Edgar Filing: BRE PROPERTIES INC /MD/

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14306

BRE PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Maryland		94-1722214
*(State or Other Jurisdiction of Incorporation* *or Organization)*		*(I.R.S. Employer Identification No.)*

525 Market Street 4^th Floor San Francisco, CA		94105-2712
*(Address of Principal Executive Offices)*		*(Zip Code)*

(415) 445-6530

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

x Yes ¨ No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No


Number of shares of common stock outstanding as of October 31, 2005				51,194,935

BRE PROPERTIES, INC.

INDEX TO FORM 10-Q

September 30, 2005


		Page No.
PART I	FINANCIAL INFORMATION

	ITEM 1. Financial Statements:
	Consolidated balance sheets – September 30, 2005 (unaudited) and December 31, 2004	2

	Consolidated statements of income (unaudited) – three months ended September 30, 2005 and 2004	3

	Consolidated statements of income (unaudited) – nine months ended September 30, 2005 and 2004	4

	Consolidated statements of cash flows (unaudited) – nine months ended September 30, 2005 and 2004	5

	Condensed notes to consolidated financial statements (unaudited)	6-11

	ITEM 2:
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-24

	ITEM 3:
	Quantitative and Qualitative Disclosures about Market Risk	24

	ITEM 4:
	Controls and Procedures	24

PART II	OTHER INFORMATION

	ITEM 1: Legal Proceedings	25

	ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds	26

	ITEM 3: Defaults Upon Senior Securities	26

	ITEM 4: Submission of Matters to a Vote of Security Holders	27

	ITEM 5: Other Information	27

	ITEM 6: Exhibits	27

PART I FINANCIAL INFORMATION

ITEM 1 - Financial Statements

BRE Properties, Inc.

Consolidated Balance Sheets

(Dollar amounts in thousands, except per share data)


	September 30, 2005			December 31, 2004
Assets		(unaudited	)

Real estate portfolio:
Direct investments in real estate:
Investments in rental properties	$	2,478,781		$	2,538,171
Construction in progress		142,045			108,930
Less: accumulated depreciation		(312,269	)		(280,498	)

		2,308,557			2,366,603
Equity interests in and advances to real estate joint ventures-
Investments in rental properties		10,183			10,227
Real estate held for sale, net		195,047			60,383
Land under development		77,184			43,204

Total real estate portfolio		2,590,971			2,480,417

Other assets		55,673			38,524

Total assets	$	2,646,644		$	2,518,941

Liabilities and Shareholders’ Equity

Liabilities:
Unsecured senior notes	$	980,000		$	848,201
Unsecured line of credit		226,000			187,000
Secured line of credit		75,000			140,000
Mortgage loans payable		215,690			203,365
Accounts payable and accrued expenses		54,733			58,053

Total liabilities		1,551,423			1,436,619

Minority interests		61,675			35,675

Shareholders’ equity:
Preferred stock, $0.01 par value; 20,000,000 shares authorized: 10,000,000 and 10,000,000 shares with $25 liquidation preference issued and outstanding at September 30, 2005 and December 31, 2004, respectively.		100			100
Common stock, $0.01 par value, 100,000,000 shares authorized. Shares issued and outstanding: 51,186,459 and 50,418,529 at September 30, 2005 and December 31, 2004, respectively.		512			504
Additional paid-in capital		1,081,366			1,068,613
Cumulative dividends in excess of accumulated net income		(47,520	)		(20,565	)
Stock purchase loans to executives		(912	)		(2,005	)

Total shareholders’ equity		1,033,546			1,046,647

Total liabilities and shareholders’ equity	$	2,646,644		$	2,518,941

See condensed notes to unaudited consolidated financial statements.

Consolidated Statements of Income (unaudited)

(Amounts in thousands, except per share data)


	For the Three Months Ended September 30,
	2005			2004
Revenues
Rental income	$	73,461		$	63,621
Ancillary income		3,387			2,940

Total revenues		76,848			66,561

Expenses
Real estate		24,366			20,413
Provision for depreciation		18,893			15,178
Interest		19,512			16,775
General and administrative		4,045			3,091
Other expenses		759			427

Total expenses		67,575			55,884

Other income		446			591
Income before minority interests, income from investments in unconsolidated entities and discontinued operations		9,719			11,268
Minority interests in income		(915	)		(576	)
Income from investments in unconsolidated entities		155			218

Income from continuing operations		8,959			10,910
Discontinued operations, net		2,379			3,773

Income from discontinued operations		2,379			3,773
Net Income		11,338			14,683
Dividends attributable to preferred stock		4,468			3,203

Net income available to common shareholders	$	6,870		$	11,480

Basic earnings per common share from continuing operations	$	0.09		$	0.15
Basic earnings per common share from discontinued operations		0.04			0.08

Basic earnings per common share	$	0.13		$	0.23

Diluted earnings per common share from continuing operations	$	0.09		$	0.15
Diluted earnings per common share from discontinued operations		0.04			0.08

Diluted earnings per common share	$	0.13		$	0.23

Weighted average common shares outstanding – basic		51,065			50,210

Weighted average common shares outstanding – assuming dilution		51,990			50,895

Dividends declared and paid per common share	$	0.5000		$	0.4875

See condensed notes to unaudited consolidated financial statements.

Consolidated Statements of Income (unaudited)

(Amounts in thousands, except per share data)


	For the Nine Months Ended September 30,
	2005			2004
Revenues
Rental income	$	210,014		$	185,606
Ancillary income		9,937			8,385

Total revenues		219,951			193,991

Expenses
Real estate		69,576			60,154
Provision for depreciation		52,722			40,706
Interest		55,949			49,042
General and administrative		12,853			9,488
Other expenses		1,488			1,792

Total expenses		192,588			161,182

Other income		2,146			1,108
Income before minority interests, income from investments in unconsolidated entities and discontinued operations		29,509			33,917
Minority interests in income		(2,620	)		(1,907	)
Income from investments in unconsolidated entities		402			647

Income from continuing operations		27,291			32,657
Discontinued operations, net		8,425			12,228
Gain on sale of discontinued operations		26,897			—

Income from discontinued operations		35,322			12,228
Net Income		62,613			44,885
Dividends attributable to preferred stock		13,404			8,588

Net income available to common shareholders	$	49,209		$	36,297

Basic earnings per common share from continuing operations	$	0.27		$	0.48
Basic earnings per common share from discontinued operations		0.70			0.24

Basic earnings per common share	$	0.97		$	0.72

Diluted earnings per common share from continuing operations	$	0.27		$	0.48
Diluted earnings per common share from discontinued operations		0.68			0.24

Diluted earnings per common share	$	0.95		$	0.72

Weighted average common shares outstanding – basic		50,830			50,130

Weighted average common shares outstanding – assuming dilution		51,640			50,650

Dividends declared and paid per common share	$	1.500		$	1.4625

See condensed notes to unaudited consolidated financial statements.

Consolidated Statements of Cash Flows (unaudited)

(Dollar amounts in thousands)


	For the Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	62,613		$	44,885
Adjustments to reconcile net income to net cash flows generated by operating activities:
Gain on sale of discontinued operations		(26,897	)		—
Income from investments in unconsolidated entities		(402	)		(647	)
Provision for depreciation		55,963			46,859
Noncash stock based compensation expense		2,345			996
Minority interests in income		2,620			1,907
(Increase) decrease in other assets		(6,450	)		19
Decrease in accounts payable and accrued expenses		(2,621	)		(1,167	)

Net cash flows generated by operating activities		87,171			92,852

Cash flows from investing activities:
Proceeds from sale of rental property, net		87,280			—
Purchases of operating real estate		(54,917	)		(99,711	)
Deposits on property under contract		(7,213	)		(1,050	)
Capital expenditures		(8,272	)		(12,685	)
Rehabilitation expenditures and other		(12,848	)		(8,984	)
Additions to direct investment in real estate-construction in progress		(46,660	)		(33,923	)
Additions to land under development		(42,214	)		(37,118	)
Distributions from unconsolidated entities		1,001			1,166

Net cash flows used in investing activities		(83,843	)		(192,305	)

Cash flows from financing activities:
Issuance of unsecured senior notes, net		148,087			99,437
Principal payments on unsecured senior notes and mortgage loans		(40,445	)		(16,610	)
Lines of credit:
Advances		301,000			310,000
Repayments		(327,000	)		(248,000	)
Fees		—			(388	)
Proceeds from preferred stock offering, net		—			96,436
Redemption of preferred stock		—			(53,750	)
Cash dividends paid to common shareholders		(76,163	)		(73,426	)
Cash dividends paid to preferred shareholders		(13,404	)		(8,588	)
Distributions to operating company unit holders		(1,091	)		(1,418	)
Distributions to other minority members		(1,529	)		(503	)
Redemption of minority member interest		—			(8,114	)
Proceeds from exercises of stock options and other, net		11,508			4,756

Net cash flows generated by financing activities		963			99,832

Increase in cash		4,291			379

Balance at beginning of period		—			1,105

Balance at end of period	$	4,291		$	1,484

Supplemental disclosure of non cash activities:
Transfers of direct investments in real estate-construction in progress to investments in rental properties	$	14,449		$	107,633

Transfer of land under development to direct investments in real estate – construction in progress	$	—		$	41,870

Transfer of investment in rental properties to held for sale	$	190,995		$	—

Transfer of land under development to held for sale	$	8,515		$	—

Increase in investment in rental properties and minority interest in connection with consolidation of variable interest entity	$	26,000		$	—

Change in accrued development costs for construction in progress and land under development	$	1,186		$	325

Decrease in carrying value of debt and other assets attributed to hedging activities	($	492	)	($	1,351	)

Issuance of Minority interest units, net	$	—		($	1,921	)

See condensed notes to unaudited consolidated financial statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

September 30, 2005

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements have been omitted. The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2004 of BRE Properties, Inc. (the “Company” or “BRE”). In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments only) necessary for a fair presentation of the Company’s consolidated financial statements for the interim periods presented.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain reclassifications have been made from the prior period’s presentation to conform to the current period’s presentation.

NOTE B – STOCK-BASED COMPENSATION

Effective January 1, 2003, BRE adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148). Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. BRE has adopted the prospective method as provided for in SFAS No. 148, under which the provisions of SFAS No. 123 is applied prospectively to all awards granted, modified or settled after January 1, 2003. Therefore, the cost related to stock-based compensation included in the determination of consolidated net income for the quarters and nine months ended September 30, 2005 and 2004 is less than that which would have been recognized if the fair value method had been applied to all option awards in prior years. Prior to 2003, BRE accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Option awards under BRE’s option plans vest over periods ranging from one to five years.

The following table illustrates the pro forma effect on consolidated net income and earnings per share of all outstanding option awards in each period.


	Three months ended September 30,
(amounts in thousands, except per share data)	2005			2004
Net income available to common shareholders, as reported	$	6,870		$	11,480
Add: Stock-based option expense included in reported net income		865			335
Deduct: Total stock-based option expense determined under fair value based method for all awards		(900	)		(541	)

Pro forma net income	$	6,835		$	11,274


Earnings per share:
Basic-as reported	$	0.13		$	0.23
Basic-pro forma	$	0.13		$	0.22
Diluted-as reported	$	0.13		$	0.23
Diluted-pro forma	$	0.13		$	0.22

	Nine months ended September 30,
(amounts in thousands, except per share data)	2005			2004
Net income available to common shareholders, as reported	$	49,209		$	36,297
Add: Stock-based option expense included in reported net income		2,345			996
Deduct: Total stock-based option expense determined under fair value based method for all awards		(2,490	)		(1,724	)

Pro forma net income	$	49,064		$	35,569

Earnings per share:
Basic-as reported	$	0.97		$	0.72
Basic-pro forma	$	0.97		$	0.71
Diluted-as reported	$	0.95		$	0.72
Diluted-pro forma	$	0.95		$	0.70

The effect of pro forma application of SFAS No. 123 is not necessarily representative of the effect on consolidated net income for future periods.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company expects to adopt SFAS No. 123(R) on January 1, 2006.

new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation costs for some previously granted awards that were not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R). The Company does not believe the adoption of SFAS No. 123(R) will have a material impact on its financial statements or results of operations.

NOTE C – CONSOLDATION OF VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which was revised in December 2003 (“Interpretation No. 46”), and addresses the consolidation of variable interest entities (“VIEs”). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE.

Under Interpretation No. 46, a VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) the entity’s equity holders as a group either: (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity if they occur or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE pursuant to Interpretation No. 46, the enterprise that is deemed to absorb a majority of the expected losses or receive a majority of expected residual returns of the VIE is considered the primary beneficiary and must consolidate the VIE.

Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or communities from an entity and pays a non-refundable deposit, or (ii) enters into arrangements for the formation of joint ventures, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. For each VIE created, the Company has computed expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with the Company’s financial statements.

In August 2003, BRE entered into a land option contract to purchase 13.6 acres of land located in Anaheim, California from an unrelated third party for $30,000,000. The outside closing date for the acquisition to close is in February 2006. At September 30, 2005, the non-refundable deposits made by BRE totaled $3,000,000. The contractual relationship that provides for the future purchase of an asset is considered a variable interest as defined under Interpretation No. 46. In accordance with the provisions of Interpretation No. 46, the Company has requested the private owner of the land to provide financial statement information that relates to the entity that holds title to the land. The private owners have declined in writing to provide any key financial data. The Company has exhausted “reasonable” efforts to obtain data, and given the limited knowledge on the entity, the Company does not have enough data to determine if the entity is a VIE. As a result, the Company is not consolidating the entity.

During the first quarter of 2005, the Company entered into a 22-month lease with a put/call option arrangement with an unrelated third party of a recently developed operating community located in Chino Hills, California. The total consideration payable under the put/call option is $26,000,000. The Company made a non-refundable deposit of $4,000,000 that will remain in escrow throughout the lease term and will be applied towards the $26,000,000 purchase price, if purchased. At any time during the lease period the lessor can exercise a put option for the Company to purchase the asset. The Company is not obligated to purchase the asset if the lessor exercises the put option, but would forfeit the deposit if the community was not purchased. The

Company does not have legal title to the asset owned by the third party. Based on management’s analysis, the Company determined that this arrangement is a VIE and that the Company is the primary beneficiary. The assets, liabilities and operations of the VIE are consolidated with the Company’s financial statements. The beneficial interest holders of the VIE have no recourse to the Company’s general credit. The impact to the consolidated balance sheet of the Company as of September 30, 2005 is an increase of $26,000,000 to Direct investments in Real estate and a corresponding increase to Minority interest. The impact to the consolidated statements of income for the nine months ended September 30, 2005 was an increase in total revenues of $1,265,000, an increase in real estate expenses of $421,000, an increase in depreciation expense of $541,000 and an increase to minority interest expense of $775,000.

In addition to the deposit described above, at September 30, 2005 the Company has made non-refundable cash deposits for two purchase option agreements totaling approximately $1,450,500, which are included in other assets on the consolidated balance sheet. The aggregate purchase price of properties under option is approximately $39,530,000. The option deposits generally represent the Company’s maximum exposure to loss if it elects not to purchase the optioned property. Based on the analysis performed under Interpretation No. 46, management concluded that the Company is not the primary beneficiary of these variable interest entities as of September 30, 2005.

NOTE D – DISCONTINUED OPERATIONS

The results of operations for properties sold during the period or designated as held for sale at the end of the period are required to be classified as discontinued operations. The property-specific components of net earnings that are classified as discontinued operations include operating results, depreciation expense recognized prior to the classification as held for sale, and the net gain or loss on disposal. At September 30, 2005, the Company had seven operating apartment communities classified as held for sale under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). The estimated proceeds less anticipated costs to sell the assets held for sale at September 30, 2005 are greater than the carrying values as of September 30, 2005. No depreciation has been recorded on these communities since August 2005. In addition, at September 30, 2005, the Company classified a parcel of land in Bellevue, Washington as held for sale.

The operating results for these seven communities classified as held for sale have been classified as discontinued operation for the three and nine months ended September 30, 2005 and 2004. During the six months ended June 30, 2005 the Company sold three apartment communities for a gain of $26,897,000. The operating results of these three communities and the related gain on sale are also included in the discontinued operations for nine months ended September 30, 2005 and 2004. During the fourth quarter of 2004 the Company sold three communities. The operating results of these three communities are also included in the discontinued operations for the three and nine months ended September 30, 2004.

These amounts totaled $2,379,000 and $3,773,000 for the three months ended September 30, 2005 and 2004 respectively, and $35,322,000 and $12,228,000 for the nine months ended September 30, 2005 and 2004, respectively.

The following is a breakdown of the gain on sales and the combined results of operations for the properties included in discontinued operations:


	For the Three Months ended September 30,						For the Nine Months ended September 30,
(amounts in thousands)	2005			2004			2005			2004
Rental and ancillary income	$	5,184		$	9,258		$	18,090		$	27,950
Real estate expenses		(1,990	)		(3,414	)		(6,424	)		(9,569	)
Provision for depreciation		(815	)		(2,071	)		(3,241	)		(6,153	)

Income from discontinued operations, net	$	2,379		$	3,773		$	8,425		$	12,228

Gain on sales		—			—			26,897			—

Total discontinued operations	$	2,379		$	3,773		$	35,322		$	12,228

NOTE E – EQUITY

During the nine months ended September 30, 2005, 740,196 shares of common stock were issued under the Company’s stock option plans, and 27,734 shares of common stock were issued under the Company’s direct stock purchase and dividend reinvestment plan.

NOTE F – LEGAL MATTERS

On April 14, 1997, the Company purchased Red Hawk Ranch Apartments, a 453-unit operating community in Fremont, California, from an unrelated third party builder. The community now requires extensive replacement work to correct damage the Company believes was caused by construction defects. On March 18, 2003, the Company filed suit in the Alameda County Superior Court against the builder and other parties for faulty workmanship, to protect against statutes of limitation. The Company has conducted testing to determine the extent of the damage. Based upon the testing that has been performed to date, the Company has discovered that the exterior shell of each building at the community has been compromised. As a result, during second quarter 2004, the Company expanded the size and scope of the lawsuit.

The Company commenced reconstruction during the second quarter of 2005 and expects to have the community restored during the next 12 to 15 months. The Company is actively pursuing mediation and/or litigation against the third party builder and certain sub-contractors.

Litigation and consulting charges are reported as other expenses on the consolidated statements of income. These charges totaled $759,000 and $427,000 for the three months ended September 30, 2005 and 2004 respectively, and $1,488,000 and $1,792,000 the nine months ended September 30, 2005 and 2004, respectively.

Under the provisions of SFAS 144, the Company has performed an impairment analysis on Red Hawk Ranch Apartments using undiscounted estimated cash flows that reflect the anticipated decreased net operating income during reconstruction. No impairment charge was deemed

necessary based on this analysis. The net book value of the components of the buildings that are damaged and being replaced approximate $9,400,000 and are being depreciated over the reconstruction period. During reconstruction, costs that extend the useful life of the asset, increase its value or enhance safety of the community will be capitalized. All other costs, including legal and consulting, are expensed as incurred.

While the Company’s management expects that costs of remediation will approximate up to $26,000,000, and future plaintiff litigation costs may exceed $3,000,000, it is not possible to predict or determine the outcome of legal actions, nor is it reasonably possible to accurately estimate the full range of costs associated with the matter at this time.

The Company is currently a plaintiff in a class action lawsuit in regards to defective siding materials. Based on currently available information during the third quarter of 2005, the outcome of this lawsuit is uncertain. The Company does not believe that the resolution of this matter will have a material effect on the Company’s financial position, results of operations or cash flows.

As of September 30, 2005, other than the legal matters referenced above, there were no pending legal proceedings to which the Company is a party or of which any of the Company’s properties is the subject, which management anticipates would have a material adverse effect upon the Company’s consolidated financial condition and results of operations.

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

September 30, 2005

Forward-Looking Statements

In addition to historical information, we have made forward-looking statements in this Quarterly Report on Form 10-Q. These forward-looking statements pertain to, among other things, our capital resources, portfolio performance and results of operations. Forward-looking statements involve numerous risks and uncertainties. You should not rely on these statements as predictions of future events because there is no assurance that the events or circumstances reflected in the statements can be achieved or will occur. Forward-looking statements are identified by words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or in their negative form or other variations, or by discussions of strategy, plans or intentions. Forward-looking statements are based on assumptions, data or methods that may be incorrect or imprecise or incapable of being realized. The following factors, among others, could affect actual results and future events: defaults or non-renewal of leases, illiquidity of real estate and reinvestment risk, our regional focus in the Western United States, insurance coverage, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to successfully integrate acquired properties and operations, risks and uncertainties affecting property development and construction (including construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities), failure to qualify as a real estate investment trust under the Internal Revenue Code as of 1986, as amended, environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. Our success also depends upon economic trends, including interest rates, income tax laws, governmental regulation, legislation, population changes and other factors. Do not rely solely on forward-looking statements, which only reflect management’s analysis. We assume no obligation to update forward-looking statements.

Executive Summary

We are a self-administered equity real estate investment trust, or “REIT”, focused on the acquisition, development and management of multifamily apartment communities in seven metropolitan markets of the Western United States. At September 30, 2005, our portfolio had real estate assets with a net book value of approximately $2.6 billion that included 86 wholly or majority-owned apartment communities, aggregating 24,314 units; two multifamily communities owned in joint ventures, comprised of 488 apartment units; and nine wholly or majority-owned apartment communities in various stages of construction and development, totaling 2,213 units.

We currently have five communities with a total of 1,190 units under construction, for a total estimated investment of $253,000,000, and an estimated balance to complete totaling $96,000,000. Expected delivery dates for these units range from first quarter 2006 through fourth quarter 2007. All development communities are in Southern California. At September 30, 2005, we owned four parcels of land representing 1,023 units of future development, for an estimated aggregate cost of $308,000,000 upon completion. The land parcels are located in Northern and Southern California, and the Seattle, Washington metro area.

Our year-over-year operating results reflect increased property-level same-store performance, rental and ancillary income from acquisitions completed during 2005 and 2004, and properties in the lease-up phase of development. The property acquisitions and completed development properties are considered “Non same-store communities.” Additional income from “same-store”

and “non-same-store” communities was partially offset by increases to general and administrative expense, and interest expense.

Results of Operations

Comparison of the Three Months Ended September 30, 2005 and 2004

Revenues

Total revenues were $76,848,000 for the three months ended September 30, 2005, compared to $66,561,000 for the same period in 2004. The increase in total revenues was primarily generated from communities acquired, developed and stabilized after June 30, 2004, which we define as our “non-same-store” communities. These “non same-store” communities increased revenue by $7,075,000 for the three months ended September 30, 2005, compared to same period in 2004. During the 15 months subsequent to June 30, 2004, we acquired 1,603 units and completed the construction, and lease up, of 596 units. In the third quarter of 2005, on a “same-store” basis, rental and ancillary revenues increased $3,212,000, or 5%, primarily due to increases in market rents. Monthly market rents in the “same-store” portfolio for the third quarter 2005 grew 7% to $1,233 per unit from $1,157 in the third quarter of 2004.

A summary of the components of revenues for the quarters ended September 30, 2005 and 2004 follows (dollar amounts in thousands):


	Three months ended September 30, 2005				Three months ended September 30, 2004
	Revenues		% of Total Revenues		Revenues		% of Total Revenues		% Change from 2004 to 2005
Rental income	$	73,461	96	%	$	63,621	96	%	15	%
Ancillary income		3,387	4	%		2,940	4	%	15	%

Total revenues	$	76,848	100	%	$	66,561	100	%	15	%

The total increase in rental and ancillary income of $10,287,000 for the three months ended September 30, 2005 as compared with the three months ended September 30, 2004 generated from same-store and non same-store communities was as follows (dollar amounts in thousands):


	2005 Increase
Same-store communities	$	3,212
Non Same-store communities		7,075

Total increase in rental and ancillary revenues (excluding revenues from discontinued operations)	$	10,287

Expenses

Real Estate Expenses

For the quarter ended September 30, 2005, real estate expenses totaled $24,366,000 as compared with $20,413,000 for the quarter ended September 30, 2004. The year-over-year increase in total real estate expenses was primarily attributable to the “non-same-store communities”, which increased $3,042,000 from the quarter ended September 30, 2004.

A summary of the categories of real estate expenses for the three months ended September 30, 2005 and 2004 follows (dollar amounts in thousands):


	Three months ended September 30, 2005				Three months ended September 30, 2004
	Expense		% of Total Revenues		Expense		% of Total Revenues		% Change from 2004 to 2005
Same-store	$	20,206	26	%	$	19,295	29	%	5	%
Non same-store		4,160	5	%		1,118	2	%	272	%

Total real estate expenses	$	24,366	31	%	$	20,413	31	%	19	%

Provision for Depreciation

The provision for depreciation increased to $18,893,000 for the quarter ended September 30, 2005, from $15,178,000 for the same period in 2004, excluding depreciation on discontinued operations. The $3,715,000 increase in 2005 resulted primarily from higher depreciable bases on new property acquisitions and development properties completed.

Interest Expense

Interest expense was $19,512,000 (net of interest capitalized to the cost of apartment communities under development of $3,131,000) for the quarter ended September 30, 2005, an increase of $2,737,000 or 16% from the comparable period in 2004. Interest expense was $16,775,000 for the same period in 2004 and was net of $1,253,000 of interest capitalized to the cost of apartment communities under construction. The increase in interest expense was primarily due to the issuance of $150,000,000 aggregate principal amount of unsecured notes in the second quarter of 2005, the assumption of $109,267,000 of secured debt relating to property acquisitions, and a rising short-term interest rate environment.

General and Administrative

General and administrative costs totaled $4,045,000, or approximately 5% of total revenues, for the third quarter of 2005 compared to $3,091,000, or approximately 5% of total revenues, for the three months ended September 30, 2004. The increase in 2005 is primarily due to changes in the long term incentive compensation plan, increased professional fees and additional staffing expense.

Other Expenses

Other expenses totaled $759,000 and $427,000 for the three months ended September 30, 2005 and 2004, respectively, and represent litigation and consulting costs incurred in connection with the construction defect litigation we are pursuing against the builder of our Red Hawk Ranch Community, located in Fremont, California and various subcontractors. See Part II, Item 1 “Legal Proceedings.”

Minority Interests in Income

Minority interests in income totaled $915,000 and $576,000 for the three months ended September 30, 2005 and 2004, respectively. Minority interests and consequently, minority

interests in income, primarily increased as a result of the consolidation of a variable interest entity in 2005 under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. See “NOTE C – CONSOLIDATION OF VARIABLE INTEREST ENTITIES”.

Discontinued operations

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144),” requires the results of operations for properties sold during the period or designated as held for sale at the end of the period to be classified as discontinued operations. The property-specific components of net earnings that are classified as discontinued operations include all property-related revenues and operating expenses, depreciation expense recognized prior to the classification as held for sale, and property-specific interest expense to the extent there is secured debt on the property. In addition, the net gain or loss on the eventual disposal of properties held for sale is reported as discontinued operations.

During the third quarter of 2005, there were no communities sold. At September 30, 2005, there were seven operating apartment communities classified as held for sale under the provisions of SFAS 144. The estimated proceeds less anticipated costs to sell the assets held for sale at September 30, 2005 are greater than the carrying values as of September 30, 2005. No depreciation has been recorded on these communities since August 2005.

Dividends Attributable to Preferred Stock

Dividends attributable to preferred stock for the third quarter of 2005 represent the dividends on our 8.08% Series B, 6.75% Series C and 6.75% Series D Cumulative Redeemable Preferred Stock. Dividends attributable to preferred stock for the third quarter of 2004 represent the dividends on our 8.08% Series B and 6.75% Series C Redeemable Preferred Stock. On December 9, 2004, we closed the offering of 3,000,000 shares of 6.75% Series D Cumulative Redeemable Preferred Stock. All of our currently outstanding series of preferred stock have a $25.00 per share liquidation preference.

Net Income Available to Common Shareholders

As a result of the various factors mentioned above, net income available to common shareholders for the three months ended September 30, 2005 was $6,870,000, or $0.13 per diluted share, as compared with $11,480,000, or $0.23 per diluted share, for the comparable period in 2004.

Comparison of the Nine Months Ended September 30, 2005 and 2004

Revenues

Total revenues were $219,951,000 for the nine months ended September 30, 2005, compared to $193,991,000 for the same period in 2004. The increase in total revenues was primarily generated from communities acquired, developed and stabilized after January 1, 2003, which we define as our “non same-store” communities. These “non same-store” communities increased revenue by $20,746,000 for the nine months ended September 30, 2005, compared to same period in 2004. During the 21 months subsequent to January 1, 2003, we acquired 2,115 units and completed construction on 788 units. Our same-store portfolio produced an increase in revenues of $5,214,000, or 3%, year-over-year primarily due to increases in market rents. Monthly market rents in the “same-store” portfolio for the nine months ended September 30, 2005 grew 4% to $1,190 per unit from $1,139 for the nine months ended September 30, 2004.

A summary of the components of revenues for the nine months ended September 30, 2005 and 2004 follows (dollar amounts in thousands):


	Nine months ended September 30, 2005				Nine months ended September 30, 2004
	Revenues		% of Total Revenues		Revenues		% of Total Revenues		% Change from 2004 to 2005
Rental income	$	210,014	95	%	$	185,606	96	%	13	%
Ancillary income		9,937	5	%		8,385	4	%	19	%

Total revenues	$	219,951	100	%	$	193,991	100	%	13	%

The total increase in rental and ancillary income of $25,960,000 for the nine months ended September 30, 2005 as compared with the nine months ended September 30, 2004 generated from same-store and non same-store communities was as follows (dollar amounts in thousands):


	2005 Increase
Same-store communities	$	5,214
Non Same-store communities		20,746

Total increase in rental and ancillary revenues (excluding revenues from discontinued operations)	$	25,960

Expenses

Real Estate Expenses

For the nine months ended September 30, 2005, real estate expenses totaled $69,576,000 as compared with $60,154,000 for the nine months ended September 30, 2004. The year-over-year increase in total real estate expenses was primarily attributable to the “non-same-store”, which increased $8,169,000 from the same period 2004.

A summary of the categories of real estate expense for the nine months ended September 30, 2005 and 2004 follows (dollar amounts in thousands):


	Nine months ended September 30, 2005				Nine months ended September 30, 2004
	Expense		% of Total Revenues		Expense		% of Total Revenues		% Change from 2004 to 2005
Same-store	$	56,587	26	%	$	55,334	29	%	2	%
Non same-store		12,989	6	%		4,820	2	%	169	%

Total real estate expenses	$	69,576	32	%	$	60,154	31	%	16	%

Provision for Depreciation

The provision for depreciation increased to $52,722,000 for the nine months ended September 30, 2005, from $40,706,000 for the same period in 2004, excluding depreciation on discontinued operations. The $12,016,000 increase in 2005 resulted primarily from higher depreciable bases on new property acquisitions and development properties completed, combined with $2,600,000 in additional accelerated depreciation on our Red Hawk Ranch Apartment Community. See Part II, Item 1 “Legal Proceedings.”

Interest Expense

Interest expense was $55,949,000 (net of interest capitalized to the cost of apartment communities under development totaling $8,020,000) for the nine months ended September 30, 2005, an increase of $6,907,000 or 14% from the comparable period in 2004. Interest expense was $49,042,000 for the same period in 2004 and was net of $4,623,000 of interest capitalized to the cost of apartment communities under construction. The increase in interest expense was primarily due to the issuance of $100,000,000 aggregate principal amount of unsecured notes in first quarter of 2004 and $150,000,000 aggregate principal amount of unsecured notes in the second quarter of 2005, the assumption of $109,267,000 of secured debt relating to property acquisitions, as well as a rising short-term interest rate environment.

General and Administrative

General and administrative costs totaled $12,853,000, or approximately 6% of total revenues, for the nine months ended September 30, 2005, compared to $9,488,000, or approximately 5% of total revenues, for the nine months ended September 30, 2004. The increase in 2005 is primarily due to changes in the long term incentive compensation plan, increased professional fees and additional staffing expense.

Other Expenses

Other expenses totaled $1,488,000 and $1,792,000 for the nine months ended September 30, 2005 and 2004, respectively, and represent litigation and consulting costs incurred in connection with the construction defect litigation we are pursuing against the builder of our Red Hawk Ranch Community, located in Fremont, California and various subcontractors. See Part II, Item 1 “Legal Proceedings.”

Minority Interests in Income

Minority interests in income totaled $2,620,000 and $1,907,000 for the nine months ended September 30, 2005 and 2004, respectively. Minority interests and consequently, minority interests in income, primarily increased as a result of the consolidation of a variable interest entity in 2005 under the provisions of FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. See “NOTE C – CONSOLDATION OF VARIABLE INTEREST ENTITIES”.

Discontinued operations

At September 30, 2005, there were seven operating apartment communities classified as held for sale under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). The estimated proceeds less anticipated costs to sell the

assets held for sale at September 30, 2005 are greater than the carrying values as of September 30, 2005. No depreciation has been recorded on these communities since August 2005.

During the first nine months of 2005, we sold three operating communities with a total of 928 units. The communities were sold for a gross sales price of $89,250,000, resulting in a gain on sales of approximately $26,897,000.

Dividends Attributable to Preferred Stock

Dividends attributable to preferred stock for the nine months ended September 30, 2005 represent the dividends on our 8.08% Series B, 6.75% Series C and 6.75% Series D Cumulative Redeemable Preferred Stock. Dividends attributable to preferred stock for the nine months ended September 30, 2004 represent the dividends on our 8.50% Series A, 8.08% Series B, and 6.75% Series C Redeemable Preferred Stock. On January 29, 2004, we redeemed all 2,150,000 outstanding shares of our 8.50% Series A Cumulative Redeemable Preferred Stock. On December 9, 2004, we closed the offering of 3,000,000 shares of 6.75% Series D Cumulative Redeemable Preferred Stock. All of our currently outstanding series of preferred stock have a $25.00 per share liquidation preference.

Net Income Available to Common Shareholders

As a result of the various factors mentioned above, net income available to common shareholders for the nine months ended September 30, 2005 was $49,209,000, or $0.95 per diluted share, as compared with $36,297,000, or $0.72 per diluted share, for the comparable period in 2004.

Liquidity and Capital Resources

Depending upon the availability and cost of external capital, we anticipate making additional investments in multifamily apartment communities. We expect to fund these investments through a variety of sources. These sources may include cash generated from operations, temporary borrowings under our unsecured line of credit, borrowings under our secured line of credit, proceeds from asset sales, public and private offerings of debt and equity securities and in some cases the assumption of secured borrowings. To the extent that these additional investments are initially financed with temporary borrowings under our revolving unsecured line of credit, we anticipate that permanent financing will be provided through a combination of public and private offerings of debt and equity securities, borrowings under our secured line of credit, proceeds from asset sales and secured debt. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service and dividend requirements and finance future investments for the next twelve months.

On May 19, 2005, we closed an offering of $150,000,000 of five year senior unsecured notes. The notes will mature on May 15, 2010 with a coupon rate of 4.875%. Net proceeds from the offering, after all discounts, commissions and issuance costs, totaled approximately $148,087,000.

On December 9, 2004, we closed an offering of 3,000,000 shares of 6.75% Series D Cumulative Redeemable Preferred Stock at a public offering price of $25 per share. Net proceeds from the offering, after all discounts, commissions and issuance costs, totaled approximately $72,436,000.

On March 15, 2004, we closed an offering of 4,000,000 shares of 6.75% Series C Cumulative Redeemable Preferred Stock at a public offering price of $25 per share. Net proceeds from the offering, after all discounts, commissions and issuance costs, totaled approximately $96,436,000.

On March 15, 2004, we closed an offering of $100,000,000 of dual-tranche Medium-Term Notes under a medium term note program initiated in 2001. The offering included $50,000,000 of five-year notes with a coupon rate of 3.58% and $50,000,000 of 10-year notes with a coupon rate of 4.70%.

Proceeds from these offerings have been used for general corporate purposes, including the repayment of debt, redemption of equity securities, funding for development activities and financing for acquisitions. Pending these uses, we initially used the proceeds from these offerings to reduce borrowings under our revolving unsecured credit facility.

During the second quarter of 2005, we decreased the borrowings on our secured credit facility with Fannie Mae (serviced by Prudential Multifamily Mortgage, Inc.) from $140,000,000 to $75,000,000. In August 2005, we amended the credit facility to reduce the number of multifamily communities securing the line from nine to four and relaxed certain collateral requirements. These four multifamily communities are held by a consolidated subsidiary of BRE. Current borrowings under the facility bear interest at variable rates with maturities from one to nine months, plus a facility fee of 0.65%. Our borrowing cost, including interest, margin and fees, averaged 3.73% for the nine months ended September 30, 2005. We also have the option to convert variable-rate borrowings to fixed-rate borrowings. Subject to the terms of the facility, we have the option to increase its size to $250,000,000. Borrowings under the secured facility are limited by the value of the properties we have pledged as security. Drawings under the facility are available to fund our investment activities and for general corporate purposes, and the facility matures in 2008.

We have a revolving unsecured credit facility with a capacity of $350,000,000 that matures in April 2006, with an option to extend the term one year beyond the maturity date. The interest rate on the line of credit is currently LIBOR plus 0.70%, plus a fee of 0.20% payable on the unused portion of the credit facility. Our pricing spread above LIBOR is dependent upon our credit ratings and can range from 0.50% to 1.45%. Our average cost on the unsecured line of credit for the nine months ended September 30, 2005 was 4.91%.

Borrowings under our revolving unsecured line of credit totaled $226,000,000 at September 30, 2005, compared to $187,000,000 at December 31, 2004. Drawings on the revolving unsecured line of credit are available to fund our investment activities and general corporate purposes. We typically reduce our outstanding balance on the revolving unsecured line of credit with available cash balances.

We had a total of $980,000,000 principal amount in unsecured senior notes at September 30, 2005, consisting of the following:


Maturity	Unsecured Senior Note Balance		Interest Rate
March 2007		150,000,000	5.950	%
June 2007		50,000,000	7.200	%
March 2009		50,000,000	3.580	%
September 2009		150,000,000	5.750	%
May 2010		150,000,000	4.875	%
January 2011		250,000,000	7.450	%
February 2013		130,000,000	7.125	%
March 2014		50,000,000	4.700	%

Total / Weighted Average Interest Rate	$	980,000,000	6.172	%

In addition, at September 30, 2005, we had mortgage indebtedness totaling $215,680,000 principal amount at an average interest rate of 6.01%, and remaining terms of from less than one year to eight years.

As of September 30, 2005, we had total outstanding debt balances of approximately $1,500,000,000 and total outstanding consolidated shareholders’ equity and minority interests of approximately $1,100,000,000, representing a debt to total book capitalization ratio of 58%.

Our indebtedness contains financial covenants as to minimum net worth, interest coverage ratios, maximum secured debt and total debt to capital, among others. We were in compliance with all such financial covenants during the three months ended September 30, 2005 and 2004.

We anticipate that we will continue to require outside sources of financing to meet our long-term liquidity needs beyond 2005, such as scheduled debt repayments, construction funding and property acquisitions. At September 30, 2005, we had an estimated cost of approximately $96,300,000 to complete existing construction in progress, with funding estimated from 2005 through 2007. Scheduled debt repayments through December 31, 2005 total approximately $11,083,000.

During the first quarter of 2004, we filed a shelf registration statement with the Securities and Exchange Commission under which we may issue up to $700,000,000 of securities including debt, convertible debt, common stock and preferred stock. Our recent $150,000,000 note offering and our Series D preferred stock offering totaling $75,000,000 reduced the amount available for future issuances under this registration statement to $475,000,000. Depending upon market conditions, we may issue securities under this or under future shelf registration statements. Proceeds from these issuances may be used for general corporate purposes, including investing in additional multifamily communities, funding development activities, capital expenditures, redemption of securities, increasing our working capital and repaying indebtedness. Pending the application of the net proceeds, we may invest the proceeds in investment-grade, interest-bearing securities or temporarily reduce borrowings under our revolving unsecured line of credit.

Our Board of Directors has authorized us to purchase an aggregate of $60,000,000 in shares of our common stock. See Part II; Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

We continue to consider other sources of possible funding, including further joint ventures and additional secured construction debt. We own unencumbered real estate assets that could be sold, contributed to joint ventures or used as collateral for financing purposes (subject to certain lender restrictions). We also own encumbered assets with significant equity that could be further encumbered should other sources of capital not be available (subject to certain lender restrictions).

Critical Accounting Policies

We define critical accounting policies as those that require management’s most difficult, subjective or complex judgments. A summary of our critical accounting policies follows. Additional discussion of accounting policies that we consider significant, including further discussion of the critical accounting policies described below, can be found in the notes to our consolidated financial statements in our 2004 Annual Report on Form 10-K.

Investments in Rental Properties

Rental properties are recorded at cost, less accumulated depreciation, and less an adjustment, if any, for impairment. A land value is assigned based on the purchase price if land is acquired separately, or based on market research if acquired in a merger or in an operating community acquisition. We have a development group which manages the design, development and

construction of our apartment communities. Projects under development are carried at cost, including direct and indirect costs incurred to ready the assets for their intended use and which are specifically identifiable, including capitalized interest and property taxes until units are placed in service. Direct investment development projects are considered placed in service as certificates of occupancy are issued and the units become ready for occupancy. Depreciation begins as units are placed in service. Land acquired for development is capitalized and reported as “Land under development” until the development plan for the land is formalized. Once the development plan is determined and construction contracts are signed, the costs are transferred to the balance sheet line item “Construction in progress.” Costs of replacements, such as appliances, carpets and drapes, are expensed. Improvements and betterments that increase the value of the property or extend its useful life are capitalized.

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which range from 35 to 45 years for buildings and three to ten years for other property. The determination as to whether expenditures should be capitalized or expensed, and the period over which depreciation is recognized, requires management’s judgment.

In accordance with SFAS No. 144, our investments in real estate are periodically evaluated for indicators of impairment. The evaluation of impairment and the determination of values are based on several subjective factors, and future events could occur which would cause management to conclude that indicators of impairment exist and a reduction in carrying value to estimated fair value is warranted.

In the normal course of business, we will receive offers for sale of our properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. We classify real estate as “held for sale” when all criteria under SFAS No. 144 have been met.

SFAS No. 144 also requires that the assets and liabilities and the results of operations of any communities that have been sold, or otherwise qualify as held for sale, be presented as discontinued operations in our consolidated financial statements in all periods presented. The community specific real estate classified as held for sale is stated at the lower of its carrying amount or estimated fair value less disposal costs. Depreciation is not recorded on assets classified as held for sale.

Stock-Based Compensation

Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148). Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. We have adopted the prospective method as provided for in SFAS No. 148, under which the provisions of SFAS No. 123 will be applied prospectively to all awards granted, modified or settled after January 1, 2003. Therefore, the amounts recorded in general and administrative expense related to stock-based compensation for the quarters and nine months ended September 30, 2005 and 2004 is less than that which would have been recognized if the fair value method had been applied to all option awards in prior years. Prior to 2003, we accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, which resulted in no expense recognition. Option awards under our option plan vest over periods ranging from one to five years.

Currently, the Company uses the Black-Scholes formula to estimate the value of stock options granted and expects to continue to use this option valuation model upon the required adoption of SFAS No. 123(R) on January 1, 2006. Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation costs for some previously granted awards that were not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R). The Company does not believe the adoption of SFAS No. 123(R) will have a material impact on its financial statements or results of operations.

Consolidation

Based on the provisions of Interpretation No. 46, we have concluded that under certain circumstances when we (i) enter into option agreements for the purchase of land or communities from an entity and pays a non-refundable deposit, or (ii) enter into arrangements for the formation of joint ventures, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. For each VIE created, we have computed expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If we are determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with our financial statements.

We consolidate entities not deemed as VIEs which we have the ability to control. Our consolidated financial statements include the accounts of the Company and other controlled subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

Construction in progress and land under development

The following table provides data on our nine multifamily properties that are currently under various stages of development and construction. Completion of the development properties is subject to a number of risks and uncertainties, including construction delays and cost overruns. We cannot assure that these properties will be completed, or that they will be completed by the estimated dates, or for the estimated amounts, or will contain the number of proposed units shown in the table below.

(Dollar amounts in millions)


Property Name	Location	Proposed Number of Units	Costs Incurred to Date - September 30, 2005			Estimated Total Cost		Estimated Cost to Complete		Estimated Completion Date¹
Direct Investment
The Heights	Chino Hills, CA	208	$	36.5		$	40.8	$	4.3	1Q/2006
Bridgeport Cove	Santa Clarita, CA	188		28.8			40.5		11.7	2Q/2006
Galleria at Towngate	Moreno Valley, CA	268		29.5			40.2		10.7	2Q/2006
Renaissance at Uptown Orange⁴	Orange, CA	338		36.1			77.4		41.3	4Q/2007
The Stuart at Sierra Madre Villa	Pasadena, CA	188		25.7			54.0		28.3	2Q/2007

Total Construction in Progress		1,190	$	156.6	²	$	252.9	$	96.3


Property Name	Location	Proposed Number of Units	Costs Incurred to Date - September 30, 2005			Estimated Total Cost		Estimated Construction Start
Land under development³
Bay Vista Apartments	Emeryville, CA	224	$	17.0		$	65.0		4Q/2005
Belcarra Apartments	Bellevue, WA	320		15.0			72.5		2Q/2006
Denny Way Apartments	Seattle, WA	195		9.4			49.0		2Q/2006
5600 Wilshire	Los Angeles, CA	284		35.8			121.0		1Q/2006

Total Land Under Development		1,023	$	77.2		$	307.5

(1)

“Completion” is defined as our estimate of when an entire project will have a final certificate of occupancy issued and be ready for occupancy. Completion dates have been updated to reflect our current estimates of receipt of final certificates of occupancy, which are dependent on several factors, including construction delays and the inability to obtain necessary public approvals.

(2)

Reflects all recorded costs incurred as of September 30, 2005, recorded on our consolidated balance sheet as “direct investments in real estate-construction in progress.” Included in this amount is $14.5 million of costs for the 94 completed units on The Heights and 20 completed units on Galleria at Towngate which are reflected on our Consolidated Balance Sheet as “direct investments in real estate-investments in rental properties.”

(3)

Land under development represents projects in various stages of predevelopment, development and initial construction, for which construction or supply contracts have not yet been finalized. As these contracts are finalized, projects are transferred to construction in progress on our consolidated balance sheet.

(4)	Estimated units and costs for this project have been adjusted to reflect a change in development strategy. BRE intends to sell the land originally planned for phase II.

Dividends Paid to Common and Preferred Shareholders and Distributions to Minority Members

A cash dividend has been paid to common shareholders each quarter since our inception in 1970. Our 2005 annual dividend on our common shares was increased to $2.00 per share, from $1.95 per share in 2004. Total dividends paid to common shareholders for the nine months ended September 30, 2005 and 2004 were $76,163,000 and $73,426,000, respectively. In addition, we paid $13,404,000 and $8,588,000 in aggregate dividends on our 8.50% Series A, 8.08% Series B, 6.75% Series C and 6.75% Series D Cumulative Redeemable Preferred Stock during the nine months ended September 30, 2005 and 2004, respectively.

Total distributions to minority members of our consolidated subsidiaries were $2,620,000 and $1,921,000 for the nine months ended September 30, 2005 and 2004, respectively.

ITEM 3—Quantitative and Qualitative Disclosures About Market Risk.

Information concerning market risk is incorporated herein by reference to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2004. There has been no material change in the quantitative and qualitative disclosure about market risk since December 31, 2004.

ITEM 4— Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded that there are reasonable assurances that our controls and procedures will achieve the desired control objectives. Also, we have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As of September 30, 2005, the end of the quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

Legal Proceedings.

On April 14, 1997, we purchased Red Hawk Ranch Apartments, a 453-unit operating community in Fremont, California, from an unrelated third party builder. The community now requires extensive replacement work to correct damage we believe was caused by construction defects. On March 18, 2003, we filed suit in the Alameda County Superior Court against the builder and other parties for faulty workmanship, to protect against statutes of limitation. We have conducted testing to determine the extent of the damage. Based upon the testing that has been performed to date, we have discovered that the exterior shell of each building at the community has been compromised. As a result, during third quarter 2004 we expanded the size and scope of the lawsuit.

We commenced reconstruction during the second quarter of 2005 and expect to have the community restored during the next 12 to 15 months. We are actively pursuing mediation and/or litigation against the third party builder and certain sub-contractors.

Litigation and consulting charges are reported as other expenses on the consolidated statements of income. These charges totaled $759,000 and $427,000 for the three months ended September 30, 2005 and 2004, and $1,488,000 and $1,792,000 the nine months ended September 30, 2005 and 2004, respectively.

Under the provisions of SFAS 144, we have performed an impairment analysis on Red Hawk Ranch Apartments using undiscounted estimated cash flows that reflect the anticipated decreased net operating income during reconstruction. No impairment charge was deemed necessary based on this analysis. The net book value of the components of the buildings that are damaged and being replaced approximate $9,400,000 and are being depreciated over the reconstruction period. During reconstruction, costs that extend the useful life of the asset, increase its value or enhance safety of the community will be capitalized. All other costs, including legal and consulting, are expensed as incurred.

While management expects that costs of remediation will approximate up to $26,000,000, and future plaintiff litigation costs may exceed $3,000,000, it is not possible to predict or determine the outcome of legal actions, nor is it reasonably possible to accurately estimate the full range of costs associated with the matter at this time.

As of September 30, 2005, other than the legal matters referenced above, there were no pending legal proceedings to which we are a party or of which any of our properties is the subject, which we anticipate would have a material adverse effect upon our consolidated financial condition and results of operations.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

We did not issue any securities during the three months ended September 30, 2005 that were not registered under the Securities Act.

In 2001, our Board of Directors authorized the repurchase of our common stock in an amount up to $60,000,000. The timing of repurchase activity is dependent upon the market price of our shares and other market conditions and factors. As of September 30, 2005, we had cumulatively repurchased a total of approximately $51,100,000 of common stock, representing 1,785,600 shares at an average purchase price of $28.64 per share. No shares were repurchased during the nine months ended September 30, 2005. On April 21, 2005, the Board of Directors replenished the authorized share repurchase capacity to provide for repurchases of up to $60,000,000 from that date forward.

ITEM 3.

Defaults Upon Senior Securities.

None

ITEM 4.

Submission of Matters to a Vote of Security Holders.

None

ITEM 5.

Other Information.

None

ITEM 6.

Exhibits.



11		Statement Re: Computation of Per Share Earnings

12		Statement of Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BRE PROPERTIES, INC.

(Registrant)



Date: November 2, 2005				/s/ Edward F. Lange, Jr.
				Edward F. Lange, Jr.
				Executive Vice President,
				Chief Financial Officer and Secretary
				(principal financial officer)

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