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BRE's Earnings Miss by a Penny

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BRE Properties Inc.’s first quarter 2013 core fund from operations (FFO) of 58 cents per share fell a penny short of the Zacks Consensus Estimate of 59 cents. However, core FFO at this real estate investment trust (REIT) rose by a cent from the year-ago quarter.

Quarterly results reflect improved performances in same-store property-level operating results, incremental net operating income (NOI) from newly completed properties. However, the positives were offset by a reduction in NOI from operating properties sold in 2012, decrease in partnership and management fee income from joint venture interests disposed in 2012 and 2013, as well as elevated level of outstanding shares.

Including non-recurring items, reported FFO came in at $45.1 million or 58 cents per share in first quarter 2013, compared with $43.6 million or 57 cents per share in the prior-year quarter.

BRE Properties’ total revenue during the quarter was $100.9 million, reflecting an increase of 6.3% from the year-ago quarter. Total revenue also surpassed the Zacks Consensus Estimate of $98 million.

Quarter in Detail

BRE Properties’ adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $63.1 million for the reported quarter, up 2.8% year over year. Average revenue per occupied home was $1,666.

During the reported quarter, same-store revenues increased 4.9% year over year. This reflected a 5.0% increase in revenue earned per occupied unit during the period and a 10-basis-point decrease in financial occupancy levels from the prior-year quarter.

However, operating expenses increased 4.0% year over year as a result of elevation in property taxes in the Seattle market and an overall higher level of utility and insurance costs. As a result, same-store net operating income (NOI) increased 5.3% from the year-ago quarter. Average physical occupancy in the same-store portfolio was 95.2% in first-quarter 2013.

As of Mar 31, 2013, the company had cash reserves of $21.7 million, compared with $62.2 million as of the prior-quarter end.

Notable Activities During 1Q

During the reported quarter, BRE Properties accomplished the sale of 6 joint venture (JV) interests (4 in Denver and 2 in Phoenix) to its JV partner. The total sale price was $47.4 million and the company generated a gain of $15.0 million on the sale.

Furthermore, the company delivered the first 54 homes at Aviara. It is a 166-home community situated on Mercer Island in Seattle, Wash. The total estimated cost is $44.5 million and $2.9 million is left to be funded. The company expects to complete the construction in the second quarter of 2013.

The company also started the construction of MB360, a 360-home luxury apartment community sited in San Francisco. The company expects to complete it in the fourth quarter of 2014 for a total cost of $227 million. As of Mar 31, 2013, the company financed $77.4 million of the development costs.

As of Mar 31, 2013, BRE Properties’ projected cost for its active and wholly-owned development pipeline is $770 million. Of this, about $349 million remains to be funded through the fourth quarter of 2014. This pipeline comprises the company’s Aviara, Solstice, Wilshire La Brea, Radius and MB360 projects.

2013 Outlook

For full-year 2013, BRE Properties has reaffirmed its outlook and expects core FFO in the range of $2.35 – $2.45 per share. The guidance is based on same-store revenue growth of 3.50% – 4.75% and same-store NOI growth of 3.40% – 5.55%. The company plans to update its outlook for the full year concurrent with the second-quarter earnings release.

For second-quarter 2013, the company estimates FFO per share to range from 56 cents to 60 cents. Notably, the mid-point of this guidance range compared with the first quarter results represents increased same-store NOI levels, offset by income lost due to the sale of 6 joint venture communities as well as another community’s disposition, which is slated to occur during the second quarter.


Concurrent with its first quarter 2013 earnings release, BRE Properties declared a quarterly common dividend of 39.5 cents per share for the second quarter 2013. The dividend will be paid on Jun 28, 2013 to shareholders of record as on Jun 14. Notably, the company has paid uninterrupted quarterly dividends to shareholders since its founding in 1970.

Our Take

BRE Properties experiences strong occupancy levels and high operating margins. Moreover, we expect the divesture to improve BRE Properties’ portfolio in supply-constrained premium markets of the country and enable it to outperform competitive pressure. However, with continued job cuts, demand for high-end apartment homes is likely to be affected as renters move down to less expensive B class properties.

BRE Properties currently carries a Zacks Rank #4 (Sell). However, REITs that are performing better and deserve a look include Camden Property Trust (CPT - Free Report) , Simon Property Group Inc. (SPG - Free Report) and Acadia Realty Trust (AKR - Free Report) , all carrying a Zacks Rank #2 (Buy).

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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