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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

OR

Commission file number 1-14306

BRE PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

(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

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BRE PROPERTIES, INC.

INDEX TO FORM 10-Q

September 30, 2004

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PART I FINANCIAL INFORMATION

ITEM 1 - Financial Statements

BRE Properties, Inc.

Consolidated Balance Sheets

(Dollar amounts in thousands, except per share data)

See condensed notes to unaudited consolidated financial statements.

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Consolidated Statements of Income (unaudited)

(Amounts in thousands, except per share data)

See condensed notes to unaudited consolidated financial statements.

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Consolidated Statements of Income (unaudited)

(Amounts in thousands, except per share data)

See condensed notes to unaudited consolidated financial statements.

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Consolidated Statements of Cash Flows (unaudited)

(Dollar amounts in thousands)

See condensed notes to unaudited consolidated financial statements.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

September 30, 2004

NOTE A – RESTATEMENT OF PRIOR PERIOD INCOME STATEMENT

During the third quarter of 2003, but prior to the filing of our quarterly report on Form 10-Q for the quarter ended June 30, 2003, BRE and the other parties involved in a dispute regarding BRE’s investment in the Pinnacle at MacArthur joint venture and a class action application fee lawsuit each reached verbal settlement agreements or other acknowledgements. Based upon management’s judgment of the relevant facts at that time, including the fact that no settlement documents had been prepared or negotiated, BRE determined that it would not be appropriate to record the approximately $7.3 million ($0.16 per diluted share) of settlement charges, including legal fees, in the second quarter. Following negotiation and execution of the settlement documents, BRE recorded the charges in the third quarter of 2003 as Other Expenses.

In October 2004, management determined that pursuant to FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“FAS 5”), the charges could have been deemed probable and estimable prior to the filing of the second quarter 2003 Form 10-Q and thus should have been recorded in the quarterly financial results for the period ended June 30, 2003. Accordingly, on October 8, 2004, management concluded that our interim financial statements for the quarters ended June 30, 2003 and September 30, 2003 should be restated to record the charges in the second quarter of 2003. We have filed amendments to our quarterly reports on Form 10-Q for the quarters ended June 30, 2003 and September 30, 2003 for that purpose.

NOTE B – 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, 2003 has been derived from the audited 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, 2003 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.

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NOTE C – REPORTABLE SEGMENTS AND CONCENTRATION RISK

Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires certain descriptive information to be provided about an enterprise’s reportable segments. BRE has determined that it has only one operating and reportable segment, multifamily communities, which comprised approximately 98% of BRE’s consolidated assets and substantially all of BRE’s consolidated revenues for the three and nine months ended September 30, 2004 and 2003.

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. All revenues are from external customers and there are no revenues from transactions with other segments. There are no residents that contributed 10% or more of BRE’s total consolidated revenues in the three and nine months ended September 30, 2004 or 2003.

NOTE D – STOCK-BASED COMPENSATION

Effective January 1, 2003, BRE adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS 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 148, under which the provisions of SFAS 123 will be 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, 2004 and 2003 is less than that which would have been recognized if the fair value method had been applied to all 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. 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 awards in each period.

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The effect of pro forma application of SFAS 123 is not necessarily representative of the effect on consolidated net income for future periods.

NOTE E – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

BRE has four interest rate swap agreements outstanding that 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 SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as amended. Under SFAS 133, the resulting assets or liabilities attributed to these 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.

The notional amount at September 30, 2004 of the interest rate swaps utilized in the fair value hedges is $49,265,000. All four contracts and related debt will mature in 2005. The principal amount of debt being hedged equals the notional amount of the interest rate swaps. The fair value hedges convert the interest rate on debt with a weighted average fixed rate of 7.45% to a floating rate equal to LIBOR plus an average spread of 2.81%, which resulted in an effective rate of 4.05% for the nine months ended September 30, 2004. The fair value of the interest rate swaps at September 30, 2004 was $908,000 and is recorded in other assets on the consolidated balance sheet. At September 30, 2004, offsetting amounts of $556,000 and $352,000 have been recorded as an increase to mortgage loans and unsecured senior notes, respectively. To determine the fair values of derivatives, BRE uses market valuations provided by a third party.

NOTE F – 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, 2004 and 2003, BRE had no 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).

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During the second quarter of 2003, BRE sold Brookdale Glen, with 354 units located in Portland, Oregon. Brookdale Glen was sold for approximately $26,000,000, resulting in a gain on sale of approximately $13,500,000. This community had been designated as held for sale at the end of first quarter 2003, thus no depreciation was taken during second quarter 2003. During the first quarter of 2003, BRE sold two operating communities with a total of 746 units: Newport Landing, with 480 units, located in the Phoenix metropolitan area of Glendale, Arizona and Berkshire Court, with 266 units, located in the Portland, Oregon metropolitan area of Wilsonville, Oregon. The communities were sold for an aggregate sales price of approximately $46,700,000, resulting in a gain on sales of $9,600,000.

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

NOTE G – LEGAL MATTERS

On April 14, 1997, BRE purchased Red Hawk Ranch Apartments, a 453-unit operating community in Fremont, California, from M.H. Podell Company, Inc., an unrelated third party builder. The community now requires extensive replacement work to correct damage BRE believes was caused by construction defects. On March 18, 2003, BRE filed suit in the Alameda County Superior Court against the builder and other parties to protect against statutes of limitation. BRE has conducted testing to determine the extent of the damage. Based upon the testing that has been performed to date, BRE 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.

Litigation and consulting charges recognized during third quarter 2004 totaled $1,792,000 and are reported as Other Expenses on the Consolidated Statements of Income. The charges reported in third quarter 2004 include cumulative litigation costs and consulting fees incurred to date during destructive testing to determine the extent of the damage and required reconstruction. A portion of these expenses relate to costs incurred during first and second quarter 2004 ($850,000 and $515,000, respectively) and are therefore out-of-period expenses. Management has evaluated the level of out-of-period expenses and determined that they are not material to the first, second or third quarter of 2004. Year-to-date balances are properly reflected.

BRE plans to commence reconstruction as soon as possible and expects to have the community restored during the next 18 to 21 months. BRE is actively pursuing the litigation against the third party builder and various sub-contractors.

Under the provisions of FAS 144, BRE has performed an impairment analysis on Red Hawk Ranch Apartments using undiscounted cash flows which 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

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replaced approximate $9,400,000 and are being depreciated over the reconstruction period. Additional depreciation recognized during the third quarter of 2004 totaled approximately $1,300,000. 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, will be expensed as incurred.

While BRE’s management expects that costs of remediation will approximate up to $26,000,000, and future plaintiff litigation costs may exceed $3 million, due to the preliminary nature of the damage assessment, claims and litigation, 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, 2004, other than the legal matter referenced above regarding Red Hawk Ranch, there were no pending legal proceedings to which BRE is a party or of which any of BRE’s properties is the subject, the adverse determination of which management anticipates would have a material adverse effect upon BRE’s consolidated financial condition and results of operations.

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

September 30, 2004

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 eight metropolitan markets of the Western United States. At September 30, 2004, our portfolio had real estate assets with a book value of approximately $2.3 billion that included 87 wholly or majority-owned apartment communities, aggregating 24,255 units; two multifamily communities owned in joint ventures, comprised of 488 apartment units; and six wholly-owned apartment communities in various stages of construction and development, totaling 1,536 units.

During third quarter 2004, we completed construction of two communities, Pinnacle at Talega II, with 110 units, and Pinnacle Westridge, with 234 units, both located in the Los Angeles / Orange County metro area. On July 30, 2004, we acquired Evergreen Park Apartments, with 226 units located in the Seattle suburb of Redmond, Washington, for approximately $31,000,000. During the quarter, we purchased two contiguous land parcels for future development in Emeryville, California, in the San Francisco Bay area market, for approximately $9,200,000.

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Our year-over-year operating results reflect increased rental and ancillary income from acquisitions completed during 2003 and 2004, and properties in the lease-up phase of development. The additional income from these “non-same-store” communities was partially offset by increases to interest expense, and general and administrative expense.

Results of Operations

Comparison of the Three Months Ended September 30, 2004 and 2003

Revenues

Total revenues were $76,628,000 for the three months ended September 30, 2004, compared to $69,781,000 for the same period in 2003. The increase in total revenues was primarily generated from communities acquired, developed and stabilized after June 30, 2003, which we define as our “non-same-store” communities. During the 15 months subsequent to June 30, 2003, we acquired eight communities and completed the construction of five wholly owned communities.

A summary of the components of revenues for the quarters ended September 30, 2004 and 2003 follows (dollar amounts in thousands):

Average physical occupancy rates for the quarters ended September 30, 2004 and 2003 were as follows:

Average physical occupancy for the portfolio is calculated by dividing the total occupied units by the total units in the portfolio for the three-month period. Apartment units are generally leased to residents for rental terms that do not exceed one year.

Expenses

Real Estate Expenses

For the quarter ended September 30, 2004, real estate expenses totaled $23,688,000 as compared with $21,799,000 for the quarter ended September 30, 2003. The year-over-year increase in total real estate expenses was primarily attributable to the thirteen “non-same-store” communities referenced above.

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A summary of the categories of real estate expense for the three months ended September 30, 2004 and 2003 follows (dollar amounts in thousands):

Provision for Depreciation

The provision for depreciation increased to $17,249,000 for the three months ended September 30, 2004, from $13,381,000 for the same period in 2003. The $3,868,000 increase in 2004 resulted from higher depreciable bases on new property acquisitions and development properties completed, combined with $1,300,000 in additional depreciation on our Red Hawk Ranch Apartment Community. See Part II, Item I “Legal Proceedings.”

Interest Expense

Interest expense was $16,775,000 (net of interest capitalized to the cost of apartment communities under development of $1,253,000) for the quarter ended September 30, 2004, an increase of $1,880,000 or 13% from the comparable period in 2003. Interest expense was $14,895,000 for the same period in 2003 and was net of $2,057,000 of interest capitalized to the cost of apartment communities under construction. The increase in interest expense was due to higher average debt balances combined with reduced levels of capitalized interest based on the stage of our communities under development.

General and Administrative

General and administrative costs totaled $3,229,000, or approximately 4.2% of total revenues, for the third quarter of 2004 compared to $2,201,000, or approximately 3.2% of total revenues, for the three months ended September 30, 2003. The increase in 2004 is primarily due to increases in compensation, professional fees and insurance costs.

Other Expenses

Other expenses recognized during the third quarter of 2004 totaled $1,792,000 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. The charges reported in third quarter 2004 include cumulative litigation costs and consulting fees incurred to date during destructive testing, to determine the extent of the damage and required reconstruction.

Minority Interests in Income

Minority interests in income totaled $576,000 and $823,000 for the quarters ended September 30, 2004 and 2003, respectively. Minority interests and consequently, minority interests in income, declined as operating company unit holders of BRE Property Investors LLC

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exchanged their units for shares of our common stock. Subsequent to September 30, 2003, a total of 181,401 operating company units have been converted to common shares. During the three months ended September 30, 2004 and 2003, 7,675 and 44,357 operating company units were converted to common shares, respectively.

Dividends Attributable to 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 Cumulative Redeemable Preferred Stock. Dividends attributable to preferred stock for the third quarter of 2003 represent the dividends on our 8.50% Series A and 8.08% Series B 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 March 15, 2004, we closed the offering of 4,000,000 shares of 6.75% Series C Cumulative Redeemable Preferred Stock. All 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, 2004 was $10,116,000, or $0.20 per diluted share, as compared with $14,025,000, or $0.30 per diluted share, for the comparable period in 2003, as restated.

Comparison of the Nine Months Ended September 30, 2004 and 2003

Revenues

Total revenues were $223,697,000 for the nine months ended September 30, 2004, compared to $204,950,000 for the same period in 2003, excluding revenues from discontinued operations of approximately $2,000,000. The increase in total revenues was generated from communities acquired, developed and stabilized after December 31, 2002, which we define as our “non-same-store” communities. During the 21 months subsequent to December 31, 2002, we acquired eight communities, and completed the construction of five wholly owned communities.

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A summary of the components of revenues for the nine months ended September 30, 2004 and 2003 follows (dollar amounts in thousands):

Expenses

Real Estate Expenses

Real estate expenses for multifamily properties for the nine months ended September 30, 2004 increased 13% to $68,878,000 from $60,959,000 in the comparable period in 2003, excluding real estate expenses from discontinued operations of approximately $740,000. The total increase of $7,919,000 was primarily attributable to “non same-store” expenses, which increased $6,174,000. “Same-store” expenses have increased $1,745,000, or 3%, year over year.

A summary of the categories of real estate expense for the nine months ended September 30, 2004 and 2003 follows (dollar amounts in thousands):

Provision for Depreciation

The provision for depreciation increased to $46,859,000 for the nine months ended September 30, 2004, from $39,192,000 for the same period in 2003, excluding depreciation on discontinued operations of $306,000. The $7,667,000 increase in 2004 resulted primarily from higher depreciable bases on new property acquisitions and development properties completed, combined with $1,300,000 in additional depreciation on our Red Hawk Ranch Apartment Community. See Part II, Item I “Legal Proceedings.”

Interest Expense

Interest expense was $49,042,000 (net of interest capitalized to the cost of apartment communities under development totaling $4,623,000) for the nine months ended September 30,

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2004, an increase of $4,400,000 or 10% from the comparable period in 2003. Interest expense was $44,642,000 for the same period in 2003 and was net of $7,233,000 of interest capitalized to the cost of apartment communities under construction. The increase in interest expense was primarily due to reduced levels of capitalized interest based on the stage of our communities under development, and higher average outstanding debt levels.

General and Administrative

General and administrative costs totaled $9,572,000, or approximately 4.3% of total revenues, for the nine months ended September 30, 2004, compared to $7,800,000, or approximately 3.8% of total revenues, for the nine months ended September 30, 2003. The increase in 2004 is primarily due to increases in compensation, professional fees and insurance costs.

Other Expenses

Other expenses recognized during the nine months ended September 30, 2004 totaled $1,792,000 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. The reported charges include cumulative litigation costs and consulting fees incurred to date during destructive testing, to determine the extent of the damage and required reconstruction.

Other expenses in the nine months ended September 30, 2003 represent legal settlement charges incurred in connection with the Pinnacle MacArthur joint venture dispute and a class action application fee suit. During the nine months ended September 30, 2003, we executed a settlement agreement in connection with litigation with an unrelated third party regarding the Pinnacle at MacArthur Place joint venture agreement. Under the terms of the settlement agreement, we paid the third party $6,500,000 and retained full ownership of the asset. Pinnacle at MacArthur Place is a stabilized, 253-unit community in Santa Ana, California. Also during the nine months ended September 2003, we reached a settlement agreement regarding a class action lawsuit brought against us with respect to application fees charged to residents from August 1998 to August 2003. Under the terms of the settlement, we agreed to establish a $200,000 fund to reimburse prior applicants up to $5.00 per applicant, and to pay certain related administration charges and legal expenses. The combined settlement amounts, legal fees and related expenses aggregate $7,305,000, and are reported as Other expenses on the consolidated income statement.

Minority Interests in Income

Minority interests in income totaled $1,907,000 and $2,477,000 for the nine months ended September 30, 2004 and 2003, respectively. Minority interests and consequently, minority interests in income, declined as operating company unit holders of BRE Property Investors LLC exchanged their units for shares of our common stock. Subsequent to September 30, 2003, a total of 181,401 operating company units were converted to common shares. During the nine months ended September 30, 2004, 7,675 operating company units were converted to common shares. During the comparable period in 2003, 59,357 operating units were converted to common shares.

Discontinued operations

In October 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144), which became effective on January 1, 2002. For properties accounted for under SFAS No. 144, the results of operations for properties sold during the period

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or designated as held for sale at the end of the period are 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 first six months of 2003, we sold three operating communities with a total of 1,100 units. The communities were sold for $72,700,000, resulting in a gain on sales of approximately $23,100,000. No communities were sold or classified as held for sale during the nine months ended September 30, 2004.

Dividends Attributable to 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 Cumulative 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 March 15, 2004, we closed the offering of 4,000,000 shares of 6.75% Series C Cumulative Redeemable Preferred Stock. All 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, 2004 was $37,059,000, or $0.73 per diluted share, as compared with $58,687,000, or $1.27 per diluted share, for the comparable period in 2003.

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Liquidity and Capital Resources

Depending upon the availability and cost of external capital, we anticipate making additional investments in multifamily apartment communities. These investments are expected to be funded through a variety of sources. These sources may include cash generated from operations, temporary borrowings under our unsecured 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, 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.

On January 29, 2004, we redeemed all 2,150,000 shares of 8.50% Series A Cumulative Redeemable Preferred Stock at a redemption price of $25.17118 per share. The redemption price was equal to the original issuance price of $25.00 per share, plus accrued and unpaid dividends to the redemption date. We expensed the original preferred stock issuance costs during the fourth quarter of 2003, when we announced the redemption.

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

On March 17, 2004, we issued $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 both 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 temporary borrowings under our revolving unsecured credit facility.

During the first quarter of 2004, we increased the size of our secured credit facility with Fannie Mae (serviced by Prudential Multifamily Mortgage, Inc.) from $100,000,000 to $140,000,000. Borrowings under the secured credit facility totaled $140,000,000 at September 30, 2004. The credit facility is secured by nine multifamily communities, which are held by a bankruptcy-remote special purpose 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 2.16% for the nine months ended September 30, 2004. 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. Drawings on the line of credit 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, 2004 was 2.72%. Borrowings under our

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revolving unsecured line of credit totaled $218,000,000 at September 30, 2004, compared to $196,000,000 at December 31, 2003. Drawings on the revolving unsecured line of credit are available to fund our investment activities and for 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 $848,000,000 in unsecured senior notes (excluding a basis adjustment of $352,000 from hedging activities) at September 30, 2004, consisting of the following:

In addition, at September 30, 2004, we had mortgage indebtedness totaling $129,460,000 (excluding a basis adjustment of $556,000 from hedging activities) at an average interest rate of 5.86%, and remaining terms of from less than one year to six years.

As of September 30, 2004, we had total outstanding debt balances of approximately $1,336,000,000 and total outstanding consolidated shareholders’ equity and minority interests of approximately $1,009,000,000, representing a debt to total book capitalization ratio of 57%.

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 and nine months ended September 30, 2004 and 2003.

We anticipate that we will continue to require outside sources of financing to meet our long-term liquidity needs beyond 2004, such as scheduled debt repayments, construction funding and property acquisitions. At September 30, 2004, we had an estimated cost of $152,000,000 to complete existing construction in progress, with funding estimated from 2004 through 2007. Scheduled debt repayments through December 31, 2004 total approximately $615,000.

We manage joint venture investments that are recorded under the equity method of accounting with total assets of $41,961,000 as of September 30, 2004. These joint ventures carry debt totaling $19,042,000, none of which was guaranteed by us at September 30, 2004.

During the first quarter of 2004, we filed a new 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. 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.

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Our Board of Directors has 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, 2004, 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, 2004.

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 2003 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 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.

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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.

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, 2004, we had four interest rate swap agreements with a notional value aggregating approximately $49,265,000, which are used to attain a floating rate of interest on a portion of our fixed rate debt, maturing in 2005. These derivatives qualify for hedge accounting. A third party values the instruments. 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 apply the fair value recognition provisions of Statement of Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by SFAS 148, “Accounting for Stock Based Compensation-Transition and Disclosure” (SFAS 148). We adopted the prospective method as provided for in SFAS 148, under which the provisions of SFAS 123 will be applied prospectively to all awards granted, modified or settled after January 1, 2003. Prior to 2003, we accounted for stock-based compensation under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, which resulted in no expense recognition. Under SFAS 123, we include in general and administrative expense a charge based on the implied value of options granted subsequent to January 1, 2003 and vesting in the current period. The options are valued using the Black-Scholes option-pricing model.

Consolidation

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities- an interpretation of ARB No. 51,” which was revised in December 2003 (FIN 46). Under FIN 46, a variable interest entity (“VIE”) is created when (i) the equity investment at risk in the entity 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, (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 FIN 46, the enterprise that is deemed to absorb a majority of the expected losses, receive a majority of the entity’s expected residual returns, or both, is considered the primary beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash flows as defined in FIN 46.

Under FIN 46, a non-refundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundable deposit, a VIE may have been created. We evaluate our land option and purchase contract

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investments to determine if a VIE has been created under the definition of FIN 46. When a VIE is deemed to exist, the identification of the primary beneficiary is determined through allocation of the VIE’s estimated expected losses and residual returns to the related variable interest holders. Any VIEs for which we are deemed the primary beneficiary are consolidated from the date of investment.

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 four 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.