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BRE Beats by a Whisker

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BRE Properties Inc. , a real estate investment trust (REIT), reported second quarter 2012 funds from operations (FFO) of $45.8 million or 59 cents per share, compared with $34.9 million or 49 cents in the year-earlier quarter. FFO in the reported quarter marginally beat the Zacks Consensus Estimate by a penny.

The improved quarterly performance was primarily due to increases in same-store property-level operating results, incremental net operating income (NOI) from newly acquired and completed communities and a reduction in interest expense, which was partially offset by a higher level of outstanding shares.

Total revenue during the quarter was $98.1 million versus $91.4 million in the year-ago quarter. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $62.6 million for the reported quarter compared with $59.6 million in the year-earlier quarter. Average revenue stood at $1,599 per occupied home.

Overall same-store revenues and NOI increased 5.1% and 5.6%, respectively, driven by higher rental rates per unit during the quarter (up 5.4%) partially offset by a 30 basis-point dip in financial occupancy. Average physical occupancy in the same-store portfolio was 95.4% in second quarter 2012.

During the reported quarter, BRE had four communities under construction, totaling 1,260 homes, with an estimated investment of $554 million. Additionally, BRE owns four land parcels representing 1,265 homes for future development, with an estimated investment of $513 million upon completion. The company sold Countryside Village – a 96-unit apartment community in San Diego for $12.6 million during the quarter.

The company did not issue any shares under its ‘at-the-market’ equity offering during the quarter. BRE declared a dividend of 38.5 cents for the second quarter or $1.54 on an annualized basis. The company has paid uninterrupted quarterly dividends since its inception in 1970.

As of June 30, 2012, BRE had cash reserves of $3.0 million. For third quarter 2012, BRE expects FFO in the range of 58 cents – 61 cents per share.

For full year 2012, the company has revised its earlier FFO guidance from $2.30 -$2.40 to $2.32 -$2.38 per share. Same-store revenue is expected to grow by 5.0% to 5.75% during the current year, while same-store NOI is expected to increase by 5.75% to 6.75%.

The updated guidance is based on strong market fundamentals in the first half of 2012 in the company’s Northern California and Seattle markets, and relatively tepid growth conditions in the Southern California markets like San Diego.

We maintain our long-term Neutral recommendation on the stock, which currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #3 Rank for Equity Residential (EQR - Free Report) , one of the competitors of BRE.

Note: 1. 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.

2. Financial occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of the lease agreement, regardless of the actual use or occupation by that tenant of the area being leased, and excludes tenants in abatement periods. It is obtained by dividing actual rental revenue by total possible rental revenue.

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