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WIKI ANALYSIS
BRE Properties is a real estate investment trust that owns, operates and rents apartment communities in coastal California, Phoenix, AZ, and Seattle, WA. With around 23,000 apartment units across 90 properties, the company focuses on metropolitan areas in which supply is constrained and demand is driven by strong population and employment growth. The company generally operates its properties around business, transportation, employment and recreation centers in each of its markets, in order to help target employees in these areas who have a propensity to rent rather than purchase a home elsewhere.
BRE is intricately tied to interest rate tides, which have several important effects:
- While the company competes for tenants with other apartment operators, it also competes on the relative attractiveness of owning a home versus renting an apartment. When home prices are high, renting becomes more attractive (and vice versa). Interest rates determine the attractiveness of mortgage financing. When interest rates are high, renting becomes more appealing as financing a mortgage becomes more expensive.
- It is also important to note that BRE operates as a real estate investment trust (REIT). As such, the company must distribute at least 90% of its cash flow to shareholders every year in the form of a dividend. When interest rates rise, so do demands for investment yields on dividends, which can depress a REIT's stock price.
Financial and Operating Metrics
Below are several metrics of operating performance for the company. The company has been able to steadily increase its rental revenue per apartment unit over time, fighting inflation and driving organic growth. It has modestly decreased its total apartment base over the previous three years, recycling capital by selling off more properties (at a gain) and redeploying it to new units.
Trends and Drivers
- National and Local Job Market and Employment. The strength of the labor market has important implications for the company.[3] Jobs fuel demand for all types of housing, including multi-family/apartment dwellings. Strong job growth can drive higher occupancy rates and lead to increased unit rental revenue. High unemployment and slow job growth, on the other hand, can hamper the apartment rental market and, when job growth is negative, the company can experience falling occupancy rates and lower revenue per unit, which leads to less efficient apartment buildings as the utilization of the complex falls.
- The Housing Market and New Home Construction. Factors driving the non-apartment, alternative housing market can have a substantial impact on the company. Throughout 2007, falling housing prices in the company’s key markets, coupled with decreasing new home construction and the rising cost of financing mortgages increased demand for apartments relative to houses and other living alternatives. However, if housing prices continue to fall, houses can become more attractive to purchasers, and they may substitute away from apartments and opt for single-family housing instead.
- Interest Rates. Rising interest rates have several effects on this company and other apartment REITs:[4]
- Other investments become more attractive, thereby hampering demand for apartment investors. This, in turn, decreases the market prices of the company’s properties.
- Available and existing financing becomes less attractive. Getting favorable terms on any new debt to finance building purchases becomes more difficult. The company’s interest expense on its floating rate debt increases, pressuring margins and increasing financial risk.
- The stock price can fall as investor’s demand a greater dividend yield. As a REIT, the company must, by law, distribute at least 90% of its cash flow to shareholders in the form of a regular dividend. When interest rates rise, investors demand higher dividend yields on REITs, thereby driving down their stock prices.
- Mortgage Rates. The attractiveness of mortgage financing for home purchasers has important ramifications for the apartment REITs. If mortgage rates fall and credit is plentiful, buying a home becomes more attractive than renting an apartment, thus stifling demand for the company’s rental units. On the other hand, if the availability and attractiveness of mortgages declines, as did during the fallout from the subprime lending crisis, renting an apartment becomes more appealing, so occupancy rates and rental revenue per apartment increase.
- Local population growth. The rate of population growth in the company's operating regions is another key determinant of the company's success. In towns whose populations are rapidly increasing, limited housing supply and/or the lag time in building houses leads to greater demand for the company's apartment units. The growth in local population is also closely correlated to the rate of job growth (see National and Local Job Market and Employment above).
- Dependence on economies and regulations of coastal California, Phoenix, and Seattle. All of the company's properties are located in either coastal California (cities including San Francisco, Los Angeles, San Diego, and Sacramento), Phoenix, AZ, or Seattle, WA. As compared to, say, competitor AIV, who is widely geographically diversified, the company is exposed more heavily to risks of the local economies of these three states. The rate of job growth, property taxes, zoning requirements and regulations, and other factors within these states can have important effects on the company's bottom line. The lack of geographic diversity exposes the company more heavily to real estate cycles in its operating areas, as real estate values move in tandem within a given city.
- Earthquake risk. Coastal California is at greater risk of earthquakes than other areas. Since a substantial portion of the company's properties are located in earthquake prone cities, the company must manage the risk of potential earthquake damage. While the company is insured up to around $150 million, a fat-tail event such as a severe earthquake could cause substantial damage over and above the company's coverage limits.
Competition and Market Share
The company competes against a wide array of other apartment rental owner/operators. The National Multi Housing Council estimates that around 17 million apartment units exist nationwide. The median rental income per unit is around $650 per month.[6] In the company's core market, California, there are an estimated 2.5 million apartment units, and, given the attractive demographic and economic characteristics of the state's coastal cities, competition is intense. As partly evidenced by the chart to the left, for instance, all of the company's major publicly traded competitors have operations in California.
The market for multi-family housing is highly fragmented geographically as well as within any given region. To the left are industry statistics for each of the major markets of publicly traded apartment REITs. The company’s real estate portfolio is highly diversified across geographic region, and operates in nearly every state. Based on data compiled by the National Multi Housing Council, the company was the largest operator of apartment units across the nation.[7]
Furthermore, below is a table of relevant competitive data as compared to rival or comparable companies:[8]
| Company | Apt. Units (2006) | Addressable Market (Units) | Local Market Share | National Market Share | Occupancy Rate (2006) | Operating Margin | Revenue/unit |
| BRE | 22,680 | 3,300,000 | 0.69% | 0.13% | 94.0% | 40.40% | $14,493 |
| AIV | 216,000 | 17,000,000 | 1.27% | 1.27% | 94.4% | 19.9% | $10,432 |
| EQR | 165,716 | 10,500,000 | 1.58% | 0.97% | 94.0% | 25.7% | $12,060 |
| UDR | 70,339 | 7,350,000 | 0.96% | 0.41% | 94.7% | 21.90% | $9,871 |
| CPT | 67,631 | 8,100,000 | 0.83% | 0.40% | 95.2% | 26.30% | $9,378 |
| AVB | 43,533 | 7,200,000 | 0.60% | 0.26% | 96.5% | 35.50% | $16,804 |
| ESS | 27,553 | 4,500,000 | 0.61% | 0.16% | 96.4% | 35.80% | $12,472 |
Footnotes
- ↑ BRE 2006 10-K, "Selected Financial Data," pg 24.
- ↑ BRE 2004, 2005, 2006 10-K, "Business," pg 1.
- ↑ BRE 2006 10-K, "Risk Factors," pg 9.
- ↑ AIV 2006 10-K, "Risk Factors," pg 10.
- ↑ Data from Apartment Stock data, 2006, compiled by National Multi Housing Council
- ↑ Apartment Rental data, 2005, compiled by National Multi Housing Council
- ↑ Apartment Stock data, 2006, compiled by National Multi Housing Council
- ↑ All data from annual reports of companies. Market share statistics were taken as the percentage of addressable units owned by the company. "Addressable" refers to units in the companies' stated target markets
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