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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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.

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BRE PROPERTIES, INC.

INDEX TO FORM 10-Q

September 30, 2002

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See condensed notes to consolidated financial statements

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See condensed notes to consolidated financial statements

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See condensed notes to consolidated financial statements

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See condensed notes to consolidated financial statements

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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, 2001 has been derived from the audited statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  These consolidated financial statements should be read in conjunction with the Annual Report of BRE Properties, Inc. (the “Company” or “BRE”) on Form 10-K for the year ended December 31, 2001.  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 – REPORTABLE SEGMENTS

BRE has determined that it has one operating and reportable segment, multifamily communities, which comprised approximately 97% of BRE’s assets and 99% of BRE’s revenues for the three months ended September 30, 2002. All multifamily communities owned by the Company are located in the Western United States, in three general markets that it defines as California, Pacific Northwest, and Mountain/Desert States.

BRE’s business focus is the ownership and operation of multifamily communities and it evaluates performance and allocates resources primarily based on the net operating income (“NOI”) of each individual multifamily community.  NOI is defined by the Company (and generally by the real estate industry) as the excess of all revenue generated by the community (primarily rental revenue) less direct operating expenses (primarily, but not limited to, payroll, property taxes, insurance and maintenance expense).  Accordingly, NOI excludes depreciation, capitalized expenditures and interest expense.  NOI from multifamily communities totaled $50,766,000 and $48,374,000 for the three months ended September 30, 2002 and 2001, respectively. 

All of BRE’s revenues are from external customers.  There are no tenants that contributed 10% or more of BRE’s total consolidated revenues in the three months ended September 30, 2002 or 2001.  Interest income is not separately reported, as it is immaterial.  Interest expense on debt is not allocated to individual properties, even if such debt is secured.  Further, minority interest in consolidated subsidiaries is not allocated to the related properties.  There is no provision for income tax as the Company is organized as a real estate investment trust under the Internal Revenue Code of 1986, as amended.

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BRE is exposed to the impact of interest rate changes on borrowings and will occasionally use interest rate swaps with the objective of lowering its overall borrowing costs.  BRE does not use these derivatives for trading or speculative purposes. 

During the first quarter of 2002, BRE entered into six interest rate swap agreements to attain a floating rate of interest on a portion of its fixed rate debt. BRE designated these derivative instruments to be utilized as fair value hedges in accordance with Statement of Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.  Under SFAS 133, the resulting assets or liabilities attributed to derivative instruments are carried on BRE’s consolidated financial statements at their estimated fair values.  The hedges are perfectly effective and, therefore, changes in the derivative fair value and the change in fair value of the hedged items during the hedging period exactly offset with no valuation impact on BRE’s current earnings.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting For The Impairment Or Disposal Of Long-Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. The standard was adopted by the Company effective January 1, 2002.  The adoption of this standard by the Company had no impact on the Company’s consolidated financial statements; however under SFAS 144, if the Company disposes of a material level of operating properties, such properties’ results of operations and resulting gains or losses on dispositions will have to be separately disclosed as discontinued operations in the Company’s consolidated financial statements.

NOTE D – USE OF DERIVATIVES IN HEDGING ACTIVITIES

The notional amount of the interest rate swaps utilized in the fair value hedges was $71,365,000, with maturity dates ranging from 2004 to 2005.  The principal amount of debt being hedged equals the notional amounts of the interest rate swaps.  The fair value hedges convert debt with a weighted average fixed rate of 7.45% to a floating rate equal to LIBOR plus an average spread of 3.0%, which resulted in an effective rate of 4.85% at September 30, 2002.  The fair value of the interest rate swaps at September 30, 2002 was $3,591,000 and is recorded in other assets on the consolidated balance sheets.  At September 30, 2002, offsetting amounts of $2,020,000 and $1,571,000 have been recorded as an increase to mortgage loans payable and unsecured senior notes, respectively.   To determine the fair values of derivatives, BRE uses market valuations provided by third parties.

NOTE E – OFF-BALANCE SHEET DEBT

As of September 30, 2002, senior secured indebtedness associated with joint venture investments in rental properties managed by BRE totaled $59,400,000, of which $40,000,000 is guaranteed by BRE.

NOTE F – SUBSEQUENT EVENTS

On October 16, 2002, BRE acquired Emerald Pointe Apartments with 160 units located in Diamond Bar, California for approximately $25,300,000.

As of November 6, 2002, subsequent to the end of the third quarter BRE has repurchased an additional $14,737,000 of common stock, representing 520,200 shares at an average purchase price of $28.33 per share.

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Overview

We are a self-administered equity real estate investment trust or “REIT” focused on the acquisition, development, and management of multifamily apartment communities in nine metropolitan markets of the Western United States.  At September 30, 2002, our portfolio had real estate assets with a book value of approximately $2.0 billion that included 81 wholly or majority-owned apartment communities, aggregating 22,405 units; four apartment communities that we manage and own in partnerships or other joint venture arrangements, comprised of 957 apartment units; and six wholly-owned apartment communities in various stages of construction and development totaling 1,408 units.

We completed the development of three communities with 629 units during the third quarter of 2002 and transferred these communities from construction in progress to investments in real estate: Pinnacle at Otay Ranch I, with 160 units, located in the San Diego suburb of Chula Vista, California; Pinnacle at MacArthur Place, with 253 units, located in the South Coast Metro Area of Orange County, California; and Pinnacle at the Creek, with 216 units, located in the Denver suburb of Aurora, Colorado. Since December 31, 2001, we have completed five communities with 1,013 units for a total cost of $168 million.

Forward-Looking Statements

In addition to historical information, we have made forward-looking statements in this 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, 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.

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Liquidity and Capital Resources

At September 30, 2002, our net real estate investments totaled approximately $2,022,000,000, which included 81 wholly or majority-owned apartment communities, four apartment communities that we manage and own in partnerships or other joint venture arrangements, and six wholly-owned apartment communities under various stages of construction and development. 

Depending upon the availability and cost of external capital, we anticipate making additional investments in apartment communities.  We anticipate that new investments will be funded from temporary borrowings under our revolving line of credit, internally generated cash and the proceeds derived from asset sales.  Permanent financing for future investments, which replaces funds drawn under the revolving line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and the assumption of 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.

On August 20, 2002, we issued $150,000,000 of seven-year senior unsecured notes in an underwritten public offering at a 5.75% coupon.  On March 12, 2002, we issued $150,000,000 of five-year senior unsecured notes in an underwritten public offering at a 5.95% coupon.  The net proceeds from the sales of the notes were used to repay a portion of the borrowings under our existing credit facility.

On June 20, 2002, we closed the underwritten public offering of three million shares of 8.08% Series B Cumulative Redeemable Preferred Stock at $25 per share. The Series B Preferred Stock will be redeemable at $25 per share on or after June 20, 2007. The preferred shares trade on the NYSE under the symbol BRE_prb.  Net proceeds from the offering totaled $72,449,000 after deducting the underwriting discounts and commissions and our offering expenses, and were used to repay borrowings under our existing credit facility and invest in additional multifamily communities.

We have an unsecured credit facility that matures in December 2003 with a capacity of $450,000,000 and an option to upsize the facility to $500,000,000.  Borrowings under the line of credit currently bear interest at 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 0.55% to 1.35%.

The outstanding balance on our line of credit was $160,000,000 at September 30, 2002, compared to $315,000,000 at December 31, 2001. Drawings on the line of credit are available to fund our investment activities and general corporate purposes. We typically reduce our outstanding balance on the line of credit with available cash balances.

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In addition, at September 30, 2002, we had mortgage indebtedness totaling $214,352,000 (excluding an adjustment of $2,020,000 from hedging activities) at effective interest rates ranging from 2.8% to 8.4%, with remaining terms of from less than one to 14 years.

As of September 30, 2002, we had total outstanding debt balances of approximately $1,151,000,000 and total outstanding shareholders’ equity and minority interest of approximately $902,000,000, representing a debt to total book capitalization ratio of 56%.

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 quarter ended September 30, 2002.

We anticipate that we will continue to require outside sources of financing to meet our long-term liquidity needs beyond 2002, such as scheduled debt repayments, construction funding and property acquisitions. At September 30, 2002, we had an estimated cost of $71,900,000 to complete existing construction in progress, with funding estimated from 2002 through 2004.

We have an effective shelf registration statement on file with the Securities and Exchange Commission under which we may issue up to $700,000,000 of securities including debt, common stock and preferred stock. Our $300,000,000 note issuances in 2002 and our $75,000,000 preferred stock offering in June of 2002 reduced the amount available for future issuance to $325,000,000.  Depending upon market conditions, we may issue securities under such shelf registration statement to invest in additional multifamily communities and to repay borrowings under our line of credit.  On December 7, 2001, we commenced a medium-term note program for the possible issuance, from time to time, of up to $300,000,000 of medium term notes as part of our shelf registration.  No such notes have yet been issued under the program.

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.

Our Board of Directors has authorized the purchase 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, 2002, we had cumulatively repurchased a total of approximately $37,195,000 of common stock, representing 1,295,200 shares at an average purchase price of $28.72 per share.  During the third quarter, we repurchased approximately $4,363,000 of common stock, representing 156,800 shares at an average purchase price of $27.82 per share.  As of November 6, 2002 subsequent to the end of the third quarter we have repurchased an additional $14,737,000 of common stock, representing 520,200 shares at an average purchase price of $28.33 per share.

During the first quarter of 2002, we entered into six interest rate swap agreements with a notional amount aggregating $71,365,000 that achieved a floating rate of interest on a portion of our fixed rate debt, maturing in 2004 and 2005.  We are using the interest rate swaps with the objective of lowering our overall borrowing costs.  The swaps hedge the fair market value of a portion of our

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debt.  We do not use derivatives for trading or speculative purposes.  See Notes C and D in the Condensed Notes to the Consolidated Financial Statements for additional information.

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 Annual Report on Form 10-K.

Real Estate

Our investments in real estate are carried at cost and are periodically evaluated for indicators of impairment.  The evaluation of impairment and the determination of values are based on several factors, and future events could occur which would cause management to conclude that indicators of impairment exist and a reduction in carrying value is warranted.

Capital Expenditures

We capitalize those expenditures related to conducting significant rehabilitation of existing assets and extending the useful life of existing assets.  These expenditures are depreciated over estimated useful lives determined by management.  We expense certain improvements related to the operation of apartment communities, including carpets, window coverings and appliance replacements, as well as those expenditures necessary to maintain an existing community in ordinary operating condition.  The determination as to whether expenditures should be capitalized or expensed, and the period over which depreciation should be determined, requires management’s judgment. 

Internal Cost Capitalization

We have a development group which handles the design, development and construction of our apartment communities.  All direct and indirect costs incurred to ready these assets for their intended use, including interest and real estate taxes during construction, are capitalized as a cost of the communities. 

Derivatives and Hedging Activities

We use derivative financial instruments in the normal course of business with the objective of lowering our overall borrowing costs.  As of September 30, 2002, we had six interest rate swap agreements with a notional value aggregating $71,365,000 that are used to attain a floating rate of interest on a portion of our fixed rate debt, maturing in 2004 and 2005.  These derivatives qualify for hedge accounting as discussed in Notes C and D to our September 30, 2002 consolidated financial statements.   The instruments are valued by third parties.  The values of these derivatives will change over time as cash receipts and payments are made and as market conditions change.

Stock-Based Compensation

We have elected to account for our stock-based compensation in accordance with APB No. 25, which results in no compensation expense for options issued with an exercise price equal to the market value of our common shares on the grant date, instead of Statement No. 123, which would result in compensation expense being recorded based on the fair value of the stock-based compensation issued.

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Results of Operations

Comparison of the Three Months Ended September 30, 2002 and 2001

Revenues

Total revenues were $71,526,000 for the three months ended September 30, 2002, compared to $66,788,000 for the same period in 2001.  This increase was due to the revenues generated from communities acquired and developed after June 30, 2001.  In the past 15 months, we have acquired seven communities and completed the construction of four wholly owned communities.  The increase in revenues generated from acquired and developed properties has been partially offset by a reduction in revenue from our same store portfolio and a reduction in other income.  The year over year decrease in same store revenue is attributable to lower average monthly rents.  The largest component of other income recognized in 2001 was development fees from our joint venture construction projects.  Due to the stage of completion of these projects, no development fee income has been recognized in 2002.

A summary of the components of revenue for the quarters ended September 30, 2002 and 2001 follows (dollars in thousands):

Multifamily communities’ average physical occupancy rates for the quarters ended September 30, 2002 and 2001 were as follows:

Portfolio occupancy is calculated by dividing the total occupied units by the total units in the portfolio.  Apartment units are generally leased to residents for rental terms that do not exceed one year. 

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Expenses

Real Estate Expenses

Real estate expenses for multifamily properties for the quarter ended September 30, 2002 increased 15% to $20,605,000 from $17,867,000 in the comparable period in 2001.  Same-store expenses increased 4%, while non same-store expenses increased 453%.  The third quarter 2002 non same-store number includes expenses from the 11 communities we have acquired or developed after June 30, 2001, while the third quarter 2001 non same-store number includes expenses from four development communities that were in the lease-up phase in 2001, one community we purchased in August of 2001 and two communities we sold in August of 2001.

A summary of the categories of real estate expense for the three months ended September 30, 2002 and 2001 follows (dollars in thousands):

Provision for Depreciation

Depreciation expense increased by $1,921,000 to $12,347,000 for the quarter ended September 30, 2002 from the comparable period in 2001.  The increase in 2002 resulted primarily from an increased depreciable basis on newly developed and acquired properties.

Interest Expense

Interest expense was $14,454,000 (net of interest capitalized to the cost of apartment communities under development of $2,971,000) for the quarter ended September 30, 2002, an increase of $2,454,000 or 20% from the comparable period in 2001.  Interest expense was $12,000,000 for the same period in 2001 and was net of $3,473,000 of interest capitalized to the cost of apartment communities under construction.  The increase in interest expense was due to higher average debt balances in 2002 and a slightly lower level of capitalized interest, offset by lower average interest rates on outstanding borrowings. 

General and Administrative

General and administrative costs totaled $2,976,000 or approximately 4.2% of total revenues for the third quarter in 2002 and $2,212,000 or approximately 3.3% of total revenues, for the third quarter in 2001.  The third quarter 2002 amount includes a $540,000 non-recurring expense related to the retirement of one of our executive officers.  General and administrative expenses are 3.4% of total revenues for the third quarter of 2002 when the one-time charge is excluded.

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Net Gain (Loss) on Investments

During third quarter 2002, we sold our minority partnership interest in a commercial property for a net gain on sale of approximately $7.2 million. We also sold our investment in shares of common stock of Corrigo, Inc., a nonaffiliated technology company, at a loss of $800,000. In addition, an agreement to sell excess land was executed and finalized during the quarter ended September 30, 2002. As a result, we recorded the related loss of approximately $1.5 million in advance of closing. These three transactions complete the disposition of our nonmultifamily-related investments and holdings. The net gain resulting from these three transactions is approximately $4.9 million. 

During third quarter 2001, we sold two Tucson communities with 445 units for an aggregate sales price of $11,000,000, pursuant to an agreement with G&I III Residential One, LLC, an affiliate of DRA Advisors, Inc.  The Tucson sale completed a $280,000,000 portfolio sale of apartment communities we initiated in the third quarter of 2000.  In addition, we sold our minority interest in a nonmultifamily asset for $1,115,000.  The transactions resulted in an aggregate net loss of $327,000.

Minority Interest

Minority interest in net income was $960,000 and $1,048,000 for the quarters ended September 30, 2002 and 2001, respectively.  The decrease in the third quarter of 2002 is the result of a reduction in outstanding BRE Property Investors LLC operating company units as members of the limited liability company continue to exchange their operating company units for shares of our common stock. 

 Dividends Attributable to Preferred Stock

Dividends attributable to preferred stock represent the dividends on our 8.5% Series A and 8.08% Series B Cumulative Redeemable Preferred Stock. 

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, 2002, was $22,389,000, or $0.48 per diluted share, as compared with $21,766,000, or $0.46 per diluted share, for the comparable period in 2001.

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Results of Operations

Comparison of the Nine Months Ended September 30, 2002 and 2001

Revenues

Total revenues were $206,851,000 for the nine months ended September 30, 2002, compared to $198,371,000 for the same period in 2001.  This increase was due to the revenues generated from communities acquired and developed after December 31, 2000.  In the past 21 months, we have acquired seven communities and completed the construction of six wholly owned communities.  The increase in revenues generated from acquired and developed properties has been partially offset by a reduction in revenue from our same store portfolio and a reduction in other income.  The year over year decrease in same store revenue is attributable to lower average monthly rents.  The largest component of other income recognized in 2001 was development fees from our joint venture construction projects.  Due to the stage of completion of these projects, no development fee income has been recognized in 2002.

A summary of the components of revenue for the nine months ended September 30, 2002 and 2001 follows (dollars in thousands):

Expenses

Real Estate Expenses

Real estate expenses for multifamily properties for the nine months ended September 30, 2002 increased 10% to $58,179,000 from $52,808,000 in the comparable period of 2001.  Same-store expenses increased 4%, while non same-store expenses increased 105%.  The year to date September 2002 non same-store number includes expenses from the 13 communities we have acquired or developed since January 1, 2001, while the year to date September 2001 non same-store number includes expenses from three development communities that were in the lease-up phase in 2001, one community we purchased in August of 2001 and three communities we sold in 2001.

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A summary of the categories of real estate expense for the nine months ended September 30, 2002 and 2001 follows (dollars in thousands):

Provision for Depreciation

Depreciation expense increased by $5,126,000 to $34,711,000 for the nine months ended September 30, 2002 from the comparable period in 2001.  The increase in 2002 resulted primarily from an increased depreciable basis on newly developed and acquired properties.

Interest Expense

Interest expense was $41,220,000 (net of interest capitalized to the cost of apartment communities under development of $9,211,000) for the nine months ended September 30, 2002, an increase of $5,013,000 or 14% from the comparable period in 2001.  Interest expense was $36,207,000 for the same period in 2001 and was net of $10,271,000 of interest capitalized to the cost of apartment communities under construction.  The increase in interest expense was due to higher average debt balances in 2002 and a lower level of capitalized interest, offset by lower average interest rates on outstanding borrowings. 

General and Administrative

General and administrative costs totaled $7,589,000 or approximately 3.7% of total revenues for the nine months ended September 30, 2002 and $7,127,000 or approximately 3.6% of total revenues, for the nine months ended September 30, 2001.  The year to date 2002 amount includes a $540,000 non-recurring expense related to the retirement of one of our executive officers.  General and administrative expenses are 3.4% of total revenues for the nine months ended September 2002 when the one-time charge is excluded. 

Net Gain (Loss) on Investments

During third quarter 2002, we sold our minority partnership interest in a commercial property for a net gain on sale of approximately $7.2 million. We also sold our investment in shares of common stock of Corrigo, Inc., a nonaffiliated technology company, at a loss of $800,000. In addition, an agreement to sell excess land was executed and finalized during the quarter ended September 30, 2002. As a result, we recorded the related loss of approximately $1.5 million in advance of closing. These three transactions complete the disposition of our non multifamily-related investments and holdings. The net gain resulting from these three transactions is approximately $4.9 million. 

During third quarter 2001, we sold two Tucson communities with 445 units for an aggregate sales price of $11,000,000, pursuant to an agreement with G&I III Residential One, LLC, an affiliate of DRA Advisors, Inc.  The Tucson sale completed a $280,000,000 portfolio sale of apartment communities we initiated in the third quarter of 2000.  In addition, we sold our minority interest in a non multifamily asset for $1,115,000.  The transactions resulted in an aggregate net loss of $327,000.

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Minority Interest

Minority interest in net income was $2,883,000 and $3,143,000 for the nine months ended September 30, 2002 and 2001, respectively.  The decrease in 2002 is the result of fewer outstanding BRE Property Investors LLC operating company units as several members of the limited liability company have exchanged their operating company units for shares of our common stock over the past 21 months. 

Losses from Internet business

Losses from Internet business total $0 and $7,163,000 for the nine months ended September 30, 2002 and 2001, respectively, and represent the net losses of VelocityHSI, Inc., our former non-real estate investment, which was spun off by BRE on August 15, 2000.  Subsequent to the spin-off, our investment in VelocityHSI was recorded under the equity method of accounting.  We were required to record 100% of VelocityHSI’s losses to the extent of our investment, including advances, until it secured an independent source of financing or our investment and advances were reduced to zero.  During the second quarter of 2001, we reduced our investment, including advances to VelocityHSI, to zero and provided for a $2,400,000 reserve for our potential liabilities related to VelocityHSI.  VelocityHSI filed for bankruptcy protection during the third quarter of 2001.  Our related reserve for our potential liabilities at September 30, 2002 is approximately $1,000,000 and is included in accounts payable and accrued expenses on the accompanying consolidated balance sheet.

Dividends Attributable to Preferred Stock

Dividends attributable to preferred stock represent the dividends on our BRE’s 8.5% Series A and 8.08% Series B Cumulative Redeemable Preferred Stock.  The Series B offering closed on June 20, 2002.

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, 2002 was $62,024,000, or $1.34 per diluted share, as compared with $58,585,000, or $1.26 per diluted share, for the comparable period in 2001.

Construction in progress and land under development

Land acquired for development is capitalized and reported as “land under development” until the construction and supply contracts are in place.  Once the contracts are finalized, the costs are transferred to the balance sheet line item, “construction in progress.”  Land acquisition, development and the carrying costs of properties under construction are capitalized and reported as “direct investments in real estate” or “equity interests in and advances to real estate joint ventures”, as appropriate, in “construction in progress.” We transfer the capitalized costs for each building in a community under construction to the balance sheet line item, “investments in rental properties,” once the building receives a final certificate of occupancy and is ready to lease.

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The following table presents data with respect to the six multifamily communities included in “construction in progress” and “land under development” at September 30, 2002.  Completion of these properties is subject to a number of risks and uncertainties, including construction delays and cost overruns.  No assurance can be given 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 units proposed in the table below.

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DIVIDENDS TO SHAREHOLDERS AND DISTRIBUTIONS TO MINORITY MEMBERS

A cash dividend has been paid to common shareholders each quarter since our inception in 1970.  On February 21, 2002, we increased the annual dividend on our common shares to $1.95 per share from $1.86 per share. Total dividends paid to common shareholders for the nine months ended September 30, 2002 and 2001 were $67,224,000 and $64,950,000, respectively.  In addition, we paid $5,107,000 and $3,426,000 in aggregate dividends on our 8.5% Series A and 8.08% Series B Cumulative Redeemable Preferred Stock in the nine months ended September 30, 2002 and 2001, respectively. 

Total distributions to minority members of our consolidated subsidiaries were $2,958,000 and $3,216,000 for the nine months ended September 30, 2002 and 2001, respectively.

ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk

Information concerning market risk is incorporated herein by reference from Item 7A of our Form 10-K for the year ended December 31, 2001.  There has been no material change in the quantitative and qualitative disclosure about market risk since December 31, 2001.

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.  Also, we have investments in certain unconsolidated entities.  As we do not control these entities, our disclosure controls with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

Within 90 days prior to the date of 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 significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

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PART II - OTHER INFORMATION

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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.

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States Code), we, Frank C. McDowell and Edward F. Lange, Jr. hereby certify, to the best of our knowledge, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 of BRE Properties, Inc. fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of BRE Properties, Inc.

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CERTIFICATIONS

I, Frank C. McDowell, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of BRE Properties, Inc.;

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;              

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Edward F. Lange, Jr., certify that:

1.  I have reviewed this quarterly report on Form 10-Q of BRE Properties, Inc.;

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;              

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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