Fitch Downgrades BRE Properties' Senior Ratings To 'BBB'; Rating Outlook Stable

Business Wire, Jan 29, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 29, 2003

Fitch Ratings has downgraded to 'BBB' from 'BBB ', the $955 million of senior unsecured notes of BRE Properties, Inc., (NYSE:BRE) due 2004 through 2013. Fitch has also downgraded approximately $129 million of outstanding preferred stock to 'BBB-' from 'BBB'. The Rating Outlook is Stable.

The ratings are supported by BRE's good asset quality of class A/B properties, experienced and capable management team, and the firm's ability to maintain 94% occupancy levels in a more difficult operating environment. While BRE has operated prudently in this more constrained economic environment, as evidenced by its reduced development pipeline, the maintenance of financial flexibility, and minimal near-term funding needs, its credit statistics have been pressured by macro-economic conditions affecting all apartment owners, primarily a low interest rate environment and job losses which have weakened demand for apartment units. This constrained operating environment is highlighted by Fitch's Negative Outlook for the Multifamily Sector.

BRE's western geographic focus has disproportionately affected BRE, specifically, its market exposure to San Francisco (representing 26% of total net operating income (NOI) and Seattle (11%). In the San Francisco market, BRE has been able to maintain solid occupancy levels, currently at same-store average occupancy of 93%. However, market rents have declined as evidenced by BRE's market rent per unit to $1,496/month (fourth quarter-2002 (4Q'02)) from $1,599/month (4Q'01), and with relatively flat operating expenses, NOI has declined 15%. BRE's Seattle, Phoenix and Denver markets have also experienced erosion in market fundamentals, which have had a corresponding impact on BRE's earnings and credit statistics. Nevertheless, deterioration in market fundamentals may be leveling off. However, the timing and magnitude of a recovery remains uncertain and at the 'BBB' rating level, Fitch anticipates BRE has ample credit cushion and financial flexibility to operate in this more constrained economic environment.

Recognizing the challenges BRE has faced, the ratings and Outlook continue to reflect the company's focus on high barrier to entry markets characterized by high land values and difficult entitlement processes, which help mitigate oversupply. Unlike many Southeastern apartment markets (Atlanta, Charlotte), BRE's markets should rebound at a better pace than lower barrier to entry markets. BRE's sizeable exposure to the more resilient southern California markets (representing 33% of total NOI) helps partially offset its exposure to more challenged markets. Other benefits include a moderating development pipeline, solid debt maturity schedule as evidenced by no more than 6.5% of total debt maturing in any one year through 2006 (excluding bank credit facility), and solid financial flexibility as evidenced by unencumbered NOI supporting unsecured interest expense at better than 2.5 times (x) coverage. BRE has ample short-term liquidity with $269 million available on $450 million bank credit facility, due to mature December 2003, and Fitch anticipates this to be renewed during the first half of 2003.

BRE's interest and fixed charge coverages (inclusive of capital expenditures and capitalized interest) declined to 2.9x and 2.5x (4Q'02), from 3.6x and 3.3x (4Q'01), respectively. Leverage has slightly increased with debt over undepreciated book at 52% (42% over total market capitalization) as of 4Q'02, compared to 50% (40% total market capitalization), as of 4Q'01. Effective leverage has increased with debt plus preferred over undepreciated book at 57% (53% over total market capitalization) as of 4Q'02, compared to 53% (42% total market capitalization) as of 4Q'01, reflecting the issuance of $75 million in preferred stock in June 2002.

BRE Properties is a $2.8 billion (total market capitalization) REIT that acquires, develops and manages apartment communities in Western U.S. markets. BRE directly owns and operates 80 apartment communities totaling 22,245 units in California, Arizona, Washington, Oregon, Utah and Colorado. The firm currently has apartment communities (2,325 units) in various stages of development, including joint ventures.