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BRE Properties Beats Estimates

Zacks Equity Research

BRE Properties Inc (BRE), a real estate investment trust (:REIT), reported third quarter 2012 fund from operations (:FFO) of $32.5 million or 42 cents per share, compared with $41.5 million or 55 cents in the year-earlier quarter.

Excluding the non-recurring items, recurring FFO stood at $47.5 million or 62 cents per share in third quarter 2012. Recurring FFO in the reported quarter beat the Zacks Consensus Estimate by 2 cents.

The recurring FFO in third quarter 2012 also compared favorably with the year-ago recurring FFO of 55 cents. The  increase in year over year FFO was primarily due to improved performances in same-store property-level operating results, incremental net operating income (:NOI) from newly acquired and completed communities,  and a reduction in interest expense. It was, however, partially offset by a higher level of outstanding shares.

Total revenue during the quarter was $100.4 million versus $94.6 million in the year-ago quarter. Total revenue in the quarter beat the Zacks Consensus estimate of $98 million. Adjusted earnings before interest, tax, depreciation, and amortization (:EBITDA) were $65.0 million for the reported quarter compared with $60.9 million in the year-earlier quarter. Average revenue stood at $1,626 per occupied home.

Overall same-store revenues and NOI increased 5.3% and 6.6%, respectively, driven by higher rental rates per unit during the quarter (up 5.5%) partially offset by a 20 basis point dip in financial occupancy. Average physical occupancy in the same-store portfolio was 95.5% in third quarter 2012.

During third quarter 2012, BRE purchased a land site in Redwood City California for $11.4 million. Additionally, BRE sold interests in three unconsolidated joint ventures for $26.9 million.

Year-to-date, BRE has funded 20% of the $171 million total estimated development cost on the Pleasanton sites. The company intends to enter into joint ventures for the development of two land parcels in Pleasanton, California and sell two land parcels that compose its Park Viridian II site in Anaheim, California. These decisions are aimed at reducing the company's development outlay. To fund the remaining wholly-owned pipeline of projects under development, the company plans to sell off certain communities in its existing portfolio and utilize the funds available under its existing unsecured revolving credit facility.

During the reported quarter, BRE issued $300 million of 10.5 year senior unsecured notes with a coupon of 3.375%. The company did not issue any shares under its ‘at-the-market’ equity offering during the quarter. BRE declared a dividend of $0.385 for the third quarter or $1.54 on an annualized basis. The company has paid uninterrupted quarterly dividends since its inception in 1970.

As of September 30, 2012, BRE had cash reserves of $30.0 million. For fourth quarter 2012, BRE expects FFO in the range of 57 cents –60 cents per share. For full year 2012, the company has revised its earlier FFO guidance from $2.32-$2.38 per share to $2.16-$2.19.

BRE currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Equity Residential (EQR) also holds a Zacks #2 Rank, which implies a short term Buy rating.

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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