Fitch Rates BRE Properties' $250M Sr Note Offering ``BBB+''

Business Wire, Jan 9, 2001

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 9, 2001

Fitch has assigned its "BBB " rating to a recent offering of $250 million, 7.45% senior unsecured notes due 2011 by BRE Properties Inc. (NYSE:BRE).

Proceeds will be used to reduce bank borrowings. Fitch has also affirmed its "BBB " rating for BRE's $243 million senior unsecured notes due 2001-2013, and "BBB" rating for $54 million cumulative preferred stock. The Rating Outlook is Stable.

Founded in 1970, BRE is a San Francisco-based equity real estate investment trust (REIT) that specializes in the ownership and management of multifamily apartment properties in western states. The Fitch ratings reflect favorably on BRE's high quality portfolio, the stable cash flow attributes of multifamily properties, conservative use of debt leverage, experienced management team and long operating history.

Fitch's primary rating concerns for BRE are an active development program and regional geographic concentration, with California contributing approximately two-thirds of net operating income (NOI). Risks associated with potential regional economic downturns are mitigated, however, by above-average barriers to new development.

As of Sept. 30, 2000, BRE's portfolio included 18,594 units (68 properties) in six western states, with concentrations in San Francisco (30% of NOI), San Diego (14%), Los Angeles/Orange County (13%), Phoenix (12%) and Seattle (11%). Fitch considers a high percentage of the portfolio to be class A quality, with an average age of 12 years.

Reversing a 1997 transaction in which the company expanded into the Southwest and Mountain regions from its core West Coast markets, BRE recently exited the less attractive Tucson, Albuquerque, and Las Vegas markets through the sale of 22 properties into a joint venture in which it retained a 15% interest.

Net proceeds from the transaction, totaling $248 million, will be recycled into core markets, with a focus on Southern California and Denver, primarily through new construction. Fitch believes this strategy is credit neutral, with benefits of diminished exposure to low-barrier-to-entry markets balanced by increased regional concentration, earnings dilutions, and leasing risks associated with redeployment of proceeds into development communities.

Fitch's ratings recognize the strength of BRE's recent operating performance, with same-store revenues up 6% for the quarter ended Sept. 30, and occupancy averaging 97% throughout the portfolio. Revenue gains have been driven primarily by rent spikes in Northern and Southern California, which has also resulted in significantly below-market rents in those markets.

As of Sept. 30, management estimated that in-place rents were approximately 10% below market, providing both rent upside through lease rollover and cushion against potential market or economic downturns. However, given that much of the rent differential is concentrated in the San Francisco Bay Area, Fitch is concerned that weakness in that market's technology-related economic base will result in flat or negative growth in market rents.

BRE's ability to sustain its impressive 9% same-store growth in NOI through tight expense controls could also be pressured by rising utility rates, although near-term exposure is mitigated by the pass-through of rate increases to tenants.

Since acquiring the development team and portfolio of Trammel Crow Residential-West in late 1997, BRE has become one of the multifamily sector's most active developers, with established development teams in each of the company's targeted markets.

As of Sept. 30, the development pipeline totaled $480 million, including three communities under construction ($99 million budgeted investment), five properties that will be built using joint venture (JV) partners ($168 million) and seven communities in various stages of pre-development ($212 million).

BRE's remaining cost to complete the pipeline was approximately $160 million, adjusted for JV equity commitments and mortgage debt. Going forward, Fitch anticipates that annual construction starts ranging between $200 million-$250 million (approximately 15% of total assets) will be funded primarily through asset sales and retained earnings.

Leasing risks associated with new development are partially mitigated by low vacancy rates in targeted markets. Fitch also acknowledges the positive contribution of new development to overall portfolio quality.

BRE's increased use of joint venture structures is viewed by Fitch as credit neutral. Strategic benefits, including opportunities to reduce development funding exposure and recycle capital into more attractive markets, are balanced by reduced transparency of off-balance sheet debt.

JV loan-to-value ratios range from 35-40% for the development ventures to approximately 70% for the JV that has acquired BRE's Southwest portfolio as discussed above. Going forward, Fitch anticipates that improved balance sheet flexibility and stock performance provides BRE with the opportunity to retain 100% interests in newly developed properties, although continued access to private capital allows the company to maintain development levels should public markets become unfavorable.