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Analyst Blog

On Oct 8, 2013, we affirmed our long-term Neutral recommendation on the apartment retail real estate investment trust (REIT), BRE Properties Inc. . The decision was based on the company’s recent Calif.-based premium asset buyout, better-than-expected second-quarter performance and rising apartment industry fundamentals. However, increasing interest rates, capital market volatility and stiff competition from other housing alternatives remain matters of concern.

Why the Reiteration?

Aided by a rise in both revenues and operating margins, BRE Properties’ second-quarter 2013 core FFO of 63 cents per share surpassed the Zacks Consensus Estimate by 5% and the year-ago quarter figure by 6.8%. Encouragingly, the company raised its 2013 core FFO outlook, which boosts investors’ confidence in the stock.

Also, the divestitures and significant development projects continue to improve BRE Properties’ portfolio in supply-constrained premium U.S. markets and enable it to counter competitive pressure. The recent asset buyout in Hollywood is the notable one in this respect. Moreover, going forward, we believe that the rise in apartment demand generated by ‘echo boomers’ – children of the baby boomer generation – will offer BRE Properties ample growth opportunities.

Yet, rising interest rates and the capital market volatility will likely limit the company’s ability to refinance existing debt and undertake portfolio-restructuring initiatives, thereby denting the company’s growth prospects to some extent.

In addition, the steady recovery of the housing market and increase in supply in the Sunbelt regions are anticipated to partly impede the overall rent growth in BRE Properties’ operating regions. Also, though the company’s decent development pipeline is encouraging, this increases operational risks in the current volatile market and exposes it to rising construction costs, entitlement delays and lease-up risks.

Over the last 60 days, the Zacks Consensus Estimate for 2013 funds from operations (FFO) per share remained at $2.48. On the other hand, for 2014, it upped 0.4% to $2.64. Thus, BRE Properties now carries a Zacks Rank #3 (Hold).

BRE Properties is scheduled to report its third-quarter 2013 earnings on Nov 4, 2013, after the closing bell. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at 64 cents per share, which depicts a year-over-year increase of 2.74%.

Other Stocks to Consider

Other REITs that are currently performing better include Select Income REIT Common Share (SIR - Snapshot Report), Education Realty Trust, Inc. (EDR - Snapshot Report) and Simon Property Group Inc. (SPG - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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