The Baldwin Insurance Group, Inc. (BWIN) Q2 2014 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Brookfield Residential Properties Inc. conference call and webcast to present the company's 2014 Second Quarter Results to shareholders. As a reminder, the conference is being recorded. [Operator Instructions] At this time, I'd 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 2014 Second 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 more information on our company, please also visit our website. We achieved very good results in the second quarter of 2014 as we continue to bring new communities to market, while capitalizing on stronger lot and home prices. For the 3 months ended June 30, 2014, our net income increased to $42 million or $0.36 per diluted share from $24 million or $0.21 per diluted share during the comparative period in 2013. The improvement in net income was due to improved housing and land gross margins as our overall margin for the second quarter increased 31% compared to 26% during the same period in 2013. Our Canadian markets continued to perform at a steady pace as we operate in markets where barriers to entry are high and economic fundamentals continue to be strong. In particular, the current constrained supply of entitled lots in Calgary, coupled with strong demand, has resulted in price escalation. To ensure appropriate continuity, we continue to show a disciplined release of lots until further entitlements of lots and new projects are approved. We believe that the underlying fundamentals in our U.S. markets continue to strengthen despite a moderation in the rate of house price increases, as a double-digit growth is experienced in many U.S. markets in 2012 and 2013 was not sustainable. Going forward, we expect to see a more healthy and balanced growth rate in home prices that should support absorptions and affordability in the longer term. We believe the biggest challenge in the U.S. right now is the hesitancy of the first-time buyer to enter the housing market. Several reasons for this: student debt; slower household formations; lack of down payment; together with a certain fear factor on the part of the younger buyers that real estate doesn't always go up, which was certainly the belief 5 to 10 years ago. The average age of new homebuyers has increased significantly as a result. However, we're not concerned in the long run about this issue because as the cost of rent increases in most markets, home ownership will again become more appealing, especially as that first-time buyers' job situation improves. Over the last several years, we have continued our focus on bringing lots from a raw state through the approval and entitlement process, which has set us up well for 2014 and beyond. As a result of our efforts, we have increased our number of active housing communities to 56 from 47 at the end of 2013. Our outlook for 2014 and '15 remains positive. Based on current market conditions, we anticipate an income before income taxes for 2014 should be measurably higher than in 2013. Given the complexity and timing variability of lot sales in particular, many of our lot initial closings are projected for the end of 2014, and are subject to the normal timing risk of approvals and the development and closing process. As a result, if they do not close in '14. 2014, we would anticipate they will occur early in 2015. Our land position with approximately 109,000 lots controlled, provides us with a large and readily developable land portfolio in North America. We're well positioned to gradually increase our homebuilding and land sales activity in the future as the overall market continues to improve. I'm now going to pass it over to Craig, who will review the financials.

Thank you, Alan. And good morning, everyone. As Alan mentioned, our results in the second quarter was strong. Net income increased $18 million to $42 million or $0.36 per diluted share in the second quarter -- over the second quarter of 2013. Second quarter revenue increased 8% to $321 million over the second quarter of 2013 and lot closings increased 26% to 515 units compared to the second quarter of 2013. The average home selling price increased 31% to $552,000 in the second quarter compared to $420,000 for the same period in 2013. The increase of $18 million in net income for the 3 months ended June 30, 2014, compared to the same period in 2013 was primarily the result of a $21 million increase in gross margin, which resulted mainly from higher lot closing and higher average home selling prices, combined with an increase in equity earnings from unconsolidated entities of $5 million, and an increase in other income of $2.5 million due to a onetime asset sale not in land inventory. This was partially offset by higher general administrative expenses of $4 million, an increase in interest expense of $4 million and an increase in income tax expense of $1 million. Land revenue totaled $81 million for the 3 months ended June 30, 2014, a decrease of $24 million when compared to the same period of 2013, while gross margin increased $2 million to $43 million over the same period in 2013. When you look at our operating segments for the 3 months ended June 30, 2014, land revenue in Canada was $64 million, a decrease of $35 million when compared to the same period in 2013. The decrease was primarily the result of a mix of land sold as there was a decrease in raw and partially-finished acre sales due to a 216 acre parcel sale in 2013. This was partially offset by 5 additional single family lots sold in 2014 when compared to the same period in 2013. Gross margin decreased $2 million to $39 million when compared to 2013. As a result of the lower raw and partially finished acre sales in 2014, partially offset by the mix of lands sold, additional single-family lots sold and the higher average lot selling price due to improved market conditions. Land revenue in California for the 3 months ended June 30, 2014, increased by $9 million when compared to the same period in 2013. This was primarily the result of sales 94 single-family lots sold in 2014 compared to no land sales in 2013. Land revenue in the Central and Eastern U.S. segment increased by $2 million and gross margin remains flat for the 3 months ended June 30, 2014. The increase in revenue was due to an increase of 8 single-family lots sold, primarily in our Denver market, and an increase in average lot selling price related to the mix of lots sold. In terms of our housing operation, housing revenue is $240 million for the 3 months ended June 30, 2014, compared to $193 million for the same period in 2013. The increase was the result of increased average home selling prices in all our operating segment, partially offset by fewer home closings. Gross margin increased $19 million as a result of a 31% increase in the average selling price when compared to the same period in 2013, partially offset by a 5% decrease in home closings. In Canada, housing revenues for the 3 months ended June 30, 2014, remained consistent when compared to the same period in 2013. Total home closings decreased 8% for the 3 months ended June 30, 2014, compared to the same period in 2013 due to decreased closings in Alberta as a result of timing. The average home selling price increased 9% due to price escalation from market conditions in Alberta and from product mix, particularly due to Ontario having a higher proportionate share of the total home closings as our homes in Ontario have a slightly higher average selling price. As a result of higher average selling price, gross margin increased by $3 million for the 3 months ended June 30, 2014, when compared to the same period in 2013. In California, we had housing revenue of $118 million for the 3 months ended June 30, 2014, an increase of $33 million when compared to the same period of 2013. The increase in revenue was due to a 64% increase in the average home selling price for the 3 months ended June 30, 2014, when compared to the same period in 2013, partially offset by 21 fewer home closings. Gross margin increased $14 million as a result of the increase in average home selling price, which is primarily driven by modest price increases and a product mix of higher-priced homes closed in some of our San Francisco Bay Area and Southern California communities for the 3 months ended June 30, 2014, when compared to the same period in 2013. The Central and Eastern U.S. housing revenue increased $14 million for the 3 months ended June 30, 2014, when compared to the same period of 2013, as a result of 18 additional home closings and an increase in the average home selling price. A portion of the increase is a result of the Denver market, which had 13 home closings for the 3 months ended June 30, 2014, compared to no closings in the same period of 2013. Our Denver operation began in 2013 and did not start having closings until the third quarter of 2013. Gross margin increased by $2 million when compared to the same period in 2013 due to product mix and higher selling prices. The increase in the average home selling price is due to increases in home closings and product mix of the homes closed in different communities across the segment when compared to 2013. Our backlog continues to be strong with a 5% increase in backlog units and a 22% increase in backlog value when compared to the same quarter of 2013. Net new home orders for the 3 months ended June 30, 2014, were up marginally at 679 versus 665 in the same period of 2013, with improvements in all regions other than the Central and Eastern, which was impacted by the more measured market in the Washington, D.C. area. For the 3 months ended June 30, 2014, incentives held flat in all regions other than Central and Eastern with some marginal increase in Washington, D.C. Moving to our balance sheet. As of June 30, 2014, our assets totaled $3.3 billion. Our land and housing inventory and investment in unconsolidated entities are our most significant assets with a combined book value of $2.8 billion or approximately 84% of our total assets. In the second quarter, the increase in our land and housing assets is attributable to acquisitions of $36 million, development activity and a stronger backlog. During the quarter, we repurchased for cancellation approximately 540,000 shares of our common -- at an average price of $20.11 under our normal course issuer bid. We funded the purchases through our available cash and believe that these purchases are prudent investments at times when the market price of our common share may not fully reflect the underlying value of our business and our future business prospects. We'd like to thank you for joining us on the quarter end conference call, and I'll now turn the call back to the operator who will moderate questions.

[Operator Instructions] The first question today comes from Bob Wetenhall of RBC Capital Markets.

I wanted to get a view, total controlled lot inventory is down 3.5% year-over-year, and it looks like you're slowing the pace of net inventory growth a little bit. It was over $200 million in the first quarter of '13 and now it's $125 million. Are you shifting a little bit more towards a divesting phase rather than a position of building up inventory?

That's a good question. I think as we said in some of the past calls, Bob, I mean, we are -- we don't need the 109,000, obviously, to accomplish what we need to do as a company, but we are trying to be opportunistic. When monetization opportunities do present themselves, where it's not critical for the business or there's a value being paid for the lot position that reward as appropriately for where we're at, we will look to do that. So I think you'll see some initiatives on that over the next 12 to 18 months. I mean, they just -- we're working our way through some of those different markets.

Okay. And in your core Canada markets, I think -- and correct me if I'm wrong -- home prices are increasing at a faster pace than lot prices. And we were trying to understand whether that's a function of mix between lots and homes, and also your ASPs in Canada are up nearly 10%. And is that indicative of a richer mix shift in what you're selling? Or is that just strong price momentum in the Calgary market?

With respect to the lot price increases, obviously, as an absolute percentage, the increase value on the lots is a higher percentage on lots. And therefore, when the houses are going up, most of the residuals, it goes into the house, it's a smaller percentage on the house price. Just because of the land components maybe 35% of the ultimate finished house price. So most of it would be on the land side, which will then translates into the same dollar amount, probably, coming through on the house, which is obviously a slightly smaller percentage just because of the denominator. Does that -- I think that's -- anything else what you're asking? If there's any confusion, don't hesitate to get back to us, but I think that -- I mean, if a lot price goes up $20,000, I mean, that could well be a 10% increase on the lot, but obviously, it might only be a 5% increase or a 4% increase on the house.

Well, so that's why we're asking, because it looks like home prices are actually outpacing the growth in lot prices.

On the absolute dollar amount, you mean?

On a percentage basis.

Yes, well, in some cases, there could be some mix in it as well. I mean, there was a few amenity lots and et cetera, and a few amenity -- that type of stuff. We can get back on specifics. I don't have it right on the tip of my tongue. But Craig, did you have any...?

Yes, I think what you both said in terms of mix. Obviously, on the house prices we mentioned you had a higher component, Ontario as well, which will drive up the house price, because those are more expensive homes. In terms of the lot, we've had meaningful price increases, obviously, higher price increases out of Calgary, as Alan mentioned, versus Edmonton. And so that will depend on the mix between Calgary and Edmonton going forward.

I mean on an overall basis, we're obviously very comfortable with where we're at from a Calgary, Edmonton and Toronto, I mean, from a Canadian perspective, that's the overriding thing. On an apples-to-apples basis, I would say that the direction has been up in all 3 markets, just to give you that indication.

And you expect that strong pricing momentum it sounds like to continue in 2H, correct?

Yes, I mean, I think -- I mean, not necessarily continue on that trajectory as much. I mean, I think, obviously, there's a constrained supply situation in one of the markets, which as we get that resolved, it should bring more moderation to the pricing.

The next question comes from Will Randow of Citigroup.

In terms of your Canadian land margin, some -- it almost seems like you're on your acceleration, not sure if it's mix driven. But also California, holding in, or -- I shouldn't say holding in -- picking up a little bit. How should we think about the pace of land sale margins? I know it can be choppy. As well as the pace of land sales in the second half of '14?

From a Canadian point of view, it should be a fairly steady state. I would say there's nothing -- not too much volatility there. I think the only issue from a California point of view is it could be, as we've said in the past, a lot of the stuff in California is opening up some new communities. So it's back-end loaded and it depends on us literally getting the service and the entitlements that all there. It's just a question of physically getting the infrastructure and the services into the lots such that we can accomplish the sale, all of the lots are under contract for the most part. And it's really just a question of getting to a finished state. So that's really the situation in California, I would say.

And just on the pace front, I mean, in the first half, your land sales have been a bit lower than the first half of last year for obvious reasons. How should we think about the second half? Should that also be lower year-on-year?

Which year are you talking about, Will?

Land sales, I apologize.

A particular region?

No, just totaled up. I mean, you're running a little bit below -- down year-on-year each quarter in the first half. Should we think about it kind of that same down, call it, $10 million a quarter to $20 million in the second half each quarter, year-on-year?

Well, it's Craig. I think in terms of lot sales, obviously, at the end of last year, we gave you unit count guidance. We don't update that throughout the year, but I think in terms of Canada lot sales, as we did mention, we are getting marginally better gross margin. But it is a more measured pace and so yes, we could be the actual unit count could be off marginally from that original unit count guidance, but as we said, we've made it up in margin. In terms of the other regions, it really depends, as Alan mentioned. A lot of those lot sales that we are looking to occur are scheduled to happen very near at the end of the year. And so there's always the chance they could slide.

Got it. And just as a follow-up. Your Central and Eastern segment in terms of housing gross margins, how much do you think your overhead carry, I believe it's above average, is distorting your gross margin? What do you think the run rate is once those communities are firing on all cylinders?

Yes, I think where you see that, I think you see that in Central and Eastern lot sales in particular where we're not selling enough yet to really carry, hit the full carry cost. In terms of the housing margin, I'm not sure if it's much impacted. I think to some extent, that's just a lower margin region.

Yes, I mean, and obviously, on the gross side -- on the gross margin, particularly, I mean, obviously, that's pre-SG&A. So from that point of view -- but we're -- I mean, obviously, DC is probably a little bit slower, as Craig alluded to through his comments. There's no question that the DC market, I mean, most builders are experiencing a softening in the DC market-right now, which is from a government perspective and some of the uncertainty surrounding that. And really from a Colorado point of view, we're still getting our legs there with respect to our housing initiatives and our housing business. So we're comfortable we're going to get there. But that one market is probably a bit softer, is the DC market, I would suggest on that front.

The next question comes from Sam McGovern of Crédit Suisse.

Sort of continuing on the land sale questions. When you think about sort of the areas of housing that are softening, have you seen any sort of related pullbacks from the builders in terms of demand for land at this point?

Good question, Samuel. I'll just -- I'll run through a couple of regions from a U.S. point of view, just to give you the flavor of the month of what's going on, I mean. I would say from a California point of view, I mean, we sold some lots there just at the end of the quarter, for instance, that was Inland Empire, tight lots. The communities I was touching on there that we have coming on towards the end of the year, we've got a number of phases that are coming on in those communities in Southern California, which are under contract. And we haven't had any real hesitation from the point of view of the builders. They've put earnest money up in most cases, as we speak, finishing off some DD, but we don't see any problems there at this point. I switched into Austin. Again, we've got a couple of communities coming on there. We've got the lots under contract. We're seeing no hesitation with respect to closing on those. Again, it's just a function of getting them serviced, so that we can, actually, physically close the contracts. Phoenix, I would say, is a tale of a few different stories. I would say in our Eastmark project, we've seen some builders who are continuing to do okay and other builders who are struggling a little bit. So that market, as we've touched on before, has flattened out because of the significant appreciation last year, but we are seeing some builders who are still being successful and others who have decided to move on. So it's a little bit of a tale of 2 different types of situations, but we're still on track from what we're planning in the Phoenix market, but there are some guys who are choosing to back off because things have flattened out a little bit too much.

Got it. And just on the stock buybacks. You guys are about a little more than a quarter of the way through the normal course issuer bid. How do you think about -- whether you want to scale that up over time or versus investing -- using that money to invest in the business?

Yes. I mean -- I guess, we also look at the buyback as a form of capital allocation. I mean, there's really -- I mean, obviously, the alternative is to continue to go there and buy some other assets, but we think we're, obviously, buying our own assets at what we believe is a very, very attractive price. We're betwixt and between with respect to the quantum. I mean, we're all well aware of the public float. I mean we have a major shareholder, got 68% of the company, we have 32% public float. And obviously, the more we do on the buyback, obviously, the more we impinge upon the public float -- so we're trying to strike a healthy balance that show confidence, because we think it's a tremendous buy anyway. Obviously, when we initiated it, it was a higher stock price than where we are today and, obviously, the returns are even higher at the pricing we're at this point in time in our opinion. So it's a -- we're trying to strike that balance. I mean, obviously, if we increase it, we somewhat inhibit the public float a little bit more, which has other consequences down the road, potentially, for people entering and exiting the stock.

Got it, that's helpful. And then just a housekeeping question. What was total liquidity at the end of the quarter?

Approximately $1 billion between cash on hand and the various -- Craig, correct me if I'm wrong.

No, that's right. I see we showed that cash balance and then we still have the U.S. $250 million revolver. We have that Brookfield Asset Management line of $300 million and the availability on the Canadian line, which is $500 million line. Our odds keep on dropping [ph].

The next question comes from Julie Matthews of Wells Fargo Securities.

So I wanted to ask first just what you think are some of the major pieces of the Brookfield story that is either understood -- misunderstood or overlooked by investors right now? I mean, just looking at your buyback price and where it's trading at now, like you just alluded to, something's amiss. And I just wanted to see what your top two things you think are just driving that gaps between Wall Street and your internal idea of what your value proposition is?

I'll just touch on a few. I mean, obviously, we're a little bit more land heavy than many of the other U.S. companies. Obviously, there's a bit more visibility on pure home building. We are -- so, therefore, the visibility into our earnings as much as we try and be as transparent as possible through our corporate profile and our website and come up with what we think is excellent disclosure, it is a little bit lumpier obviously on the land side, which is not as predictable to many out there. As I touched on earlier on a normal course issuer bid, I mean, we do have a 32% public float, which, I mean, when everybody was jumping into the housing sector last year, from a momentum point of view, all it does is that if people do want to exit, it just makes it a little bit tougher from a liquidity point of view. But our story -- I mean, we have long land, but we have -- we do not have to be at the replenishing. I mean, the story is that we are extremely well positioned in Canada and the United States. We've got a great steady-state in Canada, which some people don't quite understand, but, I mean, I think, we got a 50-year track record, which proves it up. And then you can look with 9 years of history sitting in our corporate profile and another 41 years before that, where we proved up how consistent our opportunity is and our business case is up here in Canada. But I think from a U.S. point of view, we still -- we're still getting to the point -- if we wanted to do close to 500 homes in each of our markets, I mean, we've got 11 markets. We're only doing about 2,500 homes. We can easily be doubling the number of units there, and we can be also dealing with lot absorptions and selling off to others and show that more mature state, which we are not yet at. So it's just -- it's understanding that we are going to get to that point where we will be absorbing 6,000 to 10,000 units either through lot sales or housing occupancies or whatever, and showing a significant amount of cash flow and earnings. As we go forward and it's really understanding and looking at what our track record is. I get it from the last 3 years since we've been a merged company. Candidly, the first 15 months, it was really -- there wasn't much to talk about. Land truly was that 4 letter that nobody wanted to talk about. And then the next 15 to 18 months was a very good positive story with respect to the U.S. recovery, and that has paused somewhat. We're not really that concerned on the pause because, candidly, if the market continued to the pace it was going at in the back half of '12 and into '13, there would be a lot of concerns with respect to that pace of increases. So we're okay. We think that the recovery will continue, but at a much more measured pace. And people such as ourselves will be a significant beneficiary of that as we move up our housing activity and our monetization activity throughout the lot sales to third-party builders, who are actively still trying to feed their pipeline. Many of their peers are looking to us to supply lots to them as we go forward, and we already have the land. We have entitled in many cases. We just have to service it and bring it to the marketplace.

Next question, more near term. How should we think about orders per community in California going forward? This recent quarter, there was significant decline, and I don't know if maybe you could help us understand what drove that decline, if it was more of a demand-related issue with the buyer? If it's you have less-attractive communities that are online now versus a year ago? Or if it's a higher-priced mix issue? So more of an explanation for the decline in the most recent quarter as well as how we should benchmark it going forward?

I'll deal with your second point. Our communities are extremely attractive, so just to make that point. I think our price point has climbed a fair bit in California. As a result, you maybe don't quite see the absorptions per community as high. I mean, we're selling $900,000 homes. You don't necessarily get to that level from an absorption point of view, the higher price point. You're getting a little bit more into niche in some cases. And it's not necessarily a direction that we're going consciously. It just happens to fit the particular land asset and communities that we're bringing on at this point in the -- not so much in the cycle, but the land assets that we have currently. I mean, I think, we will obviously be striving to deal with more balance, and maybe not say more affordable. But on a general direction, we think affordability, we want to try and continue to address that. But some of the land assets in the community we're bringing on just now are meeting a need in the marketplace that they just happen to be higher-priced product at this point in time. So we're not concerned about it. I mean, we got some great margins coming through. Obviously, I mean, we're still making north of 20% in many of those cases from a gross margin perspective on $900,000 homes.

[Operator Instructions] Our next question comes from Andrew Feinman of Iridian Asset Management.

I saw you guys in New York in May, and bought some stock for our clients. And so at the moment, we have a loss and -- the story was very compelling because of the -- your inventory of properties that were -- that you owned with kind of a built-in 25% gross margin because you bought them well, and not too much need for replenishment. So I guess, I'm wondering if it's visible yet when we might see a return of capital? Or is that even the wrong way to look at it? Are you really planning to use the capital to build more houses, so what I should be looking for is growth in earnings and not necessarily cash coming into my pocket through a dividend?

Yes, I mean, I think -- and thanks for the question. I think, the -- I mean, as I touched on a little bit earlier, I mean, for instance, the stock buyback initiative is just one leg of a capital allocation approach that we would look at. I mean, we would look to try and balance. I think we can -- we would like to increase our housing presence in many of our markets. So that will require some additional investment. That just gets us to a good critical mass in each of the markets where we currently do business. So that will require some of our capital that way, but we will be looking to monetize some selling, some other lots and things of that nature. And I really think we would be taking a balanced approach with respect to capital. The idea of repeat trading capital is always one of the considerations as we go through different cycles. And I'm not saying we're at that point at this point. I mean, generally speaking, we do -- we will generate a significant amount of cash over time, and we just have to balance off the opportunities that exist in the marketplace and, obviously, anything to do from a shareholder initiative. We're not a company, which is going to -- nor have we ever been where we have to grow for growth sake. I mean, we're very focused from a point of view of enhancing value for shareholders, and we will take whatever the appropriate measures are in order to that, whether it be on stock buybacks or will it be through earnings power or whatever, and we'll be looking at the appropriate returns in all cases.

Well, I appreciate that and I'm also -- I like everything you're doing, but I just -- the stock buyback so far, your number of shares, it's still up year-over-year. So that hasn't actually helped me as a residual owner in terms of the value of my holdings. And the earnings...

The only thing I can think of in that one is that there was a small conversion of some of our old preferreds. But I mean, obviously, we bought, as we reported over 500,000 through the end of the quarter. We've continued to buy on a consistent basis every day since then because of the value that we're seeing in the marketplace.

So in the past, you've paid special dividends, from time to time. And so I guess -- and you mentioned that when you were in New York in May. Can you see an opportunity for that to occur sometime in the investable time horizon? Special or regular?

I think, I mean -- as I said earlier, I think we have to look at what opportunities are out there and if we feel that the best opportunities to repatriate money to shareholders as opposed to continuing to invest in the business, we would take the appropriate action trying to find some way to address that. I'm not going to get into whether that's on the card at this point in time. I mean, we're still -- I would -- candidly, I still think we're in the early innings of the U.S. housing recovery at this point. And I think there is a fair bit of room to grow, to be quite honest. And so I'm not saying I'm doubling down, but I'm just saying that, I think, there's still many opportunities out there in the marketplace as well. We'll approach it from a balanced point of view to try and come up with the right mix for the company and, obviously, its shareholders.

Okay. The last thing I'll just say, it seems with the thin float, and getting thinner, if earnings go up, it's not clear that the market will necessarily give me a return -- give your stock a fair valuation on those earnings without being accompanied by free cash flow that is somehow making its way back to your owners.

I appreciate the insight.

The next question comes from David Spier of Nitor Capital.

Listen, I don't want to beat a dead horse here, but on the buyback, it seems like you guys repurchased around $10 million worth of shares. On our analysis, which obviously could be wrong, but it seems like that the market is valuing your land at a severe discount here to anything that will be available in the open market. So therefore, wouldn't it, more or less, make the most sense to place the primary focus on buying back your own shares, rather than taking cash out of the company via dividend, as previously mentioned? Or buying more land? I know when you mentioned that the small float and there's liquidity issues, especially with aggressively buying back shares. And -- but you even mentioned that your shares still represent compelling value here. So more or less, what I'm getting at is how do you go about bridging this gap for shareholders? And at the same time, also taking advantage of the opportunities that's in front of you?

Yes, I mean, it's a fine balance. There's no question about it, David. We try to find that balance on the 2 million share number that we picked again to try and protect the public float somewhat, as well as to assure that we think it's a very good investment.

More or less what I'm getting at, if you have the ability to buy back your own shares and you're buying land at a severe discount to anything else that's available; but at the same time, you're afraid of causing liquidity issues. Will you go out and buy land on the open market at a higher -- at a premium instead of hurting your liquidity more or less? That's kind of what I'm getting at.

No, we're not going to buy land just for the sake of buying land, because we don't want to hurt the float, no. We'll do the right thing with respect to from an -- I mean, we're still with the same criteria as we've always had with respect to when we're repurchasing assets that we need to make certain returns. It's not -- I understand your point, but we're not going to do something just because...

That's good to hear, from everything you guys have done so far that it seems that would be the case...

We have a discipline in terms of how we're approaching it, yes.

The only thing I would add that we have talked about in the past is the other thing we're obviously balanced against is developing our land in order to advance it for monetization. While our acquisitions in the quarter certainly have gone down, you are seeing our dollars that are being spent. To develop the land to advance it using plans [ph] that we've talked about.

That makes sense. The land doesn't develop itself, so that make sense. The other question, the last one I'll leave it be. But looking at the longer term here and ignoring some of the more shortsighted metrics that a lot of the analysts seem to focus on, I think it's worth mentioning that you mentioned that you're land-heavy and that's the reason for the discount. But being land-heavy is, in our minds, actually a positive, considering it's a significantly higher margin business. At the same time, it seems like, on our numbers, you guys are selling lots about $130,000 to $140,000 per lot. Historically, you guys are generating around 40%-plus margins, around $55,000 per lot. But if you look at your share price, the market seems to value your 109,000 lots at under $20,000 per lot. So that's a pretty significant discount that we're more or less referring to between the real value you guys are generating, about $55,000, and the implied value of the shares, which is around $20,000. So I hope that's realized by all. That it's not...

Yes, I mean, I think we've tried to disclose in the profile. As you know, David, I mean, from a raw land point of view, you can see the book value of our raw land and we try to explain what we will net out of that raw land on a future cash flow point of view on an undiscounted basis, which is an excess of $5.5 billion. So we try to give that visibility and that doesn't have any inflation on any of those things then too, that does include any housing on top of that either. So I appreciate your point and that's why we're trying to be as transparent as possible.

All right. Looking forward to seeing you guys bridge that gap and getting that price to reflect the accurate value.

I appreciate. Thanks, David.

We have a follow-up question from Will Randow of Citigroup.

And I have a little bit of a shortsighted question. In regards to community count growth in the second half, are you still looking on the housing side mid-50s? And how does that ramp up over the next 2 years?

Will, it's Craig. In terms of -- yes, I think we have -- original guidance was roughly community count of 57 including JVs. I think we're at 56 so that would be about a net 1 in the later half of the year. In terms of the next 2 years, I'm not sure we're in a position to give that right now.

Do you think it's mid-single digit or greater than that? Growth year-on-year?

Well, let's work our way through different nuances a bit. As I said earlier on, Will, just about increasing the housing activity in some of the region so, I mean until we literally get through some of the pros and cons, I just don't want to be sort of misleading until we really got ahead around exactly how much we're going to be doing our sales versus selling through others.

The next question comes from Frank Mayer of Vision Capital.

It seems to me that one of the problems that Brookfield is experiencing is that the quarterly report only reports on earnings per se, which is on dispositions, sales of houses and sales of land. During this period, during the 3 months and during the 6 months of 2014, fiscal 2014, the company has created considerable value, both through the appreciation of land and its marketplace and through the processing of land, which enhances its value as it becomes entitled lots and annexed land within cities, et cetera. So the question I have for management is could you give us some idea of what that unreported number might be? The appreciation of value that has occurred to the benefit of individual shareholders during the first 6 months of the year? I noticed that, in that regard, that, of course, Al, you mentioned, a reference to $5.5 billion of undiscounted cash flow. I think these numbers are only revised once a year and that would presumably pick that up. Could you -- if you're not prepared to give us a dollar amount for the first 6 months, could you give us some idea as to what the trend in the $5.5 billion might be and where that number might stand at year end?

Yes. It's obviously difficult to try and value the appreciation. That's just part of what we do every day, Frank, obviously, to try and bring it to the process to add the value. And I totally get your point with respect to if unrealized gain that we get from the other 90,000 lots that we're continuing to take through the process. The $5.5 billion, I mean, I just want to make sure we're all clear. But obviously, we will be moving land from raw into a developed state. So I mean, as we go through, I mean if everything stayed static and prices are increasing, you continue to see that number go up. We will, obviously, be pulling some numbers out of the $5.5 billion as we bring it through to the developed state. So I think what is incumbent upon us to do is to try and explain as we update that once a year as to what has moved from raw into developed, and you'll see that corresponding change there. It's either going to be crystallized through sales or it's going to end up in land under development. But you're exactly right. I mean, what we -- we are experiencing some price increases in some of the markets, which is one aspect of value creation as we continue to hold land which will go up in value because of that. And we continue to get value creation through taking a particular piece of land from an unentitled state to an entitled or further progressing it. So there's a combination of ways of doing that and we try to explain in the profile which ones are entitled, what states they're at, things of that nature. And then there's enough map, et cetera, there to try to explain people build to understand in some of the markets what that should result in. But it's difficult to do on an unrealized gain calculation on a quarter-by-quarter basis because there's a lot of moving parts. I get your point.

I mean, let's start at the base case. Is it fair to say that the $5.5 billion have not gone down?

We don't update it until we do it at the end of the year. I mean, as we take -- as I said, what I can't recall is exactly how much -- we've approved a lot of land taking of raw and into developed states, so I mean, we've done like close to a number of project approvals through the course of the year, which continues to develop. So I mean, we're bringing more lots on. And as we touched on a little bit earlier in the call is, we haven't quite replenished all of it, nor do we have to. I mean, our lot count is down slightly. But I mean, we're still in a very, very solid state. So all I'm saying is there will be some that come out. I mean, we could be taking out 300, 400 acres worth of land easily in some of the regions to move it into a developed state, which comes out of the $5.5 billion, that brings it much closer to crystallization. It's still a very positive story. So I mean, we will update and try to bring clarity as to what's gone in and what's come out. So that you can get a more apples-to-apples version when you see it. If that number was $5.6 billion -- I'm just picking a number, Frank -- it could be well that we took out what used to be $600 million worth of raw land out of that $5.5 billion number, and so the net increase is there, but the rest of it is coming through land under. So I'm just trying to show the movement.

I mean how many years have you been doing the -- this $5.5 billion number now?

I think just since the merger. So just over 3 years ago.

And what has the pace of the increase in the number been over those 3.5 years? I mean, what did it start off at? I don't have...

I think we referenced it within the profile, the exact movements year-over-year. With that said, there's a lot of moving parts. I mean, other examples would be if we decide to monetize something in raw or partially finished state that arguably could bring down the number, but would be a very positive thing. I think Alan referenced that...

I'm just trying to get out what are the historic increased been in that numbers over the last 3 years?

$5.5 billion.

I'm going off the top. I think it was $4.7 billion, then $5 billion and then $5.5 billion.

So I mean, is there anything to suggest that, that progression would not continue?

Other than we're going to be trying to advance and monetize and do things, and create -- I mean, obviously the quicker we advance some of the monetization, the more value we have for the company. So that's the whole point. And so, I mean, this is all undiscounted, no inflation if we advance the timing of the cash recover that allows us to reinvest with the old other capital allocation, things that we touched on earlier, so it's -- we're very comfortable at where we're at. Let's put it that way.

The last question comes from Rick Murray with Midwest Advisors.

Just a quick question, I apologize, I got on the call late, so you may have already covered this, but related to the pace of absorption in California, it seems like there's been a bit of a dramatic slowing. Was there -- are there any other sort of timing or other issues related to community openings or anything like that?

Yes, Rick, it's Alan here. Yes, we did touch on it a little bit earlier on. But really, just to clarify -- I mean, our price points have gone up quite significantly in California for a lot of good reasons. But just from a pace point of view, typically, on the higher end homes, it will be slightly lower pace. So I think it's just a mix thing at this point. I'm not -- we're not too concerned. We're still achieving our margins and our results. But as we get closer to that $900,000 price point, which I'm not seeing is going to be replicated forever, but at this point, with the types of lands that we have and the communities we have, we're going up to some of that higher price point and the absorptions will be a touch slower just because of the cost.

Okay, I appreciate that. And then just a final comment. I may be old or old-fashioned, but being in the land development business 6 years into a housing cycle, I'd be very comfortable holding on to liquidity.

Yes. I understand. We're sitting with just about $1 billion of liquidity at this point, so we're in very good shape with respect to that. Our debt profile is 2020, 2022 from a point of view of unsecured notes. I still believe that the pause that we've seen from a U.S. housing recovery point of view, we touched on earlier on the call, I think I'm not saying it's going to prolong it, but I still think we're not in the late innings of a recovery, by any stretch, in my opinion, from a U.S. point of view. So I think there's still some room to grow, but we still have, which we're going to come up with a balanced approach with respect to reinvestment, increasing our footprint in the areas where we do business, and looking at capital allocation for shareholder different initiatives such as the buyback, so we're trying to take a balanced approach to it.

There are no further questions. I'll now hand the call back over to Alan Norris for closing comments.

Thanks, Brock. Thanks, everybody for taking the time out of your busy day to listen to our call. I appreciate your support and your insight, and we look forward to talking to you at the end of Q3. Thank you.

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