<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 June 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)
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<S> <C>
Maryland 94-1722214
-------------------------------------------------------- ----------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
44 Montgomery Street
36/th/ Floor
San Francisco, CA 94104-4809
-------------------------------------------------------- ----------------
(Address of principal office) (Zip Code)
</TABLE>
(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 August 11, 2000 45,345,370
<PAGE>
BRE PROPERTIES, INC.
INDEX TO FORM 10-Q
June 30, 2000
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<CAPTION>
Page No.
-------------
<S> <C>
Part I FINANCIAL INFORMATION
ITEM 1:
Consolidated balance sheets - June 30, 2000 and December 31,
1999 2
Consolidated statements of income - three months ended June 30,
2000 and 1999 3
Consolidated statements of income - six months ended June 30,
2000 and 1999 4
Consolidated statements of cash flows - six months ended June
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 9-20
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk 20
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 21
ITEM 2 Changes in Securities and Use of Proceeds 21
ITEM 3 Defaults Upon Senior Securities 21
ITEM 4 Submission of Matters to a Vote of Security Holders 21
ITEM 5 Other Information 22
ITEM 6 Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
--------------------
<TABLE>
<CAPTION>
Consolidated Balance Sheets (unaudited)
-------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
June 30, December 31,
2000 1999
-------------------- ---------------------
<S> <C> <C>
Assets
Real estate portfolio:
Direct investments in real estate:
Investments in rental properties $1,734,721 $1,691,762
Construction in progress 67,175 46,575
Less: accumulated depreciation (127,261) (109,623)
-------------------- ---------------------
1,674,635 1,628,714
-------------------- ---------------------
Equity interests in real estate joint ventures:
Investments in rental properties 9,613 -
Construction in progress 36,974 15,083
-------------------- ---------------------
46,587 15,083
Land under development 27,022 26,538
-------------------- ---------------------
Total real estate portfolio 1,748,244 1,670,335
Cash 477 13,812
Other assets 40,750 23,015
-------------------- ---------------------
Total assets $1,789,471 $1,707,162
==================== =====================
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans $ 195,964 $ 211,403
Unsecured senior notes 243,000 253,000
Unsecured line of credit 417,500 315,000
Accounts payable and other liabilities 19,004 17,212
-------------------- ---------------------
Total liabilities 875,468 796,615
-------------------- ---------------------
Commitments and contingencies (note D)
Minority interest 88,570 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
outstanding at June 30, 2000 and December 31, 1999 53,750 53,750
Common stock, $.01 par value, 100,000,000 shares authorized.
Shares issued and outstanding: 44,931,381 at June 30, 2000;
44,679,341 at December 31, 1999 449 447
Additional paid-in capital 675,685 671,760
Accumulated net income in excess of cumulative dividends 98,197 99,241
Stock purchase loans to executives (2,648) (2,291)
-------------------- ---------------------
Total shareholders' equity 825,433 822,907
-------------------- ---------------------
Total liabilities and shareholders' equity $1,789,471 $1,707,162
==================== =====================
See notes to consolidated financial statements
</TABLE>
2
<PAGE>
Consolidated Statements of Income (unaudited)
-------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
-----------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Revenue
Rental income $60,088 $53,967
Other income 5,349 4,372
------------------- -----------------
Total revenue 65,437 58,339
------------------- -----------------
Expenses
Real estate operating 19,213 17,459
Depreciation 9,680 9,126
Interest 12,094 10,296
General and administrative 2,063 1,996
Internet business segment 1,818 -
------------------- -----------------
Total expenses 44,868 38,877
------------------- -----------------
Income before net gain (loss) on sales of investments in rental
properties, minority interest and dividends attributable to
preferred stock 20,569 19,462
Net gain (loss) on sales of investments in rental properties - 54
------------------- -----------------
Income before minority interest 20,569 19,516
Minority interest in income 1,430 1,336
------------------- -----------------
Net income 19,139 18,180
Dividends attributable to preferred stock 1,142 1,142
------------------- -----------------
Net income available to common shareholders $17,997 $17,038
=================== =================
Net income per outstanding common share:
Income before net gain (loss) on sales of investments in rental
properties less minority interest $ 0.40 $ 0.38
Net gain (loss) on sales of investments in rental properties - -
------------------- -----------------
Net income per share - basic $ 0.40 $ 0.38
=================== =================
Income before net gain (loss) on sales of investments in rental
properties and minority interest $ 0.40 $ 0.38
Net gain (loss) on sales of investments in rental properties - -
------------------- -----------------
Net income per share - assuming dilution $ 0.40 $ 0.38
=================== =================
Weighted average common shares outstanding - basic 44,780 44,570
=================== =================
Weighted average common shares outstanding - assuming dilution 48,210 47,850
=================== =================
Dividends declared and paid per common share $ 0.425 $ 0.390
=================== =================
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
Consolidated Statements of Income (unaudited)
-------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Revenue
Rental income $117,730 $106,260
Other income 9,310 7,499
------------------- -----------------
Total revenue 127,040 113,759
------------------- -----------------
Expenses
Real estate operating 36,618 34,399
Depreciation 18,660 17,310
Interest 23,729 20,135
General and administrative 3,957 3,692
Internet business segment 1,818 -
Provision for non-recurring charge - 1,250
------------------- -----------------
Total expenses 84,782 76,786
------------------- -----------------
Income before net gain (loss) on sales of investments in rental
properties, minority interest and dividends attributable to
preferred stock 42,258 36,973
Net gain (loss) on sales of investments in rental properties - 54
------------------- -----------------
Income before minority interest 42,258 37,027
Minority interest in income 2,782 2,751
------------------- -----------------
Net income 39,476 34,276
Dividends attributable to preferred stock 2,284 1,898
------------------- -----------------
Net income available to common shareholders $ 37,192 $ 32,378
=================== =================
Net income per outstanding common share:
Income before net gain (loss) on sales of investments in rental
properties less minority interest $ 0.83 $ 0.73
Net gain (loss) on sales of investments in rental properties -
------------------- -----------------
Net income per share - basic $ 0.83 $ 0.73
=================== =================
Income before net gain (loss) on sales of investments in rental
properties and minority interest $ 0.83 $ 0.73
Net gain (loss) on sales of investments in rental properties -
------------------- -----------------
Net income per share - assuming dilution $ 0.83 $ 0.73
=================== =================
Weighted average common shares outstanding - basic 44,750 44,430
=================== =================
Weighted average common shares outstanding - assuming dilution 48,000 47,740
=================== =================
Dividends declared and paid per common share $ 0.85 $ 0.78
=================== =================
See notes to consolidated financial statements
</TABLE>
4
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Consolidated Statements of Cash Flows (unaudited)
-------------------------------------------------------------------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
---------------------------------------------
2000 1999
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 39,476 $ 34,276
Adjustments to reconcile net income to net cash generated by
operating activities:
Provision for depreciation 18,660 17,310
Provision for nonrecurring charge - 1,250
Net (gain) loss on sales of investments in rental properties - (54)
Minority interest 2,782 2,751
Increase (decrease) in accounts payable and other
liabilities 1,792 (4,067)
(Increase) decrease in other assets (3,954) 2,396
-------------------- -------------------
Net cash flows generated by operating activities 58,756 53,862
-------------------- -------------------
Cash flows from investing activities:
Additions to direct investment construction in progress (29,241) (8,908)
Advances to unconsolidated joint ventures-construction in
progress (39,833) (19,055)
Reimbursements of construction in progress from
unconsolidated joint ventures 28,525 31,592
Purchase of land for development (20,680) (13,120)
Multifamily properties purchased (27,894) -
Capital expenditures (2,370) (2,325)
Rehabilitation and other expenditures (14,250) (2,536)
Investment in Internet business segment (4,964) -
Proceeds from sales of property, net - 11,510
-------------------- -------------------
Net cash flows used in investing activities (110,707) (2,842)
-------------------- -------------------
Cash flows from financing activities:
Principal payments on mortgage loans and unsecured senior
notes (25,439) (5,964)
Lines of credit:
Advances 183,500 69,000
Repayments (81,000) (131,000)
Proceeds from preferred equity offering, net - 51,659
Proceeds from exercises of stock options, net 3,925 3,663
Distributions to minority members (1,852) (2,765)
Dividends paid (40,518) (36,573)
-------------------- -------------------
Net cash flows generated by (used in) financing activities 38,616 (51,980)
-------------------- -------------------
Decrease in cash (13,335) (960)
Balance at beginning of period 13,812 2,057
-------------------- -------------------
Balance at end of period $ 477 $ 1,097
==================== ===================
Supplemental disclosure of non cash activity
Transfers of construction in progress to direct investment
real estate $ 8,641 $ 5,347
==================== ===================
Transfers of construction in progress to joint venture
interest $ 20,196 $ 22,455
==================== ===================
Interest capitalized $ 8,130 $ 5,035
==================== ===================
Transfers of net real estate joint ventures-construction in
progress to investments in rental properties $ 5,049 $ -
==================== ===================
See notes to consolidated financial statements
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
June 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
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 the community, 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 currently directly owns (or consolidates
for financial reporting purposes) may be contributed into a joint venture in the
future. Accordingly, the line item captions in the 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. Beginning
this quarter, BRE has determined that it has 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 quarter ended June 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 installation, access and content to the multifamily
apartment industry. VelocityHSI assets included in the consolidated balance
sheet consist of $4,964,000 in costs advanced primarily for equipment,
capitalized software development and prepaid transaction costs, which are
included in other assets. (As discussed under Note E, BRE intends to distribute
approximately 86% of VelocityHSI to its shareholders in August 2000.)
Additionally, a $1,818,000 net loss from VelocityHSI's operations is included in
the statement of operations for the quarter ended June 30, 2000. This loss
includes $320,000 of revenues generated from BRE-owned apartment communities,
which are VelocityHSI's only customers as of June 30, 2000.
6
<PAGE>
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 $43,912,000 and $39,158,000 for the quarters ended June 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 quarters ended June 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 results of operations or
financial position.
NOTE D - COMMITMENTS
--------------------
As of June 30, 2000, the Company had a commitment to acquire one multifamily
community, with a total estimated acquisition cost of approximately $41 million.
The Company expects to fund the commitment in calendar year 2000. There can be
no assurance that this community will be acquired or will be acquired for the
estimated cost indicated.
NOTE E - SUBSEQUENT EVENTS
--------------------------
On July 10, 2000, the Company entered into an agreement with G&I III Residential
One LLC ("G&I") pursuant to which the Company and BRE Property Investors, LLC
agreed to sell 4,909 apartment units in 22 communities for $280 million in the
form of cash and assumption of debt. The communities are located in Albuquerque,
Las Vegas, Phoenix and Tucson and, although there can be no assurance, the
transaction is scheduled to close in September 2000. The closing of the
transaction is subject to customary closing conditions. It is anticipated that
the Company will invest approximately $12 million in cash in a joint venture in
which G&I will have an approximate 85% equity interest and the Company will have
an approximate 15% equity interest. The Company will treat this transaction as a
sale, and anticipates recording a loss of approximately $35 million in the third
quarter. The Company plans initially to use the cash proceeds of approximately
$248,000,000 (after the anticipated investment in the joint venture) to pay down
amounts outstanding on the Company's line of credit.
On March 16, 2000, the Company announced to shareholders its intention to
spin off the assets and operations of its high-speed Internet segment into a
corporation formed in April 2000, VelocityHSI, Inc. ("VelocityHSI"). VelocityHSI
provides high-speed Internet installation, access and content to the multifamily
apartment industry. On August 8, 2000, the Registration Statement which
describes the spin off and distribution of VelocityHSI shares to BRE
shareholders was declared effective by the Securities and Exchange Commission.
Each BRE shareholder of record as of August 7, 2000 will receive one share in
VelocityHSI for every five common shares of BRE owned. It is anticipated that
9,069,074 shares of VelocityHSI common stock will be distributed to BRE
shareholders, and BRE is expected to retain 1,363,678 shares, or approximately
7
<PAGE>
13% ownership. Additional shares will be sold and given to VelocityHSI and BRE
employees and limited partners of BRE Property Investors, LLC in related
transactions, and BRE option holders will receive options to purchase
VelocityHSI common shares on the same one for five ratio. BRE's ownership is
expected to be reduced to 9.9% upon the completion of such transactions. After
the distribution, BRE will record its investment in VelocityHSI under the equity
method of accounting. The distribution is expected to occur on or about August
15, 2000.
In addition, BRE has agreed to provide VelocityHSI with administrative services
and advance VelocityHSI, Inc. up to $10 million for operations, including
reimbursements for administrative services provided under the agreement, plus
unlimited capital expenditures for equipment to be installed at properties owned
by BRE, from the date of distribution through September 30, 2001. On September
30, 2001, VelocityHSI will be obligated to repay the advances. BRE has also
guaranteed VelocityHSI's office lease, which requires rental payments of
approximately $325,000 per year and has a term of five years beginning July 1,
2000.
8
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ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------------------------------------
June 30, 2000
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 86 apartment communities (aggregating 22,882 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. Beginning this quarter, BRE has determined that it
has two operating and reportable segments, multifamily communities and Internet
business operations. Internet business operations consist of operations of the
Company's segment, VelocityHSI, Inc. ("VelocityHSI"), which was incorporated in
April 2000 as a wholly owned subsidiary and was previously a division within
BRE. VelocityHSI provides high-speed Internet installation, access and content
to the multifamily apartment industry. The Company's revenues consist primarily
of rental income (92% of total revenues in the quarters ended June 30, 2000 and
1999) 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 and
development 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 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
9
<PAGE>
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.
10
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Quarters Ended June 30, 2000 and 1999
Revenues
Total revenues were $65,437,000 for the three months ended June 30, 2000
compared to $58,339,000 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 $6,138,000 to revenues for the three months ended June 30,
2000, as compared to the same period in 1999. Further, multifamily rental
revenues from "same-store" communities (multifamily communities owned by the
Company and stabilized as of April 1, 1999 consisting of 20,519 of BRE's 22,882
total units) increased $3,419,000 for the three months ended June 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 4%.
Physical occupancy on a same store basis was 97% at June 30, 2000 and 1999.
Other income increased from $4,372,000 in the quarter ended June 30, 1999 to
$5,349,000 for the quarter ended June 30, 2000, due primarily to the portfolio
changes discussed above and net development and management fees.
A summary of the components of revenue for the quarters ended June 30, 2000 and
1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 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 $54,291 $51,000
Non same-store 5,741 2,911
------------------ --------------
Total Multifamily 60,032 92% 53,911 92% 11%
Commercial and retail 56 - 56 - -
------------------ --------------- -------------- --------------- ---------------
Rental revenue 60,088 92% 53,967 92% 11%
Other income 5,349 8% 4,372 8% 22%
------------------ --------------- -------------- ---------------
Total revenue $65,437 100% $58,339 100% 12%
================== =============== ============== ===============
</TABLE>
Multifamily communities physical occupancy rates as of June 30, 2000 and 1999
were as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Multifamily: Same-store 97% 97%
------------------------------------------------------------------------------
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.
11
<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 June 30,
2000 increased 10% to $19,213,000 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 29.4% and 29.9% for the quarters ended June
30, 2000 and 1999, respectively.
A summary of the categories of real estate expenses for the quarters ended June
30, 2000 and 1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 30, 1999
---------------------------------- --------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 1999 to 2000
-------------- ---------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Multifamily:
Same-store $17,169 $16,333 5%
Non same-store 1,826 1,156 58%
Other 218 (30) 827%
-------------- ------------
Total real estate expense $19,213 29.4% $17,459 29.9 % 10%
============== ============
</TABLE>
Provision for Depreciation
The provision for depreciation increased by $554,000 to $9,680,000 for the
quarter ended June 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 $12,094,000 (net of interest capitalized to the cost of
apartment communities under development of $5,192,000) for the quarter ended
June 30, 2000, an increase of $1,798,000 or 17% from the comparable period in
1999. Interest expense was $10,296,000 for the same period in 1999 and was net
of $2,001,000 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 the Company's lines of credit, and interest expense on higher
average balances on the lines of credit (due to expenditures on construction in
progress).
12
<PAGE>
General and Administrative
General and administrative costs were $2,063,000 or approximately 3.2% of total
revenues for the second quarter in 2000 and $1,996,000 or approximately 3.4% of
total revenues, for the second quarter in 1999. 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
approximately 12% from the quarter ended June 30, 1999 to the quarter ended June
30, 2000.
Net Gain (Loss) on Sales of Real Estate Investments
There was no gain or loss on sales of real estate investments in the three
months ended June 30, 2000. The net gain on sale of real estate investments for
the three months ended June 30, 1999 was due to the gain on sale of the Los
Senderos community in Phoenix, Arizona and was offset by the loss on sale of a
property under construction.
Internet Business Segment
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 installation, access and content to the multifamily
apartment industry. During the quarter ended June 30, 2000, BRE recognized a
net loss from operations of $1,818,000, primarily due to operating, general and
administrative and marketing expenses of VelocityHSI.
Minority Interest in Income
Minority interest in income was $1,430,000 and $1,336,000 for the quarters ended
June 30, 2000 and 1999, respectively. The increase is due to the addition of
one property in the second quarter of 2000 structured as a limited liability
company in which BRE has less than a 100% interest.
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 Available to Common Shareholders
Net income available to common shareholders was $17,997,000 and $17,038,000 for
the quarters ended June 30, 2000 and 1999 respectively, an increase of $959,000.
This increase is primarily due to increased revenues from changes in the
portfolio, partially offset by higher interest expense and expenses related to
the Company's Internet business segment.
13
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Six Months Ended June 30, 2000 and 1999
Revenues
Total revenues were $127,040,000 for the six months ended June 30, 2000 compared
to $113,759,000 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 $11,457,000 to multifamily rental revenues for the six months
ended June 30, 2000 as compared to the same period in 1999. Further,
multifamily rental revenues from "same-store" communities (multifamily
communities owned by the Company and stabilized as of January 1, 1999 and
consisting of 20,255 of BRE's 22,882 total units) increased $5,870,000 for the
six months ended June 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%. Physical occupancy on a same store
basis was 97% at June 30, 2000 and 1999.
Other income increased from $7,449,000 in the six months ended June 30, 1999 to
$9,310,000 for the six months ended June 30, 2000, due primarily to the
portfolio changes discussed above and net development and management fees.
A summary of the components of revenue for the six months ended June 30, 2000
and 1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Six months Ended Six months Ended
June 30, 2000 June 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 $106,378 $100,476
Non same-store 11,240 5,652
------------------ --------------
Total Multifamily 117,618 93% 106,128 93% 11%
Commercial and retail 112 - 132 - (15%)
------------------ --------------- -------------- ---------------
Rental revenue 117,730 93% 106,260 93% 11%
Other income 9,310 7% 7,499 7% 24%
------------------ --------------- -------------- ---------------
Total revenue $127,040 100% $113,759 100% 12%
================== =============== ============== ===============
</TABLE>
14
<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 six months ended June
30, 2000 increased 6% to $36,618,000 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 30.2% for the
six months ended June 30, 2000 and 1999, respectively.
A summary of the categories of real estate expenses for the six months ended
June 30, 2000 and 1999 follows (dollars in thousands):
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------------------------- ----------------------------------
% of Total % of Total % Change from
Expense Revenue Expense Revenue 1999 to 2000
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Multifamily:
Same-store $32,688 $31,871 3%
Non same-store 3,770 2,492 51%
Other 160 36 344%
--------------- ---------------
Total real estate expense $36,618 28.8% $34,399 30.2% 6%
=============== ===============
</TABLE>
Provision for Depreciation
The provision for depreciation increased by $1,350,000 to $18,660,000 for the
six months ended June 30, 2000 from the comparable period of 1999. The increase
resulted primarily from the acquisition of two multifamily properties.
Interest Expense
Interest expense was $23,729,000 (net of interest capitalized to the cost of
apartment communities under development of $8,130,000) for the six months ended
June 30, 2000, an increase of $3,594,000 or 18% from the comparable period in
1999. Interest expense was $20,135,000 for the same period in 1999 and was net
of $5,035,000 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 outstanding balances on our credit lines.
15
<PAGE>
General and Administrative
General and administrative costs were $3,957,000 or approximately 3.1% of total
revenues for the first six months in 2000 and $3,692,000 or approximately 3.2%
of total revenues, for the first six months in 1999.
Net Gain (Loss) on Sales of Real Estate Investments
There was no gain or loss on sales of real estate investments in the six months
ended June 30, 2000. The net gain on sale of real estate investments for the
six months ended June 30, 1999 was due to the sale of the Los Senderos community
in Phoenix, Arizona and was offset by a loss on a sale of property previously
under construction.
Internet Business Segment
During the six months ended June 30, 2000, BRE recognized a net loss from
operations of $1,818,000, primarily due to operating, general and
administrative, and marketing expenses of VelocityHSI.
Minority Interest in Income
Minority interest in income was $2,782,000 and $2,751,000 for the six months
ended June 30, 2000 and 1999, respectively.
Dividends Attributable to Preferred Stock
Dividends attributable to preferred stock represents the dividends on BRE's 8
1/2% Series A Cumulative Redeemable Preferred Stock.
Net Income Available to Common Shareholders
Net income available to common shareholders was $37,192,000 and $32,378,000 for
the six months ended June 30, 2000 and 1999, respectively, an increase of
$4,814,000. This increase is primarily due to increased revenues from the
portfolio and the addition of two multifamily apartment communities and five
communities previously under lease up, and is partially offset by higher
interest costs and expenses related to the Company's Internet business segment.
16
<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." The
Company transfers the capitalized costs of direct investment properties 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.
The following table presents data with respect to the Company's properties
included in "Construction in progress" and "Land under development" at June 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>
Proposed Cost to Date - Estimated Total
Units/1/ June 30, 2000 Cost
-------------- -------------------- -----------------------
<S> <C> <C> <C>
Direct investment
construction in progress/2/ 708 $ 67,175,000 $ 96,300,000
Equity interests in joint
venture construction in
progress/3/ 1,235 36,974,000 $158,900,000
-------------- -------------------- -----------------------
Subtotal 1,943 104,149,000 $255,200,000
=======================
Land under development/4/ 1,180 27,022,000
-------------- --------------------
Total 3,123 $131,171,000
============== ====================
</TABLE>
______________
/1/ As of June 30, 2000, 307 of these units had been delivered.
/2/ Consists of Pinnacle Bellcentre community in Bellevue, Washington; Pinnacle
Carmel Creek community in San Diego, California; and Pinnacle at Overlook II
community in Folsom, California, with 248, 348 and 112 units planned,
respectively. Pinnacle at Overlook II has an estimated completion in the
third quarter of 2000; Pinnacle Bellcentre and Pinnacle Carmel Creek in the
fourth quarter of 2000.
/3/ Consists of the gross costs of five communities, Pinnacle at Stone Creek,
Pinnacle Sonata, Pinnacle at MacArthur Place, Pinnacle Galleria, and
Pinnacle at Queen Creek, 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 $ 60,000,000 of draws on
construction loans and joint venture partner's capital contribution. The
Company's net equity contribution upon completion is estimated to be
$33,000,000.
/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; and Pinnacle at Denver Tech Center, in Greenwood Village,
Colorado, with 180, 216, 204, 160 and 420 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.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
At June 30, 2000, the Company's cash totaled $477,000, down from $13,812,000
at December 31,1999 due to the cash flow used by investing and financing
activities over the excess of cash flows generated by operating activities, as
follows:
- Net cash flows generated by operating activities increased
from $53,862,000 in the first six months of 1999 to
$58,756,000 in the first six 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 used in investing activities increased by
$107,865,000 from $2,842,000 for the six months ended June 30,
1999, due primarily to increased funding of construction in
progress and purchases of land under development and purchases
of multifamily operating properties.
- Net cash flows of $38,616,000 were generated by financing
activities for the six months ended June 30, 2000, while net
cash flows used in financing activities were $51,980,000 for
the six months ended June 30, 1999. The cash was generated
primarily from borrowings on the liens of credit in excess of
repayments, offset by principal payments on mortgage loans and
unsecured senior notes.
Borrowings under the Company's lines of credit totaled $417,500,000 at June
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. The Company typically reduces its
outstanding balance on the lines of credit with available cash balances. The
Company entered into a second line of credit with the same financial institution
in the quarter ended June 30, 2000. Borrowings of up to $500,000,000 are
available under the Company's lines of credit, with $82,500,000 available at
June 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. Cost of the lines of credit are 0.15%
and 0.30%, respectively, per annum on the total commitment amounts.
The Company had a total of $243,000,000 in unsecured indebtedness other than
the line of credit at June 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%.
In addition, at June 30, 2000, the Company had mortgage indebtedness totaling
$195,964,000 at interest rates ranging from 5.3% to 9.3%, with remaining terms
ranging from less than one to 28 years.
18
<PAGE>
For additional information regarding the Company's 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 the Company's 1999 Form 10-K. Certain of the
Company's indebtedness contain 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 quarter and six months ended June 30, 2000.
The Company purchased five land sites for development for a gross purchase
price of approximately $20,700,000. Further, the Company funded approximately
$29,000,000 for direct investment construction in progress and advanced a net
$12,000,000 for joint venture construction in progress during the six months
ended June 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. Because of higher prices and corresponding declining
rates of return on completed apartment communities in its targeted Western
markets, the Company presently does not anticipate significant acquisitions of
completed apartment communities in 2000, other than the communities noted below.
The Company continually evaluates its portfolio to determine whether
acquisitions or dispositions may be appropriate to maximize the portfolio's
performance.
The Company intends to meet its short-term liquidity requirements through cash
balances and cash flows provided by operations, borrowings on the unsecured
lines of credit and to a lesser extent, proceeds from asset sales. The Company
believes that its cash flow and cash available from its lines of credit and
other borrowings will be sufficient to meet its liquidity needs during 2000,
which include normal recurring expenses, debt service requirements, budgeted
expenditures for improvements to certain properties, funding ongoing
construction in progress and distributions required to maintain the Company's
real estate investment trust qualification under the Code.
However, the Company anticipates that it will continue to require outside
sources of financing to meet its long-term liquidity needs beyond 2000, such as
scheduled debt repayments, construction funding and property acquisitions. At
June 30, 2000, the Company had committed to purchase one multifamily community
for approximately $41,000,000 (estimated to fund in the year 2000) and had an
estimated cost of $29,100,000 to complete existing direct investment
construction in progress. Due to timing requirements, the Company made advances
to joint venture construction in progress slightly in excess of its budgeted
contribution during the period. In addition, the estimated cost to complete
land under development has not been determined as the development plans have not
been finalized. These properties may be contributed to a joint venture, which
may significantly lower the Company's required funding. 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 $750,000,000 in
equity, debt, preferred or convertible securities, of which approximately
$640,000,000 remains unused at June 30, 2000. The Company is actively searching
for other sources of possible funding, including further joint ventures and
additional secured construction debt. The Company owns unencumbered real estate
assets that could be sold, contributed to joint ventures or used as collateral
for financing purposes (subject to certain lender restrictions) and has
encumbered assets with significant equity that could be further encumbered
should other sources of capital not be available.
19
<PAGE>
PLANNED SPIN-OFF OF VELOCITYHSI, INC.
On March 16, 2000, the Company announced to BRE shareholders its intention to
spin off the assets and operations of its high-speed Internet segment into a
corporation formed in April 2000, VelocityHSI, Inc. ("VelocityHSI"). VelocityHSI
provides high-speed Internet installation, access and content to the multifamily
apartment industry. On August 8, 2000, the Registration Statement which
describes the spin off and distribution of VelocityHSI shares to BRE
shareholders was declared effective by the Securities and Exchange Commission.
Each BRE shareholder of record as of August 7, 2000 will receive one share in
VelocityHSI for every five common shares of BRE owned. It is anticipated that
9,069,074 shares of VelocityHSI common stock will be distributed to BRE
shareholders, and BRE is expected to retain 1,363,678 shares, or 13% ownership.
Additional shares will be sold and given to VelocityHSI and BRE employees and
limited partners of BRE Property Investors, LLC in related transactions, and BRE
option holders will receive options to purchase VelocityHSI common shares on the
same one for five ratio. BRE's ownership is expected to be reduced to 9.9% upon
the completion of such transactions. After the distribution, BRE will record its
investment in VelocityHSI under the equity method of accounting. The
distribution is expected to occur on or about August 15, 2000.
DIVIDENDS AND DISTRIBUTIONS TO MINORITY MEMBERS
A cash dividend has been paid to common shareholders each quarter since the
Company's inception in 1970. On February 24, 2000, the Company increased its
annual dividend on its common shares from $1.56 per year to $1.70 per year.
Total dividends paid to common shareholders for the six months ended June 30,
2000 and 1999 were $38,234,000 and $34,675,000, respectively. In addition, the
Company paid $2,284,000 and $1,898,000 in dividends on its 8 1/2% Series A
Cumulative Redeemable Preferred Stock in the six months ended June 30, 2000 and
1999, respectively.
Total distributions to minority members of the Company's consolidated
subsidiaries were $1,852,000 and $2,765,000 for the six months ended June 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 the Company's 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.
20
<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
At the Annual Meeting of shareholders held on May 16, 2000, the
shareholders elected three Directors for three-year terms, and approved one
other corporate action by the following votes:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITH-HELD NON-VOTE
-------------------------------------------------- -------------- ------------ --------------
% of
Shares
Voted on % of No. of No. of No. of
No. of shares this Item Outstanding Shares Shares Shares
---------------- ----------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Item No. 1
(Election of
Directors)
Class III
William Borsari 39,464,405 99% 88% 371,691
Frank C. McDowell 39,477,142 99% 88% 358,954
Edward E. Mace 39,466,324 99% 88% 369,772
Item No. 2
Approval of the
Amended and
Restated
Non-Employee
Director Stock
Option Plan 35,980,580 99% 81% 3,318,750 536,561 205
</TABLE>
21
<PAGE>
The terms of office of the Company's six other directors continued after the
Annual meeting, as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Director Term Expires Class
--------------------------------------------------------------------------------
<S> <C> <C>
Robert A. Fiddaman 2001 I
Roger P. Kuppinger 2001 I
Arthur G. von Thaden 2001 I
L. Michael Foley 2002 II
John McMahan 2002 II
Gregory M. Simon 2002 II
--------------------------------------------------------------------------------
</TABLE>
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Unsecured Line of Credit Loan Agreement - Bank of America
10.2 Employment Agreement with Ed Lange
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:
None.
22
<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: August 14, 2000 /s/ Leroy E. Carlson
--------------- --------------------
LeRoy E. Carlson
Executive Vice President,
Chief Operating Officer
(principal financial officer)
23
