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We reiterate our Neutral recommendation on BRE Properties Inc. as we expect the stock to perform in line with the broader market. The company reported second quarter 2011 funds from operations (FFO) of $34.9 million or 49 cents per share versus $28.9 million or 46 cents per share in the year-earlier quarter.

Funds from operations, 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.

BRE Properties is a real estate investment trust (REIT) that develops, acquires, and manages multi-family apartment communities primarily in the Western U.S., where it currently operates in three states: California, Washington and Arizona.

Despite a challenging macroeconomic environment, home values in most of the BRE Properties’ markets are still among the highest in the country and the rent-to-own gap remains high. BRE Properties’ assets are generally located in supply-constrained premium markets of the country that have fared comparatively better than its competitors. Consequently, the company has strong upside potential.

The company has established a track record of conservative capital management and cash returns to shareholders in the form of steady dividend and share repurchases. Since its inception in 1970, the company has paid uninterrupted quarterly dividends to shareholders.

However, BRE Properties competes with other housing alternatives such as rental apartments, condominiums and single-family homes that are available for rent, and new and existing condominiums and single family homes available for sale. Consequently, the company is under severe stress to maintain profitability.

BRE currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. One of its competitors, Equity Residential (EQR - Analyst Report) also holds a Zacks #3 Rank.

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