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On Nov 29, Zacks Investment Research downgraded apartment real estate investment trust (REIT), BRE Properties Inc. to a Zacks Rank #3 (Hold).

Why the Downgrade?

Aided by an increase in same-store community-level operating results on a year-over-year basis and net operating income (NOI) from newly completed assets, BRE Properties reported third-quarter 2013 core fund from operations (FFO) of 65 cents per share on Nov 4, which surpassed the Zacks Consensus Estimate by 1.6%.

Despite posting decent quarterly results, the stock descended 5.7% since then. We believe the concerns surrounding the taper issues and the rising yields on the U.S. Treasury 10-year note triggered the fall.

Moreover, with a considerable number of projects nearing completion, supply is likely to increase in the near term. This could slow down rent growth as more companies seek occupancy.

Additionally, in the third quarter, the company experienced a dip in NOI from operating assets sold in 2012 and 2013, and a decline in partnership and management fee income from joint venture interests offloaded in 2012 and 2013.

Nevertheless, in the medium term, new starts are likely to be pushed back amid rising construction costs and interest expenses. Also, BRE Properties’ portfolio in supply-constrained premium U.S. markets gives it a competitive edge.

Moreover, we expect the company to benefit in the long-term from growing demand driven by ‘echo boomers’ – children of the baby boomer generation – who prefer to move out of their parent's house but are restrained by a volatile job market and mounting student debt.

For BRE Properties, the Zacks Consensus Estimate for 2013 and 2014 FFO per share has remained flat at $2.51 and $2.66, respectively, over the last 7 days. The stock currently has a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

Some better-ranked stocks in the same sector include American Residential Properties, Inc. (ARPI - Snapshot Report), Education Realty Trust, Inc. (EDR - Snapshot Report) and Spirit Realty Capital, Inc. (SRC - Snapshot Report). All these stocks hold 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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