On Jan 21, 2014, we reaffirmed our long-term recommendation on BRE Properties Inc. (BRE) – a residential real estate investment trust (:REIT) – at Neutral. This reflects BRE’s decision to merge with Essex Property Trust, Inc. (ESS), its better-than-expected results in the third quarter as well as increased guidance.
However, we believe that the current stock price has already captured a part of these positives. Moreover, integration risks and stiff competition from other housing alternatives restrain us from becoming extremely positive on the stock.
BRE Properties is set to merge with Essex Property during the first-quarter of 2014 in a cash-and-stock deal, creating the leading public owner of multifamily properties in the attractive West Coast markets. As per the offer, shareholders of BRE Properties would receive 0.2971 shares of Essex common stock and $12.33 in cash for each BRE share they hold.
The combined company is projected to have a pro forma equity market capitalization of approximately $10.4 billion and a total market capitalization of around $15.4 billion. With a solid management team at Essex and a significant geographic overlap, we believe that this combined entity can enjoy a strong property base in the region and effectively leverage on the attractive market fundamentals, operating efficiencies and reward shareholders accordingly.
Moreover, BRE Properties’ third-quarter 2013 core FFO of 65 cents per share surpassed the Zacks Consensus Estimate by 1.6% and the year-ago figure by 4.8%. Also, the company increased the core FFO per share guidance for full-year 2013. Quarterly results were aided by increase in same-store community-level operating results on a year-over-year basis and net operating income from newly completed assets.
Yet, though the merger of BRE Properties with Essex would lead to the formation of a leading owner of multifamily properties in the growing West Coast markets, the integration would need sufficient time and involves risk related to integration of such a large entity.
Moreover, the steady recovery of the housing market and increase in supply in the Sunbelt regions are expected to partly impede the overall rent growth in the region. The company also faces stiff competition from other housing alternatives.
BRE Properties is slated to release its fourth quarter and full-year 2013 financial results on Feb 3, after the market close. The Zacks Consensus Estimate for FFO per share for the quarter is pegged at 65 cents per share, depicting year-over-year growth of 6.56%. Moreover, for 2013 the estimates remained flat at $2.51. The stock currently has a Zacks Rank #2 (Buy).
Other Stock to Consider
Other players in the residential REIT industry, which look attractive at current levels, include Education Realty Trust, Inc. (EDR) and UDR, Inc. (UDR). Both these stocks carry the same rank as of BRE Properties.
Note: 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.