Fitch Downgrades BRE Properties' IDR to 'BBB-'; Outlook Stable

Fitch Ratings has downgraded the Issuer Default Rating (IDR) and outstanding obligation ratings of BRE Properties, Inc. (NYSE: BRE) as follows:

--IDR to 'BBB-' from 'BBB';

--Unsecured revolving credit facility to 'BBB-' from 'BBB';

--Senior unsecured notes to 'BBB-' from 'BBB';

--Convertible senior notes to 'BBB-' from 'BBB';

--Preferred stock to 'BB' from 'BB+'.

The Rating Outlook is Stable.

The downgrades reflect Fitch's expectation that reductions in same property net operating income (NOI) due to challenging market conditions will result in BRE's leverage, defined as net debt to recurring operating EBITDA, approaching 9.0 times (x) from its current level of 8.4x as of Dec. 31, 2009, absent meaningful deleveraging transactions. Fitch believes this expected leverage level, in addition to the company's significant geographic concentration (82% of same store NOI in 2009 was derived from the state of California), presents a credit profile consistent with a 'BBB-' IDR.

In 2009, same-store NOI declined 6.5% for the year ended Dec. 31, 2009 and Fitch expects a similar decline in 2010. Additionally, while BRE has significantly reduced its development activities to represent 5% of total undepreciated assets as of Dec. 31, 2009, down from 13.4% as of Dec. 31, 2008, Fitch anticipates that competitive leasing conditions will cause BRE's properties under development and under lease-up to only provide modest incremental contribution to company NOI over the next 12 to 18 months.

BRE has limited debt maturities through 2014, with the exception of 2012, when the company has $371.3 million of convertible senior notes that could potentially be put to the company. In addition, the company's unsecured revolving credit facility, with approximately $288 million drawn as of Dec. 31, 2009, also matures in 2012, resulting in a degree of debt maturity concentration assuming BRE does not meaningfully reduce amounts outstanding.

Factors supporting the ratings include BRE's strong liquidity, solid unencumbered asset coverage of unsecured debt, and solid fixed charge coverage ratios.

For the period Jan. 1, 2010 through Dec. 31, 2011, BRE's sources of liquidity (unrestricted cash, availability under BRE's unsecured revolving credit facility and expected retained cash flows from operating activities after dividends) are expected to cover uses of liquidity (debt maturities and recurring capital expenditures) by 3.4x.

Additionally, BRE has solid asset coverage of unsecured debt. Fitch calculates that BRE's ratio of unencumbered operating real estate, valued at a blended 7.5% capitalization rate, to net unsecured debt was 2.0x and 1.6x as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Although BRE encumbered assets in 2009, the amount of unsecured debt declined, improving its unencumbered asset to unsecured debt ratio.

Cash flow coverage metrics are solid. For the 12 months ended Dec. 31, 2009, fixed-charge coverage (defined as recurring operating EBITDA less capital expenditures, divided by total interest incurred and preferred stock dividends) was 2.0x, improved from 1.8x in 2008. Additionally, BRE's risk-adjusted capital ratio improved to 1.1x as of Dec. 31, 2009 at a 'BBB' rating category stress level, up from 0.9x as of Dec. 31, 2008 due to the increase in the company's equity base.

In addition, BRE's ratios under its unsecured revolving credit facility and senior unsecured note financial covenants do not hinder its financial flexibility.

The two-notch difference between BRE's IDR and its preferred stock rating is consistent with Fitch's hybrid securities rating criteria, 'Rating Hybrid Securities,' dated Dec. 29, 2009, available on Fitch's web site at 'www.fitchratings.com'. BRE's preferred stock has a cumulative coupon deferral option exercisable by BRE and thus has readily triggered loss absorption provisions in a going concern (i.e., without triggering a general corporate default and without effect on senior obligations).

The Stable Outlook reflects BRE's strong liquidity position, expected stable fixed charge coverage and limited future development expenditures over the next 12 to 24 months.

GUIDELINES FOR FURTHER RATING ACTIONS

The following factors may have a positive impact on BRE's ratings and/or Outlook:

--Leverage, defined as net debt to recurring operating EBITDA, sustaining below 8.0x for several quarters (leverage was 8.4x as of Dec. 31, 2009);

--Fixed charge coverage sustaining above 2.0x for several quarters (coverage was 2.0x for the year ended Dec. 31, 2009).

The following factors may have a negative impact on BRE's ratings:

--Leverage sustaining above 9.5x;

--Fixed charge coverage sustaining below 1.5x.

--A liquidity shortfall (liquidity coverage was 3.4x for the period Jan. 1, 2010 - Dec. 31, 2011).

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:

--'Equity Credit for Hybrids & Other Capital Securities- Amended' (Dec. 29, 2009);

--'Rating Hybrid Securities' (Dec. 29, 2009);

--'Recovery Rating and Notching Criteria for REITs' (Dec. 23, 2009);

--'Corporate Rating Methodology' (Nov. 24, 2009);

--'Updated Criteria for U.S. REIT Risk-Adjusted Earnings' (Aug. 10, 2009);

--'Evaluating Corporate Governance' (Dec. 12, 2007);

--'Updated Criteria for U.S. Equity REIT Capital Standards; (Nov. 12, 2007);

--'Criteria for Rating U.S. Equity REITs' (Aug. 9, 2007).

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts:

Fitch Ratings, New York
Kimberly Chan, [phone]
Janice Svec, [phone]
Cindy Stoller, [phone] (Media Relations)
[e-mail]