAPTION>
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Quarter Ended March 31,
1999 1998
---------------------- ---------------------
<S> <C> <C>
Income before net gain (loss) on sales of investments
in rental properties and minority interest $17,511 $15,983
Plus-provision for non-recurring charge 1,250 -
Less-minority interest not convertible into common
stock (146) -
---------------------- ---------------------
Earnings $18,615 $15,983
====================== =====================
Fixed charges:
Interest $ 9,839 $ 8,535
Capitalized interest 3,034 2,026
Preferred stock dividends 756 -
Other 12 12
---------------------- ---------------------
Fixed Charges $13,641 $10,573
====================== =====================
Earnings plus fixed charges, excluding capitalized
interest and preferred stock dividends $28,466 $24,530
====================== =====================
Divided by fixed charges $13,641 $10,573
===================== =====================
Ratio of earnings to fixed charges 2.1 2.3
====================== =====================
</TABLE>
