BRE Properties Inc. (BRE), a real estate investment trust (REIT) that operates apartment communities, reported third quarter 2010 FFO (fund from operations) of $30.6 million or 47 cents per share compared to $32.5 million or 59 cents in the year-earlier quarter. Fund 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. The reported FFO for the quarter marginally beat the Zacks Consensus Estimate by a penny.

Excluding non-recurring items, FFO for the reported quarter was 51 cents per share. Total revenues from continuing operations during the quarter were $88.0 million versus $82.7 million in the year-ago quarter. Total revenues during the reported quarter were well ahead of the Zacks Consensus Estimate of $84.0 million. Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) were $57.1 million for the quarter, compared to $55.7 million in the corresponding period of the previous year.

Same-store revenues declined 0.8% to $78.7 million during the quarter, while same-store expenses increased 1.9% to $20.2 million. Overall same-store net operating income decreased 1.8% to $53.4 million during the quarter, primarily due to a 3.5% year-over-year decline in average same-store market rent from $1,479 per unit in third quarter 2009 to $1,428 in third quarter 2010. Average physical occupancy in the same-store portfolio during the quarter was 96.2% versus 94.8% in the year-earlier quarter.

The dismal same-store performance was largely due to the continued job losses in most of the BRE’s markets. Stagnant job growth has negatively affected the demand for apartments, and high-end apartment homes have been hit the hardest as renters move down to less expensive ‘B’ class properties.

During the quarter, BRE acquired two stabilized properties for $216.3 million. These included a 226-unit property in San Jose, California, for $50.3 million and a 500-unit property in Marina del Rey, California, for $166 million. In addition, the company also purchased 2.4 acres of land in downtown Sunnyvale, California, for $19 million. Year to date, BRE has acquired four operating communities (two in Southern California and two in the San Francisco Bay area), totaling 1,037 units for $292 million.

Currently, BRE has a single property in Santa Clara, California, in lease-up stage (270 units). The property was 67% occupied at quarter-end. During the quarter, BRE sold two operating properties (978 units) in the Inland Empire for approximately $97.6 million, resulting in a profit of $13.2 million.

During the quarter, BRE issued $300 million 10.5-year senior unsecured notes, with a coupon of 5.20%, proceeds from which were utilized to fund a tender offer for 4.125% convertible notes that was announced concurrently with the note offering. Total debt at quarter-end was $1.9 billion with cash and cash equivalents of $105.8 million. Interest coverage ratio was 2.8x, while fixed charge coverage ratio was 2.5x.

The company declared a quarterly dividend of 37.5 cents per share, equivalent to an annualized basis of $1.50 per share. Since its inception in 1970, BRE has paid quarterly dividends uninterruptedly.

For full year 2010, BRE reduced its earlier FFO guidance from the range of $1.84 – $1.92 per share to $1.54 – $1.57, primarily due to $23 million or $0.37 per share loss on retirement of debt that will be recorded for the annual period. Same-store net operating income for fiscal 2010 is expected to decline by 3.5% to 4.0% compared to the previous year. We maintain our Neutral rating on the stock, which presently has a Zacks #3 Rank translating a short-term Hold recommendation.

 
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