BRE Properties Beats, Dividend Up

Zacks

BRE Properties Inc.’s (BRE) fourth quarter 2012 core fund from operations (:FFO) of 61 cents per share were a penny ahead of the Zacks Consensus Estimate of 60 cents. Moreover, core FFO at this real estate investment trust (:REIT) exceeded the year-ago quarter’s figure of 57 cents per share. Simultaneously, the company announced a 2.6% hike in its 2013 quarterly dividend.

For full year 2012, BRE Properties’ core FFO came in at $2.39 per share, surpassing the Zacks Consensus Estimate of $2.27 per share and up from $2.20 per share reported a year ago.

The better-than-expected results at BRE Properties, which escalated 7.0% quarterly and 8.6% yearly, were backed by improved performances in same-store property-level operating results, incremental net operating income (:NOI) from acquired and newly completed properties as well as a reduction in interest expense. It was, however, partially offset by higher level of outstanding shares.

Including non-recurring items, reported FFO came in at $46.9 million or 61 cents per share in fourth quarter 2012, up from $43.3 million or 57 cents per share in the prior-year quarter. For full year 2012, FFO totaled $168.9 million or $2.19 per share, well ahead of $154.4 million or $2.14 per share recorded a year ago.

BRE Properties’ total revenue during the quarter was $100.3 million, reflecting an increase of 6.8% from the year-ago quarter. Total revenue also surpassed the Zacks Consensus Estimate of $97 million. For full year 2012, the company generated total revenue of $390.1 million, up 7.5% year over year and ahead of the Zacks Consensus Estimate of $385 million.

Quarter in Detail

BRE Properties’ adjusted earnings before interest, tax, depreciation and amortization (:EBITDA) were $65.6 million for the reported quarter, ahead of $61.9 million reported in the year-earlier quarter. Average revenues stood at $1,645 per occupied home.

Overall, same-store revenues and NOI increased 5.6% and 6.2%, respectively, year over year. This was driven by higher rental rates per unit during the quarter (up 5.5%) along with a 10 basis point increase in financial occupancy. Average physical occupancy in the same-store portfolio was 95.7% in fourth quarter 2012.

As of Dec 31, 2012, the company had cash reserves of $62.2 million.

Notable Activities During 4Q

During fourth quarter 2012, BRE Properties completed the sale of 2 San Diego apartment communities for $77.0 million in total.

During the reported quarter, BRE Properties accomplished the construction of Lawrence Station -- a 336-home community located in Sunnyvale, Calif. -- for a total cost of around $110.0 million. In addition, in the fourth quarter, the company started construction of Radius -- a 264-unit luxury apartment community located in Redwood City, Calif. -- with an estimated total cost of $98 million.

As of Dec 31, 2012, BRE Properties’ projected cost for its active and wholly-owned development pipeline is $770 million. Of this, about $395 million remains to be funded through the first quarter of 2015. This pipeline comprises the company’s Aviara, Solstice, Wilshire La Brea, Redwood City and Mission Bay projects.

2013 Outlook

For full year 2013, BRE Properties 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 a same-store NOI growth of 3.40% – 5.55%.

For first quarter 2013, the company estimates FFO per share to range from $0.54 to $0.58. This would represent a decline from fourth quarter 2012 FFO per share and would reflect a loss of NOI from San Diego communities sold in the fourth quarter. Alongside, it would reflect a sequential increase in both general and administrative expenses and operating expenses in the first quarter as well as the potential loss of NOI from community disposition activity.

Dividend Hike

Concurrent with its fourth quarter 2012 earnings release, BRE Properties declared a quarterly common dividend of $0.395 per share for 2013. This represents a hike of 2.6% from the prior dividend rate. The increased dividend will be paid on Mar 29, 2013 to shareholders of record as on Mar 15.

Our Take

We are encouraged by the improved performance at BRE Properties. This leading multi-family apartment REIT focuses primarily on the supply-constrained markets of Western U.S.

It experiences strong occupancy levels and high operating margins through operating efficiencies and cost controls, and by deploying new and recycled capital to supply-constrained markets of Western U.S. This provides compelling growth potential to the company. Moreover, dividend hikes boost investors’ confidence on the stock.

In addition to BRE Properties, 3 other REITs have raised their dividends recently. These include Simon Property Group Inc. (SPG) that raised its dividend by 4.5% sequentially; AvalonBay Communities Inc. (AVB), which hiked its dividend by 10.3%; and Apartment Investment and Management Company (AIV) that made a 20% sequential hike in its quarterly cash dividend rate.

BRE currently retains a Zacks Rank #3 (Hold).

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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