Item 1. BUSINESS
Corporate Profile
BRE Properties, Inc. ("BRE" or the "Company"), a Maryland corporation, is a fully integrated real estate investment trust which owns, develops, rehabilitates, manages and acquires apartment communities in 12 targeted metropolitan markets in the Western United States. At December 31, 1999, BRE's multifamily portfolio included 86 completed multifamily communities aggregating 22,690 units in California, Arizona, Washington, Utah, New Mexico, Nevada, Oregon and Colorado and eight apartment communities under development aggregating an estimated 2,161 units. On that date, BRE also owned one commercial property and held limited partnership interests in two shopping centers. Founded in 1970, the Company has paid 117 consecutive quarterly dividends to shareholders since it commenced operations.
The Company's business objective is to build valuable, innovative residential Lifestyle Solutionstm for its customers. BRE does this by building, buying and internally managing high-quality apartment homes, located conveniently to the business, transportation and employment centers the Company believes are essential to rental customers. Recognizing that customers have many housing choices, BRE focuses on developing and acquiring apartment homes with customer-defined amenities and by providing professional management services, delivered by well-trained associates.
The Company believes that its future growth will be supported by the continued implementation of a six-point strategy focused on property operations, research-driven capital deployment, customer satisfaction, technological innovation and balance sheet management. Key characteristics of the strategy include:
. Focus on accelerated growth from operation of existing assets--through internal property management activities, continued improvements in operating efficiencies and selective sale of properties which management believes have reached maximum cash flow potential.
. Deployment of new capital to supply-constrained markets of the West-- through both direct and joint-venture investment, based on a research- driven model which targets Western U.S. markets with long-term positive fundamentals for apartment demand.
. Creation of a valuable residential customer experience--through delivery of goods and services that enhance the residential experience, encouraging customers to extend their leases and refer BRE's apartment communities to other prospective customers.
. Innovation of technology-enabled tools--that support leasing, management, maintenance, customer satisfaction and retention efforts.
. Creation of a sought-after constituent culture--through continued development and enhancement of Company attributes that attract and retain valuable customers, talented associates and loyal shareholders.
. Maintenance of balance sheet strength and flexibility--to fund obligations and appropriate growth opportunities.
Events During 1999
During 1999, the Company completed the development and lease-up of six communities that were under development at December 31, 1998. The Company also purchased two other multifamily communities located in Los Angeles and San Diego totaling 628 units and four land sites for development of an estimated additional 1,132 units.
The Company started a program of joint ventures in 1999, and as of December 31, 1999, had committed to three joint ventures. These joint ventures involve the construction of three communities with 780 proposed units and an estimated total cost of $72,000,000 with BRE's contribution representing approximately $17,000,000. The Company is a minority partner in the joint ventures and will receive additional operational cash flow or sales proceeds upon certain return thresholds from the property. The Company intends to continue using joint ventures to fund the development and or acquisition of multifamily communities.
In the first quarter of 1999, the Company issued a total of 2,150,000 shares of preferred stock for net proceeds of approximately $52,000,000.
Events During 1998
During 1998, the Company completed the construction of eight communities that were under construction as of December 31, 1997. Seven of these were ready for occupancy as of December 31, 1998. The Company also purchased seven other multifamily communities located in Denver, Seattle, Portland, Los Angeles and San Diego totaling 1,597 units and five land sites for development of an estimated additional 1,215 units. Three multifamily communities and four commercial and retail properties were sold and the proceeds reinvested in multifamily communities.
In February 1998, the Company issued $130 million in unsecured notes due 2013, at an effective yield of 7.3%, taking advantage of what it considered a favorable interest rate. In October 1998, the Company's $300 million lines of credit were replaced with one $400 million line of credit and the maturity was extended by more than one year. Also, the Company issued a total of 2,119,515 shares of common stock for net proceeds of $56 million, further enhancing the Company's financial flexibility.
In addition to completing seven of the eight properties under construction, BRE also completed the integration of the personnel and assets purchased from Trammell Crow Residential-West in November 1997 as described below.
Events During 1997
On November 18, 1997, the Company completed the acquisition of certain assets and operations of Trammell Crow Residential-West ("TCRW") (the "Transaction"), which further advanced significant objectives of BRE's strategic plan. As a result of the Transaction, BRE:
. Acquired 16 completed apartment communities totaling 4,786 units and eight apartment communities under development (the "Development Communities") aggregating approximately 2,445 units, all of which were completed and ready for occupancy by the first quarter of 1999;
. Added development, construction and third-party management capabilities, creating fully integrated multifamily real estate operations, and further strengthened and deepened the senior management team; and
. Significantly increased the geographic diversification of the portfolio by expanding from nine Western markets to 12.
BRE acquired these assets and operations of TCRW pursuant to a definitive agreement (the "Contribution Agreement"). The consideration for the Transaction included the payment to certain entities of approximately $160 million in cash and $100 million in common stock based on a stock price of $26.93 per share as provided in the Contribution Agreement. Further, certain entities received 2,824,587 operating company units ("OC Units") (valued at $76 million assuming a stock price of $26.93 per share) in BRE Property Investors LLC (the "Operating Company"). The Operating Company also assumed approximately $120 million in debt. The Operating Company is a 74% owned subsidiary of BRE and BRE is the sole managing member. The OC Units held by holders other than the Company are exchangeable, at the option of the holders, into common
stock of the Company on a 1:1 basis or, at the option of the Company, cash in an amount equal to the market value of the common stock at the time of the exchange. As of December 31, 1999, 185,000 OC Units have been exchanged for common stock.
In connection with the acquisition of the Development Communities, the Contribution Agreement also provides for the additional issuance of OC Units, based on the completion of certain budget and schedule objectives relating to the Development Communities. Accordingly, a total of 430,624 OC Units were issued for the Development Communities.
Competition
All of the Company's communities are located in developed areas that include other multifamily communities. There are numerous other multifamily properties and real estate companies within these areas that compete with the Company for tenants and development and acquisition opportunities. Such competition could have a material effect on the Company's ability to lease apartment homes at its communities or at any newly developed or acquired communities and on the rents charged. The Company may be competing with others that have greater resources than the Company. In addition, other forms of residential properties including single family housing provide housing alternatives to potential residents of upscale apartment communities.
Structure, Tax Status and Investment Policy
BRE is a real estate investment trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company generally will not be subject to Federal income tax if it distributes 95% of its taxable income to its shareholders. REITs are subject to a number of complex organizational and operational requirements. If the Company fails to qualify as a REIT, its taxable income may be subject to income tax at regular corporate rates. See "Risk Factors--Tax Risks."
The Company's long-range investment policy emphasizes the development, construction and acquisition of multifamily communities located in the Western United States. As circumstances warrant, certain properties may be sold and the proceeds reinvested into multifamily communities which management believes offer better growth potential. Among other items, this policy is intended to enable management to monitor developments in local real estate markets and to take an active role in managing the Company's properties and improving their performance. The policy is subject to ongoing review by the Board of Directors and may be modified in the future to take into account changes in business or economic conditions, as circumstances warrant.
Employees
As of December 31, 1999, the Company had approximately 1,060 employees. None of the employees is covered by collective bargaining agreements.
Investment Portfolio
See Items 2 and 7 of this report for a description of the Company's individual investments and certain developments during the year with respect to these investments. See Item 14(d), Schedule III (financial statement schedule), for additional information about the Company's portfolio, including location, costs and encumbrances.
In addition, see Item 8 of this report for the Company's consolidated financial statements.
Executive Officers of the Registrant
The following persons were executive officers of the Company as of March 17, 2000:
Mr. McDowell was appointed to his current position in June, 1995. Mr. Carlson and Mr. Nunn joined the Company in March, 1996. Mr. Ward was appointed in connection with the Transaction in November, 1997 and Ms. Barr was appointed to her current position in July, 1998. Set forth below is information regarding the business experience of each of the executive officers:
From 1992 to 1995, Mr. McDowell was Chief Executive Officer and Chairman of Cardinal Realty Services, Inc., a Columbus, Ohio-based apartment management company and owner of multifamily housing. From 1988 to 1992, Mr. McDowell was Senior Vice President, Head of Real Estate of First Interstate Bank of Texas. Mr. McDowell holds a Bachelor of Business Administration Degree and a Master of Business Administration Degree, both from the University of Texas, Austin.
Mr. Carlson served as Vice President and Chief Financial Officer of Real Estate Investment Trust of California from 1980 to 1996. Prior to joining RCT, Mr. Carlson was the Chief Financial Officer of the William Walters Company, a large asset management company based in Los Angeles, California. He is a licensed Certified Public Accountant in the State of California. Mr. Carlson holds a Bachelor's Degree from the University of Southern California.
Mr. Ward served as group managing partner of TCRW prior to the acquisition of TCRW by BRE. While with TCRW, Mr. Ward served on the management board, which was responsible for TCRW's strategic planning and governance. Prior to 1987, Mr. Ward held the position of Vice President and Regional Manager of Lomas Management, Inc. located in Dallas, Texas. Mr. Ward holds a degree in Business Administration from the University of Texas, Austin.
Mr. Nunn served as Vice President of Asset Management of RCT from 1990 to 1996. Prior to joining RCT, Mr. Nunn was a Vice President of Asset Management and a property manager for the William Walters Company from 1986 to 1990. Mr. Nunn holds a Bachelor's Degree from California State University, Long Beach and is a Certified Property Manager.
Ms. Barr served as a Vice President of the asset management group for the Company since 1990 and was promoted in 1998 to Senior Vice President, Strategic Planning & Communications. Ms. Barr holds a Bachelor's Degree in Economics from the University of San Francisco and is a Certified Property Manager.
There is no family relationship among any of the Company's executive officers or Directors.
RISK FACTORS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. In this section, "we" or "us" refers to the Company and "you" refers to the Company's shareholders.
Risks Due to Investment in Real Estate
Decreased Yields from an Investment in Real Property Due to Factors Which May Cause a Decrease in Revenues or an Increase in Operating Expenses
Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend upon the amount of revenues generated and expenses incurred. If properties do not generate revenues sufficient to meet operating expenses, debt service and capital expenditures, our results of operations and ability to make distributions to you and to pay amounts due on our debt will be adversely affected. The performance of the economy in each of the areas in which the properties are located affects occupancy, market rental rates and expenses. These factors consequently can have an impact on the revenues from the properties and their underlying values. The financial results of major local employers may also have an impact on the revenues and value of certain properties.
Other factors may further adversely affect revenues from properties. These factors include the general economic climate, local conditions in the areas in which properties are located such as an oversupply of apartment units or a reduction in the demand for apartment units, the attractiveness of the properties to residents, competition from other multifamily communities and our ability to provide adequate facilities maintenance, services and amenities. Our revenues would also be adversely affected if residents were unable to pay rent or we were unable to rent apartments on favorable terms. If we were unable to promptly relet or renew the leases for a significant number of apartment units, or if the rental rates upon such renewal or reletting were significantly lower than expected rates, then our funds from operations would, and our ability to make expected distributions to you and to pay amounts due on our debt may, be adversely affected. There is also a risk that as leases on the properties expire, residents will vacate or enter into new leases on terms that are less favorable to us. Operating costs, including real estate taxes, insurance and maintenance costs, and mortgage payments, if any, do not, in general, decline when circumstances cause a reduction in income from a property. We could sustain a loss as a result of foreclosure on the property, if a property is mortgaged to secure payment of indebtedness and we were unable to meet our mortgage payments. In addition, applicable laws, including tax laws, interest rate levels and the availability of financing also affect revenues from properties and real estate values.
Development and Construction Projects May Not Be Completed or Completed Successfully
As a general matter, property development and construction projects typically have a higher, and sometimes substantially higher, level of risk than the acquisition of existing properties. We intend to actively pursue development and construction of multifamily apartment communities. There can be no assurance that we will complete development of the properties currently under development or any other development project that we may undertake. Risks associated with our development and construction activities may include the following:
. development opportunities may be abandoned;
. construction costs of multifamily apartment communities may exceed original estimates, possibly making the communities uneconomical;
. occupancy rates and rents at newly completed communities may not be sufficient to make the communities profitable;
. financing for the construction and development of projects may not be available on favorable terms or at all;
. construction and lease-up may not be completed on schedule; and
. expenses of operating a completed community may be higher than anticipated.
In addition, development and construction activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. Development and construction activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations.
Investments in Newly Acquired Properties May Not Perform in Accordance with Expectations
In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire and may acquire additional properties. However, no assurance can be given that we will have the financial resources to make suitable acquisitions or that properties that satisfy our investment policies will be available for acquisition. Acquisitions of properties entail risks that investments will fail to perform in accordance with expectations. Such risks may include construction costs exceeding original estimates, possibly making a project uneconomical. Other risks may include financing not being available on favorable terms or at all and construction and lease-up may not be completed on schedule. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property might prove inaccurate. In addition, there are general real estate investment risks associated with any new real estate investment. Although we undertake an evaluation of the physical condition of each new investment before it is acquired, certain defects or necessary repairs may not be detected until after the investment is acquired. This could significantly increase our total acquisition costs, which could have a material adverse effect on us and our ability to make distributions to you and pay amounts due on our debt.
Illiquidity of Real Estate and Reinvestment Risk May Reduce Economic Returns to Investors
Real estate investments are relatively illiquid and, therefore, tend to limit our ability to adjust our portfolio in response to changes in economic or other conditions. Additionally, the Code places certain limits on the number of properties a REIT may sell without adverse tax consequences. To effect our current operating strategy, we have in the past raised, and will seek to continue to raise additional funds, both through outside financing and through the orderly disposition of assets which no longer meet our investment criteria. Depending upon interest rates, current development and acquisition opportunities and other factors, generally we will reinvest the proceeds in multifamily properties, although such funds may be employed in other uses. In the markets we have targeted for future acquisition of multifamily properties, there is considerable buying competition from other real estate companies, many of whom may have greater resources, experience or expertise than us. In many cases, this competition for acquisition properties has resulted in an increase in property prices and a decrease in property yields. Due to the relatively low capitalization rates currently prevailing in the pricing of potential acquisitions of multifamily properties which meet our investment criteria, no assurance can be given that the proceeds realized from the disposition of assets which no longer meet our investment criteria can be reinvested to produce economic returns comparable to those being realized from the properties disposed of, or that we will be able to acquire properties meeting our investment criteria. To the extent that we are unable to reinvest proceeds from the assets which no longer meet our investment criteria, or if properties acquired with such proceeds produce a lower rate of return than the properties disposed of, such results may have a material adverse effect on us. In addition, a delay in reinvestment of such proceeds may have a material adverse effect on us.
We may seek to structure future dispositions as tax-free exchanges, where appropriate, utilizing the nonrecognition provisions of Section 1031 of the Code to defer income taxation on the disposition of the exchanged property. For an exchange of such properties to qualify for tax-free treatment under Section 1031 of the Code, certain technical requirements must be met. Given the competition for properties meeting our investment criteria, it may be difficult for us to identify suitable properties within the foregoing time frames in order to meet the requirements of Section 1031. Even if we can structure a suitable tax-deferred exchange, as
noted above, we cannot assure that we will reinvest the proceeds of any of these dispositions to produce economic returns comparable to those currently being realized from the properties which were disposed of.
Substantial Competition Among Multifamily Properties and Real Estate Companies May Adversely Affect Our Rental Revenues and Development and Acquisition Opportunities
All of the properties currently owned by us are located in developed areas. There are numerous other multifamily properties and real estate companies, many of which have greater financial and other resources than we have, within the market area of each of the properties which will compete with us for tenants and development and acquisition opportunities. The number of competitive multifamily properties and real estate companies in such areas could have a material effect on (1) our ability to rent the apartments and the rents charged and (2) development and acquisition opportunities. The activities of these competitors could cause us to pay a higher price for a new property than we otherwise would have paid or may prevent us from purchasing a desired property at all, which could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt.
Potential Effect on Operations Due to Geographic Concentration of Properties and Economic Conditions; Dependence on Western United States Regions
Our portfolio is located in Phoenix, the San Francisco Bay Area, Los Angeles/Orange County, San Diego, Seattle, Tucson, Sacramento, Salt Lake City, Albuquerque, Las Vegas, Portland, and the Denver area. Our performance could be adversely affected by economic conditions in, and other factors relating to, these geographic areas, including supply and demand for apartments in these areas, zoning and other regulatory conditions and competition from other properties and alternative forms of housing. In that regard, certain of these areas have in the recent past experienced economic recessions and depressed conditions in the local real estate markets. To the extent general economic or social conditions in any of these areas deteriorate or any of these areas experiences natural disasters, the value of the portfolio, our results of operations and our ability to make distributions to you and to pay amounts due on our debt could be materially adversely affected.
Inability to Implement Growth Strategy; Potential Failure to Identify, Acquire or Integrate New Acquisitions
Our future growth will be dependent upon a number of factors, including our ability to identify acceptable properties for development and acquisition, complete acquisitions and developments on favorable terms, successfully integrate acquired and newly developed properties, and obtain financing to support expansion. There can be no assurance that we will be successful in implementing our growth strategy, that growth will continue at historical levels or at all, or that any expansion will improve operating results. The failure to identify, acquire and integrate new properties effectively could have a material adverse affect on us and our ability to make distributions to you and to pay amounts due on our debt.
A substantial portion of our growth over the last several years has been attributable to acquisitions. We intend to continue to acquire stabilized multifamily apartment communities to the extent we identify communities that meet our investment criteria. However, we do not presently expect to make a significant number of acquisitions in 2000. Acquisitions of multifamily apartment communities entail risks that investments will fail to perform in accordance with expectations. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. In addition, there are general investment risks associated with any new real estate investment. In that regard, we acquired the TCRW properties on an "as is" basis. "As is" means the sellers did not warrant as to the physical condition of the properties, which increased the risks associated with acquiring the TCRW properties.
Restrictions on the Operations of the Operating Company
A substantial portion of the properties acquired in the Transaction are held by BRE Property Investors LLC, which is referred to in this Annual Report on Form 10-K as the "Operating Company." We are the sole managing
member of the Operating Company and, as of December 31, 1999, held approximately a 74% equity interest in the Operating Company. The remaining equity interests in the Operating Company are held by third parties as nonmanaging members.
Under the terms of the limited liability company agreement governing the operations of the Operating Company (the "LLC Agreement"), the Operating Company is required to maintain certain debt service coverage, debt-to-asset and other financial ratios intended to protect the members' rights to receive distributions. In addition, with respect to certain tax-exempt financing for certain completed properties, the Operating Company is restricted from repaying its debt or taking certain other specified action which could have adverse tax consequences for the members. Further, we, as the managing member, are restricted from taking certain other specified actions--either absolutely or without the consent of a majority in interest of the nonmanaging members (or of the nonmanaging members affected thereby)--including, but not limited to, any actions:
. that would make it impossible to carry out the business of the Operating Company
. that would subject a nonmanaging member to liability as a managing member
. that would cause the Operating Company to institute bankruptcy proceedings or permit an automatic judgment to be entered against it by a creditor
Any such requirement to maintain financial ratios and any such restrictions on the actions of the Operating Company and its managing member could have a material adverse affect on us and our ability to make distributions to you and to pay amounts due on our debt.
Further, under the terms of the LLC Agreement, the Operating Company may not, without the consent of a majority in interest of the nonmanaging members, (i) dispose of any of the properties held by the Operating Company in a taxable sale or exchange prior to respective dates which are specified in the LLC Agreement for each of the properties, ranging from eight to ten years from November 18, 1997, or (ii) dissolve the Operating Company other than in certain limited circumstances specified in the LLC Agreement, such as a sale of all or substantially all of our assets, or any merger, consolidation or other combination by us with or into another person, or reclassification, recapitalization or change of our outstanding equity interests. These restrictions on our ability to dispose of a significant portion of our properties and to dissolve the Operating Company, even when such a disposition or dissolution of the Operating Company would be in our best interest, could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt.
The Operating Company also must distribute all Available Cash (as defined in the LLC Agreement) on a quarterly basis: first, to members (other than us) until each member has received, cumulatively on a per Operating Company unit basis, distributions equal to the cumulative dividends declared with respect to one share of BRE common stock over the corresponding period (subject to adjustment from time to time as applicable to account for stock dividends, stock splits and similar transactions affecting BRE common stock) (the "Priority Distribution"); and second, the balance to us.
If the Operating Company's Available Cash in any quarterly period is insufficient to permit distribution of the full amount of the Priority Distribution for that quarter, we are required to make a capital contribution to the Operating Company in an amount equal to the lesser of (i) the amount necessary to permit the full Priority Distribution or (ii) an amount equal to the sum of any capital expenditures made by the Operating Company plus the sum of any payments made by the Operating Company on account of any loans to or investments in, or any guarantees of the obligations of, BRE or our affiliates for that quarterly period.
In addition, we may not be removed as the managing member of the Operating Company by the nonmanaging members, with or without cause, other than with our consent. We may not voluntarily withdraw from the Operating Company or transfer all or any portion of our interest in the Operating Company without the consent of all of the nonmanaging members, except in certain limited circumstances, such as a sale of all or substantially all of our assets, or any merger, consolidation or other combination by us with or into another person, or any reclassification, recapitalization or change of our outstanding equity interests. Such restrictions on
our withdrawal as the managing member of the Operating Company, and on our ability to transfer our interest in the Operating Company, could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt.
Uninsured and Underinsured Losses; Limited Insurance Coverage
We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to our properties with certain policy specifications, limits and deductibles. While we currently carry flood and earthquake insurance for our properties with an aggregate annual limit of $250 million, subject to substantial deductibles, no assurance can be given that such coverage will be available on acceptable terms or at an acceptable cost, or at all, in the future, or if obtained, that the limits of those policies will cover the full cost of repair or replacement of covered properties. In addition, there may be certain extraordinary losses (such as those resulting from civil unrest) that are not generally insured (or fully insured against) because they are either uninsurable or not economically insurable. Should an uninsured or underinsured loss occur to a property, we could be required to use our own funds for restoration or lose all or part of our investment in, and anticipated revenues from, the property and would continue to be obligated on any mortgage indebtedness on the property. Any such loss could have a material adverse effect on us and our ability to make distributions to you and pay amounts due on our debt.
Survey Exceptions to Certain Title Insurance Policies May Result in Incomplete Coverage in the Event of a Claim
We did not obtain updated surveys when we acquired the TCRW properties because we believe that prior owners of the TCRW properties in the past obtained surveys of these properties. Because updated surveys of the properties acquired in the Transaction were not obtained, the title insurance policies obtained by us for those properties contain exceptions for matters that an updated survey might have disclosed. Such matters might include such things as boundary encroachments, unrecorded easements or similar matters, which would have been reflected on a survey. Moreover, because no updated surveys were prepared for these properties, there can be no assurance that the title insurance policies in fact cover the entirety of the real property, buildings, fixtures, and improvements which we believe they cover, any of which could have a material adverse effect on us.
Adverse Changes in Laws May Affect Our Potential Liability Relating to the Properties and Our Operations
Increases in real estate taxes and income, service and transfer taxes cannot always be passed through to residents or users in the form of higher rents, and may adversely affect our cash available for distribution and our ability to make distributions to you and to pay amounts due on our debt. Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, which could have a material adverse effect on us and our ability to make distributions to you and pay amounts due on our debt. In addition, future enactment of rent control or rent stabilization laws or other laws regulating multifamily housing may reduce rental revenues or increase operating costs.
Potential Effect on Costs and Investment Strategy From Compliance With Laws Benefiting Disabled Persons
A number of federal, state and local laws (including the Americans with Disabilities Act) and regulations exist that may require modifications to existing buildings or restrict certain renovations by requiring improved access to such buildings by disabled persons and may require other structural features which add to the cost of buildings under construction. Legislation or regulations adopted in the future may impose further burdens or restrictions on us with respect to improved access by disabled persons. The costs of compliance with these laws and regulations may be substantial, and limits or restrictions on construction or completion of certain renovations may limit implementation of our investment strategy in certain instances or reduce overall returns on our investments, which could have a material adverse effect on us and our ability to make distributions to you and to
pay amounts due on our debt. We review our properties periodically to determine the level of compliance and, if necessary, take appropriate action to bring such properties into compliance. We believe, based on property reviews to date, that the costs of such compliance should not have a material adverse effect on us. Such conclusions are based upon currently available information and data, and no assurance can be given that further review and analysis of our properties, or future legal interpretations or legislative changes, will not significantly increase the costs of compliance.
Liabilities Assumed in the Transaction May Exceed Expectations
In the Transaction, we (1) acquired the TCRW properties either by acquiring title to the properties and related assets (plus assumption of associated contractual obligations of the contributing parties) or, as to certain TCRW properties, by acquiring all of the ownership interests in the partnerships or limited liability companies which held such properties, and (2) assumed certain specified loans secured by the TCRW properties. Under the terms of the Transaction, we have not expressly agreed to assume any liabilities other than the assumed loans and the contractual obligations, warranties and guarantees referenced above. However, as a matter of law, we automatically assumed all of the liabilities (known, unknown or contingent) of the partnerships and limited liability companies whose ownership interests were acquired by us, potentially including liabilities unrelated to the properties conveyed pursuant to such transfer. Moreover, even in cases where title to the properties and related assets (rather than ownership interests therein) were acquired by us, the legal doctrine of successor liability may give creditors of and claimants against the prior owners the right to hold us responsible for liabilities which arose with respect to such properties prior to their acquisition by us, whether or not such liabilities were expressly assumed by us under the terms of the Transaction.
As a result of the foregoing, there can be no assurance that we will not be subject to liabilities and claims relating to the TCRW properties arising from events which occurred or circumstances which existed prior to our acquisition of those properties, which could have a material adverse effect on us and our ability to make distributions to you and pay amounts due on our debt. In that regard, the terms of the Transaction do not provide for us to be indemnified against such liabilities and claims.
Limited Indemnification in the Event of Claims or Liabilities Arising out of the Transaction
We acquired the TCRW properties on an "as is" basis, meaning that the properties were acquired without warranty from the sellers. As a result, we have no recourse against the sellers for matters relating to the properties or the Transaction, except to a limited extent. This limited indemnification relates to claims or liabilities that might arise out of the Transaction or actions taken by the sellers before the closing. Specifically, certain Trammell Crow Residential entities and related parties (the "TCRW Parties") have agreed to indemnify us and our affiliates only against claims arising out of (1) certain representations made by the TCRW Parties in the Transaction, (2) certain breaches of fiduciary duties by the TCRW Parties and (3) certain documents filed in connection with the Transaction.
We have no recourse against the TCRW Parties with respect to any claims that are not within the specific coverage of the indemnity provisions. In addition, in the event we are entitled to indemnification, the terms of the Transaction significantly limit the amount which we would be entitled to recover.
There can be no assurance that we will not be confronted in the future with claims by third parties relating to the Transaction or to the activities of the TCRW Parties or the operations of the TCRW properties and matters related thereto prior to the closing of the Transaction. Likewise, there can be no assurance that the properties acquired in the Transaction will meet our expectations. Accordingly, the limited scope of the indemnification could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt. See "Liabilities Assumed in the Transaction May Exceed Expectations," above.
We and the Operating Company have also provided a limited indemnity to the TCRW Parties. Notwithstanding the limit upon our indemnification obligations, if claims within the coverage of the indemnity
provisions were brought against us, we could be required to incur costs in defending against or satisfying the claims, which could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt.
Risks Due to Real Estate Financing
We anticipate that future developments and acquisitions will be financed, in whole or in part, under various construction loans, lines of credit, other forms of secured or unsecured financing or through the issuance of additional debt or equity by us. We expect periodically to review our financing options regarding the appropriate mix of debt and equity financing. Equity, rather than debt, financing of future developments or acquisitions could have a dilutive effect on the interests of our existing shareholders. Similarly, there are certain risks involved with financing future developments and acquisitions with debt, including those described below. In addition, if new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for such properties may not be available or may be available only on disadvantageous terms or that the cash flow from new properties will be insufficient to cover debt service. If a newly developed or acquired property is unsuccessful, our losses may exceed our investment in the property. Any of the foregoing could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt.
Potential Inability to Renew, Repay or Refinance Our Debt Financing
We are subject to the normal risks associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest, the risk that indebtedness on our properties, or unsecured indebtedness, will not be able to be renewed, repaid or refinanced when due or that the terms of any renewal or refinancing will not be as favorable as the terms of such indebtedness. If we were unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to us. Such losses could have a material adverse effect on us and our ability to make distributions to you and pay amounts due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code.
Increase in Cost of Indebtedness Due to Rising Interest Rates
We have incurred and expect in the future to incur indebtedness which bears interest at a variable rate. Accordingly, increases in interest rates would increase our interest costs, which could have a material adverse effect on us and our ability to make distributions to you or cause us to be in default under certain debt instruments (including our debt). In addition, an increase in market interest rates may lead holders of our common shares to demand a higher yield on their shares from distributions by us, which could adversely affect the market price for BRE common stock.
Potential Incurrence of Additional Debt and Related Debt Service
We currently fund the acquisition and development of multifamily communities partially through borrowings (including our line of credit) as well as from other sources such as sales of properties which no longer meet our investment criteria or the contribution of property to joint ventures. Our organizational documents do not contain any limitation on the amount of indebtedness that we may incur. Accordingly, subject to limitations on indebtedness set forth in various loan agreements, we could become more highly leveraged, resulting in an increase in debt service, which could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt and in an increased risk of default on our obligations.
Restrictive Terms of Certain Indebtedness May Cause Acceleration of Debt Payments
At December 31, 1999, we had outstanding borrowings of $73 million under two loan agreements with one lender which, among other things, (1) contain a covenant which requires us to maintain our investment grade rating for our long-term unsecured debt and (2) define "events of default" to include the acquisition by any person of either (a) 20% or more of our outstanding shares or securities (or other securities convertible into such securities) or (b) 10% or more of our outstanding shares or securities (or other securities convertible into such securities) if such acquisition results in any change of our board of directors or any change in our management or any of our assets. In the event that we fail to maintain an investment grade rating for our long- term unsecured debt or if such an event of default occurs, the lender may declare all borrowings under such loan agreements to be due and payable immediately, which could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt.
Potential Liability Under Environmental Laws
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances in, on, around or under such property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of, or failure to remediate properly, such substances may adversely affect the owner's or operator's ability to sell or rent the affected property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos- containing materials and other hazardous or toxic substances. The operation and subsequent removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the current or former ownership (direct or indirect), operation, management, development and/or control of real properties, we may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines, and claims for injuries to persons and property.
Our current policy is to obtain a Phase I environmental study on each property we seek to acquire and to proceed accordingly. No assurance can be given, however, that the Phase I environmental studies or other environmental studies undertaken with respect to any of our current or future properties will reveal all or the full extent of potential environmental liabilities, that any prior owner or operator of a property did not create any material environmental condition unknown to us, that a material environmental condition does not otherwise exist as to any one or more of such properties or that environmental matters will not have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt. We currently carry no insurance for environmental liabilities.
Certain environmental laws impose liability on a previous owner of property to the extent that hazardous or toxic substances were present during the prior ownership period. A transfer of the property does not relieve an owner of such liability. Thus, we may have liability with respect to properties previously sold by us or our predecessors.
Ranking of Securities and Subordination of Claims
A significant portion of our operations is conducted through our subsidiaries, including the Operating Company. Our cash flow and the consequent ability to make distributions and other payments on our equity securities and to service our debt, will be partially dependent upon the earnings of such subsidiaries and the distribution of those earnings to us, or upon loans or other payments of funds made by such subsidiaries to us. In
addition, debt or other arrangements of our subsidiaries may impose restrictions that affect, among other things, our subsidiaries' ability to pay dividends or make other distributions or loans to us.
Likewise, a substantial portion of our consolidated assets are owned by our subsidiaries, effectively subordinating certain unsecured indebtedness of BRE to all existing and future liabilities, including indebtedness, trade payables, lease obligations and guarantees of our subsidiaries. The Operating Company has guaranteed amounts due under our $400 million bank credit facility (the "Credit Facility") with a syndicate of banks. Likewise, any other of our subsidiaries with assets or net income which, when multiplied by our effective percentage ownership interest in such subsidiary exceeds $30 million or 5% of our consolidated net income, respectively, is required to guarantee the repayment of borrowings under the Credit Facility. The Operating Company and other of our subsidiaries may also, from time to time, guarantee other of our indebtedness. Therefore, our rights and rights of our creditors, including the holders of other unsecured indebtedness, to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of such subsidiary's creditors, except to the extent that we may ourselves be a creditor with recognized claims against the subsidiary, in which case our claims would still be effectively subordinate to any security interests in or mortgages or other liens on the assets of such subsidiary and would be subordinate to any indebtedness of such subsidiary senior to that held by us.
Provisions Which Could Limit a Change in Control or Deter a Takeover
In order to maintain our qualification as a REIT, not more than 50% in value of our outstanding capital stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities). In order to protect us against risk of losing our status as a REIT due to a concentration of ownership among our shareholders, our articles of incorporation provide, among other things, that if the Board of Directors determines, in good faith, that direct or indirect ownership of BRE common stock has or may become concentrated to an extent that would prevent us from qualifying as a REIT, the Board of Directors may prevent the transfer of BRE common stock or call for redemption (by lot or other means affecting one or more shareholders selected in the sole discretion of the Board of Directors) of a number of shares of BRE common stock sufficient in the opinion of the Board of Directors to maintain or bring the direct or indirect ownership of BRE common stock into conformity with the requirements for maintaining REIT status. These limitations may have the effect of precluding acquisition of control of us by a third-party without consent of the Board of Directors.
In addition, certain other provisions contained in our articles of incorporation and bylaws may have the effect of discouraging a third-party from making an acquisition proposal for us and may thereby inhibit a change in control. For example, such provisions may (i) deter tender offers for BRE common stock which offers may be attractive to the shareholders, or (ii) deter purchases of large blocks of BRE common stock, thereby limiting the opportunity for shareholders to receive a premium for their shares of BRE common stock over then-prevailing market prices.
Tax Risks
Tax Liabilities as a Consequence of Failure to Qualify as a REIT
Although management believes that we are organized and are operating so as to qualify as a REIT under the Code, no assurance can be given that we have in fact operated or will be able to continue to operate in a manner so as to qualify or remain so qualified. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations and the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our taxable gross income in any year must be derived from qualifying sources and we must make distributions to shareholders aggregating annually at least 95% of our REIT taxable income (excluding net capital gains). Thus, to the extent revenues from non-qualifying sources such as income from third-party management represents more than 5% of our gross income in any taxable year,
we will not satisfy the 95% income test and may fail to qualify as a REIT, unless certain relief provisions apply, and, even if those relief provisions apply, a tax would be imposed with respect to excess net income, any of which could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt. Additionally, to the extent the Operating Company or certain other subsidiaries are determined to be taxable as a corporation, we would not qualify as a REIT, which could have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt. Finally, no assurance can be given that new legislation, new regulations, administrative interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.
If we fail to qualify as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, which would likely have a material adverse effect on us and our ability to make distributions to you and to pay amounts due on our debt. In addition, unless entitled to relief under certain statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce funds available for investment or distributions to you because of the additional tax liability to us for the year or years involved. In addition, we would no longer be required to make distributions to you. To the extent that distributions to you would have been made in anticipation of qualifying as a REIT, we might be required to borrow funds or to liquidate certain investments to pay the applicable tax.
Item 2.
Item 2. PROPERTIES
General
In addition to the information in this Item 2, certain information on our portfolio is contained in Schedule III (financial statement schedule) under Item 14(d).
Multifamily Property Data
Our multifamily properties represent 100% of our real estate portfolio and 97% of our total revenue.
During 1997 and 1996, multifamily revenues as a percentage of total revenues did not increase in proportion to the increase in the relative size of the multifamily portfolio at December 31 of the year indicated due to the timing of purchases of multifamily properties and the sales of commercial properties. No single multifamily property accounted for more than 10% of revenues in 1999.
The following table discloses certain year-end operating data about our multifamily units.
- -------- (1) Portfolio occupancy is calculated by dividing the total occupied units by the total units in the portfolio. Apartment units are generally leased to residents for rental terms which do not exceed one year.
This table summarizes data about our stabilized multifamily properties:
- -------- (2) Represents the aggregate net operating income of all properties in each market divided by the total net operating income of multifamily properties for the year ended December 31, 1999, and includes the results of two completed properties acquired during 1999 from the date of acquisition. Accordingly, these results do not reflect a full year of operations for properties acquired or completed in 1999 and six communities under lease- up.
(3) Represents physical occupancy at December 31, 1999. The total is a weighted average by units for all communities.
(4) Represents total gross potential rent divided by total units as of December 31, 1999. The total is a weighted average by units for all communities shown.
Completed Properties
In 1999, BRE completed the development of Pinnacle Flamingo West at Las Vegas, Nevada which added 324 units to the Company's portfolio.
Properties Under Development
This table provides information about our multifamily properties under development or construction at December 31, 1999. We can not guarantee that the estimated costs or completion dates will be accurate.
- -------- (5) Represents when the Company estimates a certificate of occupancy will be received for the entire community.
(6) These amounts are shown gross of the joint venture partner's equity or construction loan.
(7) The development plan is under finalization.
Commercial and Retail Property Data
This table provides certain information about our commercial and retail properties for the following year ends:
- -------- (8) For commercial and retail properties, portfolio occupancy is calculated by dividing the total occupied square footage by the total rentable square footage in the portfolio.
(9) Average minimum annual rent per square foot is calculated by dividing the reported minimum rental income for commercial and retail properties by total rentable square feet. The changes in the amounts shown are due to variances in occupancy levels and the changing composition of the properties due to acquisitions and dispositions.
At December 31, 1999, BRE owned only one commercial property and two investments held in limited partnerships in which the Company is a minority partner. These partnership investments are included as other assets in the Company's consolidated balance sheet and are not included in the above table. No single tenant accounted for more than 10% of revenues for the year ended December 31, 1999.
Insurance, Property Taxes and Income Tax Basis
The Company carries comprehensive liability, fire, extended coverage and rental loss insurance on its properties with certain policy specifications, limits and deductible. In addition, the Company currently carries flood and earthquake coverage with an annual aggregate limit of $250,000,000 (after policy deductibles ranging from 2%-5% of damages). Management believes the properties are adequately covered by such insurance.
Property taxes on portfolio properties are assessed on asset values based on the valuation method and tax rate used by the respective jurisdictions; such rates ranged from approximately 1% to 2% of assessed values for 1999. The gross carrying value of the Company's direct investments in rental properties was $1,691,762,000 as of December 31, 1999; at that date BRE's assets had an underlying federal income tax basis approximately $146,000,000 lower, which reflects, among other factors, the carryover of basis on tax-deferred exchanges.
Headquarters
The Company leases its corporate headquarters at 44 Montgomery Street, 36th Floor, San Francisco, California, 94104-4809, from OTR, an Ohio general partnership. The lease has an 8-year term, and covers 15,142 rentable square feet at annual per square foot rents which began at $37.00 in 1998 and rise to $44.00 in the eighth year of the lease. The lease term ends on January 31, 2006. The Company also maintains regional offices in: Seattle, Washington; Sacramento, Long Beach, Newport Beach and San Diego, California; Phoenix and Tucson, Arizona; Las Vegas, Nevada; Denver, Colorado; and Salt Lake City, Utah.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is defending various claims and legal actions that arise from its normal course of business, 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 will have a material adverse effect on the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "BRE". As of March 17, 2000, there were approximately 6,600 recordholders of BRE's common stock and the last reported sales price on the NYSE was $26.00. The number of holders does not include shares held of record by a broker or clearing agency, but does include each such broker or clearing agency as one recordholder. As of March 17, 2000, there were approximately 35,000 beneficial holders of BRE's common stock.
This table shows the high and low sales prices of the common stock reported on the NYSE Composite Tape and the dividends we paid for each common share.
Since 1970, when BRE was founded, we have made regular and uninterrupted quarterly distributions to shareholders. The payment of distributions by the Company is at the discretion of the Board of Directors and depends on numerous factors, including the cash flow, financial condition, capital requirements, REIT provisions of the Code and other factors.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes. The 1998, 1997 and 1996 results were significantly affected by the transaction with Trammell Crow Residential-West in 1997, the merger with Real Estate Investment Trust of California in 1996, and numerous acquisitions and dispositions as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations." As such, the consolidated financial statements and notes thereto included elsewhere in this report are not directly comparable to prior years.
- ------- (10) Management considers Funds from Operations ("FFO") to be an appropriate supplemental measure of the performance of an equity REIT because it is predicated on cash flow analyses that facilitate an understanding of the operating performances of the Company's properties without giving effect to noncash items such as depreciation. FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as net income or loss (computed in accordance with generally accepted accounting principles) excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization of real estate assets. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO by other REITs may vary materially from that of the Company, and therefore the Company's FFO and the FFO of other REITs may not be directly comparable. On October 27, 1999, NAREIT revised this definition for periods after January 1, 2000.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
BRE Properties, Inc. ("BRE" or the "Company") is a real estate investment trust that owns and internally manages a portfolio of 86 apartment communities (aggregating 22,690 units) in 12 major markets of the Western United States. The majority of our revenues are from rental income from our portfolio of multifamily properties (93% of total revenues in 1999, 94% in 1998 and 93% in 1997). Our policy emphasizes cash flows from operations rather than the realization of capital gains through property dispositions.
BRE has a Western-focused investment strategy. In 1999, we acquired two apartment communities in Los Angeles and San Diego, with a total of 628 units. In addition, we acquired land or started development on 2,161 proposed units. In 1998, we acquired seven apartment communities in Denver, Seattle, Portland, Los Angeles and San Diego, for a total of 1,597 units. In November 1997, we acquired the assets and operations of Trammell Crow Residential-West ("TCRW") (the "Transaction"). This transaction added 16 completed properties totaling 4,786 units, eight properties under development comprising 2,445 units (seven were completed in 1998, the eighth in 1999; two were stabilized in 1998 and the balance in 1999) and management experience in development and construction. In 1996, we merged with Real Estate Investment Trust of California (the "Merger"), which added 22 apartment communities (totaling 3,581 units) and 18 commercial and retail properties to our portfolio. The Transaction and the Merger provided increased depth in management and other resources. We started our in-house development and construction function with personnel and resources from the Transaction. As planned, we sold all but one of our commercial and retail properties by December 31, 1998. During the years ended December 31, 1999, 1998 and 1997, we acquired a total of 38 multifamily properties, which were funded in part by the proceeds from the sale of commercial and retail properties.
In addition to historical information, we make forward-looking statements in this Annual Report on Form 10-K. These forward-looking statements pertain to, among other things, our capital resources, portfolio performance and results of operations. Forward-looking statements involve numerous risks and uncertainties. You should not rely on these statements as predictions of future events because there is no assurance that the events or circumstances reflected in the statements can be achieved or will occur. Forward-looking statements are identified by words such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates," or "anticipates" or in their negative form or other variations, or by discussions of strategy, plans or intentions. Forward-looking statements are based on assumptions, data or methods that may be incorrect or imprecise or incapable of being realized. The following factors, among others, could affect actual results and future events: defaults or nonrenewal of leases, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to successfully integrate acquired properties and operations, risks and uncertainties affecting property development and construction (including construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities), failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"), environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. Our success also depends on general economic trends, including interest rates, income tax laws, governmental regulation, legislation, population changes and other factors. Do not rely solely on forward-looking statements, which only reflect management's analysis. We assume no obligation to update forward-looking statements.
Results of Operations
Comparison of the Years ended December 31, 1999, 1998 and 1997
General
The results of operations for the three years ended December 31, 1999 were significantly affected by acquisitions of apartment communities, including the Transaction, and the repositioning of the Company's portfolio through the sale of commercial and retail properties. The 1999 results include completion and lease-up of six properties acquired in the Transaction and nine communities acquired in 1998, with a full year of stabilized operations in 1999. The 1998 results include revenue and expense for an entire year for 16 stabilized apartment communities that were acquired in the Transaction, while the 1997 results included those properties only from November 18, 1997. In addition, the 1998 results include a full year of operations from five other acquisitions in 1997, and a partial year for 1998 acquisitions and seven completed communities previously under development that were acquired in the Transaction. During 1997 and continuing in 1998, the Company substantially completed the strategic repositioning of its portfolio to concentrate on apartment communities and disposed of nearly all of its commercial and retail assets, which significantly reduced the revenues received from such properties in 1999 and 1998.
At December 31, 1999, the Company's portfolio of apartment communities consisted of the following: (i) 17,592 units in 69 communities that were completed and stabilized for all of 1999 and 1998 ("same-store" communities; see footnote 11 on page 24), (ii) 3,291 units in 11 stabilized communities that were acquired or stabilized in 1998 and held for all of 1999 and (iii) 1,807 units in six communities that were completed and leased up in 1999.
Revenues
Total revenues (excluding net gain on sales of investments in rental properties) were $234,253,000 in 1999, $203,245,000 in 1998 and $137,761,000 in 1997. Revenues increased in 1999 primarily from the completion and lease-up of six apartment communities and acquisitions of stabilized properties in 1998, which were held for all of 1999. Revenues increased in 1998 primarily as a result of revenues derived from 16 stabilized apartment communities acquired in the Transaction. A summary of revenues for the years ended December 31, 1999, 1998 and 1997 follows.
Multifamily rental income increased in each of the last three years primarily due to property acquisitions (including the completion and lease-up of communities under construction) and to a lesser extent, increases in same- store communities. A summary of net changes in rental revenue by type of community follows.
- -------- (11) The Company defines annual same-store communities as those with stabilized operations for the two full years listed. A stabilized community has reached the underwritten occupancy (typically 95%) or has been completed for one year. Includes 17,592 of the Company's 22,690 units at December 31, 1999 and 11,722 of the 21,858 units at December 31, 1998.
On a same-store basis, rental revenues increased 4% due to average rent per unit increasing approximately 3% and higher occupancy in 1999. On a same-store basis in 1998, rental revenues increased 6% due to average rent per unit increasing approximately 5% and decreased use of rental concessions, which were partially offset by lower occupancy in 1998.
Revenues from commercial and retail properties decreased 75% in 1999 compared to 1998 due to sales of properties during 1998, and decreased 83% in 1998 compared to 1997 due to the sale of four properties. Commercial and retail revenues as a percentage of total revenues have declined in each of the last three years as a result of the Company's strategy emphasizing redeployment of these investments into apartment communities.
Portfolio occupancy rates as of December 31:
For multifamily properties, portfolio occupancy is calculated by dividing the total occupied units by the total units in stabilized communities in the portfolio at the end of the period. For commercial and retail properties, portfolio occupancy is calculated by dividing the total occupied square footage by the total rentable square footage in the portfolio at the end of the period.
The following table summarizes by property classification the acquisitions and dispositions for the years ended December 31, 1999, 1998 and 1997 (dollar amounts are gross acquisition costs in the case of acquisitions, total delivered cost in the case of completed development communities and gross sales prices in the case of property sales).
Acquisition/disposition summary:
- -------- (12) Includes, for 1997, 16 properties acquired in the Transaction with an aggregate cost of approximately $386,000,000, held by consolidated subsidiaries of BRE
Other income
Other income (which consists primarily of recurring nonrental income derived from apartment communities and includes, among other items, partnership, interest and third-party property management and development income) was $16,196,000, $12,439,000 and $9,083,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The increase in 1999 over 1998 is due to other income from same-store communities, communities acquired in 1998 and held for all of 1999, and development fees from joint ventures to the extent of third-party interests. The increase in 1998 over 1997 is due largely to other income generated by communities acquired in 1997 and held for all of 1998, including those acquired in the Transaction.
Expenses
Real estate expenses
A summary of real estate expenses for the years ended December 31, 1999, 1998 and 1997 follows.
Real estate expenses for multifamily rental properties (which include maintenance and repairs, utilities, on-site staff payroll, property taxes, insurance, advertising and other direct operating expenses) increased by $5,903,000 (9%) in the year ended December 31, 1999 as compared to the prior year. This increase is due largely to the completion and lease-up of six communities previously under development as real estate expenses at same-store communities remained unchanged. Real estate expenses for the year ended December 31, 1998 increased 47% or $20,517,000 from 1997 primarily due to acquisitions in 1998 and communities completed in 1998,which were previously under development, and the expenses for an entire year for properties acquired in 1997, including those acquired in the Transaction. Multifamily real estate expenses as a percentage of multifamily rental income decreased from 35.8% in 1997 to 34.0% in 1998 and to 32.4% in 1999. Although not measurable with precision, management believes that this decrease resulted in part from economies of scale derived from increased concentration of assets in the Company's markets.
Provision for depreciation
The provision for depreciation increased by $7,761,000 for the year ended December 31, 1999 as compared to 1998, and increased $9,825,000 for the year ended December 31, 1998 as compared to 1997. The increases in 1999 and 1998 resulted from additional depreciation on property acquisitions (including those properties acquired in the Transaction) and to a lesser extent, depreciation on development properties completed in 1999. Further, during 1998 and 1997, dispositions of commercial and retail properties generally resulted in a higher depreciable base (and related depreciation expense) as the original cost basis plus the realized gain was reinvested.
Interest expense
Interest expense for the years ending December 31, 1999, 1998 and 1997 follows.
Year-end debt balances at December 31, 1999, 1998 and 1997 follow.
Interest expense increased $6,097,000 to $41,695,000 in 1999 due to eight properties previously under development and lease-up. The cost of development increased borrowings under the line of credit and related interest expense, and lowered capitalization of interest upon completion. These increases were offset in part by the paydown of the line of credit from the proceeds of the January 1999 issuance of $53,750,000 in Series A Preferred Stock. In 1998, interest expense increased $13,992,000 to $35,598,000 due to: interest on the $130,000,000 unsecured senior notes due 2013, issued in February 1998; borrowings on the line of credit to fund acquisitions of stabilized properties; a full year of interest on debt assumed and incurred in the Transaction of approximately $280,000,000; and a full year of interest on $50,000,000 unsecured notes due 2007 issued in June 1997. This amount was offset in part by a paydown of balances on the Company's credit facilities from the net proceeds of equity offerings in 1998 totaling approximately $56,000,000 and net proceeds from property sales of approximately $31,000,000. Further, the 1998 amount is net of capitalized interest related to construction in progress for eight communities acquired in the Transaction and five other properties purchased for development. The 1997 interest expense was partially offset by the paydown of balances on the Company's line of credit using net proceeds from equity offerings in 1997 totaling approximately $109,900,000 and net proceeds from sales of investments in rental properties of approximately $105,318,000.
General and administrative expenses
General and administrative expenses for the three years ending December 31, 1999 were as follows.
General and administrative expenses as a percentage of total revenues decreased by 0.1% in 1999 as compared to 1998 due to continued efficiencies in administrating a larger portfolio and a restructuring of corporate personnel in the first quarter of 1999. In 1998 as compared to 1997, general and administrative expenses decreased by 0.1%, although total revenues increased approximately 48%. This relatively small decrease is due to the efficiencies of administering a larger portfolio being offset in part by start-up costs in establishing new regional offices (the Company added new regions in connection with the Transaction) and the relocation of its corporate office. No such costs were incurred in 1997.
Included in general and administrative expenses is office rent of $792,000, $568,000 and $415,000 for the three years ended December 31, 1999.
Provision for nonrecurring charge
In the first quarter of 1999, BRE recorded a restructuring charge of $1,250,000 related to reductions in corporate personnel. In the third quarter of 1998, BRE recorded a provision for litigation loss of $2,400,000 in connection with a jury award and related legal expenses. Both of these charges were concluded in 1999 with no further charge to expense. There were no such amounts in 1997.
Net gain (loss) on sales of investments in rental properties
The net gain on sales of investments in rental properties in 1999 was $54,000, primarily from the sale of the Los Senderos community. In 1998, the net loss on sales of investments in rental properties was $1,859,000, primarily from the sale of the Park Glenn apartment community and three commercial and retail properties: Hawthorne Del Amo, Valencia Medical Center and Vista Village Shopping Center for a total gross sale price of approximately $17,300,000. The net gain on sales in 1997 was $27,824,000, primarily due to the sale of the Villa Serra, Central, Santa Fe Springs and Hub properties for a total gross sale price of approximately $80,500,000. Certain of these sales were structured as tax-deferred exchanges, with the proceeds applied toward new investments in apartment communities. As of December 31, 1999, the Company had gains on sales totaling approximately $146,000,000 which have been deferred for federal and state income tax purposes since the Company's organization in 1970.
Minority interest in income
Minority interest in income was $5,447,000 for the year ended December 31, 1999 due to the earnings attributable to the minority members of the Company's consolidated subsidiaries, up from $4,224,000 for the year ended December 31, 1998. This increase is primarily due to the issuance of additional interests in income pursuant to the attainment of development goals in the Transaction and a full year of operations from another consolidated subsidiary formed in 1998. Minority interest in income was $4,224,000 for the year ended December 31, 1998 due to the earnings attributable to the minority members of the Company's consolidated subsidiaries, up from $972,000 for the year ended December 31, 1997. This increase is primarily due to a full year of allocation of income to minority members in connection with the Transaction.
Dividends attributable to preferred stock
The Company issued 2,150,000 shares of 8 1/2 % Series A Cumulative Redeemable Preferred Stock during the quarter ended March 31, 1999, and recorded $4,182,000 in dividends for the year ended December 31, 1999. No preferred stock was outstanding in the 12 months ended December 31, 1998 or 1997.
Net income available to common shareholders
Net income available to common shareholders was $69,034,000, $60,644,000 and $76,197,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The increase in the year ended 1999 as compared to 1998 is due largely to an increase in net contribution to income from the completion of six communities and properties acquired or stabilized in 1998 and held for all of 1999. The decrease in the year ended 1998 as compared to 1997 is due largely to the loss on the sale of investments in rental properties in 1998, while 1997 had gains on sales of investments in rental properties. This decrease was offset in part by contributions to net income from properties acquired during 1997 and held for all of 1998, primarily from the Transaction.
Construction in progress and land under development
Land acquired for development is capitalized and reported as "Land under development" until the development plan for the land is formalized. Once the development plan is determined, the costs are transferred to the balance sheet line items "Construction in progress." Land acquisition, development and carrying costs of properties under construction are capitalized and reported as "Direct investments in real estate" or "Equity interests in and advances to real estate joint ventures", as appropriate, in "Construction in progress." The Company transfers the capitalized costs of direct investment properties for each building in a community under construction to the balance sheet line item "Investments in rental properties" once the building receives a final certificate of occupancy and is ready to lease.
The following table presents data with respect to the Company's properties included in construction in progress and land under development at December 31, 1999, for both direct investment and equity interest properties. Completion of these properties is subject to a number of risks and uncertainties, including construction delays and cost overruns. No assurance can be given that these properties will be completed or, if completed, that they will be completed by the estimated dates or for the estimated amounts or that they will contain the number of units proposed in the table below.
- -------- (13) As of December 31, 1999, 339 of these units had been delivered.
(14) Consists of the Pinnacle Bellevue community in Bellevue, Washington, Pinnacle Carmel Creek community in San Diego, California, and Pinnacle at Overlook II in Folsom, California, with 248, 348 and 112 units planned, respectively. Pinnacle at Overlook II has an estimated completion in the third quarter of 2000; the others in the fourth quarter of 2000.
(15) Consists of the gross costs of three communities, Pinnacle at Blue Ravine, Pinnacle Sonata and Pinnacle at Queen Creek, with 260, 268 and 252 units planned, respectively. These three communities are under joint venture agreements and are presented on the financial statements net of $56,700,000 of draws on
construction loans and joint venture partner's capital contribution. The Company's net equity contribution upon completion is estimated at $16,500,000.
(16) Consists of Pinnacle MacArthur Place in Santa Ana, California and Pinnacle at Denver Tech Center, Greenwood Village, Colorado with 253 and 420 units planned, respectively. The development plans for these communities are under review and finalization, including obtaining final bids for construction costs, and the total proposed units may change.
Impact of Inflation
Over 97% of BRE's total revenues for 1999 were derived from apartment properties. Due to the short-term nature of most apartment leases (typically one year or less), the Company may seek to adjust rents to mitigate the impact of inflation upon renewal of existing leases or commencement of new leases, although there can be no assurance that the Company will be able to adjust rents in response to inflation. In addition, occupancy rates may also fluctuate due to short-term leases that permit apartment residents to leave at the end of each lease term at minimal cost to the resident.
Year 2000 Considerations
As of December 31, 1998, the Company had completed a project that replaced portions of its software so that its computer systems would function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost for the Company's systems was approximately $200,000, and such costs were expensed according to the Company's existing policy. The Company completed the necessary software replacement largely using existing employees. The Company believes that with the conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. As of March 1, 2000, the Company has not experienced significant operational problems due to Year 2000 issues. Further, the Company believes that its risk for future operational problems related to the Year 2000 issue is minimal.
The Company is dependent on third parties to continue operating properly, and as of March 1, 2000, the Company is unaware of any significant Year 2000 issue preventing third parties with material dealings with the Company to function normally. However, as a component of its Year 2000 project, the Company has discussed Year 2000 compliance issues with its key vendors and service providers, and has developed contingency plans, although there can be no assurance that these contingency plans will successfully avoid future service interruption.
Due to the complexity and pervasiveness of the Year 2000 issue and, in particular, the uncertainty regarding the compliance programs of third parties, no assurance can be given that these estimates will be achieved; actual results could differ materially from those anticipated.
Liquidity and Capital Resources
At December 31, 1999, the Company's cash totaled $13,812,000, up from $2,057,000 at the end of 1998 due to the excess of cash flow provided by operating and financing activities over cash flows used for investing activities, as follows:
-- Net cash flows generated by operating activities increased by $15,943,000 from $97,081,000 for the year ended December 31, 1998, due primarily to higher net income in 1999.
-- Net cash flows generated by financing activities decreased by $188,038,000 from $191,057,000 for the year ended December 31, 1998, due primarily to the issuance in 1998 of senior unsecured notes and higher borrowings on the line of credit to fund construction in progress and acquisitions of stabilized properties.
-- Net cash flows used in investing activities decreased by $186,009,000 from $290,297,000 for the year ended December 31, 1998, due primarily to the 1998 funding of construction in progress and acquisitions of stabilized properties.
Borrowings under the Company's line of credit totaled $315,000,000 at December 31, 1999, compared to $264,000,000 at December 31, 1998. Drawings on the line of credit are available to pay dividends to shareholders and distributions to minority members, to fund capital improvements and operating expenses, and to fund property acquisitions and development. The Company typically reduces its outstanding balance on the line of credit with available cash balances. Borrowings of up to $400,000,000 are available under the Company's line of credit, with $85,000,000 available at December 31, 1999. The line of credit matures in August 2001 and bears interest at the lower of LIBOR plus 0.70% or a rate based on bids of the participating banks. Cost of the line of credit is 0.15% per annum on the total commitment amount.
The Company had a total of $253,000,000 in unsecured indebtedness other than the line of credit at December 31, 1999, consisting of the following:
-- $73,000,000 of unsecured senior notes with an interest rate of 7.44% per annum on $55,000,000 and 7.88% per annum on $18,000,000. This indebtedness is to be repaid through scheduled principal payments annually from 2000 to 2005;
-- $50,000,000 principal amount of unsecured senior notes due 2007, with an effective interest rate of approximately 7.8%; and
-- $130,000,000 principal amount of unsecured notes due 2013, with an effective interest rate of 7.3%.
In addition, at December 31, 1999, the Company had mortgage indebtedness totaling $211,403,000 at interest rates ranging from 5.3% to 9.3%, with remaining terms of from less than one to 29 years.
For additional information regarding the Company's line of credit, unsecured senior notes payable and mortgage loans payable, including scheduled principal payments over the next five years, see Notes 5 and 6 to Notes to Consolidated Financial Statements. Certain of the Company's indebtedness contain financial covenants as to minimum net worth, interest coverage ratios, maximum secured debt and total debt to capital, among others. The Company was in compliance with all such financial covenants during the year ended December 31, 1999.
The Company purchased two completed apartment communities totaling 628 units during the year ended December 31, 1999 for a gross purchase price of approximately $58,000,000. During this period, the Company also purchased four land sites for development of an estimated 1,132 units, for a gross purchase price of approximately $13,000,000. Further, the Company funded approximately $21,000,000 for direct investment construction in progress and funded approximately $49,000,000 in costs in 1999 for construction in progress for communities under joint venture agreements. These acquisition and construction costs were funded by borrowings on the line of credit, the issuance of preferred stock, construction loans on communities under joint venture agreements and proceeds from the sale of properties. Because of higher prices and corresponding declining rates of return on completed apartment communities in its targeted Western markets, the Company presently does not anticipate significant acquisitions of completed apartment communities in 2000, other than the communities noted below. The Company continually evaluates its portfolio to determine whether acquisitions or dispositions may be appropriate to maximize the portfolio's performance.
The Company intends to meet its short-term liquidity requirements through cash balances and cash flows provided by operations, borrowings on the unsecured line of credit and to a lesser extent, proceeds from asset sales. The Company believes that its cash flow and cash available from its line of credit will be sufficient to meet its liquidity needs during 2000, which include normal recurring expenses, debt service requirements, budgeted expenditures for improvements to certain properties, funding ongoing construction in progress and distributions required to maintain the Company's real estate investment trust qualification under the Code.
However, the Company anticipates that it will continue to require outside sources of financing to meet its long-term liquidity needs beyond 2000, such as scheduled debt repayments, construction funding and property acquisitions. At December 31, 1999, the Company had committed to purchase two multifamily communities for approximately $65,000,000 (estimated to fund in the year 2000) and had an estimated cost of $50,000,000 to
complete existing direct investment construction in progress, and $2,000,000 (net of construction financing and partners' contributions) to fund joint venture construction in progress, with funding estimated from 2000 to 2002. In addition, the estimated cost to complete land under development has not been determined as the development plans have not been finalized. These properties may be contributed to a joint venture, which may significantly lower the Company's required funding. To facilitate the acquisition of public capital, the Company filed a universal shelf registration statement in March 1998 providing for the issuance of up to $750 million in equity, debt, preferred or convertible securities, of which approximately $640,000,000 remains unused at December 31, 1999. The Company believes that public capital markets will not be, for the foreseeable future, as significant a source of funding as they have in the three years ended December 31, 1999. The Company is actively searching for other sources of possible funding, including further joint ventures and additional secured construction debt. The Company owns unencumbered real estate assets that could be sold, contributed to joint ventures or used as collateral for financing purposes (subject to certain lender restrictions) and has encumbered assets with significant equity that could be further encumbered should other sources of capital not be available.
Substantially all of the properties acquired in the Transaction are held through BRE Property Investors LLC (the "Operating Company"). Under the terms of the limited liability company agreement governing the operations of the Operating Company (the "LLC Agreement"), the nonmanaging members are entitled to receive certain distributions of cash prior to the Company. If the Operating Company's cash available for distribution is not sufficient to permit such priority distributions, the Company is required to make certain capital contributions to the Operating Company. The Operating Company is also required to maintain certain debt service coverage, debt-to-asset and other financial ratios intended to protect the members' rights to receive priority distributions. Under the terms of the LLC Agreement, among other items, the properties owned by the Operating Company may not be sold in a taxable transaction without the consent of the nonmanaging members for up to 10 years from the closing of the Transaction. The Operating Company has also guaranteed repayment of borrowings under the Company's $400 million line of credit.
Dividends and Distributions to Minority Members
A cash dividend has been paid to common shareholders each quarter since the Company's inception in 1970. Dividends per common share were $1.56 in 1999, $1.44 in 1998 and $1.38 in 1997. Total dividends paid to common shareholders for the three years ended December 31, 1999, 1998 and 1997 were $69,544,000, $62,138,000 and $51,063,000, respectively. Distributions to minority members were $5,587,000 in 1999, $4,189,000 in 1998 and $972,000 in 1997. In 1999, $4,182,000 in dividends were paid to preferred shareholders.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes in short-term LIBOR interest rates. The Company does not have any direct foreign exchange or other significant market risk.
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's unsecured line of credit. The Company primarily enters into fixed and variable rate debt obligations to support general corporate purposes, including acquisitions, capital expenditures and working capital needs. The Company continuously evaluates its level of variable rate debt with respect to total debt and other factors, including its assessment of the current and future economic environment. The Company did not have any derivative financial instruments at December 31, 1999, but had in previous years. In 1997 and 1998, the Company closed out treasury rate lock agreements in conjunction with the issuance of its $50 million unsecured senior notes due 2007, issued in June 1997, and $130 million unsecured senior notes due 2013, issued in February 1998. The purpose of these treasury rate lock agreements was to obtain what the Company considered advantageous pricing for future anticipated debt issuance.
The fair values of BRE's financial instruments (including such items in the financial statement captions as cash, other assets, accounts payable and other liabilities and unsecured line of credit) approximate their carrying or contract values based on their nature, terms and interest rates that approximate current market rates. The fair
value of mortgage loans payable and unsecured senior notes is estimated using discounted cash flow analyses with an interest rate similar to that of current market borrowing arrangements. The fair value of the Company's mortgage loans payable and unsecured senior notes approximates their carrying value at December 31, 1999.
The Company had $347,530,000 and $297,000,000 in variable rate debt outstanding at December 31, 1999 and 1998, respectively. A hypothetical 10% adverse change in interest rates would have had an annualized unfavorable impact of approximately $2,200,000 and $1,800,000, respectively, on the Company's earnings and cash flows based on these year-end debt levels. The Company cannot predict the effect of adverse changes in interest rates on its variable rate debt and, therefore, its exposure to market risk, nor can there be any assurance that fixed rate, long term debt will be available to the Company at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements. Such Financial Statements and Schedules are incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers. See "Executive Officers of the Registrant" in Part I of this report.
(b) Directors. The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, relating to the Company's 1999 Annual Meeting of Shareholders, under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," to be filed with the Securities and Exchange Commission within 120 days of December 31, 1999. A summary of the directors and their principal business for the last five years follows:
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, relating to the Company's 1999 Annual Meeting of Shareholders, under the headings "Executive Compensation and Other Information" and "Board and Committee Meetings; Compensation of Directors," to be filed with the Securities and Exchange Commission within 120 days of December 31, 1999.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, relating to the Company's 1999 Annual Meeting of Shareholders, under the heading "Security Ownership of Certain Beneficial Owners and Management" to be filed with the Securities and Exchange Commission within 120 days of December 31, 1999.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, relating to the Company's 1999 Annual Meeting of Shareholders, under the headings "Stock Loans" and "Employment Contracts and Termination of Employment and Change in Control Arrangements-- Mr. McDowell--Stock Loan," to be filed with the Securities and Exchange Commission within 120 days of December 31, 1999.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Schedule III--Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted.
3. See Index to Exhibits immediately following the Consolidated Financial Statements. Each of the exhibits listed is incorporated herein by reference.
(b) Reports on Form 8-K:
None
(c) Exhibits
See Index to Exhibits.
(d) Financial Statement Schedules
See Index to Financial Statements and Financial Statement Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated March 22, 2000 BRE Properties, Inc.
/s/ Frank C. McDowell By: _________________________________ Frank C. McDowell President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of BRE Properties, Inc.:
We have audited the accompanying consolidated balance sheets of BRE Properties, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the related schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the related financial schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BRE Properties, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Francisco, California January 18, 2000
BRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands, except per share data)
See Notes to Consolidated Financial Statements
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Dollar amounts in thousands, except per share data)
See Notes to Consolidated Financial Statements
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
See Notes to Consolidated Financial Statements
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollar amounts in thousands, except share and per share data)
See Notes to Consolidated Financial Statements
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company
BRE Properties, Inc. ("BRE" or the "Company") is a self-administered real estate investment trust that owns and operates multifamily communities and other income-producing properties in the Western United States. At December 31, 1999, BRE's portfolio, owned directly or through subsidiaries, consisted of 89 properties, including 86 multifamily communities (aggregating 22,690 units), one commercial and retail property, and two properties held in partnerships in which BRE is a limited partner. Of these properties, 39 were located in California, 22 in Arizona, nine in Washington, five in Nevada, five in Utah, four in New Mexico, three in Oregon and two in Colorado. In addition, at December 31, 1999, there were eight properties under development aggregating an estimated 2,161 units, including 780 units held under joint venture agreements in which BRE will be a minority owner when construction is completed.
Transaction with Trammell Crow Residential-West
On November 18, 1997, BRE acquired 16 completed properties and eight development properties from certain entities of Trammell Crow Residential-West (the "Transaction") pursuant to a definitive agreement (the "Contribution Agreement"). BRE paid a total of approximately $160 million in cash and issued $100 million in common stock based on a stock price of $26.93 per share, as provided for in the Contribution Agreement. In addition, certain entities received Operating Company Units ("OC Units ") valued at $76 million in BRE Property Investors LLC (the "Operating Company"), a Delaware limited liability company and majority-owned subsidiary of BRE. The Operating Company also assumed approximately $120 million in debt. BRE is the sole managing member of the Operating Company and owned an approximate 74% interest therein at December 31, 1999. Substantially all of the properties acquired in the Transaction were held through the Operating Company, which was formed by the Company for the purpose of acquiring the properties in the Transaction. The Operating Company continues to hold substantially all of the properties acquired in the Transaction.
The OC Units held by nonmanaging members are included in minority interest in the Company's consolidated financial statements. Starting in November 1998, nonmanaging members of the Operating Company can exchange their units for common stock of BRE on a 1:1 basis or, at the option of the Company, cash in an amount equal to the market value of such common stock at the time of the exchange. As of December 31, 1999, 185,000 OC Units have been exchanged for common stock. The nonmanaging members are entitled to priority distributions regardless of the cash flow of the Operating Company. The Operating Company is also required to maintain certain financial ratios to protect the nonmanaging member's distributions. Further, the Company is restricted from selling assets of the Operating Company in a taxable sale for a period ranging from eight to ten years from the date of the Transaction. The Operating Company has also guaranteed the repayment of the Company's $400 million line of credit.
The Contribution Agreement also provided for an additional issuance of OC Units dependent on the extent to which the eight development properties attained completion schedules and budget objectives. Accordingly, a total of 430,624 additional OC Units were issued. In 1998, the Company recorded a liability of approximately $7 million for its estimate of additional OC Units to be issued. The actual amount was reclassified to minority interest in 1999, once the actual number of OC Units issued was determined.
Equity Offerings
In the first quarter of 1999, BRE issued 2,150,000 shares of 8 1/2% Series A Cumulative Redeemable Preferred Stock for net proceeds of approximately $52 million. The Series A Preferred Stock is redeemable, at the Company's option, starting January 29, 2004.
In July 1998, the Company issued 1,750,000 shares of common stock, for net proceeds of approximately $47 million. In April 1998, the Company issued 369,515 shares of common stock for net proceeds of approximately $9 million.
Debt Offering
In February 1998, the Company issued $130 million in unsecured notes due 2013, with a coupon rate of 7.125% resulting, after related costs, in an effective rate of 7.3%.
2. Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of the Company, the Operating Company and other subsidiaries that hold title to individual properties. All significant intercompany balances and transactions have been eliminated in consolidation. Due to the Company's ability to control the Operating Company and other subsidiaries, such entities have been consolidated with the Company for financial reporting purposes.
During 1999, the Company entered into joint venture agreements in which the Company will be a noncontrolling minority owner. Accordingly, these interests are recorded using the equity method. BRE receives certain fees for the development and construction of the real estate property held by these joint ventures and has recognized other income to the extent of the third-party interest.
Rental property
Rental property is recorded at cost, less accumulated depreciation, less an adjustment, if any, for impairment. Rental properties are evaluated for impairment when conditions indicate that the sum of expected future cash flows before interest from a rental property during the expected holding period may be less than its carrying value. Upon determination that such impairment has occurred, rental properties are reduced to estimated fair value. There were no properties for which an adjustment for impairment in value was made in 1999 or 1998. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which range from 35 to 45 years for buildings and three to ten years for other property. Direct investment development projects are considered placed in service as certificates of occupancy are issued and the units become ready for occupancy. Land acquired for development is capitalized and reported as "Land under development" until the development plan for the land is formalized. Once the development plan is determined, the costs are transferred to the balance sheet line items "Construction in progress."
Real estate held for sale
Real estate classified as held for sale is stated at the lower of its carrying amount or estimated fair value less disposal costs. Depreciation is not recorded on assets classified as held for sale.
In the normal course of business, BRE will receive offers for sale of its properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. As a result, real estate is not classified as "held for sale" until it is likely, in the opinion of management, that a property will be disposed of in the near term, even if sales negotiations for such property are currently under way. No properties were considered "held for sale" for this purpose as of December 31, 1999 or 1998.
Rental expenses and capitalized costs
For multifamily properties, costs of replacements, such as appliances, carpets and drapes, are expensed. For all properties, improvements and betterments that increase the value of the property or extend its useful life are capitalized.
Cash and short-term investments
Financial instruments that potentially subject BRE to concentrations of credit risk include cash, short-term investments and funds held in escrow. BRE places its cash deposits and temporary cash investments with creditworthy, high-quality financial institutions. Cash and cash-equivalent balances are held with various financial institutions and may at times exceed the applicable Federal Deposit Insurance Corporation limit of $100,000.
Deferred costs
Included in Other assets are costs incurred in obtaining debt financing that are deferred and amortized over the terms of the respective debt agreements as interest expense. Related amortization expense is included in interest expense in the accompanying consolidated statements of income. Net deferred financing costs included in Other assets in the accompanying balance sheets are $7,730,000 and $8,713,000 as of December 31, 1999 and 1998, respectively.
Income taxes
BRE has elected to be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended ("the Code"). As a result, BRE will not be subject to federal taxation at the corporate level to the extent it distributes, annually, at least 95% of its REIT taxable income, as defined by the Code, to its shareholders and satisfies certain other requirements. In addition, the states in which BRE owns and operates real estate properties have provisions equivalent to the federal REIT provisions. Accordingly, no provision has been made for federal or state income taxes in the accompanying consolidated financial statements.
Net gain (loss) on sales of investments in rental properties
Sales are generally recorded after title has been transferred to the buyer and after appropriate payments have been received and other criteria met.
Fair value of financial instruments
The fair values of BRE's financial instruments (including such items in the financial statement captions as cash, other assets, accounts payable and other liabilities and unsecured line of credit) approximate their carrying or contract values based on their nature, terms and interest rates that approximate current market rates. The fair value of mortgage loans payable and unsecured senior notes is estimated using discounted cash flow analyses with an interest rate similar to that of current market borrowing arrangements. The fair value of the Company's mortgage loans payable and unsecured senior notes approximates their carrying value at December 31, 1999.
Reclassifications
Certain reclassifications have been made to the prior years' financial statements to conform to the presentation of the current year's financial statements.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Descriptive information about reportable segments
BRE adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement 131") in the fourth quarter of 1998. Statement 131 requires certain descriptive information to be provided about an enterprise's reportable segments. BRE has determined
that it has one operating and reportable segment, multifamily communities, which comprised 98% of BRE's assets at December 31, 1999 and 1998 and approximately 96% of its total revenues for the three years ended December 31, 1999. All multifamily communities owned by the Company are located in the Western United States, in three general markets that it defines as Coastal, Desert and Mountain states.
BRE's business focus is the ownership and operation of multifamily communities; it evaluates performance and allocates resources primarily based on the net operating income ("NOI") of an individual multifamily community. NOI is defined by the Company (and generally by the real estate industry) as the excess of all revenue generated by the community (primarily rental revenue) less direct operating expenses (primarily, but not limited to, payroll, property taxes, insurance and maintenance expense). Accordingly, NOI excludes depreciation, capitalized expenditures and interest expense. NOI from multifamily communities totaled $158 million, $134 million and $83 million for the years ended December 31, 1999, 1998, and 1997, respectively. All other segment measurements are presently disclosed in the accompanying consolidated balance sheets and Notes to Consolidated Financial Statements.
All revenues are from external customers and there are no revenues from transactions with other segments, as the only activity outside operating apartments is the ownership of one parcel of commercial land. There are no tenants that contributed 10% or more of BRE's total revenues in 1999, 1998 or 1997. Interest income is not separately reported, as it is immaterial. Interest expense on debt is not allocated to individual properties, even if such debt is secured. Further, minority interest in consolidated subsidiaries is not allocated to the related properties. There is no provision for income tax as the Company is organized as a REIT under the Code.
3. Real Estate Portfolio
Direct investments in rental properties--multifamily:
An analysis of direct investment construction in progress follows.
As of December 31, 1999, the Company had commitments to acquire two multifamily communities with a total estimated acquisition cost of approximately $65,000,000. The Company expects the commitments will be funded in calendar year 2000. There can be no assurance that these communities will be acquired, or will be acquired for the estimated cost indicated.
During the year ended December 31, 1998, approximately $7,000,000 of taxable gain (unaudited) was deferred under Section 1031 of the Code for certain properties sold. BRE's carrying value of its assets exceeded the tax basis by approximately $146,000,000 (unaudited) at December 31, 1999.
4. Equity Interests in and Advances to Real Estate Joint Ventures
As of December 31, 1999, BRE had no completed communities under joint venture agreements. Such communities are accounted for under the equity method and, accordingly, BRE's interest is presented net of debt or partners' contributions. An analysis of equity interests in real estate joint ventures-- construction in progress follows.
The joint ventures have total costs in construction in progress of $71,698,000 at December 31, 1999. The joint ventures have construction loans with total commitments of $72,700,000, with $54,668,000 outstanding at December 31, 1999. These construction loans are guaranteed by BRE, mature in 2000 and 2011, and have interest rates between 7.00%-7.25%, with interest only due until maturity.
5. Line of Credit and Unsecured Senior Notes
As of December 31, 1999, BRE had an unsecured line of credit for up to $400,000,000, expiring in August 2001. Borrowings totaled $315,000,000 at December 31, 1999 and $264,000,000 at December 31, 1998. The interest rate is variable and the average interest rate was approximately 6.1% and 6.3% for the years ended December 31, 1999 and 1998, respectively.
As of December 31, 1999, there were $253,000,000 in unsecured senior notes outstanding with an average fixed interest rate of 7.5% with interest only due through 1999. Included in this effective interest rate is the amortization of the costs related to the issuance of the $50 million unsecured notes due 2007 and the $130 million unsecured notes due 2013. These unsecured notes are to be repaid through scheduled principal payments from 2000 through 2005, 2007 and 2013.
The line of credit and unsecured senior note agreements contain various covenants that include, among other factors, tangible net worth and requirements to maintain certain financial ratios. BRE was in compliance with such financial covenants as of December 31, 1999.
6. Mortgage Loans Payable
The following data pertain to loans payable at December 31, 1999 and 1998.
Included in the $211,403,000 mortgage loans payable is $32,530,000 of tax- exempt debt with a variable interest rate, which was 3.3% at December 31, 1999. The effective interest rate on this debt is 5.3%, which includes amortization of related fees and costs. Interest on all other mortgage loans is fixed.
Scheduled principal payments required on the unsecured line of credit, unsecured senior notes payable and mortgage loans payable for the next five years and thereafter are as follows. Included in the 2001 amount is $315,000,000 for the unsecured line of credit.
Interest expense on mortgage loans and unsecured senior notes including amortization of related costs aggregated $36,164,000, $35,654,000 and $17,034,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Capitalized interest was $9,485,000, $12,606,000 and $1,178,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Excluding capitalized interest, interest expense exceeded cash paid for interest by approximately $1,500,000 and $1,300,000 in 1999 and 1998, respectively; this difference was immaterial in 1997.
7. Stock Option Plans
BRE has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations in accounting for its employee and non-employee director stock options. As discussed below, the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation" ("Statement 123"), requires the use of option valuation models that were not developed for use in valuing employee and non-employee director stock options. Under APB 25, because the exercise price equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Employee Plan
The 1984 and 1992 Stock Option Plans and the 1999 BRE Stock Incentive Plan ("Plans") provide for the issuance of Incentive Stock Options, Non-Qualified Stock Options, restricted shares and other grants. The maximum number of shares that may be issued under the Plans is 4,350,000. The option price may not be less than the fair market value of a share on the date that the option is granted and the options generally vest over five years. The 1999 BRE Stock Incentive Plan was adopted by shareholders in 1999. The 1999 BRE Stock Incentive Plan incorporated the Broad Based Plan created in 1998, and allows for grants of up to 2,000,000 shares. During 1999 and 1998, certain key employees were allowed to exercise options with a reload provision and 18,567 and 186,374 reload grants were made, respectively, in those years. Changes in options outstanding during the years ended December 31, 1999, 1998 and 1997 were as follows.
At December 31, 1999, the exercise price of shares under option ranged from $12.97 to $28.06, with a weighted average exercise price of $24.96. The exercise price of all options granted in the years ended December 31, 1999, 1998 and 1997 was equal to the market price on the date of grant. Expiration dates range from 2000 through 2009; the weighted average remaining contractual life of these options is 8.1 years. Stock options were exercised during 1999 on options originally granted from $12.97 to $26.00. At December 31, 1999, there were 20,175 restricted shares outstanding under the Plans, and 18,375 were granted in 1999. There were no restricted shares granted in 1998 or 1997.
In addition to the options granted under the Plans, an option for 100,000 shares (at $15.32 per share) is held by the President and Chief Executive Officer. During 1998, 33,334 and in 1999, 33,333 such options were exercised for $15.32 per share; 33,333 options remain outstanding at December 31, 1999. This option was registered with the Securities and Exchange Commission on a Form S-8 and is not part of the Plans. This option had a fair value of $2.28 per share in 1995, the year of the grant. In conjunction with the 1996 merger with Real Estate Investment Trust of California ("RCT"), options on 381,900 BRE shares equivalent to options previously granted under the RCT plan were issued to officers with exercise prices ranging from $11.41 to $14.70. During 1999, 81,919 of these options were exercised at $14.70 and none of these options remain outstanding at December 31, 1999. In addition, an outside consultant holds options on 8,000 shares at a strike price of $26.88, which is not a part of the Plans.
Direct Stock Purchase and Dividend Reinvestment Plan
In 1996, the Company instituted a direct stock purchase and dividend reinvestment plan (the "DRIP") in which shareholders may purchase either newly issued or previously issued shares. The total amount of shares authorized under the DRIP is 1,500,000; from inception through December 31, 1999, 122,001 new shares have been issued.
Non-Employee Director Stock Option Plan
The Amended and Restated Non-Employee Director Stock Option Plan provides for the issuance of 25,000 Non-Qualified Stock Options per year to each non- employee member of the Board of Directors and an additional 25,000 options to the Chairman of the Board of Directors. In addition, up to 8,000 options may be granted to each non-employee director for committee membership and/or chairmanship, and up to 5,000 options may be granted based on operational performance. This plan has a reload provision that granted an additional 140,681 options in 1999 and 100,305 options in 1998. The maximum number of shares that may be issued under this plan is 1,550,000. As with the Plans, the option price may not be less than the fair market value of a share on the date the option is granted. Changes in options outstanding for the years ended December 31, 1999, 1998 and 1997 were as follows.
At December 31, 1999, the exercise prices of shares under option ranged between $15.25 and $27.88, with expiration dates from 2004 to 2009. The exercise price of all options granted in the years ended December 31, 1999, 1998 and 1997 was equal to the market price on the date of grant. The options vest ratably over one year, except for options granted pursuant to a reload, which vest 100% after 18 months from the date of the grant, and options granted by operational performance, which vest immediately. The weighted average remaining contractual life of these options is 8.4 years.
Pro forma information regarding net income and earnings per share required by Statement 123 was determined as if BRE had accounted for the employee and non-employee director stock options granted only in the years ended December 31, 1999, 1998 and 1997 under the fair value method of that Statement. The impact on the years ended December 31, 1999, 1998 and 1997 of options granted prior to 1996 was excluded from this presentation. The fair value for these options was estimated as of the date of grant using a Black-Scholes option pricing model, with the following weighted average assumptions for the years ended December 31, 1999, 1998 and 1997.
The Black-Scholes option pricing model was developed for use in estimating the fair market value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the above stock option plans have characteristics significantly different from those of traded options, and because, in
management's opinion, changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of the above stock option plans.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting periods. BRE's pro forma information, as if the Company had adopted Statement 123 as discussed above, follows.
The effect of the application of Statement 123 is not necessarily representative of the effect on net income for future years.
8. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share with respect to income from continuing operations:
9. Retirement Plan
BRE has a defined contribution retirement plan covering all employees with more than six months of continuous full-time employment. In addition to employee elective deferrals, in 1999 and 1998, BRE contributed up to 3% of the employee's compensation up to $4,800 per employee in 1999, and $4,500 in 1998. In 1997,
BRE's contribution was limited to 1.5% of the participating employee's salary. The aggregate amounts contributed by BRE were $359,000, $197,000 and $63,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
10. Related Party Transactions
Certain executives of BRE have purchased stock, the consideration for which was interest-bearing recourse loans. The loans may be forgiven in whole or in part upon the achievement of certain performance goals for BRE related to growth in assets, funds from operations and stock price. A portion of the loans expected to be forgiven are expensed currently as compensation. At December 31, 1999, the carrying amount of the loans was $2,291,000 and was included in other assets. The amounts of such loans expected to be forgiven and treated as compensation expense were $166,000, $370,000 and $151,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
11. Litigation
BRE defends against various claims and legal actions that happen in its normal course of business, including certain environmental actions. BRE cannot predict the ultimate outcome of these matters. In the opinion of management, there are no current actions that would have a material adverse effect on BRE's consolidated results of operations or financial position.
In the third quarter of 1998, the Company recorded a provision for litigation loss of $2,400,000 in connection with a jury award and related legal expenses. This judgment was settled in 1999 with no additional charges to expenses.
13. Supplemental Financial Data
Quarterly financial information (unaudited) follows.
For the years ended December 31, 1999, 1998 and 1997, the federal income tax components of the Company's dividends on the common stock were as follows. In 1999, the dividends on the preferred stock were 100% allocable to ordinary income (unaudited).
BRE PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999 (Dollar amounts in thousands)
BRE PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1999 (Dollar amounts in thousands)
BRE PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1999 (Dollar amounts in thousands)
BRE PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1999 (Dollar amounts in thousands)
- ----- * Property held by a consolidated subsidiary of the Company ** These properties are also collateral for the loan shown on the Cimmaron property.
BRE PROPERTIES, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Amounts in thousands)
The activity in investments in rental properties and related depreciation for the three-year period ended December 31, 1999 is as follows:
Investments in rental properties:
INDEX TO EXHIBITS