SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-5305
BRE PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-1722214
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Montgomery Street
Telesis Tower, Suite 2500
San Francisco, CA 94104-5525
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(Address of principal office) (Zip Code)
Registrant's telephone number,
including area code (415) 445-6530
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Inapplicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ . No __X__ .
Number of shares of Class A common stock
outstanding as of October 31, 1995 10,970,865
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PART I FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BRE PROPERTIES, INC.
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BALANCE SHEETS (Dollar amounts in thousands)
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October 31, 1995 July 31, 1995
(unaudited)
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ASSETS
Equity investments in real estate $ 370,076 $ 377,175
Less: Accumulated depreciation and amortization (46,730) (47,811)
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323,346 329,364
Investments in limited partnerships 1,202 1,181
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Real estate portfolio 324,548 330,545
Mortgage loans 7,163 7,409
Allowance for possible losses (1,250) (1,250)
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330,461 336,704
Cash and short-term investments 15,232 4,462
Funds in escrow for tax-deferred exchange 3,854
Other assets 8,214 6,720
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Total assets $ 357,761 $ 347,886
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 4,091 $ 4,116
Mortgage loans payable 112,519 100,828
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Total liabilities 116,610 104,944
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Shareholders' equity
Class A common stock, $0.01 par value, 50,000,000
shares authorized. Shares issued and outstanding
10,970,865 at October 31,1995 and 10,962,065 at
July 31, 1995 109 109
Additional paid-in capital 212,246 212,127
Undistributed net realized gain on sales of
properties 28,796 30,706
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Total shareholders' equity 241,151 242,942
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Total liabilities and shareholders' equity $ 357,761 $ 347,886
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See notes to financial statements.
2
BRE PROPERTIES, INC.
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STATEMENTS OF INCOME (unaudited)
(Amounts in thousands, except in per share data)
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For the Three Months
Ended October 31
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REVENUE 1995 1994
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Rental income $16,084 $14,110
Interest on short-term investments 139 242
Interest income on mortgage loans 209 138
Income from limited partnerships 140 82
Other income 143 117
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Total revenue 16,715 14,689
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EXPENSES
Real estate expenses 5,837 4,767
Provision for depreciation and amortization 1,988 1,785
Interest expense 2,075 1,451
General and administrative 915 1,229
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Total expenses 10,815 9,232
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Income before gain on sales of investments 5,900 5,457
Gain (loss) on sales of investments (899)
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NET INCOME $ 5,001 $ 5,457
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Income per share
Primary
Income before gain on sales of investments $ .54 $ .50
Gain (loss) on sales of investments (.08)
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Net income $ .46 $ .50
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Dividends declared $ .63 $ .60
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Weighted average shares outstanding 10,984 10,932
See notes to financial statements.
3
BRE PROPERTIES, INC.
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STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
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For the three months
ended October 31
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1995 1994
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Cash flows from operating activities:
Net income $ 5,001 $ 5,457
Non-cash revenues and expenses included in income:
Provision for depreciation and amortization 1,988 1,785
Loss on sales of investments 899
Increase in other assets (425) (11)
Increase (decrease) in accounts payable and other liabilities (25) 647
Other increase 188 443
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CASH FLOWS GENERATED BY OPERATING ACTIVITIES 7,626 8,321
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Cash flows from investing activities:
Equity investments:
Apartments purchased (16,231)
Cash invested in apartments acquired through tax-deferred
exchange (361)
Options payments on apartments being developed (480)
Apartment expansion (1,252)
Improvements to apartments (196) (86)
Space preparations and tenant improvements:
Shopping centers (374) (1,172)
Light industrial and warehouse (398)
Funds in escrow for tax-deferred exchange 3,854
Advances on mortgage loans receivable (1,500)
Repayments on mortgage loans receivable 246 44
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NET CASH FLOWS GENERATED BY (USED IN) INVESTING ACTIVITIES 2,689 (20,595)
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Cash flows from financing activities:
Mortgage loans payable:
New mortgage loans 12,000
Principal payments (309) (278)
Capitalized costs of proposed merger (589)
Proceeds from grants of restricted shares and exercises of
stock options 119 279
Dividends paid (6,912) (6,555)
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NET CASH FLOWS GENERATED BY (USED IN) FINANCING ACTIVITIES 4,309 (6,554)
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Increase (decrease) in cash and short-term investments 14,624 (18,828)
Balance at beginning of year 4,462 28,938
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Balance at end of period $ 19,086 $ 10,110
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4
BRE PROPERTIES, INC.
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NOTES TO FINANCIAL STATEMENTS (unaudited)
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October 31, 1995
NOTE A - BASIS OF PRESENTATION
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The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the company's Annual Report on Form 10-K for the fiscal year ended July
31, 1995, together with the portions of the company's 1995 Annual Report to
shareholders incorporated therein by reference. In the opinion of management,
all adjustments (consisting of normal recurring adjustments only) have been
made which are necessary for a fair statement of the results for the interim
period presented herein.
Certain reclassifications have been made to the 1994 financial statements to
conform to the presentation of the 1995 financial statements.
NOTE B - NET INCOME PER SHARE
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Primary net income per share is based upon the average number of shares
outstanding during the periods, increased for the assumed exercise of vested,
in-the-money stock options.
NOTE C - LITIGATION
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The company, because of the nature of its business, is sometimes subject to
various threatened or filed legal claims, including certain environmental
actions. While it is not feasible to predict or determine the ultimate outcome
of these matters, in the opinion of management, none of these actions,
individually or in the aggregate, will have a material effect on the company's
results of operations, cash flows, liquidity or financial position.
NOTE D - COMMITMENTS
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BRE has entered into a development and option agreement with Picerne
Development Corporation (Picerne), an Arizona corporation, which is a wholly
owned subsidiary of Picerne Investment Corporation, a privately held apartment
developer headquartered in Rhode Island. Picerne is developing Arcadia Cove, a
432-unit apartment complex in Phoenix, Arizona. The development is being
financed through two loans made by Wells Fargo Bank. The two loans are for
$4,226,000 (standing loan) and $19,125,000 (construction loan), for a total of
$23,351,000. As of October 31, 1995, $10,207,000 was outstanding under the
loans. BRE has guaranteed repayment of the loans and has the right to acquire
the property at or before completion of construction, which is currently
expected in mid-1996.
5
BRE has made, or is committed to make, monthly option payments to Picerne as
follows:
(IN THOUSANDS)
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December 94 $ 220
February 95 - July 95 $ 60 x 6 months 360
August 95 - December 95 160 x 5 months 800
January 96 - March 96 100 x 3 months 300
April 96 - May 96 20 x 2 months 40
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Estimated total option payments $1,720
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BRE's estimated total cost for the property, including interest expense and
marketing expenses during construction, is $23,900,000.
In addition, BRE has committed to purchase Phase II of Newport Landing
Apartments, in Glendale, Arizona. BRE purchased the adjacent 240-unit Phase I
in September 1995, for $9,235,000. Phase II, also planned for 240 units, is
currently being developed, with construction expected to be completed mid-1996.
Picerne, which developed Phase I, is also developing Phase II for BRE. The cost
for Phase II is projected to be $12,784,000.
Subsequent to July 31, 1995, the company committed to purchase an additional
266 units to be built near Portland, Oregon at a price of $16,350,000.
Construction is underway, with completion expected in the spring of 1996. BRE
will purchase the property following its completion in accordance with plans
and specifications.
NOTE E - RECENT DEVELOPMENT
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On October 11, 1995, BRE entered into an Agreement and Plan of Merger (the
"Merger Agreement") by and among BRE, Real Estate Investment Trust of
California ("REIT-Cal") and a newly-formed Maryland subsidiary of REIT-Cal
("REIT-Cal Sub"). The Merger Agreement, which has been approved by the Board
of Directors and Boards of Trustees of each of the parties, would result in the
acquisition of REIT-Cal by BRE through (i) a merger of REIT-Cal with and into
REIT-Cal Sub followed by (ii) a merger of REIT-Cal Sub with and into BRE (the
"Merger"). Following consummation of the Merger, it is contemplated that BRE
would change its state of corporate domicile from Delaware to Maryland.
Under the terms of the Merger Agreement, each issued and outstanding share of
beneficial interest, without par value, of REIT-Cal would be converted into the
right to receive 0.57 (the "Exchange Ratio") of a share of BRE common stock in
a tax-free transaction. In the event that either (i) (a) the average closing
price per share of BRE common stock as reported by the New York Stock Exchange
(the "NYSE") for the ten consecutive trading days ending on (and including) the
trading day immediately preceding the date of REIT-Cal's stockholders meeting
to consider the Merger (the "BRE Average Price") is less than $28.575, and (b)
the difference between the BRE Average Price and the closing price of BRE
common stock on the NYSE on
6
September 11, 1995, expressed as a percent of the closing price of BRE common
stock on the NYSE on September 11, 1995, is at least 10% greater than the
percentage decline in the value of the NAREIT Equity REIT Index over the period
from September 11, 1995 to the trading day immediately preceding the date of
the REIT-Cal stockholders meeting to consider the Merger, or (ii) the BRE
Average Price is less than $28.07, the agreement may be terminated by REIT-Cal
unless BRE increases the Exchange Ratio so that the Exchange Ratio as adjusted
would equal a fraction the numerator of which is the product of 0.57 times (x)
$28.575 in the case of a proposed termination under clause (i) above, or (y)
$28.07 in the case of a proposed termination under clause (ii) above, and the
denominator of which is the BRE Average Price.
Closing of the Merger is contingent upon, among other things, approval of the
stockholders of BRE and REIT-Cal. The Merger will be treated as a purchase for
accounting purposes. Upon the closing, Frank C. McDowell would continue to
serve as President and Chief Executive Officer of BRE. Three executives of
REIT-Cal would also be added to BRE management: Jay W. Pauly as Senior
Executive Vice President and Chief Operating Officer; LeRoy E. Carlson as
Executive Vice President and Chief Financial Officer; and John H. Nunn as
Senior Vice President, Property Management. In addition, three directors of
REIT-Cal would be appointed to the BRE Board of Directors, increasing BRE's
Board from six to nine members.
NOTE F - SUBSEQUENT EVENTS
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On November 27, 1995, the Directors declared a dividend of $.63 per share,
payable December 21, 1995 to shareholders of record December 8, 1995.
7
BRE PROPERTIES, INC.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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October 31, 1995
LIQUIDITY AND CAPITAL RESOURCES
The company's cash and short-term investments totaled $15,232,000 at October
31, 1995, up from $4,462,000 at July 31, 1995. In addition to the $15,232,000
in cash and short-term investments, $3,854,000 was in escrow for completion of
a tax-deferred exchange.
During the quarter ended October 31, 1995, BRE borrowed, on a non-recourse
basis, $12,000,000 secured by the Verandas Apartments in Union City,
California. The loan has a 10-year term, with amortization based on 30 years,
and a fixed interest rate of 7.3%. The balloon payment at maturity is
$10,372,000. Depending on market conditions at maturity, the company may
choose, among other things, to renegotiate the terms with the existing lender,
refinance the property with another lender or sell assets to repay the balloon
amounts.
During the quarter BRE completed the tax-deferred exchange of the vacant Pomona
Warehouse property in Pomona, California for the 240-unit Phase I of Newport
Landing Apartments in Glendale, Arizona. The loss on the disposition of the
Pomona Warehouse was $93,000.
In addition, $3,854,000 has been placed in escrow as the proceeds from the
disposition of the vacant Irvine Spectrum property in Irvine, California. The
proceeds are expected to be invested on a tax-deferred basis in one of the
several apartment properties that BRE has under contract to purchase. The loss
on the disposition of the Irvine Spectrum Property was $806,000 (net of a
$13,000 increase to the reported gain on Marymoor Warehouse, sold in November
1994).
An additional $374,000 was invested during the quarter in space preparation and
tenant improvements at shopping centers.
Cash commitments at October 31, 1995 include the December 21, 1995 dividend
payment of approximately $6,912,000.
In addition, as more fully discussed in Note D of Notes to Financial
Statements, BRE plans to acquire Arcadia Cove, a 432-unit apartment community
currently under development, the 240-unit second phase of Newport Landing, and
266 units to be built, in the summer of fiscal 1996. The aggregate purchase
price for these properties is approximately $53,034,000. (including, in the
case of Arcadia Cove, option payments made by the company). These acquisitions
may be funded through a combination of tax-deferred exchanges and borrowings
under the existing lines of credit.
8
In addition to cash and short-term investments, the company has available bank
lines of credit totaling $30,000,000. There were no borrowings under those
lines of credit at October 31, 1995. The company expects to use a portion of
the lines of credit to fund the cash portion of the purchase price for the
apartment acquisitions described above.
RESULTS OF OPERATIONS
Net income for the quarter ended October 31, 1995 was $5,001,000 ($.46 per
share), compared to $5,457,000 ($.50 per share) for the same quarter last year.
Funds from operations totaled $7,888,000 for the quarter ended October 31,
1995, up 9% from the same period last year. Funds from operations is defined
as net income (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus provisions for depreciation, amortization and possible
investment losses. Because income-producing properties are typically evaluated
without taking into account non-cash charges such as provisions for
depreciation, amortization and possible investment losses, management believes
that funds from operations is an appropriate supplemental measure of the
company's operating performance.
At October 31, 1995, overall occupancy levels by class of property were as
follows:
Property Type Overall Occupancy
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Apartments 96 %
Shopping centers 96
Other 97
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WEIGHTED AVERAGE 96 %
--
--
The weighted average occupancy is calculated by multiplying the occupancy for
each property by its square footage and dividing by the total square footage in
the portfolio.
REVENUE
Rental income rose 14% for the October 31, 1995 quarter from the comparable
period last year. Apartments acquired since August 1, 1994 (and therefore
owned less than two years) generated gross rents of $2,185,000 for the quarter
while apartments owned for two or more years contributed $498,000 in higher
revenue (up 5%).
Interest income on short-term investments decreased $103,000 from the
comparable quarter last year as a result of lower average invested balances as
cash was used to purchase apartments.
9
EXPENSES
Operating expenses of equity investments increased 22% from the year earlier
period, primarily due to expenses on the new apartment acquisitions.
General and administrative expenses were $915,000 for the quarter ended October
31, 1995, down $314,000 (26%) from $1,229,000 for the comparable quarter last
year, which had included $437,000 of legal costs paid in connection with
litigation. During the fourth quarter, ended July 31, 1995, BRE successfully
recovered $363,000 of this $437,000 from various insurance carriers. Excluding
this litigation-related expense, general and administrative expenses rose for
the quarter ended October 31, 1995 as a result of higher salaries and employee
benefits due to a larger staff.
As more fully discussed in Note E of Notes to Financial Statements, on October
11, 1995, BRE entered into the Merger Agreement with REIT-Cal. Through October
31, 1995, BRE has paid investment banking, legal, accounting and other costs
related to the Merger aggregating $565,000. This amount has been capitalized
in anticipation of the Merger. Included in the $565,000 is $222,000 which had
originally been expensed during the fiscal year ended July 31, 1995. This
$222,000 was credited against general and administrative expenses during the
quarter ended October 31, 1995.
Commencing August 1, 1995, BRE began allocating a portion of its salaries,
employee benefits and other personnel costs to the real estate expense of the
properties in the portfolio. While this reclassification does not change the
company's net income or funds from operations, such an allocation reduces
reported general and administrative expenses and increases real estate expense
by an equal amount. Management believes that this allocation is consistent with
industry practices and will provide a better matching of the revenue generated
by the properties and the expenses required to generate that revenue. The
amounts reclassified from general and administrative expenses to real estate
expenses were $400,000 and $345,000 for the quarters ended October 31, 1995 and
1994, respectively.
Interest expense was up $624,000 from the comparable quarter last year. This
increase reflected new mortgage loans, assumed since August 1, 1994, on Camino
Seco Village, Colonia del Rio, Fountain Plaza, Hacienda del Rio, SpringHill and
Verandas Apartments. The principal of these loans totaled approximately
$27,939,000.
GAIN (LOSS) ON SALES
No gain on sales of investments was recorded during the quarter ended October
31, 1995. The company has recorded in its financial statements gains totaling
$62,307,000 which have been deferred for tax purposes since the company's 1970
inception through October 31, 1995.
The losses on the previously discussed sales of Pomona Warehouse and Irvine
Spectrum aggregated $899,000 for the quarter ended October 31, 1995.
10
DIVIDENDS
The $.63 per share dividend for the quarter ended October 31, 1995, was
approximately 88% of funds from operations. Dividends totaled $6,912,000,
compared to reportable net income of $5,001,000. Reportable net income is
after deduction of $1,988,000 of depreciation expense (a non-cash charge) and
$899,000 of loss on sales of investments. The dividend exceeded reportable
net income.
11
BRE PROPERTIES, INC.
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
During the quarter, Standard & Poor's withdrew its "A" implied senior
credit rating on BRE, following the announcement of the proposed
Merger with non-rated Real Estate Investment Trust of California. BRE
has no existing indebtedness subject to credit ratings. Should BRE seek
a rating in the future, the indebtedness subject to the rating will be
evaluated in accordance with then-existing credit standards.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are submitted herewith:
10.1 Amended and Restated Non-Employee Director Stock Option
Plan dated October 2, 1995.
11. Computation of Earnings Per Share
(b) Reports on Form 8-K. The company filed a Current Report on Form 8-K
dated October 11, 1995 reporting, under Item 5 of such form, the
execution of an Agreement and Plan of Merger with Real Estate
Investment Trust of California. The transactions contemplated by
the Agreement and Plan of Merger are subject to completion of
various terms and conditions, including approval by the
shareholders of both companies.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRE PROPERTIES, INC.
(Registrant)
Date December 11, 1995 /s/ Howard E. Mason, Jr.
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Howard E. Mason, Jr.
Senior Vice President, Finance
Date December 11, 1995 /s/ Ellen G. Breslauer
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Ellen G. Breslauer
Secretary and Treasurer
13
EXHIBIT INDEX
Number Description
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10.1 Amended and Restated Non-Employee Director Stock
Option Plan dated October 2, 1995
11 Computation of Earnings per Share
14