<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 EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000 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)
<TABLE>
<S> <C>
Maryland 94-1722214
--------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
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 November 10, 2000 45,804,695
<PAGE>
BRE Properties, Inc.
INDEX TO FORM 10-Q
September 30, 2000
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1:
Consolidated balance sheets - September 30, 2000 and December 31,
1999 2
Consolidated statements of operations - three months ended
September 30, 2000 and 1999 3
Consolidated statements of income - nine months ended September
30, 2000 and 1999 4
Consolidated statements of cash flows - nine months ended
September 30, 2000 and 1999 5
Notes to consolidated financial statements 6-8
ITEM 2:
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-19
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk 19
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 20
ITEM 2 Changes in Securities and Use of Proceeds 20
ITEM 3 Defaults Upon Senior Securities 20
ITEM 4 Submission of Matters to a Vote of Security Holders 20
ITEM 5 Other Information 20
ITEM 6 Exhibits and Reports on Form 8-K 20
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
<TABLE>
Consolidated Balance Sheets (unaudited)
-----------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
------
Real estate portfolio:
Direct investments in real estate:
Investments in rental properties $1,463,680 $1,691,762
Construction in progress 47,985 46,575
Less: accumulated depreciation (116,791) (109,623)
---------- ----------
1,394,874 1,628,714
---------- ----------
Equity interests in real estate joint ventures:
Investments in rental properties 9,697 -
Construction in progress 50,315 15,083
---------- ----------
60,012 15,083
Land under development 54,613 26,538
---------- ----------
Total real estate portfolio 1,509,499 1,670,335
Cash 882 13,812
Other assets 53,055 23,015
---------- ----------
Total assets $1,563,436 $1,707,162
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Mortgage loans $ 214,987 $ 211,403
Unsecured senior notes 243,000 253,000
Unsecured line of credit 208,500 315,000
Accounts payable and other liabilities 24,010 17,212
---------- ----------
Total liabilities 690,497 796,615
---------- ----------
Commitments and contingencies (note E)
Minority interest 70,608 87,640
---------- ----------
Shareholders' equity
Preferred stock, $.01 par value, liquidation preference $25.00 per
share, 10,000,000 shares authorized. 2,150,000 shares of Series A
issued and outstanding 53,750 53,750
Common stock, $.01 par value, 100,000,000 shares authorized.
Shares issued and outstanding: 45,681,540 at September 30,
2000;
44,679,341 at December 31, 1999 457 447
Additional paid-in capital 694,081 671,760
Accumulated net income in excess of cumulative dividends 56,946 99,241
Stock purchase loans to executives (2,903) (2,291)
---------- ----------
Total shareholders' equity 802,331 822,907
---------- ----------
Total liabilities and shareholders' equity $1,563,436 $1,707,162
========== ==========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations (unaudited)
-----------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
For the Three Months Ended
September 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue
Rental income $ 60,298 $55,519
Other income 4,315 4,310
-------- -------
Total revenue 64,613 59,829
-------- -------
Expenses
Real estate operating 18,537 18,587
Depreciation 9,881 8,977
Interest 11,154 10,400
General and administrative 2,042 1,431
Internet business segment 1,258 -
-------- -------
Total expenses 42,872 39,395
--------- -------
Income before net gain (loss) on sale of investments in rental
properties, minority interest and dividends attributable to
preferred stock 21,741 20,434
Net gain (loss) on sale of investments in rental properties $(32,711) -
-------- -------
Income (loss) before minority interest (10,970) 20,434
Minority interest in income 1,220 1,353
-------- -------
Net income (loss) (12,190) 19,081
Dividends attributable to preferred stock 1,142 1,142
-------- -------
Net income (loss) available to common shareholders $(13,332) $17,939
======== =======
Net income (loss) per outstanding common share:
Income before net gain (loss) on sale of investments in rental
properties less minority interest $ 0.43 $ 0.40
Net gain (loss) on sale of investments in rental properties (0.72) -
-------- -------
Net income (loss) per share - basic $ (0.29) $ 0.40
======== =======
Income before net gain (loss) on sale of investments in rental $ 0.42 $ 0.40
properties and minority interest
Net gain (loss) on sale of investments in rental properties
(after adjustment to eliminate anti-dilutive effect of loss on
sale) (0.71) -
-------- -------
Net income (loss) per share - assuming dilution $ (0.29) $ 0.40
======== =======
Weighted average common shares outstanding - basic 45,250 44,680
======== =======
Weighted average common shares outstanding - assuming dilution 48,510 47,860
======== =======
Dividends declared and paid per common share $ 0.425 $ 0.390
======== =======
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
<TABLE>
Consolidated Statements of Income (unaudited)
----------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
2000 1999
------------ ----------
<S> <C> <C>
Revenue
Rental income $178,028 $161,779
Other income 13,624 11,809
-------- --------
Total revenue 191,652 173,588
-------- --------
Expenses
Real estate operating 55,155 52,986
Depreciation 28,541 26,287
Interest 34,882 30,535
General and administrative 5,999 5,123
Internet business segment 3,076 -
Provision for non-recurring charge - 1,250
-------- --------
Total expenses 127,653 116,181
-------- --------
Income before net gain (loss) on sales of investments in rental
properties, minority interest and dividends attributable to
preferred stock 63,999 57,407
Net gain (loss) on sales of investments in rental properties (32,711) 54
-------- --------
Income before minority interest 31,288 57,461
Minority interest in income 4,002 4,104
-------- --------
Net income 27,286 53,357
Dividends attributable to preferred stock 3,426 3,040
-------- --------
Net income available to common shareholders $ 23,860 $ 50,317
======== ========
Net income per outstanding common share:
Income before net gain (loss) on sales of investments in rental
properties less minority interest $ 1.26 $ 1.13
Net gain (loss) on sales of investments in rental properties ($0.73) -
-------- --------
Net income per share - basic $ 0.53 $ 1.13
======== ========
Income before net gain (loss) on sales of investments in rental $ 1.25 $ 1.13
properties and minority interest
Net gain (loss) on sales of investments in rental properties
(after adjustment to eliminate anti-dilutive effect of loss
on sale) ($0.72) -
-------- --------
Net income per share - assuming dilution $ 0.53 $ 1.13
======== ========
Weighted average common shares outstanding - basic 44,990 44,500
======== ========
Weighted average common shares outstanding - assuming dilution 48,160 47,740
======== ========
Dividends declared and paid per common share $ 1.28 $ 1.17
======== ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (unaudited)
---------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
For the Nine Months Ended
September 30,
-------------------------
2000 1999
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 27,286 $ 53,357
Adjustments to reconcile net income to net cash generated by
operating activities:
Provision for depreciation 28,541 26,287
Net (gain) loss on sales of investments in rental properties 32,711 (54)
Minority interest 4,002 4,104
(Increase) decrease in other assets (6,970) 1,438
Increase (decrease) in accounts payable and other liabilities 6,798 (1,351)
--------- ---------
Net cash flows generated by operating activities 92,368 83,781
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property, net 255,730 11,510
Multifamily properties purchased (27,894) (24,264)
Capital expenditures (3,465) (3,485)
Rehabilitation and other expenditures (17,947) (8,185)
Additions to direct investment construction in progress (42,963) (26,203)
Advances to unconsolidated joint ventures-construction in progress (56,094) (32,055)
Reimbursements of construction in progress from unconsolidated
joint ventures 31,445 42,128
Additions to land for development (48,271) (5,030)
Investment in joint venture (11,288) -
Investment in and advances to Internet business segment (11,631) -
--------- ---------
Net cash flows generated by (used in) investing activities 67,622 (45,584)
--------- ---------
Cash flows from financing activities:
Principal payments on mortgage loans and unsecured senior notes (41,416) (6,747)
Proceeds from new mortgage loan 35,000 -
Lines of credit:
Advances 266,000 126,000
Repayments (372,500) (152,000)
Dividends paid (60,687) (55,158)
Proceeds from exercises of stock options, net 4,672 3,438
Distributions to minority members, net (3,989) (4,202)
Proceeds from preferred equity offering, net - 51,659
--------- ---------
Net cash flows used in financing activities (172,920) (37,010)
--------- ---------
(Decrease) increase in cash (12,930) 1,187
Balance at beginning of period 13,812 2,057
--------- ---------
Balance at end of period $ 882 $ 3,244
========= =========
Supplemental disclosure of non cash activity
Transfers of construction in progress to direct investment real
estate $ 41,553 $ 5,667
========= =========
Transfers of land for development to joint venture interest $ 20,196 $ 22,455
========= =========
Transfers of net real estate joint ventures-construction in
progress to investments in rental properties $ 5,049 $ -
========= =========
Interest capitalized $ 11,885 $ 7,226
========= =========
Minority interest unit conversions to common shares $ 17,045 $ -
========= =========
Distribution of 87% of Internet business segment to shareholders $ 8,892 $ -
========= =========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
September 30, 2000
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, 1999 (the "1999 10-K"). In
the opinion of management, all adjustments (consisting of normal recurring
adjustments only) have been made that are necessary for a fair statement of the
financial position and results for the interim periods presented herein.
Certain reclassifications have been made from the prior period's presentation to
conform to the current period's presentation.
The Company has entered into joint venture agreements whereby BRE funds all or a
pro rata share of the construction costs of a multifamily community. These
funds include proceeds from construction loans. For those joint ventures for
which BRE funds all costs of construction, upon completion of construction, the
community is contributed to the joint venture. The joint venture partner's
equity contribution and long term secured debt (if any) are used to pay off
outstanding construction loans. The joint ventures are unconsolidated and are
reported using the equity method, with secured debt offset against the cost
basis of the community for financial statement presentation. From time to time,
communities under construction that BRE directly owns (or consolidates for
financial reporting purposes) may be contributed into a joint venture.
Accordingly, the line item captions in the consolidated balance sheet reflect
the joint ventures separately from direct investments in real estate. Further,
purchases of land for development have been segregated until the Company
determines actual cost based on bids for construction contracts, the most
advantageous course of development (including possibly selling part of the land)
and whether the land will be contributed to a joint venture arrangement.
NOTE B - 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. During
the nine months ended September 30, 2000, BRE determined that it had two
operating and reportable segments, multifamily communities and Internet business
operations. Multifamily communities comprised 99% of BRE's assets and 99% of
its total revenues as of and for the nine months ended September 30, 2000. All
multifamily communities owned by the Company are located in the Western United
States.
Internet business operations consist of operations of the Company's segment,
VelocityHSI, Inc. ("VelocityHSI"), which was incorporated as a wholly owned
subsidiary in April 2000 and was previously a division within BRE. VelocityHSI
provides high-speed Internet access to the multifamily apartment industry. On
August 15, 2000, BRE distributed approximately 87% of its investment in
VelocityHSI to BRE shareholders and retained the balance. Each BRE shareholder
of record as of August 7, 2000 received one share of VelocityHSI for every five
common shares of BRE owned. After cash distributions in lieu of fractional
shares, 9,066,383 shares of VelocityHSI common stock were distributed to BRE
shareholders. BRE retained 1,363,678 shares, and additional shares were sold
and given to VelocityHSI and BRE employees and limited partners of BRE Property
Investors, LLC in related transactions. BRE option holders received options to
purchase VelocityHSI common shares on the same one for five ratio.
6
<PAGE>
BRE's ownership has subsequently been reduced to 9.9% of VelocityHSI and, since
August 15, 2000, our investment is recorded under the equity method of
accounting. Such investment was $1,337,000 as of September 30, 2000, which is
included in other assets on the accompanying consolidated balance sheet. In
addition, we have included in other assets, on the consolidated balance sheet as
of September 30, 2000, a receivable in the amount of $1,402,000 for funds BRE
has advanced to VelocityHSI primarily for equipment and capitalized software
development. These costs, together with interest at 9% per annum, will be
repaid to BRE on or before September 30, 2001. A net loss of $1,258,000 from
VelocityHSI's operations through August 15, 2000 is included in the consolidated
statement of operations for the three months ended September 30, 2000
($3,076,000 net loss for the nine months ended September 30, 2000). Our pro
rata share of VelocityHSI's income or loss subsequent to August 15, 2000 will be
recorded on a 90-day lag basis to allow VelocityHSI time to complete its
accounting, as allowed under acceptable accounting practices. However, until
VelocityHSI obtains a source of outside financing other than BRE, we will record
100% of VelocityHSI's earnings or losses.
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 $39,051,000 and $33,993,000 (excluding NOI from sold communities) for
the three months ended September 30, 2000 and 1999, respectively. All other
segment measurements are presently disclosed in the accompanying Consolidated
Balance Sheets and Notes to Consolidated Financial Statements.
All BRE revenues are from external customers. There are no tenants that
contributed 10% or more of BRE's total revenues in the three months ended
September 30, 2000 or 1999. 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.
NOTE C - LITIGATION
-------------------
BRE is defending various claims and legal actions that arise from its normal
course of business. While it is not feasible to predict or determine the
ultimate outcome of these matters, in the opinion of management, none of these
actions will have a material adverse effect on BRE's consolidated results of
operations or financial position.
NOTE D - LOSS ON SALE OF INVESTMENTS IN RENTAL PROPERTIES
---------------------------------------------------------
On September 13, 2000, BRE and BRE Property Investors LLC sold 19 communities
(totaling 4,288 apartment units) pursuant to an agreement with G&I III
Residential One LLC, an unrelated third party, for an aggregate sale price of
$261,000,000. BRE then invested approximately $11,288,000 of the net proceeds in
a joint venture related to the buyer in which BRE has a 15% equity interest. The
communities are located in Albuquerque, Las Vegas, Phoenix, and Tucson and BRE
recorded a loss on sale of $32,711,000.
NOTE E - COMMITMENTS
--------------------
As of September 30, 2000, the Company had commitments to sell three remaining
communities pursuant to the agreement with G&I III Residential One, LLC.
Although there can be no assurance, BRE anticipates that the
7
<PAGE>
remaining three communities (totaling 621 units and located in Tucson) will be
sold and contributed to a joint venture in the fourth quarter of 2000. The
remaining three communities represent approximately $19,000,000 of the total
$280,000,000 sales price. This second closing is subject to customary closing
conditions and loan assumptions. Because of uncertainties inherent in real
estate transactions, these properties are included in direct investments in real
estate and depreciated, rather than reclassified to "held for sale."
As of September 30, 2000, the Company had a commitment to acquire a multifamily
community in Denver, Colorado (Pinnacle Mountain Gate) with an estimated
acquisition cost of $43,000,000. The Company expects to fund the commitment in
the fourth quarter of 2000. There can be no assurance that this community will
be acquired, or acquired for the estimated cost indicated.
In addition, BRE has agreed to provide VelocityHSI with up to $10,000,000 in
funds through September 30, 2001, to be used for general corporate purposes.
BRE has also agreed to provide VelocityHSI with funds through September 30, 2001
(expected to be $4,000,000) to finance the installation of equipment at
properties owned by BRE. These advances must be repaid by VelocityHSI on or
before September 30, 2001, together with interest on periodic unpaid balances at
a rate of 9% per year.
NOTE F - MINORITY INTEREST CONVERSIONS
--------------------------------------
On November 18, 1997, BRE acquired certain assets and operations of Trammell
Crow Residential West. In connection with the transaction, certain entities
received operating company units in BRE Property Investors LLC. The units are
exchangeable to common stock on a 1:1 basis after a one-year holding period.
The operating company units are held by members representing minority interest.
During the quarter ended September 30, 2000, 632,923 operating company units
were converted to BRE common shares, reducing minority interest by $17,045,000.
NOTE G - SUBSEQUENT EVENTS
--------------------------
On October 11, 2000, BRE acquired Sun Pointe Village, a multifamily property in
Fremont, California. The 336-unit apartment community was acquired for
$63,700,000 and was financed with borrowings under our line of credit.
8
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------------------------------------
September 30, 2000
Overview
BRE Properties, Inc. is a regionally focused, self-administered equity real
estate investment trust which primarily owns and operates a portfolio of 67
apartment communities, aggregating 18,594 units, in 10 major markets of the
Western United States. We are also a minority-limited partner in a medical
office property and twenty multifamily properties held in partnerships. Our
revenues consist primarily of rental income (93% of total revenues in the three
months ended September 30, 2000 and 1999) derived from our 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, management fees, development income and income from
partnership investments. Our policy 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, we typically seek 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, and Section 21E of the Securities
Exchange Act of 1934, as amended, such as those pertaining to anticipated
closings of transactions and uses of proceeds and our 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. You can identify forward-looking statements 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 of these words and phrases or other variations of
these words and phrases 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
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 real estate investment
trust under the Internal Revenue 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. Readers 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. See also our reports filed from time to
time with the Securities and Exchange Commission pursuant to the Securities Act.
9
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Quarters Ended September 30, 2000 and 1999
Revenues
Total revenues were $64,613,000 for the three months ended September 30, 2000
compared to $59,829,000 for the same period in 1999. This increase was
primarily due to increases in rental rates, decreased use of concessions, and an
increase in multifamily rental revenues resulting from the acquisition of two
multifamily communities and the completion of five multifamily properties
previously under lease up. These changes in the portfolio contributed, on a net
basis, approximately $5,869,000 to revenues for the three months ended September
30, 2000, as compared to the same period in 1999. Further, multifamily rental
revenues from "same-store" communities (multifamily communities owned by us and
stabilized as of April 1, 1999 consisting of 17,774 of our 18,594 total units)
increased $3,125,000 for the three months ended September 30, 2000 compared to
the same period in 1999. This increase in same-store communities was due
primarily to an average increase in rental rates of approximately 6%. Physical
occupancy on a same store basis was 98% at September 30, 2000 and 96% at
September 30, 1999.
Other income increased from $4,310,000 in the quarter ended September 30, 1999
to $4,315,000 for the quarter ended September 30, 2000.
A summary of the components of revenue for the quarters ended September 30, 2000
and 1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 30, 1999
----------------------------------- ------------------------------------
% of Total % of Total % Change from
Revenues Revenues Revenues Revenues 1999 to 2000
-------------- ---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Rental Revenue:
Multifamily:
Same-store $49,860 $46,735
Non same-store 3,341 23
Sold communities 7,041 8,705
------- --------
Total Multifamily 60,242 93% 55,463 93% 9%
Commercial and retail 56 - 56 - -
------- --- -------- --- -
Rental revenue 60,298 93% 55,519 93% 9%
Other income 4,315 7% 4,310 7% -%
------- --- -------- ---
Total revenue $64,613 100% $59,829 100% 8%
======= === ======== ===
</TABLE>
Multifamily communities' physical occupancy rates as of September 30, 2000 and
1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------
<S> <C> <C>
Multifamily: Same-store 98% 96%
----------------------------------------------------------------------
Multifamily: All 97% 96%
----------------------------------------------------------------------
</TABLE>
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.
10
<PAGE>
Expenses
Real Estate Expenses
Real estate expenses for multifamily properties (including maintenance and
repairs, utilities, on-site staff payroll, property taxes, insurance,
advertising and other direct operating expenses) for the quarter ended September
30, 2000 decreased slightly to $18,537,000 from the comparable period in 1999
primarily due to the reduction of expenses for the properties sold on September
13, 2000. Expenses of two multifamily property acquisitions and the completion
of five multifamily properties previously under lease up offset the reduction of
expenses due to the sale. Real estate expenses as a percentage of total
revenues were 28.7% and 31.1% for the quarters ended September 30, 2000 and
1999, respectively, primarily due to increased economies from operating a larger
portfolio throughout the majority of the quarter.
A summary of the categories of real estate expenses for the quarters ended
September 30, 2000 and 1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 30, 1999
------------------------------------- ----------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 1999 to 2000
------------- ----------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Multifamily:
Same-store $14,881 $14,918 -%
Non same-store 848 - 100%
Sold communities 2,631 3,646 (28%)
Other 177 23 670%
Total real estate expense $18,537 28.7% $18,587 31.1% -%
======= =======
</TABLE>
Provision for Depreciation
The provision for depreciation increased by $904,000 to $9,881,000 for the
quarter ended September 30, 2000 from the comparable period in 1999. The
increase in 2000 resulted primarily from the acquisition of two multifamily
properties.
Interest Expense
Interest expense was $11,154,000 (net of interest capitalized to the cost of
apartment communities under development of $3,755,000) for the quarter ended
September 30, 2000, an increase of $754,000 or 7% from the comparable period in
1999. Interest expense was $10,400,000 for the same period in 1999 and was net
of $2,191,000 of interest capitalized to the cost of apartment communities under
construction. This increase was due largely to higher rates on variable rate
debt, such as our lines of credit, and interest expense on higher average
balances on the lines of credit (due to expenditures on construction in
progress).
11
<PAGE>
General and Administrative
General and administrative costs were $2,042,000 or approximately 3.2% of total
revenues for the third quarter in 2000 and $1,431,000 or approximately 2.4% of
total revenues, for the third quarter in 1999. The increase in general and
administrative costs as a percentage of total revenues is primarily the result
of the timing of payments, higher professional fees associated with recent
transactions and cost of living salary increases. Total general and
administrative expenses grew at a rate of 43%, with total revenues increasing
approximately 8% from the quarter ended September 30, 1999 to the quarter ended
September 30, 2000.
Net Gain (Loss) on Sale of Investments in Rental Properties
The net loss on sale of investments in rental properties for the three months
ended September 30, 2000 relates to the recent sale and joint venture
transaction closed on September 13, 2000. We sold 19 communities in Tucson,
Albuquerque, Las Vegas, and Phoenix to an unrelated third party for $261,000,000
and recognized a net loss of $32,711,000. There was no gain or loss on sale of
real estate investments for the three months ended September 30, 1999.
Internet Business Segment
Internet business operations consist of operations of VelocityHSI through August
15, 2000, the date of the spin off and distribution. VelocityHSI was previously
our wholly owned subsidiary. VelocityHSI provides high-speed Internet
installation, access and content to the multifamily apartment industry. During
the quarter ended September 30, 2000, we recognized a net loss from operations
of $1,258,000, primarily due to operating, general and administrative and
marketing expenses of VelocityHSI prior to the distribution.
Minority Interest in Income
Minority interest in income was $1,220,000 and $1,353,000 for the quarters ended
September 30, 2000 and 1999, respectively. The decrease in the third quarter of
2000 is due to a lower distribution paid to BRE Property Investors LLC operating
company unit holders as several members of the limited liability company
exchanged their operating company units for shares of common stock this quarter.
Dividends Attributable to Preferred Stock
Dividends attributable to preferred stock represent the dividends on BRE's 8
1/2% Series A Cumulative Redeemable Preferred Stock.
Net Income (Loss) Available to Common Shareholders
Net income (loss) available to common shareholders was ($13,332,000) and
$17,939,000 for the quarters ended September 30, 2000 and 1999 respectively, a
decrease of $31,271,000. This decrease is primarily due to the loss of
$32,711,000 on the sale of real estate noted above. The difference between the
loss and the net change between quarters is a result of increased revenues from
the acquisition of two multifamily communities and the completion of five
multifamily properties previously under lease up.
12
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 2000 and 1999
Revenues
Total revenues were $191,652,000 for the nine months ended September 30, 2000
compared to $173,588,000 for the same period in 1999. This increase was
primarily due to increases in rental rates, decreased use of concessions, and an
increase in multifamily rental revenues resulting from the acquisition of two
multifamily communities and the completion of five multifamily properties
previously under lease up. These changes in the portfolio contributed, on a net
basis, approximately $16,054,000 to multifamily rental revenues for the nine
months ended September 30, 2000 as compared to the same period in 1999. Physical
occupancy was 97% at September 30, 2000 and 1999. Further, multifamily rental
revenues from "same-store" communities (multifamily communities owned by BRE and
stabilized as of January 1, 1999 and consisting of 16,886 of our 18,594 total
units) increased $8,430,000 for the nine months ended September 30, 2000,
compared to the same period in 1999. This increase in revenue from same-store
communities was due primarily to an average increase in rental rates of
approximately 6%.
Other income increased from $11,809,000 in the nine months ended September 30,
1999 to $13,624,000 for the nine months ended September 30, 2000, due primarily
to the portfolio changes discussed above and development and management fees.
A summary of the components of revenue for the nine months ended September 30,
2000 and 1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine months Ended Nine months Ended
September 30, 2000 September 30, 1999
-------------------------------- --------------------------------
% of Total % of Total % Change from
Revenues Revenues Revenues Revenues 1999 to 2000
------------ ----------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Rental Revenue:
Multifamily:
Same-store $139,597 $131,167
Non same-store 13,392 5,265
Sold communities 24,871 25,160
-------- --------
Total Multifamily 177,860 93% 161,592 93% 10%
Commercial and retail 168 - 187 - (10%)
-------- --- -------- ---
Rental revenue 178,028 93% 161,779 93% 10%
Other income 13,624 7% 11,809 7% 15%
-------- --- -------- ---
Total revenue $191,652 100% $173,588 100% 10%
======== === ======== ===
</TABLE>
13
<PAGE>
Expenses
Real Estate Expenses
Real estate expenses for multifamily properties (including maintenance and
repairs, utilities, on-site staff payroll, property taxes, insurance,
advertising and other direct operating expenses) for the nine months ended
September 30, 2000 increased 4% to $55,155,000 from the comparable period in
1999 primarily due to expenses of two multifamily property acquisitions and the
completion of five multifamily properties previously under lease up. Real
estate expenses as a percentage of total revenues were 28.8% and 30.5% for the
nine months ended September 30, 2000 and 1999, respectively, primarily due to
increased economies from operating a larger portfolio.
A summary of the categories of real estate expenses for the nine months ended
September 30, 2000 and 1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------------------ ------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 1999 to 2000
------------- --------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Multifamily:
Same-store $41,487 $40,992 1%
Non same-store 3,869 1,512 156%
Sold communities 9,464 10,425 -9%
Other 335 57 488%
------- -------
Total real estate expense $55,155 28.8% $52,986 30.5% 4%
======= =======
</TABLE>
Provision for Depreciation
The provision for depreciation increased by $2,254,000 to $28,541,000 for the
nine months ended September 30, 2000 from the comparable period of 1999. The
increase resulted primarily from the acquisition of two multifamily properties.
Interest Expense
Interest expense was $34,882,000 (net of interest capitalized to the cost of
apartment communities under development of $11,885,000) for the nine months
ended September 30, 2000, an increase of $4,347,000 or 14% from the comparable
period in 1999. Interest expense was $30,535,000 for the same period in 1999
and was net of $7,226,000 of interest capitalized to the cost of apartment
communities under construction. This increase was due largely to higher rates
on variable rate debt and higher average outstanding balances on our credit
lines.
14
<PAGE>
General and Administrative
General and administrative costs were $5,999,000 or approximately 3.1% of total
revenues for the first nine months in 2000 and $5,123,000 or approximately 3.0%
of total revenues, for the first nine months in 1999.
Net Gain (Loss) on Sales of Investments in Rental Properties
The net loss on sales of investments in rental properties for the nine months
ended September 30, 2000 relates to the 19 communities (4,288 units) in Tucson,
Albuquerque, Las Vegas, and Phoenix we sold for $261,000,000, as previously
discussed. The net gain on sale of investments in rental properties for the
nine months ended September 30, 1999 was due to the sale of the Los Senderos
community in Phoenix, Arizona and was offset by a loss on sale of property
previously under construction.
Internet Business Segment
During the nine months ended September 30, 2000, we recognized a net loss from
operations of $3,076,000, primarily due to operating, general and
administrative, and marketing expenses of VelocityHSI prior to the spin off and
distribution on August 15, 2000.
Minority Interest in Income
Minority interest in income was $4,002,000 and $4,104,000 for the nine months
ended September 30, 2000 and 1999, respectively.
Dividends Attributable to Preferred Stock
Dividends attributable to preferred stock represents the dividends on our 8 1/2%
Series A Cumulative Redeemable Preferred Stock.
Net Income Available to Common Shareholders
Net income available to common shareholders was $23,860,000 and $50,317,000 for
the nine months ended September 30, 2000 and 1999, respectively, a decrease of
$26,457,000. This decrease is primarily due to the $32,711,000 loss on the
disposal of assets and is partially offset by increased revenues from the
acquisition of two multifamily communities and the completion of five
multifamily properties previously under lease up.
15
<PAGE>
Construction in progress and land under development
Land acquired for development is capitalized and reported as "land under
development" until the development plan for the land is formalized. Once the
development plan is determined, the costs are transferred to the balance sheet
line items "construction in progress." Land acquisition, development and
carrying costs of properties under construction are capitalized and reported as
"direct investments in real estate" or "equity interests in and advances to real
estate joint ventures", as appropriate, in "construction in progress." We
transfer the capitalized costs for each building in a community under
construction to the balance sheet line items "investments in rental properties,"
once the building receives a final certificate of occupancy and is ready to
lease.
The following table presents data with respect to properties included in
"construction in progress" and "land under development" at September 30, 2000,
for both direct investment and equity interest properties. 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 or that they will contain the
number of units proposed in the table below.
<TABLE>
<CAPTION>
Total Proposed Cost to Date -
Units/1/ September 30, 2000 Estimated Total Cost
-------------- ------------------ --------------------
<S> <C> <C> <C>
Direct investment -
Construction in progress/2/ 708 $ 47,985,000 /1/ $ 99,400,000
Equity interests in joint
ventures-Construction in progress/3/ 1,235 50,315,000 $168,200,000
----- ------------ ------------
Subtotal 1,943 98,300,000 $267,600,000
============
Land under development/4/ 1,624 54,613,000
----- ------------
Total 3,567 $152,913,000
===== ============
</TABLE>
----------------------
/1/ As of September 30, 2000, 320 of these units had been delivered and
$41,553,000 has been transferred out of CIP into investments in rental
properties.
/2/ Consists of Pinnacle Bellecentre in Bellevue, Washington; Pinnacle Carmel
Creek in San Diego, California; and Pinnacle at Overlook II in Folsom,
California, with 248, 348 and 112 units planned, respectively. All three
communities have an estimated completion date in the fourth quarter of
2000.
/3/ Consists of the gross costs of five communities, Pinnacle at Stone Creek in
Paradise Valley, Arizona; Pinnacle Sonata in Bothell, Washington; Pinnacle
at MacArthur Place in Santa Ana, California; Pinnacle Galleria in
Roseville, California; and Pinnacle at Queen Creek in Chandler, Arizona
with 226, 268, 253, 236 and 252 units planned, respectively. These five
communities are under joint venture agreements and are presented on the
financial statements net of $63,000,000 of draws on construction loans and
one joint venture partner's capital contribution. Our net equity
contribution upon completion is estimated to be $34,000,000.
/4/ Consists of Pinnacle at the Bluffs in Renton, Washington; Pinnacle at the
Creek in Aurora, Colorado; Pinnacle at Otay Ranch I and II in Chula Vista,
California; Pinnacle at Denver Tech Center, in Greenwood Village, Colorado,
Pinnacle at Fullerton, in Fullerton, California; and Pinnacle at Talega, in
Newport, California; with 180, 216, 204, 160, 420, 192, and 252 units
planned, respectively. The development plans for these communities are
under review and finalization, including obtaining final bids for
construction costs, and the total proposed units may change.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
At September 30, 2000, cash totaled $882,000, down from $13,812,000 at December
31, 1999 due to the cash flows used by financing activities over the excess of
cash flows generated by operating and investing activities, as follows:
- Net cash flows generated by operating activities increased from
$83,781,000 in the first nine months of 1999 to $92,368,000 in the
first nine months of 2000, due to higher earnings from the addition of
two real estate properties and the completion of five properties
previously under lease up.
- Net cash flows of $67,622,000 were generated by investing activities
for the nine months ended September 30, 2000, due primarily to the
sale of 19 communities for net proceeds of $255,730,000. Proceeds from
the sale are offset primarily by increased funding of construction in
progress, purchases of land under development and purchases of
multifamily operating properties. Net cash flows used in investing
activities were $45,584,000 for the nine months ended September 30,
1999.
- Net cash flows used in financing activities increased from $37,010,000
for the nine months ended September 30, 1999 to $172,920,000 for the
first nine months of 2000. The increase in cash used was primarily
related to the net repayments in excess of borrowings on the lines of
credit, mortgage loans, and unsecured senior notes.
Balances on our lines of credit totaled $208,500,000 at September 30, 2000,
compared to $315,000,000 at December 31, 1999. Drawings on the lines of credit
are available to pay dividends to shareholders and distributions to minority
members, to fund capital improvements and operating expenses, and to fund
property acquisitions and development. We typically reduce our outstanding
balance on the lines of credit with available cash balances. Borrowings of up
to $500,000,000 are available under our lines of credit, with $291,500,000
available at September 30, 2000. The lines of credit mature in August 2001 as to
$400,000,000 and in December 2000 as to $100,000,000 and bear interest at the
lower of LIBOR plus 0.70% as to $400,000,000 and LIBOR plus 0.95% as to
$100,000,000, or a rate based on bids of the participating banks. Costs of the
lines of credit are 0.15% and 0.30%, respectively, per annum on the total
commitment amounts.
We had a total of $243,000,000 in unsecured indebtedness other than the line of
credit at September 30, 2000, consisting of the following:
- $63,000,000 of unsecured senior notes with an interest rate of 7.44%
per annum on $45,000,000 and 7.88% per annum on $18,000,000. This
indebtedness is to be repaid through scheduled principal payments
annually from 2001 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, with an
effective interest rate of approximately 7.3%.
17
<PAGE>
In addition, at September 30, 2000, we had mortgage indebtedness totaling
$214,987,000 at interest rates ranging from 5.3% to 9.3%, with remaining terms
ranging from less than one to 28 years.
For additional information regarding our lines 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 Consolidated Financial
Statements contained in our 1999 Form 10-K. Certain of our indebtedness contain
financial covenants as to minimum net worth, interest coverage ratios, maximum
secured debt and total debt to capital, among others. We were in compliance with
all such financial covenants during the quarter and nine months ended September
30, 2000.
During the nine months ended September 30, 2000, we purchased six land sites for
development for a gross purchase price of approximately $48,271,000, including
costs to prepare the land for development of $13,496,000. Further, we funded
approximately $43,000,000 for direct investment construction in progress and
advanced a net $25,000,000 for joint venture construction in progress during the
nine months ended September 30, 2000. These acquisition and construction costs
were funded by borrowings on the lines of credit and construction loans on
communities under joint venture agreements. We continually evaluate our
portfolio to determine whether acquisitions or dispositions may be appropriate
to maximize the portfolio's performance.
Depending upon the availability and cost of external capital, we anticipate
making additional investments in multi-family communities. New investments are
funded from temporary borrowings under our lines of credit, internally generated
cash and the proceeds derived from asset sales. Permanent financing for future
investments, which replaces funds drawn under the lines of credit, is expected
to be provided through a combination of private and public offerings of debt and
equity securities, the assumption of secured debt, and proceeds derived from
joint venture arrangements. We believe our liquidity and various sources of
available capital are sufficient to fund operations, meet debt service and
dividend requirements, and finance future investments.
As of September 30, 2000, we have an effective shelf registration on file with
the Securities and Exchange Commission under which we may issue up to
$640,000,000 of securities including debt, convertible debt, common and
preferred stock. Depending upon market conditions, we may issue securities
under such shelf registration to invest in additional multifamily communities
and to repay borrowings under our lines of credit.
Spin-off and Distribution of VelocityHSI, Inc.
On August 15, 2000, we completed the VelocityHSI spin off. BRE shareholders of
record as of August 7, 2000 received one share of VelocityHSI for every 5 shares
of BRE owned. Immediately after the spin-off, we continued to hold 13%
ownership in VelocityHSI.
At the time of the spin-off, our investment in VelocityHSI was approximately
$10,029,000. We recorded 86.9% of this investment as an in-kind dividend
distribution, representing the spin-off to shareholders, and the remainder
remained on our balance sheet as our initial investment in VelocityHSI. After
the spin-off, advances made by BRE to VelocityHSI will be reimbursed, including
interest at 9%, repayable by September 30, 2001. Such advances are limited to
$10,000,000 for general corporate purposes plus an amount necessary (expected to
be $4 million) to install VelocityHSI services at all BRE communities.
18
<PAGE>
DIVIDENDS AND DISTRIBUTIONS TO MINORITY MEMBERS
A cash dividend has been paid to common shareholders each quarter since our
inception in 1970. On February 24, 2000, we increased our annual dividend on
our common shares from $1.56 per year to $1.70 per year. Total dividends paid to
common shareholders for the nine months ended September 30, 2000 and 1999 were
$57,261,000 and $52,118,000, respectively. In addition, we paid $3,426,000 and
$3,040,000 in dividends on our 8 1/2% Series A Cumulative Redeemable Preferred
Stock in the nine months ended September 30, 2000 and 1999, respectively.
Total distributions to minority members of our consolidated subsidiaries were
$3,989,000 and $4,202,000 for the nine months ended September 30, 2000 and 1999,
respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Information concerning market risk is incorporated herein by reference to Item
7A of our Form 10-K for the year ended December 31, 1999. There has been no
material change in the quantitative and qualitative disclosure about market risk
since December 31, 1999.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
As of September 30, 2000, there were no pending legal proceedings to
which we are a party or of which any of our properties is the subject,
the adverse determination of which we anticipate would have a material
adverse effect upon our financial condition and results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
During the three months ended September 30, 2000, an aggregate of
632,923 limited partnership units in BRE Property Investors LLC were
exchanged for shares of our common stock. The exchange of limited
partnership units for shares of our common stock was exempt from the
registration requirements of the Securities Act pursuant to Section
4(2) of the Securities Act and Rule 506 of Regulation D.
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:
10.1 Purchase and Sale Agreement, dated July 10, 2000, by and among G
& I III Residential One LLC, BRE Properties, Inc. and BRE
Properties Investors LLC (incorporated by reference to Exhibit
2.1 of the Registrant's Current Report on Form 8-K filed on
September 8, 2000).
10.2 Amendment No. 1 to Purchase and Sale Agreement, dated September
6, 2000, by and among G & I III Residential One LLC, BRE
Properties, Inc. and BRE Properties Investors LLC (incorporated
by reference to Exhibit 2.1 of the Registrant's Current Report
on Form 8-K filed on September 28, 2000).
10.3 Amendment No. 2 to Purchase and Sale Agreement, dated October
24, 2000, by and among G&I III Residential One LLC, BRE
Properties, Inc. and BRE Property Investors LLC.
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:
. The Registrant filed a Current Report on Form 8-K on September
8, 2000 in connection with the execution of the purchase and
sale agreement for the sale of properties to G&I III Residential
One LLC or its assignee.
. The Registrant filed a Current Report on Form 8-K on September
28, 2000 in connection with the first closing of the sale of
properties to G&I III Residential One LLC.
20
<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)
Dated: November 10, 2000 /s/ Edward F. Lange, Jr.
----------------- -----------------------------------------
Edward F. Lange, Jr.
Executive Vice President,
Chief Financial Officer and Secretary
21
