The Baldwin Insurance Group, Inc. (BWIN) Q3 2013 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Chorus Call conference operator. Welcome the Brookfield Residential Properties Inc. conference call and webcast to present the company's 2013 third quarter results to shareholders. [Operator Instructions] And the conference is being recorded. [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 for Brookfield Residential's third quarter conference call. With me today is Craig Laurie, our Chief Financial Officer. 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 make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information, I would encourage investors to review the corporate profile on our website. We achieved solid financial performance in the third quarter and the first 9 months of 2013, with results continuing to build. For the 9 months ended September 30, 2013, our income before income taxes increased 28% and our net income attributable to Brookfield Residential increased 69% over the comparable period in 2012. Our backlog, on a unit basis, is up 18% from the same period last year, with the value of the backlog up 31% over the same period driven by improvement in all regions. As has occurred in a number of past years, we anticipate that the fourth quarter will once again, contribute income before income taxes at least equal to the first 9 months income before income taxes resulting in the fiscal 2013 results being significantly higher than 2012. We continue to foresee long-term fundamental demand in the U.S. market, driven by the lack of supply of new product over the last 5 years and relative affordability of housing. Unemployment trends are slowly improving and inventory levels are still tight in almost all of our markets. Moving forward, we believe the U.S. housing market will continue to improve in the year ahead and the Canadian market will remain stable. While pricing continues to improve in the U.S. there has been some flattening of the trajectory of these increases. We had anticipated the house price increases would moderate as new supply came on. And this has been somewhat exacerbated by the uncertainty created by the disagreement and debate in Washington, D.C. in September and October. While some caution has crept into the housing market due to the U.S. government's recent actions, we do feel comfortable that we still have a considerable way to go in the housing recovery. Our Canadian markets of Alberta and Ontario continue to produce strong results. In Alberta, we have seen increases in both our lot and house prices of approximately 3.7% and 8.7%, respectively, since the beginning of this year. In Calgary, we have more approved lands than the majority of our peers, but there continues to be delays in approvals on a citywide basis. This shortage of approved serviceable land, together with ongoing job creation and the resultant emigration, are contributing to price increases. Moving forward, we expect our Canadian operations will continue to benefit from our strong market share within the energy focused Alberta market and the supply constrained Ontario market will continue to be a strong contributor to our results. Based on current landholdings, we are optimistic about our increasing profitability continuing in 2014 and beyond. As we have stated in the past, by 2015 we hope to see results in the U.S. approach profitability levels currently seen in Canada, providing the market recovery continues. While there may be factors that impact the short-term pace of the recovery, the long-term outlook for our business remains very positive. I'll now pass the call back to Craig to speak to our financial results.

Thank you, Alan, and good morning, everyone. Our financial results in the third quarter improved over the same period last year. Net income attributable to Brookfield Residential was $35 million or $0.29 per diluted share for the 3 months ended September 30, 2013, and $63 million or $0.54 per diluted share for the 9 months ended September 30, 2013. This was an increase of $20 million and $26 million, respectively, when compared to the same period in 2012 and was the result of increased gross margin from higher home closings combined with the decrease in income tax expense, which was partially offset by sales and marketing costs and general administrative expenses. For the 3 months ended September 30, 2013, total revenue increased 36% to $333 million from the third quarter of 2012 and gross margin increased $30 million to $99 million. For the 9 months ended September 30, 2013, total revenue was $801 million, an increase of 28% from $625 million during the same period of 2012 and gross margin increased to $227 million from $181 million when compared to the same period in 2012. Land revenue for the 3 months ended September 30, 2013 totaled $71 million, an increase of $9 million when compared to the same period of 2012, primarily due to an additional 77 lot closings and 11 multi-family industrial and commercial acre parcel closings when compared to the same period last year. Through the 9 months ended September 30, 2013, land revenue totaled $227 million, which was an increase of $12 million or 6% when compared to the same period in 2012. This was due to 102 more single family lot closings, compared to the same period in 2012. Land gross margin was $41 million for the 3 months ended and $110 million for the 9 months ended September 30, 2013, a $4 million increase and a $1 million decrease, respectively, when compared to the prior year. Housing revenue was $262 million for the 3 months ended September 30, 2013, compared to $183 million for the same period in 2012. The increase was the result of additional home closing in all operating segments, with California seeing the largest increase. Housing gross margin increased $26 million, as a result of a 27% increase in home closing and a 13% increase in the average selling price when compared to the same period in 2012. Housing revenue was $574 million for the 9 months ended September 30, compared to $410 million for the same period in 2012. The increase was a result of additional home closing, primarily in the California and Central and Eastern U.S. operating segments, which are benefiting from the U.S. housing market recovery. Housing gross margin increased $47 million as a result of a 26% increase in home closing, an 11% increase in the average selling price when compared to the same period in 2012. As at September 30, 2013, our total backlog, including our share of unconsolidated entities, had grown to 1,329 units, representing $639 million of value. This was up 18% and 31%, respectively, when compared to September 30, 2012. The units in value of our backlog at September 30, 2013 was higher when compared to the prior year due to stronger net new home orders. Our Canadian operations continued to be strong, primarily due to a significant backlog of 619 units entering into 2013, combined with an increase in net new home orders for the 9 months ended September 30, 2013. The Canadian market has shown a steady increase in sales with its backlog units up 11% year-over-year. The California segments increase of 49 units at September 30, 2013 was mainly due to new community openings and increased activity when compared to the same period in 2012. The Central and Eastern U.S. segment increase of 80 units at September 30, 2013 when compared to the same period in 2012, was mainly due to increased activity primarily in the Washington, D.C. market and home orders from our Denver market, which was -- launched its first community in 2013. As of September 30, 2013, our active home community, including our share of unconsolidated entities, increased to 43 up from 36 in the third quarter of 2012. Our selling and general, administrative expense was $42 million for the 3 months, and $118 million for the 9 months ended September 30, 2013, an increase of $10 million and $30 million, respectively, when compared to the same period of 2012. This was due to an increase in labor cost and headcount resulting from increased activity and higher sales and marketing expense as a result of increased activity in both Canada and the U.S. When compared to the first and second quarters of 2013, the general and administrative component of the expense is relatively consistent, with most of the increase driven by a higher sales and marketing expense linked to the increased activity. Moving to our balance sheet. As of September 30, 2013, our assets totaled $3.4 billion, which is an increase of $568 million, compared to December 31, 2012. Our land and housing inventory and investments in unconsolidated entities are our most significant asset, with a combined book value of $2.73 billion or approximately 80% of our total assets. Our land and housing assets increased due to the acquisition of $298 million, development activity and stronger backlog, partially offset by sales activity. At September 30, 2013, we controlled 100,000 -- 110,062 single family lots, which included service lots and future lot equivalents and 169 multi-family, industrial and commercial service partial acres. Thank you for joining us in our call -- quarter end conference call. I'll now turn the call back to the operator who'll moderate questions.

[Operator Instructions] The first question is from Adam Rudiger of Wells Fargo Securities.

In the past conference calls, you've given us some unit guidance I think on your expected lot and home closings, both in Canada and the U.S. I noticed that was absent from this call. I was just wondering if you had any update on those expectations.

This is Craig. So, obviously, we did give what I'd say equivalent to income guidance with -- through Alan's comments about the fourth quarter being equal to or greater than the first 9 months. In terms of the unit count guidance, to your point, we didn't update it, but what I would say is that we don't see any material differences in unit count versus what we gave last quarter. Obviously, you could have various puts and takes between the different components, but I think overall, we're still comfortable with that unit count guidance.

And then just, secondly, on land sales, always a topic of interest, just the lumpiness and the unpredictability of it, but could you talk about the pace of land sales this quarter. And if the slowdown in the U.S. side of the business has changed due to demand and/or your desire to pace for future land sales?

Adam it's Alan. I don't think -- I mean, the summer months were traditionally a little bit slower. We still got a number of land sales predicted for Q4. We're not noticing much -- too much of a slowdown. As I said earlier on, I mean, the trajectory on pricing has definitely slowed somewhat, which I think is a positive thing to be quite honest. But the appetite is -- has not changed that much. I mean I wouldn't say the froth has been taken out in many of the markets, which I think is, again, a good thing.

Your next question is from Sam McGovern of Credit Suisse.

In your outlook, you talked about your expectations for the Canadian market to remain stable. Can you talk a little bit more about what you're seeing in different regions there? Have you seen any slowdown at all in any of the areas?

Yes Sam, it's Alan. No. I mean if anything actually we're on track for an extremely good year in our Alberta housing operations, our Edmonton land operations, extremely positive. As I said in my remarks, margin -- pricing is up, in both lot prices and house prices since the beginning of the year. So, I mean, we've been a lot -- still have some job creation in Alberta and it's still a fairly affordable marketplace and we've got a best market share of anyone as you're well aware. On the Ontario side of things, we know there's been some stuff on the high rise, which we've talked about for years with respect to that the pricing issues on high rise. But on the low rise, I think the most that's probably happened is some degree of flattening on low rise pricing. Absorptions are still meeting our requirements with respect that there are so many units a month in most of our projects in the GTA. So we're quite comfortable. We're virtually on track for what we had predicted at the beginning of the year. As I'd say the 1 -- the prices are fairly flat but the absorptions have met all expectations.

Got it. And talking to the builders, it sounds like most guys continue to have a pretty healthy appetite for land, even despite the increases in interest rates. Have you seen at the margin any reduction in demand from the builders, or not really?

Is it just in the Canadian context or U.S.?

No, just across North America.

No, I don't think so. I mean I think a degree of caution, people just may be sitting back and saying boy, this mess in Washington has just sort of changed consumer perspectives a little bit. But I look at it as a blip on the road to be quite honest. I mean I think there's still an appetite for builders to secure lot supply going forward. And each builder is in a different situation by region. Obviously, some are trying to load up because they are short, others are quite comfortable. I wouldn't say that they're going overboard on it, but I think they're all trying to make sure they've got their '14 and now their '15 lot supplies sort of getting lined up.

Got it. Just in terms of M&A, you've highlighted your criteria in the past in terms of what you would be interested in size, scale, et cetera in regions as well. There's been press reports, obviously, about M&A, it sounds like a lot of that has already sort of passed. But can you remind everyone about what your criteria is and when you'd be willing to step out beyond that?

Yes, I wouldn't say we're actually stepping out beyond, I mean anything that's more of -- I mean the media stuff you're talking about has obviously been in the Wall Street Journal just recently. I mean that 1 sort of -- doesn't sort of -- our criteria still remains the same with respect to whether we're looking at a 100 lot deal, a 1,000 lot deal or a 27,000 lot deal with respect to what we are, we would be trying to do. And we look at all aspects as to whether we think is accretive for our shareholders and whether it adds value overall. So I think our return criteria depends on the age of the asset, the maturity, the entitlement status and then you look through that and then you superimpose -- if it's an entity issue, then you superimpose the other criteria on top of that. I'm not necessarily saying -- these types of things only come along once in a while, so we'll look at traditional assets and we'll look at entities, but we do this all the time. That's just -- that's what we do. So we'll see if we think it fits and we'll go through our process internally as to whether we think it fits the pistol, and then we'll take it to a certain stage or not.

Got it, and in terms of M&A, I mean how much incremental leverage would you be willing to put on the combined entity if you found the opportunity to be attractive? Is there sort of a maximum threshold that you wouldn't want to cross?

Our philosophy remains the same with existing assets or any new assets. I mean I think the mix of assets that we have in our balance sheet today lends itself to somewhere in that, I would say, 46% to 56% debt-to-cap type thing based on how much raw land we have, how much service land we have and how much housing work in progress. If we were to do an acquisition that was more raw land related, you would want to be funding more on the equity side, which would reduce the debt-to-cap side. If it was more on a service lot basis, then you can have slightly higher leverage ratio. So it depends on the mix of assets that you would be buying as to what that percentage debt-to-cap would be appropriate.

The next question is from Robert Wetenhall of RBC Capital Markets.

It was actually Desi filling in for Bob. So just looking at the Canadian segment, I think you kind of touched on it earlier with orders of 26% this quarter and the comment that you made about pretty stable growth going forward. Is it something that you would expect to grow significantly faster than the overall Canadian market, given your geographic exposure?

Yes, I would think of all the markets in Canada, we're in the best markets for sure. I mean the Alberta market has extremely good prospects and I think our land position is far better than any of our competitors to be quite honest. So, over a period of time, as we secure entitlements, we would anticipate that our position in the Alberta market continues to improve and increase, quite honestly.

Got it, and then on the pricing side, just in Canada, some of the declines year-to-date, the ASPs for your homes, is that just a function of changing product mix? Or how are these prices actually trending in the overall market there?

Yes, I mean I touched on a little bit on some price increases in Alberta on my opening remarks. But I think the rest of it is going to be on mix, Craig is that...

Yes, that's correct.

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

A couple of housekeeping questions. Can you tell me what interest was, that was capitalized in cost of goods sold? And with respect to SG&A, how much noncash stock up was reported in the quarter?

This is Craig. I'll do the first few questions. One thing I will mention is that we're filing our interim report later on today, so it'll have a lot of those details. I can definitely get them to you. So in terms of the interest capitalized, we capitalized $8.7 million of interest and expense to cost of sale of $10.7 million. In terms of SG&A. So share-based comp for the quarter was $4 million. And we had an offset of $2 million for the fair value -- the change in the fair value of our equity swap. So the net noncash would be about $2 million.

Okay. And then just, lastly, can you discuss liquidity and what other ideas you have under your bank credit facility? And then under your unsecured preferred asset facility?

Sure. So, in total, the number is about $950 million, so I can just run through it, so obviously $250 million of cash, BAM facility at $300 million undrawn, the revolver of $250 million is undrawn. And then on the Canadian facility, it's about $150 million.

Your next question is from Chris Keller [ph] of Columbia Management [ph].

Just a couple from me. Can you talk about your margins -- your gross margins in your Central and Eastern U.S. homebuilding operations. It looked like they were down kind of on a year-over-year and quarter-over-quarter basis, is there anything in particular going on there?

Yes, you're referencing Page 29 in the profile. So as you said, really that is just related to a mix issue. A little bit of mix in D.C. And then we did bring on about, say it's only 6 homes, so we did bring on some new homes in Denver. That's the beginning of that project. And we, obviously, do expect those margins to improve as we go forward, as early as the fourth quarter.

Okay. And then on I mean kind of the other side of that, you saw really kind of robust improvement in margins in California. How should we think about kind of the trajectory of margins here over the next year or so?

I think from the backlog point of view, I would say that we're comfortable with the backlogs at least equal to where we are, just better or slightly better. But I think going forward, I think we still see some -- I mean, some of the projects that we already have underway, we anticipate pretty solid margins going forward from a California perspective. I think we'll start to see some of that improvement in the other areas as well. Again, the trajectory that we saw for the first 8 months of this year, we are not assuming is replicated, but we do still believe there's a trajectory there going forward because there is still lots of room in housing recovery and from an overall U.S. affordability point of view. So we think we're quite positive on a go-forward basis. Obviously, as you -- if you have to go out and replace land, you end up getting back into that normalized level from a margin point of view. But bear in mind, we own a lot of land already. So we're in the fortunate position that we have inherent gains in most of our land position already.

And then maybe just one more question, I guess. How should we think about community count in both the U.S. and Canada in the 2014? Should we still kind of expect modest growth there?

This is Craig. We haven't given unit count, we haven't give community count guidance yet for '14. But I think, to your point, we had indicated that our target community count for '13 would be 44, obviously we're at 43, so we're very close to that. What we did talk about is that you wouldn't really say a huge contribution from those new communities in '13, it would be more be '14. And I think we still stand by that. So I don't think you'll necessarily see that community count increase in a material way in '14, a lot of that growth did occur in '13. But I think you're going to see the benefit of those new communities having come on in late '13 and really coming through in '14.

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

Perfect segue for my question, which was, it looks like sequentially you opened 1 more community -- you opened 1 community -- 1 or 2 in California in Q3. 2 is that right?

It's a little more but I can't recall.

I mean, certainly over the year, we've opened a material number and have been in number that have come off, to your point.

No, I was wondering at the end of June, you had 11 in that profile and then 13 at end of September in this profile unless -- those may not be apples-to-apples because maybe some shut and some opened. My question was really like, was there anything unique to the timing of when projects came on in Q3? And do you have, as you said before, where you'll probably get more benefit in '14 from some of these '13 community openings, do you think there is even a little bit of tick up going into Q4 from some of those projects that have opened recently?

I think from a sales perspective, yes, but, obviously, not trying translating into closings.

Yes, that would be my guess.

So you could see some impact on the backlog at the end of the year hopefully. But not -- obviously, not translating into closings in bottom line until '14.

Okay. And then I think California, if I got through the profile correctly, there were very few lots sales in California in Q3. Is that a timing issue? Is it reflective of kind of the -- just a little bit of the pause in the market? Or what can you comment on that?

I think it's mostly, in many cases, a lot of the lot sales tend to happen, I mean, the builder, from their perspective, they're trying to load up from a next year production point of view. So they like to try and drag it out as long as they can, which happens in Q4 mostly. And then they've got the lots ready to be built and starting to be building and sales beginning of the year. So I would say, we definitely have a number of lot sales scheduled for Q4 and that's traditionally when most of them will happen.

Okay, terrific. And any comments on Arizona, how that -- you entered that during the year, any kind of comments on how that's progressing and how do you feel about that?

I would say it's positive. We've taken a position in 2 other projects down there, in addition to the JV that we entered into on April 1 of this year. So we've beefed up the business a little bit there. And the big project that we entered into the Eastmark JV with DMB & Associates is making good solid progress both on the residential and a number of other initiatives on the nonresidential side. If you remember, it's a very large mixed use project. So we're getting good positive momentum on both fronts I would suggest at this point, which hopefully we'll see some benefit -- hopefully we'll report that, but the activity on the single-family side of things is very good. And, again, we're getting some interest on the nonresidential as well.

Okay. And just lastly, circling back to the lot sales in California. Are prices still improving there? Have they kind of stalled out? I know earlier in the year, it seems like as you described it, there was a lot of kind of froth in the market. What's happening with pricing on lots out there?

Yes, I would say any -- I mean the pricing is still very positive. We -- it's mostly Southern California we're looking at from lot sales at this point in Q4 and I would say it's good solid pricing from a variety of different builders on the other side of equation. So it's all very positive.

Your next question is from Frank Mayer of Vision Capital.

Alan, you alluded earlier to your strong land position in Calgary. I'm wondering if you would care to comment about your market share going forward as your land -- additional land purchases come into production.

Yes, good question, Frank. Yes, I think -- I mean, we've traditionally been in that sort of 25% to 30% market share range in Calgary. Depending on what other lands do come on, we think we are positioning for 3 new projects that we have up in the Northwest, the Northcentral and the Southeast regions of the city. As we get them entitled, we think we're obviously some of the best assets coming on. What we can't necessarily predict as easily is what other lands might come on at the same time, from other developers or whatever. But yes, there is a chance our market share can increase further from that point on. I would suggest it's not going down. I think we're probably the best positioned of all with respect to the future growth quadrants of the city.

Okay. Could you attach timing and percentages to your comment?

I can attach a rough idea on timing. I think we've got 3 projects, all of which we would like to think that we -- one of them we'd be looking for hopefully within the next by 2015, '16 and the other 2 maybe by 2016, '17, something along that range. I mean, but it's been -- it's a challenging process. As many of you are aware, we're trying to get approvals, which is good and bad. Obviously, it's good that there is a is a form of barrier to entry for many others coming into the marketplace. The bad is that it's not as predictable as you would like to think -- you'd like to hope.

So it's conceivable then your market share could go over 30%?

It's conceivable, yes.

This concludes the time allocated for questions on today's call. I will now hand the call back over to Alan Norris for closing comments.

All right. Thanks very much, everyone, for attending the call today. I'm looking forward to conversations with many of you over the next several months. And then having an excellent Q4 that we can talk about in February. So thank you very much, indeed. Thanks for your interest in Brookfield Residential.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.