The Baldwin Insurance Group, Inc. (BWIN) Q1 2013 Earnings Report, Transcript and Summary

This is the Chorus Call conference operator. Welcome to the Brookfield Residential Properties Inc conference call and webcast to present the company's 2013 first quarter results to shareholders. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alan Norris, President and Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen, and thank you for joining us today for Brookfield Residential's first quarter conference call. On the call today, I'll provide some comments about the current market conditions and will highlight some of our accomplishments during this quarter and provide our outlook going forward. With me today is Craig Laurie, our Chief Financial Officer, and Thomas Lui, our Corporate Controller, who will also discuss some of our financial and operational results. I apologize in advance, Craig is suffering a little bit from some laryngitis, but Thomas will go through the financial and we will all answer questions at the end. I would, at this time, remind you that in responding to questions and in talking about new initiatives and our financial and operating performance, we will be making forward-looking statements. These statements are subject to known and unknown risks, and future result may differ materially. For further information, I would encourage investors to review the corporate profile on our website. Our results for the first quarter of 2013 improved over the same period last year, and with the recovering U.S. housing market, we expect performance to continue to improve throughout the balance of the year. 2013 operational guidance was provided in yesterday's press release. As most of you are aware, the nature and operating cycle of our business generally lends itself to the highest proportion of the year's net income arising towards the end of the fiscal year. For the 3 months ended March 31, 2013, net income attributable to Brookfield Residential was $4 million compared to $1 million for the same quarter of the prior year. Year-over-year comparisons for the quarter show that total revenue and gross margin increased $39 million and $12 million, respectively. These increases are primarily the result of greater activity in both our land and housing operations. Our Canadian markets of Alberta and Ontario continued to perform at levels consistent with previous years. While there is a degree of concern about the differential in oil and gas pricing due to pipeline and transportation constraints, Alberta still leads the way with the lowest unemployment rates in Canada. In the U.S., the housing recovery appears to be in full swing. Pent-up demand seeking finished lots and homes are in short supply as seen in house price increases. We continue to see builders, both national and regional, working to source their future lot supply to meet this increased demand. As house prices increase, there's significant lift in the underlying finished lot value, which is extremely positive for our company. In many of our markets, a 10% increase in house prices may translate into 20% to 30% increase in the underlying value of finished lots. We continue to add to our land inventory during the first quarter with $117 million of acquisitions, approximately 54% of it in Canada, 46% in the United States. Subsequent to the quarter end, we made a strategic investment in Phoenix, Arizona, via 50-50 joint venture with an affiliate of DMB Associates for the community of Eastmark, a large mixed use project and top growth area of the Phoenix Metro area, which is over 2,200 acres remaining to be developed. We believe that the combination of our experience in large mixed use developments throughout North America, combined with DMB's talented management team, will add significant value to this asset going forward. Moving forward, we anticipate a much improved U.S. housing market in the year ahead and a generally stable Canadian market. This coming year, we anticipate our Canadian operations will benefit from our strong market share within the energy-focused Alberta market and will continue to be a strong contributor to our results. We'll also see a meaningful improvement in the U.S. as that market continues to recover. As momentum in the U.S. accelerates and house prices increase, we expect our land assets will continue to appreciate in value. Based on our current landholdings and recent price increases, we're optimistic about our increase in profitability continue in 2014 and beyond. By 2015, we hope to see results in the U.S. approach profitability levels currently seen in Canada, assuming the ongoing market recovery. I'll now pass it over to Thomas, who's actually going to run through the financial component, and then we'll do some Q&A at the end.

Thank you, Alan, and good morning, everyone. Our results in the first quarter improved over the same period last year. Alan stated net income, attributable to Brookfield Residential for 3 months ended March 31, 2013, was $4 million or $0.04 per share, compared to $1 million or $0.01 per share for the 3 months ended March 31, 2012. The increase of $3 million is primarily a result of increased gross margin from increased operations in both our land and housing operations. This was partially offset by a higher sales, marketing, general and administrative cost. Total land revenue was $52 million for the 3 months ended March 31, 2013. This is an increase of $8 million and is due to 80 more lot closings compared to the same period in 2012. Nine [ph] gross margin was $28 million for the 3 months ended March 31, 2013. This is a $4 million increase compared to the 3 months ended March 31, 2012. Our Canadian segment showed strong land activity for the 3 months ended March 31, 2013, with an increase of 59 lots compared to the same period in the prior year. Revenue for the 3 months ended March 31, 2013, was $48 million and gross margin was $29 million, an increase of $7 million and $4 million, respectively, when compared to the same period in the prior year. Increase in revenue was a result of higher lot closings, while the 7% decrease in the average selling price resulted in a lesser increase in gross margin. The decrease in average selling price was due to a higher number of lots sales in our Edmonton market, where lot prices and gross margins are typically lower. The Central and Eastern U.S. segment continues to show signs of recovery with an increase of 21 lot closings for the 3 months ended March 31, 2013, when compared to the same period in 2012. Revenue increased by $1 million while the gross margin remained stable. This is due to the increase in Denver and Austin lot sales, partially offset by the decrease in average lot selling price related to the mix of lots sold. In terms of our housing operations, active housing communities increased to 35, up from 31 in the first quarter of 2012. Housing revenue was $119 million for the 3 months ended March 31, 2013, compared to $88 million for the 3 months ended March 31, 2012. Gross margin was 19% in the first quarter compared to 17% in the first quarter of 2012, an increase of $8 million. The average home selling price for Brookfield Residential also increased from $351,000 in the first quarter 2012 to $406,000 in the first quarter of 2013. The California segment had strong sales activity with $42 million of housing revenue for the 3-month period ended March 31, 2013, an increase of $29 million when compared to the same period in 2012. The increase in revenue is due to an increase of 41 home closings for the 3-month period ended March 31, 2013, compared to the same period in 2012. Gross margin increased $7 million, also as a result of the increase in the home closings and a 44% increase in the average home selling price. This is primarily driven by the 29 home closings from the Bay Area compared to the no home closings in the same period in 2012 as the homes that we sell in the Bay Area have a higher average selling price when compared to other areas within California. The Central and Eastern U.S. segment continue to show increased activity, particularly in the Washington, D.C. market, which we have an increase in home closings, revenue and gross margin for the 3-month period ended March 31, 2013. New home orders totaled 675 during the first quarter of 2013 compared to 492 home orders for the same period in 2012, with much of the increase occurring with our U.S. operations. At the quarter ended March 31, 2013, the company's backlog of homes sold but not delivered, including our share of unconsolidated entities, was 1,213 with a sales value of $535 million, compared to 890 homes with a value of $374 million at the quarter ended March 31, 2012. Moving to our balance sheet. As of March 31, 2013, our assets totaled $2.9 billion, which is an increase of about $70 million compared to December 31, 2012. Our land and housing inventory and investments in unconsolidated entities are our most significant assets with a combined book value of $2.5 billion, or approximately 87% of our total assets. Land and housing assets increased $102 million from December 31, 2012, due to acquisitions of $117 million, development activity and stronger backlog, partially offset by sales activity during the period. Our project-specific and other financings debt increased to $603 million as of March 31, 2013, from $459 million at December 31, 2012, with the acquisitions described and development spending. Excluding any material acquisitions that may occur, this debt balance tends to reduce as the year progresses and closings increase. Thank you for joining us in our quarter end conference call. I'll now turn the call back over to the operator who will moderate questions.

[Operator Instructions] The first question is from Will Randow of Citigroup.

I guess my first question is in regards to your supplementary financial data, particularly, you disclosed that, basically, the undiscounted cash flow in your land held for development is at $5 billion. Have you recently marked that to market? Or how should we think about that?

We haven't recently marked it to market. The number is fairly consistent from what we had disclosed before. Well, I mean, and the market is moving fairly quickly at this point, but we have not gone back and reevaluated future cash flows for all of the long-term lines at this point.

And just a follow up question in regards to some of the guidance you provided. I guess, first and foremost, can you give us a sense for average selling prices for the lots and homes? And also, how should we think about, call it the financial results of this new joint venture in Phoenix?

Craig, did you want to touch on the average selling prices? I mean, they're probably in the supplemental. I don't have them at my fingertips.

I meant in regards to the guidance you provided for the full year, for average selling prices.

Will, this is Craig. I apologize for my voice. We haven't given actual guidance in terms of what the average expected selling price would be. We, as you mentioned, we do disclose what we've achieved to date on Page 10 and 11 of the interim, and it's also in the cover profile. Obviously, our expectations would be, they're probably rough, obviously, within Canada it's probably roughly but it's the same as we we've been experiencing. In the U.S., I think it'll be roughly the same. We had 2 variables to it. Obviously, as we talked about more homes we sell in the Bay Area raises the average, and then, as Alan mentioned, given the strong market conditions, we have been experiencing increasing prices as we move forward.

And then how should we think about, basically, how this new JV in Phoenix hits results? What's kind of the timeline on that and how should we frame that?

I'll touch on that just now, Will. I mean, we just brought into the project. It's an active project that is under way. So they sold -- before us joining the -- becoming a joint venture partner, they had sold just over 700 single-family lots last year. So many of those lots are now just about to be -- start development, and those builders that bought the lots will be selling. So there's already some -- it's unlikely there will be any more coming this year, albeit it's possible, depending on the rate of absorption. So because some of -- we would not be selling any more immediately, but we'll be working with them. I mean, the key thing is this one is a minimum of 5,500 future single-family lots and anywhere up to 6 million to 9 million square feet of other nonresidential uses in this large mixed use project. So it is a long-term play and we'll be walking with DMB, our partner, to try and maximize and really take advantage of what we think is a superior location in the Phoenix Metro area. So it's a -- we're very positive on -- I mean, the market has moved significantly. We've been working on this transaction with DMB for a number of months, and we think we're still in an entry point that allows us good upside from this point on.

The next question is from Adam Rudiger from Wells Fargo Securities.

I might be a bit of broken record here, asking Will's question, but I'm going to ask it a little bit differently. In terms of the guidance for the lot sales this year, it's pretty flat on a volume basis. And Alan, going back to your comments which you've made, I think, several times, about a 10% increase in home prices translating to 20% to 30% increase in land prices. I mean, certainly, it wouldn't be unreasonable, based upon what we've heard this week from other builders, for 10% price increases in many of your markets. So would it be safe to assume that we could think about a 20% to 30% higher sales price on those lot sales and then higher gross margins as well?

Yes. I would say, in some of -- if we were selling lots up in Northern California, without question. We're probably not selling any up there, at this point, Adam. In Southern California, we've definitely seen some of those price increases. I mean, some examples, just anecdotally, would be as we touched on in prior conference calls, we were looking at lot pricings in Southwest Riverside, et cetera, somewhere in that mid $75,000 to $80,000. We sold some last year at $85,000. And I would say, those same lots, today, are probably $120,000 to $125,000. So there is no question that what we said in the past is now translating into reality. But how many of those lots we'll specifically see, I mean, the market is moving very quickly. I'm not saying we're going to necessarily not sell them because -- but we will only sell some because the market's moving so quickly that we think we have some significant more upside on many of those lots and we're not going to be blowing them out. Let's put it that way. We will be matching lot sales with what we think underlying absorption is and not loading up builders so that they can take that upside. So we will be matching up with where we think the underlying absorption is to the consumer.

Okay. And then just on your comments on 2015, you're hoping that the U.S. can match the profitability levels of Canada. Are talking about margins or maybe net income dollars? Or what does that mean matching profitability?

I would say it's on the net income dollars. Margins -- well, each market is a little bit different with respect to percentage margin, as you well know. I mean, Calgary, as you know, has a -- we obviously have very strong margins there. I would say that, overall, we were looking to approach close to current levels of profitability in Canada with -- on a net -- on a segmented basis, if you looking at segmented information, that's where we would like to try and get our U.S. operation to within a couple of years. That's the goal.

Okay. And then a similar question that Will asked about Arizona, what about the California deal you did in Oakley, when should that start impacting you?

We hoped to be in there grading later this year. There's an outside chance that lot sales are building -- starting building later this year, more likely Q1 2014.

The next question is from Alex Avery of CIBC.

Alan, with the -- I guess, with your operational guidance that you provided for lots and home sales, I was just hoping you could frame that for us in terms of how that fits into what you can, as an organization, deliver to the market? I mean, is that sort of peak output? Or is there a lot more that you can push in terms of how much volume you could do, if you wanted to? Are you guys in, I guess, sort of in flat-out harvest mode in terms of producing and selling, or are you holding back? And then I guess secondly, how does that compare to what the market demand would be? I mean, if you wanted to, could you do 6,000 combined lots and homes next year -- this year?

Good morning, Alex. I think we got more room in the gas tank. There's more room to go with that question. We're going to be up about 300 homes in the U.S. We've got way more capacity than that as we go forward. There's no question. We're not trying to -- I mean, right now, just as we gear up, we're definitely trying to match production and sales and not get too far ahead because of the significant volatility in the marketplace. So we are trying to match it up so we don't get too much ahead of ourselves. We are seeing some cost pressures on the cost side as well as, obviously, pick up on the revenue side. But I mean, the U.S. operations got capacity to do a lot more, but it's not going to happen overnight. It will happen gradually and we just need to gear up appropriately to do that. I mean, we'll be up 300 home sales this year, for instance. We could be up, I mean, for instance, another 300, easily, next year, within the capacity and the community we have. We will be opening close to 13 or 14 new communities this year. And so we will see a significant pickup just from a closings perspective. Most of the financial impact of those new communities will not be felt in 2013. Most of them, the closings from that, will result in '14 and beyond. So we've got room to go. We're not concerned about that.

And so, in the scenario that the market is there for significantly more, is your thinking that you just continue to, I guess, keep pace with the market? Or are you in sort of a hold back and let prices rise? Or conversely try and get as much done as possible?

It depends on this market, to be quite honest. I mean, if we think prices are continuing to increase, we're obviously going to be very selective. We're not going to just not sell into it. We have to still create momentum in the various communities, but we're not going to get ahead of the underlying demand from the consumer. In areas where we think it might be a little bit more mature, then we would look to be doing something different, maybe repositioning some stuff. I mean, in the Toronto market, we think things have flattened out a little bit there. So we're obviously in a different mode there than we would, say, in Southwest Riverside or Northern California. Each one is a little bit different depending on the metric. So I mean, we look at everything from the point of view of where we think -- just to try and make sure that we feed the communities at the right time. We sell and we try and match up with underlying demand. If somebody has a different view of the future that we think is more attractive from their point of view than what we see, then we would, obviously, we would move to reposition and sell that asset.

Okay. And then have you guys provided, I guess, a little bit of background how to deal came together in Phoenix? Is that a market that you've been looking at for some time as an attractive market? Or was it more deal specific? How did you end up in that deal?

Yes, I mean, I think we've looked at Phoenix and we've spent a lot of time looking at that market. I mean, I would say that DMB, our partner down there, is probably one of the most respected development companies in that market area. And we had entertained some discussions with them, some time ago on a number of different fronts. And we ended up realizing that we shared a lot of common vision and culture, with respect to how to do a master plan development and a mixed use aspect, which we think we can bring significant experience to that side of things. And we just -- we ended up in a venture together. So it is a very good structure and I think we're very, very well aligned, between our 2 organizations. So we're looking forward to that. We will continue to look at opportunities in the Phoenix area, not just on a 50-50 basis but on a wholly-owned basis as well.

And as far as the profile of that project, is there a good chunk of it that you think is just going to be a continuation of the activity that you said they'd already achieved there? Or is there a portion of that, that might be 15 or 20 years out?

There's about 600 acres of the 2,200 acres remaining, Alex, are in nonresidential. This project is the old GM proving grounds down in the Mesa -- it's right across the highway from the Mesa Gateway Airport, which is the feeder airport for Sky Harbor in Phoenix. And there are more airlines going there. We believe that the future for this area is quite significant for nonresidential uses, whether they be office, retail and other uses. So we really want to make sure that we take advantage. And I'm not saying that we're not just going to sell lots. I mean, we will sell lots into the marketplace, but the entitlements on this land have significant upside, more so than what we underwrote it at, to be quite blunt. We think there is some good upside on this, if we can find the right mix of product, both on an intensification side as well as on nonresidential uses. So we're very excited about it.

The next question is from Stefan Mykytiuk of Pike Place Capital.

A couple of questions, first off, on terms of the lot sale guidance in the U.S. you're saying about 900 lots, right? And last year, I think, you did around 750 in the U.S.? That sound right?

Yes.

The 750 though, didn't -- that included those lot sales in Playa Vista in the fourth quarter, correct?

Yes.

Yes, which was -- so it was like -- what was that like, 263 or something like that?

Yes. I'm sorry, the number of that was 195.

I'm sorry, 195. So last year's 752 included 195 that were essentially at no margin, right? I just want to make sure. So -- because the 900 doesn't look like a big increase over 750, but it really is over, call it, 550 or 555, since those Playa Vista didn't...

That is correct.

Right, right. Okay. I want to make sure I have that right in my head. And that we can play with our assumptions in terms of what happens with lot pricing this year, but it's -- I would think, the impact on the gross profit's probably going to be much more dramatic than we'd think, again, comparing 750 to 900.

Yes, I think that's fair. Albeit, the mix, depending on the region, I mean, the market is -- the recovery is coming fairly significantly across the country but each one -- each region still has, I would say, its hotspots. I mean, the Bay Area has been going very hot for a while, as we all know. Southern Cal is now picking up and getting closer to those levels in different spots. It's happening in a much more relaxed fashion, if you want to put it that way, so you won't see as much of a price increase there as we are seeing in some of the other areas. And D.C. in some of the areas it's happening. But again, depending on the rings and the assets. But we're confident that the price pressure is still coming in those other areas and will translate through the balance of the year, through increased prices and continue to increase as supply is constrained and demand continues.

Okay. All right. Got it. And then, in -- back to the comment you made about by 2015, you think the U.S. will be as profitable as Canada. If I'm looking at the supplemental right, U.S. was basically breakeven in Q1, correct?

Yes.

Right.

And when you're -- so really, I guess, maybe backing out, it's probably -- what you're trying to say is -- since Canada is not improving at that dramatic of a rate, you're probably saying in 2015, U.S. can be as profitable in dollars as perhaps Canada was for all of 2012?

Yes. We're saying that -- we think on a -- as the U.S. picks up momentum and prices continue to increase, and assuming an ongoing market recovery, we're just trying to give some indication to -- on the call to our various stakeholders that we think with the various communities we're opening and what price increases that we can get, approach the profitability levels that are currently experienced in Canada on an overall segmented basis. That's correct. So I mean, through volume and price and margin, on an overall basis. When you look at a segmented information for Canada for 2012, we would hope to be approaching those levels by 2015 in the U.S. We're just trying to give some slightly longer term guidance for people that -- as we see the market unfolding. Whether we're right or wrong will remain to be seen. But we're feeling confident at this point.

Right, right. But that -- I mean, that essentially implies a doubling of the profitability?

That's what it would imply.

Yes, okay. And just in terms of the SG&A, I know it was up quite a bit. Looking at the supplemental, it seems like some of that was non-cash stock comp but the bulk of it was really just relating to higher profitability levels. Is it just kind of linear to sales at this point? And is it -- I mean, I would think a lot of that has changed in the U.S. then?

Stefan, this is Craig. As you mentioned, on Page 16, we do breakout SG&A. As you mentioned, the stock comp is going to depend on stock price, so maybe exclude that for now. Sales and marketing is going to be tied to our revenue. And then, as you said, G&A does have a component of activity. I think our current expectations would be, in the next couple of quarters, for the actual G&A piece to be relatively consistent within the first quarter, but then, obviously, in the fourth quarter we would expect an increase as we did have in 2012 as well.

[Operator Instructions] The next question is from Andrew Berg of Post Advisory Group.

Just to follow up of the last question, when you say consistent SG&A, you're talking on the dollar amount, correct?

Andrew, yes, it's correct.

Okay. Does the improvement you're seeing in the U.S. housing market, in any way, alter the timetable you have for Playa Vista or does that continue to be a sort of a farther out project?

Sorry, could you repeat that, Andrew?

Given the improvement you're seeing in the U.S. market, does that in any way alter the timing for when you would become more active with Playa Vista?

I mean, obviously, it's a -- the lots that we sold last year, the builders will be under construction this year. And really depending on the rate of absorption that they experience would determine when we bring on the other 500-plus lots that we have left over in Playa. We also have some retail assets there as well and some other ancillary assets, but a lot depends on the other 500 lots, they just -- they'll depend on the pace of absorption for the existing ones so that we don't go in and cannibalize that particular thing. But we have seen good price appreciation since we did that acquisition back in the fall of last year, without question. So we're very, very comfortable and very optimistic about that asset also.

Okay. And then a housekeeping question. Interest capitalized and cost of goods sold, how much was that?

Andrew, it's in -- did we break it out in Note 2?

It's broken out in Note 2 of the financial statements, on Page 41.

Okay, I'll look it up, then. I haven't seen those yet.

The next question is from Rick Murray of Midwest Advisors.

I just wanted to ask about the cancellations which look like they ticked up a bit in the first quarter, and I was just wondering if there's anything extraordinary you saw in the quarter? And as just a follow up, if you could provide some color in terms of land prices and trends you're seeing in Canada?

This is Craig. In terms of the cancellation, as you did mention, we do break it out within the interim report and you can see it -- in Page 15. As you pointed out, it was really -- they were consistent. They were actually down in California. The increase was in Central and Eastern, really related to D.C., and it just happened to be -- it was kind of situation dependent there on our product mix. But as you said, I wouldn't say that we would expect it to particularly increase, I think it was just kind of a particular situation.

I guess, I was inquiring more specifically into the cancellations in Canada, which looked like they were, in the quarter, almost as many as you had all of last year. I was just curious if there was something extraordinary that was going on.

No. Not aware of anything there at all. I don't think there's anything to be alarmed about, so, no. Did you want to ask questions, sorry, secondly, on the pricing in Canada?

Yes. Just in terms of trends you're seeing there and in terms of home prices and land prices.

I would say that, taking Ontario first, I would say that, it's been a fairly soft landing with the slowdown in the high-rise business in Ontario. I would think that we've had reasonable price increases in the Ontario market, up until probably the end of Q3 last year. I would say that, low-rise product is now flattening out somewhat, from a house price perspective, in Toronto. In the Alberta market, we probably pushed in the last 6 months, house prices have gone up, depending on the product, anywhere between $2,000 and $12,000 a door. In the Alberta market, it's a fairly tight marketplace, still some constraints on supply in there. And we have seen good, good in-migration into the province. So it's not off-the-scale, by any stretch. But we have seen modest improvements in pricing in that marketplace. On the land side, small increases on the -- when we are selling finished lots. But -- and we will start to see a little bit of cost pressure up in Alberta as well, just on the trade side. But we're all obviously impacted by things like lumber, across the board, obviously across all of North America.

[Operator Instructions] There are no more questions at this time. I'll turn the call back over to Alan Norris for any closing comments.

Thank you. So thanks, once again, for joining us today. And as we look forward to meeting with many of you for the next -- between now and the next earnings call in August, as Craig and I will both be speaking at a number of industry conferences over the next several months. So please reach out, at any point in time, if we're in, we'll try to reach out to you as well. If we're coming your way or you're going to be attending those conferences, we'll try and do some more detailed conversations. So thanks, once again, for joining us today.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.