Fitch Revises BRE Properties, Inc.'s Outlook to Positive; Affirms 'BBB' IDR

Fitch Ratings has revised the Rating Outlook for BRE Properties, Inc. (NYSE: BRE) to Positive from Stable. In addition, Fitch has affirmed the following credit ratings:

--Issuer Default Rating (IDR) at 'BBB';

--Unsecured revolving credit facility at 'BBB';

--Senior unsecured notes at 'BBB';

--Convertible senior notes at 'BBB';

--Preferred stock at 'BB+'.

The ratings affirmations reflect Fitch's view that BRE's multifamily portfolio fundamentals will continue to improve in 2012 and 2013, following same-store NOI declines of -6.4% and -3.7% in 2009 and 2010, respectively. The Outlook revision to Positive is driven by BRE's improvement of its leverage and coverage metrics and by Fitch's expectation that BRE's near- to medium-term credit profile will improve to a level more consistent with a 'BBB+' IDR, for a multifamily REIT which owns properties in coastal California and Seattle.

BRE has meaningfully reduced debt on an absolute and relative basis since 2007 through raising equity, selling non-core assets and reducing development spending. Leverage improved to 7.0 times (x) as of Dec. 31, 2011 from 8.1x and 8.4x as of Dec. 31, 2010 and Dec. 31, 2009, respectively. Fitch expects BRE's leverage to continue to decline through organic de-levering (EBITDA growth), remaining between mid-6.0x to 7.0x, a range appropriate for a 'BBB+' rating. In a stress case not anticipated by Fitch resulting in negative same-store NOI, leverage could sustain above 8.0x, which would be appropriate for a 'BBB-' IDR. Fitch defines leverage as net debt divided by recurring operating EBITDA.

Additionally, BRE's fixed charge coverage ratio has improved to 2.2x for 2011, as compared to 1.9x for 2010, and Fitch expects this metric to improve to between 2.5x-3.0x as fundamentals improve, a range appropriate for a 'BBB+' IDR. In a stress case not anticipated by Fitch resulting in negative same-store NOI, fixed-charge coverage could sustain below 2.0x, which would be appropriate for a 'BBB-' IDR. Fitch defines fixed charge coverage as recurring operating EBITDA less renewal and replacement capital expenditures, divided by interest expense, capitalized interest and preferred stock dividends.

The company has improved the quality of its portfolio over the last few years through approximately $200 million of dispositions in non-core markets. As such, the vast majority of assets are now located in supply constrained, coastal California markets. Fitch views the strategy of owning assets in supply-constrained coastal markets as a credit positive as these markets also exhibit solid demand factors such as high cost of for-sale single-family housing and proximity to solid job growth markets.

Fitch expects that BRE's portfolio will continue to experience positive operating fundamentals for the next few years with same store NOI growth between 4% and 6% each year through 2014. The company should benefit from the stabilization of properties under development and recently acquired properties contributing to recurring operating EBITDA.

Given California's Proposition 13 tax-related consequence of selling assets, the company has traditionally utilized development as an essential component for growth. The sizeable scale of BRE's development pipeline has historically been a credit concern and negatively impacted the company's leverage ratios. In 2011, citing positive market fundamentals, the company restarted its development pipeline. Although not all costs are contractual nor within Fitch's time horizon, the pipeline's costs will total $1.3 billion of which $935 million remains unfunded. BRE's management intends to front-end its development activity and indicated future development advances will not surpass $200-$250 million annually. Fitch does not view the current pipeline as a significant concern given the positive operating fundamentals, project-specific sub-market supply and strong liquidity profile, although Fitch notes the inherent risks in development.

The company's geographic concentration offsets to a degree the credit positive of the company's supply-constrained market focus strategy. 82.5% of same store NOI in 2011 was derived from the state of California (Fitch rates California's general obligation bonds 'A-'; Outlook Stable), with 23% of 2011 NOI from San Diego, 21% from the San Francisco Bay Area, 18% from Orange County, and 15% from Los Angeles. While BRE's SSNOI performance has been in line with a market-weighted PPR index, Fitch notes the seismic risks of the state and the potential for government budget dynamics to pressure property taxes.

The Positive Outlook centers on Fitch's expectation that BRE's credit profile will improve to be consistent with a 'BBB+' rating, supported by management's commitment to reduce leverage through equity raises to offset development risks or should operating fundamentals deteriorate.

Further, BRE continues to access various sources of capital and maintain a strong liquidity profile. For the period of Jan. 1, 2012 to Dec. 31, 2013, Fitch calculates that BRE's sources of liquidity (cash, availability under its unsecured revolving credit facility and projected retained cash flows from operating activities after dividends and distributions and adjusting for the company's increased dividend) exceed uses of liquidity (debt maturities and amortization and projected renewal and replacement capital expenditures) by 3.4x, which is strong for the current 'BBB' rating. Driving the strong liquidity coverage is BRE's minimal near term maturing debt; the next large debt maturity is a $300 million unsecured notes maturity in 2017.

In addition, BRE maintains a strong level of unencumbered assets that provides solid coverage of unsecured debt for the rating category. Fitch calculates that BRE's ratio of unencumbered operating real estate to net unsecured debt (UAUD), ranges from 2.4x to 3.2x using a range of capitalization rates with a UAUD midpoint of 2.7x. This midpoint has improved from 2.4x and 1.9x as of Dec. 31, 2010 and Dec. 31, 2009, respectively, providing increasing cushion to unsecured bondholders.

The financial covenants in the company's unsecured debt agreements do not limit BRE's financial flexibility.

The two-notch differential between BRE's IDR and its preferred stock ratings is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. Based on Fitch's report 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

The following factors may result in an upgrade to 'BBB+':

--Leverage, defined as net debt to recurring operating EBITDA, sustaining below 7.0x for several quarters (leverage was 7.0x as of Dec. 31, 2011);

--Fixed charge coverage sustaining above 2.5x for several quarters (coverage was 2.2x for the year ended Dec. 31, 2011).

The following factors may result in negative momentum on the ratings and/or Rating Outlook:

--Leverage levels sustaining above 8.0x for several consecutive quarters;

--Fixed-charge coverage sustaining below 2.0x for several consecutive quarters;

--If operating fundamentals relapse similar to the environment of 2009 in the near term, rather than remaining strong.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--Criteria for Rating U.S. Equity REITs and REOCs, Feb. 27, 2012;

--Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis, Dec. 15, 2011;

--Corporate Rating Methodology, Aug. 12, 2011;

--Parent and Subsidiary Rating Linkage, Aug. 12, 2011;

--Recovery Rating and Notching Criteria for REITs, May. 12, 2011.

Applicable Criteria and Related Research:

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=671869

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

Recovery Rating and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490

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