Apartment REITs Will Charge Off Projects Dropped During Predevelopment Stage; Will Continue at Sites Already Under Construction
San Francisco-based apartment builder BRE Properties, Inc. (NYSE:
BRE) announced it will halt work on three West Coast developments in the planning and predevelopment stages, lay off 33 employees, or 4% of its workforce, and start no new projects this year in response to the soft economy and weakened real estate fundamentals. BRE's annoucement follows a similar disclosure last week by Chicago-based Equity Residential (NYSE:
EQR) that it will cancel five apartment projects due to the troubled market.
As part of the "deceleration" of BRE's development program, the company will stop activity on three sites that are currently under option agreements or letters of intent, and record a non-routine abandonment charge of about $5.1 million, or $0.10 per share, in its fourth-quarter 2008 earnings.
BRE last week notified 33 management and staff employees, primarily in the development area, that their positions had been eliminated, incurring cash severance charges totaling about $1.5 million to be recorded in the current quarter. The action cuts the company’s development personnel by 36%.
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"While development remains a critical component of our long-term business model, capital preservation is the leading priority for all businesses," said BRE President and Chief Executive Officer Constance B. Moore. "We believe the tactical changes we have adopted are proportionate with the level of economic deterioration, and should help us maintain sufficient credit capacity and liquidity, and ensure our continued success."
According to financial documents, BRE had five projects under construction at the end of the third quarter, 5600 Wilshire, a 284-unit community in Los Angeles; Park Viridian, 320 units, Anaheim, CA; Taylor 28, 197 units, Seattle, WA; Belcarra Apartments, 296 units, Bellevue, and Crossings, 270 units, Santa Clara, CA. BRE said the five apartment communities under construction are not affected by the action and management expects to complete the construction and lease-up of these communities as planned, at an estimated cost of about $100 million. No more construction starts are anticipated during 2009.
The REIT listed three properties in various stages of pre-development, development, and initial construction, for which construction or supply contracts have not yet been finalized, including Wilshire La Brea, Los Angeles, 470 units and 40,000 square feet of retail; a 240-unit apartment project in Pleasenton, CA, and Stadium Park II, a project in Anaheim, CA.
The company currently has approximately $500 million available under its unsecured credit facility, liquidity and expected operating cash flow that are sufficient to fund remaining construction costs and meet scheduled debt maturities for 2009 and 2010. BRE expects between $150 million and $175 million in property sales this year and also expects to arrange secured debt financing to meet near-term debt maturities.
Chicago-based Equity Residential will incur a $115 million charge in the fourth quarter as a result of its project shutdowns.
"We have said for some time that maintaining ample liquidity and credit capacity are our foremost priorities and as a result we would be very cautious regarding new development projects," said David J. Neithercut, Equity Residential’s president/CEO. "Our decision to take these charges is a result of our annual review of the company’s investment activities and operating strategy in light of current and anticipated conditions in the economy and capital and real estate markets."
EQR will not start any new projects until capital markets and the economy show signs of improvement. The company has already cut its development staff and may continue to make adjustments as conditions warrant. Ten apartment complexes under construction won't be affected by the cutback.