Sun Shines for BRE Properties

The company recently said same-store rents increased 9% in Southern California (excluding San Diego), compared with 6% growth in its other California markets and 8% growth in Seattle. Edward Lange Jr., BRE's chief financial officer, expects market rents to increase 7% to 7.5% this year in Southern California. Meanwhile, fve of the six new properties BRE is developing are located in and around Los Angeles.

All this means growth is coming. But investors may have already priced in the momentum. BRE shares are up 25% this year. On Wednesday, the stock reached a 52-week high of $56.68.

BRE recently projected that funds from operations, a common REIT performance metric, would total $2.40 to $2.52 per share in 2006, but about 30 cents of that is coming from a one-time gain from a recent litigation settlement. Analysts' mean estimate is $2.34, according to Thomson First Call. The company reported 2005 FFO per share of $2.15.

At $56.68, BRE is trading at 24.2 times consensus estimates for 2006 FFO. If you chop the roughly 30 cents that comes from the favorable litigation settlement, then the stock is at 27.8 times FFO.

In comparison, fellow apartment REIT AvalonBay (AVB Quote) trades at 26.6 times forward FFO. Archstone-Smith (ASN Quote) trades at 22.5 times estimated 2006 FFO.

Only one Wall Street analyst has a buy rating on BRE, with the majority having hold ratings. Deutsche Bank analyst Lou Taylor is the lone bull on BRE, and he raised his price target to $55 in February.

Taylor, whose firm does banking with BRE, values the company's portfolio using a 6% cap rate (initial rate of return), which he says is near where BRE's properties would sell for in the private market. He admits this might be a conservative cap rate, given that management itself uses a 5.25% cap rate to gauge what its portfolio would fetch in a sale. (The lower the cap rate, the higher the price a portfolio fetches).

But even BRE management admits it is being conservative. In its fourth-quarter supplemental report, BRE says the weighted average cap rate for its portfolio, on the basis of market-cap rates, is 4.75% to 5.25%. If the 4.75% cap rate is used, the net asset value of the company shoots up to $62.80, according to BRE's calculations. At 5.25%, BRE values its NAV at $54.23. Taylor's NAV estimate assumes a cap rate of 6%. Taylor says the discrepancy for the two figures likely has to do with his valuing the development pipeline higher than BRE does.

BRE is set to announce its first-quarter earnings in late April. As Taylor notes, the company has had trouble meeting its earnings guidance in the past. But this time around, there could be additional upside to report. In Southern California, Seattle and San Diego, rent growth is clearly accelerating. Even if Northern California lags a bit, the apartment market there will only be helped in the long run by the lack of affordability in houses for sale.