BRE Apartments Building, Buying

By Sharon Simonson

San Francisco-based apartment owner BRE Properties Inc. told analysts it did not expect to buy nearly as much in 2011 as it did last year because prices are too high and yields too low in its core, coastal California markets.

Yet the growth momentum the company established last year looks likely to continue. Before the end of March, BRE executives expect to close on the $55 million acquisition of an existing, stabilized community, company executives said.

They declined to disclose more detail.

BRE also has six complexes in various stages of development and construction, accounting for 1,742 new units. It also is pursuing entitlement rights for a proposed 361-unit complex on land near the Walnut Creek BART station for which the company has made a non-refundable deposit.

The company already owns and operates 75 existing communities with more than 21,300 units, primarily in California. It has joint-venture arrangements involving an additional 13 properties with another 4,080 units.

Its upcoming property purchase follows investment of more than $300 million during 2010 to buy four stabilized properties, including Fountains at River Oaks in San Jose, and one land parcel in Sunnyvale.

“As you have heard me say before, it is time for BRE to grow, and 2010 was a very good start,” Connie Moore, BRE’s president and chief executive officer, told analysts Feb. 8 in discussing the company’s fourth-quarter and full-year results. “Multifamily fundamentals will be incredible for the next several years.

BRE began construction on its 336-unit Lawrence Station community in Sunnyvale at the end of 2010. That property is expected to be complete at the beginning of 2013. Meanwhile, it hopes to break ground on a second Sunnyvale complex later this year near the Sunnyvale Town Center redevelopment. That proposed, 280-unit project is to be constructed on land BRE acquired from Silicon Valley developer Peter Pau for $19 million last year. It also is completing the initial leasing of its newly built, 270-unit Villa Granada complex in Santa Clara.

“2011 acquisition activity won’t match 2010,” Moore said. “Cap rates in our coastal market reflect an extremely competitive environment, fueled by the widespread understanding of the fundamentals for multifamily properties and the attractive financing still available.”

Capitalization rates, a measure of first-year yield based on operating income and purchase price, are at or below 4.5 percent, she said. “We expect to be active in 2011, at the right price, but do not expect to be as successful closing deals as we were in 2010,” she said.

Despite the frothy acquisition market, BRE fundamentals are recovering from the economic beating that followed the financial crisis. Year-over-year, same store revenue was down 2 percent in 2010 compared to the year before, and that was better than expected. Year-over-year net operating income was down 3.7 percent.

“These operating results reflect the end of a two-year downward cycle,” Moore said. “You will recall in the second quarter of 2010, we experienced sequential same-store revenue improvement for the first time since 2008. This quarter we experienced year-over-year same-store revenue growth for the first time in eight quarters.”

Same-store properties are stabilized assets owned by BRE for at least five quarters.

BRE reported Feb. 7 that its full-year funds from operations were nearly $100 million, down from nearly $121 million in 2009. The 2010 results include a one-time loss of $23.5 million caused by the retirement of debt. Funds from operations, or FFO, is the most-common metric used to measure operating performance of real estate investment trusts.

BRE owns apartments in roughly equal proportions in San Diego, Orange County, Los Angeles, San Francisco and Seattle. It also owns a smattering in the Inland Empire, a market where it is selling.

The company’s outlook for 2011 assumes limited to no new job creation in the markets where it does business, Moore said. The upper end of its projections is 150,000 new jobs across all BRE operating markets. Still, the company anticipates revenue growth in the Bay Area of 4 percent to 5.25 percent in 2011, driven by demographic trends and limited new supply.

One residual of the Great Recession has been a drop in construction prices, an outcome that BRE executives said they, too, are experiencing. Construction costs dropped as much as 15 percent in late 2008 and early 2009 and stayed down, they said. The company’s Lawrence Station project has seen its cost drop 12 percent from the time the company first considered buying the land to now. BRE closed on that land in the last quarter of 2009.