Management’s Views & Expectations
Our near-term expectations are aligned with most economic forecasts: (1) we expect job losses in the first quarter of 2009 to rival the last quarter of 2008, then a deceleration in the momentum with job losses continuing into 2010; (2) we expect to see a continued clearing of single-family housing inventories and the possibility of a bottom in home prices identified late in 2009; and (3) we expect foreclosures to continue into 2010, but become less of a factor once the jobs environment and home prices stabilize. Against this backdrop, we believe market rents for apartments may decline over the next two years and begin to turn positive again in 2011. We have addressed the expected level of rent loss for 2009 in our initial earnings guidance, a range of 3% to 6%. The level of further rent erosion will depend a great deal on the success or failure of the recently enacted government stimulus programs.

It is not surprising that our enterprise priorities, like those of many real estate companies, lead with capital preservation and enhancing liquidity. Our tactical decisions are tied to four key risks that we believe face our industry: (1) the depth and duration of this recession, and the attendant impact on operations and earnings; (2) the availability and cost of public capital, both near- and long-term; (3) the availability and cost of secured debt from Fannie Mae and Freddie Mac; and (4) transaction risk or the ability to sell communities as a source of capital.

As stated earlier, we announced in January a deceleration of our development program and no new construction starts in 2009. We have completed a review of our development program and have confirmed that all remaining sites are viable and accretive based on current scheduling, a reasonable level of economic recovery after 2010 and continued industry access to government-sponsored secured debt.

There should be no confusion – if we had information that suggested or clearly indicated that our current development program would be dilutive from an earnings or credit perspective, we would cease all development activity and jettison the program. However, what we have learned from prior cycles is that many management teams and companies overreact to economic disruptions and underprepare for the long-term. Most management teams in the development field have experienced past cycles when transactions and sites were dropped or abandoned at the cost of future growth, and later regretted. BRE has a long history of acting in the best interest of investors and serving as a good steward of capital. We are operating in a very cautious mode, and if the time arises to further decelerate our development program, we will do so. That time is not now.

We clearly understand the reality of this environment and what lies in front of us. The next couple of years will be difficult. The decline in jobs will exert pressure on market rents. However, the absence of rental supply in most of our markets, higher propensity-to-rent levels and strong demographics should help shape a fairly robust recovery. It is the timeline to the recovery horizon that remains uncertain. This uncertainty regarding the timing and magnitude of the economic recovery may continue to weigh heavily on BRE shares. However, we believe once U.S. jobs and home prices reach a point of stabilization, we will see investor funds flow return to the REIT industry, and the BRE share price will begin to reflect the underlying strength of our business.

The decisions we made and the actions we have taken have helped to safeguard this enterprise. We are not questioning our ability to survive. Our focus now turns to developing a surplus of liquidity to prepare for opportunities that we expect to emerge in our core markets over the next couple of years. Economic recessions often present terrific acquisition opportunities late in the cycle, and we will not be bashful to participate. There is an old saying: “Don’t waste a good recession.” We believe our house is in solid order and do not plan to waste a single moment when we see opportunity.

We greatly appreciate your support and confidence, and we will continue to work hard to earn it.