BRP Group, Inc.
Q4 2007 Earnings Call Transcript

Published: 14 Apr 2008

[Operator:]

At this time, I would like to turn the conference over to Ian Cockwell, President and Chief Executive Officer. Please go ahead, Mr. Cockwell.

[Ian Cockwell:]

Good morning, ladies and gentlemen, and thank you for joining us today for Brookfield Homes’ Fourth Quarter Conference Call. Before we continue, please note that in talking about our financial performance and responding to questions, we may make forward-looking statements. Forward-looking statements are subject to known and unknown risks and results may differ materially. For further information on such factors or risks, I’d encourage you to see Brookfield Homes’ SEC filings of the full text related to forward-looking statements in our Form 10K and 10Q, which are posted in our website. We have also posted a supplementary information packet at the website, under the Investor Relations section under Reports and Presentations. It provides details of operations and other key measures of support. Joining me for the call today are Paul Kerrigan, our Chief Financial Officer, and Linda Northwood, our Director of Investor Relations. I will start today’s agenda and then turn the call over to Paul, who will review our performance for the fourth quarter. With regards to operations, 2007 was one of the most challenging years for the housing industry on record. The good news is we are two years into this downturn and the longer term demand for new homes will return based on the fundamentals of population growth and need for replacement housing. Also, the current change by homebuilders to a manufacturing platform is resulting in a fundamental shift in ownership of land which provides the opportunity to realize substantial gains when stability returns to the market. Currently, the supply of resale and new homes far exceeds demand and even though new home production has dropped to 1.1 million units a year, we do not anticipate that an equilibrium between the supply and demand for housing will be reached before 2009. This continuing imbalance, as well as, the disruption in credit markets has led to continued weak consumer confidence, a critical factor for home sales. Challenging market conditions in 2007 negatively impacted our operations with lower home sales per community, price reductions, high home sale cancellation rates, and consequently higher inventories than planned. These factors resulted in a 28% decrease in home closings for the year 2007 to 839 units, well below our targeted home closings of 1,150 to 1,250 homes. Lower volume and sales price declines resulted in a significant decrease in net income and for the first year in our history, we did not have positive operating cash flow. Despite the challenging market conditions of the past two years, we have differentiated ourselves in the industry having achieved the following

[Paul Kerrigan:]

Thank you, Ian, and good morning. For the year ended December 31, 2007, our net income totaled $60 million or $0.68 per share, a decrease of $132 million when compared to 2006. A decrease in net income for 2007 was primarily due to impairment charges and write-offs on housing land assets and reduced gross margins on housing to 17% from 26% in 2006. A decline in net income in 2007 was offset by a reversal of $51 million of income tax liabilities. Impairment and other charges were $103 million before minority interest and taxes, consisting of $74 million relating to 1,896 lots located mainly in the inland empire California and Washington, D.C. areas, as well as, write-off’s $29 million related to the 4,031 un-entitled lots under option which we decided to no longer pursue. In summary, our earnings can be broken down as follows

[Ian Cockwell:]

Thank you, Paul. Looking ahead, our balance sheet is strong with our assets largely located in geographic areas with the constraints supply at large and which are demonstrated strongly economic characteristics over the longer term. Looking forward to 2008, we are targeting to achieve the following goals

[Operator:]

Thank you, sir. We will now begin the Question & Answer Session. Anyone who wished to ask a question may press * then 1 on their touch tone telephone. If you wish to remove yourself from the question queue, you may press * then 2. Again, anyone who has a question may press * then 1 at this time. Our first question today comes from Joel Locker of FBN Securities.

[Joel Locker:]

Hi, guys, just wanted to see how much of JV debt you have actually against the $130 million of JV equity? It does change a lot materially from the third quarter.

[Paul Kerrigan:]

Yes, Joel, third quarter, our proportion in share in that debt, in terms of recourse debt, was approximately $133 million and at the end of the year was $85 million.

[Joel Locker:]

The actual leverage on the JV is—

[Paul Kerrigan:]

Yes, leverage came down as we dropped some joint ventures onto our books.

[Joel Locker:]

Right, and I guess the other thing was just the $100 million in cash flow projected—is that mostly from the home building operations or are there significant lot sales planned in that?

[Paul Kerrigan:]

I think we’re very comfortable generating the $100 million from our housing operations at this stage.

[Joel Locker:]

So just from housing and anything from land would be bonus on top of that?

[Paul Kerrigan:]

Yes. Right.

[Joel Locker:]

All right. I’ll just jump back in the queue.

[Operator:]

Our next question comes from Alex Baron of Agency Trading Group.

[Alex Baron:]

Yes, hi Paul. Good morning. I wanted to ask you how much line up credit you guys have from them at the end of the quarter?

[Paul Kerrigan:]

The facility’s $150 million and it was gone $90 million.

[Alex Baron:]

The other thing I wanted to see people talk about in a little bit more detail was some of these joint venture that, I guess, came back on your balance sheet that you have seen from partners. I think you guys had one that was announced from Lanar and wasn’t there another one in California from Standard Pacific?

[Paul Kerrigan:]

That, in fact, is the majority of the lots that we brought onto our books. Yes.

[Alex Baron:]

Okay, and can you talk about how much equity you had to pay out for these things and liabilities that you assumed?

[Ian Cockwell:]

The excess that we took over to $52 million, and as they were 50/50 joint venture partners, we assume liabilities of $52 million.

[Alex Baron:]

Oh, okay. So you just assume $52 million for these JV’s and the land came on your books as well?

[Paul Kerrigan:]

Right.

[Alex Baron:]

I wanted to also ask about the gross margins. I guess it seems like you guys included the write-offs inside your cost of goods sold. I was just trying to understand how much of the impairment charge, the $53 million, how much was that was actual community impairment versus—were there any land option write-offs included in that number?

[Paul Kerrigan:]

The total write-offs for the year, Alex, are $103 million of which $15 relate to joint ventures, so they’re sold for a direct cost of sales, and approximately $21 million relate to options that we directly had control. Then we have $66 million going to our direct cost of sales related to housing sales. So from a big picture perspective, our margins from house sales was 17% for the year and that excludes any impairments.

[Alex Baron:]

How about for the quarter? What was the gross margin on home sales for the quarter?

[Paul Kerrigan:]

The gross margin on home sales for the quarter was 14% and I think that’s the nature of the impairments coming in the fourth quarter was a lower margin than what we had expected.

[Alex Baron:]

Okay, and one last one. In your balance sheet, it seems like the investment and JV’s has gone up to $130 million. Is that just new money going into new projects or is that just additional money for land development going into old projects?

[Paul Kerrigan:]

It’s a combination, Alex, and it’s also investments through a joint venture that we have with CalStar.

[Alex Baron:]

Oh, you guys already started funding that one?

[Paul Kerrigan:]

In fact, we contributed our interest in one of our strategic market areas into that venture during the quarter, as I mentioned in my notes.

[Alex Baron:]

Okay, all right. Thanks. I’ll get back in the queue.

[Operator:]

Our next question comes from Stephen Massocca of Pacific Growth Equity Management.

[Stephen Massocca:]

Hey, guys. I’m just curious about the impairment charge. I would like to understand the impairment charge. The impairment charge of $103 million appears to be roughly 8 or 9% reduction in the value of your carrying inventory and property on the books. Is that a fair assessment?

[Paul Kerrigan:]

I suppose.

[Stephen Massocca:]

Okay. It seems like now would be the opportunity to really clean it out and let’s look to the future kind of thing and from other companies we own, I’ve seen impairment charges as high as 25% of what’s on the books. It seems to me like we’re—I don’t mean to prophesize here—but maybe we’re missing an opportunity. Why an impairment charge of just 8-9% when relative to the industry, we’ve seen much higher numbers? I guess that’s my question. Thank you.

[Paul Kerrigan:]

I guess first of all, our goal would never be to clean out our books, etc. We want to do the right thing and the impairment process is pretty much spelled out in our public filings and that is we have to look at the future capital in each one of our assets, compare that to our book value and the future capital’s based on our business plan assumptions or greater. Generally speaking, you don’t write the asset down. Now housing sales, we have taken— what I’ll say—a tremendous deterioration in our values as we come along and you’ve seen our gross margins get reduced from—in some business groups—35-40% but in our 15%. So, we have obviously cut prices and seen value deteriorate but at these levels, I think that’s why you see our write-offs are only 8 or 9% of our book value because the nature of our land holdings are, I would say, generally older than the people that you’re comparing ourselves to at this stage when you say 25%.

[Stephen Massocca:]

Thank you. That’s a good point. I had to take it in.

[Ian Cockwell:]

I think it’s the same in we have added value to economists and the instance in the third quarter or second quarter, in the joint ventures that they added. However, with regards to our investment in that joint venture, we were looking at fair values. Just not result in a damage.

[Stephen Massocca:]

And I understand this in an accounting process here but clearly, if you guys were—do you feel if you were to go out and acquire these assets today that 8-9% below where they’re on the books is where they would trade in the marketplace?

[Ian Cockwell:]

Each asset is looked at independently. On our book value, we’ve assessed each asset on the basis of what is their value in the market today.

[Stephen Massocca:]

Okay. Fair enough. Thank you, guys. Good luck.

[Operator:]

Our next question comes from Peter Martin of Manthis Capital.

[Peter Martin:]

Yes, in previous calls, you talked about gross margin in the backlog. I was just wondering, obviously, with this quarter’s drop, I was just wondering what those 155 units are carrying for what you think is the gross margin?

[Paul Kerrigan:]

Yes, that’s a good way to make it. Our backlog is only 150 units so I don’t know how much you take from what’s necessary but the margin of that backlog today is 15% gross margin.

[Peter Martin:]

And then you talked about in the release the $100 million you hoped to realize in cash flow next year. What’s the assumption you’re making there? Is there a per lot? How are you getting to that $100 million?

[Paul Kerrigan:]

Yes, if we look at each one of our assets and the plan is here for our assets and if we were to target 800 home closings, similar to what we did this year, we would think that with our—what I’ll say our excess inventory levels today—our stock inventory count’s higher than what it had to be in the past. We will very comfortable to achieve $100 million, as I said, just from our housing operations.

[Peter Martin:]

Okay, so the $100 million is really 800 closings of SPEC or standing inventory? Is that where the number comes from? Or does it actually raw land sales?

[Paul Kerrigan:]

No, there’s no assumptions there for raw land sales.

[Peter Martin:]

Okay. So, just 800 homes whether it’s a flat lot with no improvements but it’ll be in the 33 current developments. That’s where the 800 sales are coming from.

[Paul Kerrigan:]

Pretty much so.

[Peter Martin:]

And how much SPEC is up a t this point right now? I think on the previous call, would you consider SPEC as something that’s closed up windows? I mean, you just don’t have finishes in it, correct? Is what you considered SPEC or do I have that wrong?

[Paul Kerrigan:]

Let me tell you this. Including the homes that we have in backlog, we have firstly completed homes today, totally almost 400 homes.

[Peter Martin:]

Okay, so 400 homes completed. Mine is 150, CF is 250 in SPEC.

[Paul Kerrigan:]

Perhaps yes.

[Peter Martin:]

Okay, thank you all. I’ll just jump back in the queue.

[Operator:]

As a reminder, if you would like to ask a question, please press * then 1 on your touchtone telephone. Our next question comes from Brian Fettman of Crown Capital.

[Brian Fettman:]

Hi, guys. How are you?

[Paul & Ian (in unison):]

Very well. Thanks.

[Brian Fettman:]

Just two quick questions. I may have missed the deed. $33 million in land are from this quarter. What was that sum again?

[Paul Kerrigan:]

It was a sale of 1, 249 option lots respectively.

[Brian Fettman:]

Where was that and what region?

[Paul Kerrigan:]

It was in the Inland Empire of California.

[Brian Fettman:]

And then in addition, just so I get my numbers all correctly, on the casual statement—the decrease in housing landed inventory that $83 million line there, you sort of backed me into that number?

[Paul Kerrigan:]

Wait…where are you?

[Brian Fettman:]

On the cash flow statement through third month of cash flow from ops decrease in housing and land inventory was a positive $83 million to the cash flow statement. I was wondering if you could back me into that number really quickly. It’d be great.

[Paul Kerrigan:]

I think it just from monetizing inventory is what it’s from, right? It just means that we pull more money out of our housing inventory than we put into it and that was $83 million and if you look at our—I guess historically is because we close most of our homes in the fourth quarter of any year—you’ll see our inventory, generally speaking, enter recovery if you will.

[Brian Fettman:]

Usually, it’s a dab bit in a sense so I just was wondering if there’s anything big in there that I could point to. I guess in 2006 it look like it was a negative $187 million, so it’s completely flipped. So, I was just sort of curious if there’s any big chunks in there that I could back into.

[Paul Kerrigan:]

No, it’s all cash and from various projects. If you move your way up the cash flow statement, you can see the impairments are non-cash and you see we broken them out being $60 million in the quarter.

[Brian Fettman:]

Right. Okay, I guess I just have to walk for the K. Thanks.

[Operator:]

Our next question comes from Alex Baron from Agency Trading Groups.

[Alex Baron:]

Yes, thanks. I guess I was taking a look at your supplemental and just wanted to see if you can help me with something. The bottom of page 7, it says that you assumed $104 million in land inventory and $101 million of liabilities. So, what is the difference of those numbers versus $52 million you gave earlier?

[Paul Kerrigan:]

To quickly explain—you hit it right on, Alex—is the $104 million in the quarter is because we have increased our hugging land inventory by $104 million and we brought dead on to our balance sheet some joint ventures of $101. So, we had equity in those JV’s of only $2.6 million. So the $52 relates to—if they’re 50/50 joint ventures—we acquired the 732 lots for $52 million, right? That was from the joint venture partners. And additionally, we had brought $52 million of debt onto our balance sheet from these joint ventures. Now, we can consolidate these assets.

[Alex Baron:]

Oh, okay. Maybe I misread it then because the way I was reading it, I thought your JV investments had gone up by these numbers.

[Paul Kerrigan:]

No, not at all.

[Alex Baron:]

Okay, so it’s these numbers are the ones that came back on your balance sheet then?

[Paul Kerrigan:]

Exactly.

[Alex Baron:]

Okay, got it. Okay, thanks.

[Operator:]

Our next question comes from Peter Martin of Manthis Capital.

[Peter Martin:]

Thanks. I was just wondering…San Diego fires that were several quarters ago. Just wondering how that’s helping in terms of traffic or lot sales in those regions.

[Ian Cockwell:]

I’ve engaged the experience previously a number of years back and the short term replacement of homes, however, what really does transpire is it’s still more a market. The consumer confidence question is to buy in at this point in time. It’s not as though we’ve seen a capital within the San Diego area as a result of the fire. And I guess that’s started San Diego cross into Los Angeles area, Santa Teresa Valley.

[Peter Martin:]

And just maybe you could tell us for the next six months or maybe if you can do the whole year, what do you think the total active communities will be, like say, December 2008?

[Paul Kerrigan:]

I think you’ll find our active communities are relatively constant and that’s 30-35 level community count.

[Peter Martin:]

Okay, 33-35? Okay, and in terms of in-house financing. Obviously, CountryWide has had some issues. Are you still using CountryWide as your Brookfield Homes preferred lender when someone walks in the door?

[Ian Cockwell:]

We’re looking at various programs and they are a number of institutions stepping in with new programs at this point in time.

[Peter Martin:]

Any names? Is there anybody new? Have you replaced CountyWide?

[Ian Cockwell:]

We work with Wells Fargo. We have a very good relationship with Bank of America. Don’t know what they are anticipating their next steps will be with CountryWide.

[Peter Martin:]

Okay, and last one. The SG&A levels was somewhere around $19 million or so. Is that a good number going forward in terms of on a quarterly basis of roughly $80 million per SG&A for the year?

[Paul Kerrigan:]

Yes, I think $80 million might be a little high but if you look at our quarters over the last number of years, it’s between that $15 and $20 million.

[Peter Martin:]

Yes, there’s just always something like there’s compensation, there’s little ins and outs.

[Paul Kerrigan:]

I think the $15-20 million should be a good number to the model.

[Peter Martin:]

Thank you very much.

[Operator:]

Our next question comes from Ted Crawford of Maple Leaf Partners.

[Ted Crawford:]

The $641,000 average home selling price—that’s for closings, correct?

[Paul Kerrigan:]

Yes.

[Ted Crawford:]

Do you have that number for the new orders in the quarter?

[Paul Kerrigan:]

In fact, I don’t but I don’t suspect a dramatical difference.

[Ted Crawford:]

Okay, so you’re not seeing a larger decline in home prices in your new orders versus your closings.

[Paul Kerrigan:]

You’ve got to also remember what drives it. A lot of it is because products are very different and we have different product mix and each one of the reasons. So, different products also and you’ll find that it has swayed but not significantly in the last number of years.

[Ted Crawford:]

Okay, thank you.

[Operator:]

Our next question comes from J.T. King of CAPE Investments.

[J.T. King:]

Hi, what is your debt maturity schedule look like in 2008 compared to the $100 million cash flow number and if there’s a gap, how do you plan to address that?

[Paul Kerrigan:]

Yes, our debt maturity— I don’t have it right in front me here—but it’s approximately $200 million. So, in terms of how our projects work, I reclose homes, we pay down our debts, and then draw up a new phase as we start to develop new phases. The $200 million is not a troubling ticker to us at all.

[J.T. King:]

When you say as you sell homes, you pay down the debt. But doesn’t’ the sale of the home already baked in a bit $100 million number or am I missing something?

[Paul Kerrigan:]

I’m sorry. Say that one more time.

[J.T. King:]

When you said you pay down that debt with the specific projects as you sell homes, isn’t the sale homes that you’re talking about already baked in to the $100 million cash flow number?

[Paul Kerrigan:]

Yes, very much so but if you assume with your $800k homes and that is an average selling price of $600k or $700,000, our revenue should be $500 or $600 million. That should take care of the $200 million of that maturities and as we build new homes, we would draw new lines for new faces.

[J.T. King:]

Okay, thanks.

[Operator:]

Our next question comes from Alex Baron of Agency Trading Groups.

[Alex Baron:]

I was just still trying to reconcile these figures. So, if you added roughly a $104 million from what was previously JV assets and liabilities, it seems like your inventory number went down this quarter and your liabilities don’t seem to have gone up by that same amount. So, I’m just still trying to understand what accounts for the difference.

[Paul Kerrigan:]

I’m not quite sure I’m picking up on the details you’re talking about but you want, feel free to give me a call after the call to reconcile some figures.

[Alex Baron:]

All right, I’ll do that. My other question was

[Paul Kerrigan:]

I do. For the year?

[Alex Baron:]

For the quarter is probably is more helpful.

[Paul Kerrigan:]

Okay. Like I said overall, it was around 14% and starting with the Bay Area, it was low because we did sell the stock inventory was 10%, Southland was 13%, San Diego still high at 28%, and the D.C. area 13%.

[Alex Baron:]

Would you say these figures are somewhat representative of margins and backlogs as well? If nothing else changes, would these figures be somewhat reflective, you think, for next year?

[Paul Kerrigan:]

Like I said, backlog today is 155 units, 15% today. I could tell you that.

[Alex Baron:]

Okay. All right, great. Thanks.

[Operator:]

As a reminder, if you would like to ask a question, please press * then 1 on your touchtone telephone. Our next question comes from Joel Locker of FBN Securities.

[Joel Locker:]

Hi, guys. It’s just on the—you mentioned 400 completed homes, which means 155 in backlog and 250 completed specs. How many homes are in progress that aren’t sold, that aren’t completed?

[Paul Kerrigan:]

Let’s say another 100 to 150.

[Joel Locker:]

Another 100 to 150. All right. Thanks a lot.

[Operator:]

There are no further questions at this time.

[Ian Cockwell:]

Thank you, Operator. As there are no further questions, I thank you all for your time this morning and look forward to your participation on our future conference calls. Thank you.