On Jul 16, 2013, we reiterated our long-term recommendation on the apartment retail real estate investment trust (:REIT), BRE Properties Inc. (BRE), at Neutral. The decision was based on improved performances of the company’s operating and newly developed properties. However, BRE Properties’ huge development pipeline and stiff competition from other housing alternatives remain matters of concern.
BRE Properties’ assets are generally situated in premium supply-constrained markets of the U.S. that have fared comparatively well post recession.This drives value and mitigates operating risks, by generating relatively steady revenue growth.
In addition, the improving apartment sector will enable the company to witness significant demand for its upscale communities in the coming years. Moreover, BRE Properties has a strong financial position with minimal debt levels.
However, BRE Properties’ active development pipeline exposes it to various risks such as rising construction costs, entitlement delays and lease-ups. Additionally, the company faces stiff competition from developer of other housing alternatives. This remains a plausible concern for the company, going forward.
Over the last 60 days, the Zacks Consensus Estimate for 2013 funds from operations (:FFO) per share dropped 0.4% at $2.41. On the other hand, for 2014, it dipped 1.2% to $2.59. Thus, BRE Properties now carries a Zacks Rank #4 (Sell).
BRE Properties is scheduled to report its second-quarter 2013 earnings on Jul 30, 2013, after the closing bell. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at 60 cents per share.
The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for BRE Properties is negative 1.67% for the second quarter. This, along with its Zacks Rank #4 signifies that the company will miss earnings this season.
Other Stock to Consider
Other apartment REITs that are currently performing better include AvalonBay Communities, Inc. (AVB), Mid America Apartment Communities Inc. (MAA) and Sun Communities, Inc. (SUI). All these stocks carry a Zacks Rank #2 (Buy).
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.
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