The Baldwin Insurance Group, Inc. (BWIN) Q4 2014 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Chorus Call Conference operator. Welcome to the Brookfield Residential Properties Conference Call and Webcast to present the Company's 2014 Fourth Quarter and Year-End Results to shareholders. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [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, Mr. Norris.

Thank you very much. Good morning, ladies and gentlemen, and thank you for joining us for Brookfield Residential's 2014 year-end 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 within the meaning of applicable Canadian and US securities laws. These statements reflect predictions of future events and trends and do not relate to historical events and subject to known and unknown risks and future events may differ materially from such statements. For more information on these risks and their potential impact on our Company, please see our filings with securities regulators in Canada and the U.S. and information available on our website. Let’s begin by addressing the big, or largest shareholder Brookfield Asset Management acquired approximately 30.6% of our shares that it is not already owned for cash consideration of $24, $25 per common share. A special meeting of Brookfield Residential shareholders is scheduled for March 10, 2015 to consider and vote on the arrangement. The Brookfield Residential Board of Directors has recommended that shareholders of Brookfield Residential approve the arrangement. Shareholders are urged to carefully review the management information circular and a company materials that were mailed to shareholders and are available on SEDAR at www.SEDAR.com, on EDGAR at www.sec.gov and our Brookfield Residential’s website. Assuming shareholder approval is received and customer quoted conditions are met, it is currently expected that the closing of the arrangement will be completed prior to the end of March 2015. Obviously the Board will be inspecting the process and any updates on this process that are require to be press-released are being done. Turning over to our operations in 2014 we delivered excellent performance. Our income before income tax increased 56% to $269 million compared with the $172 million during the same period in 2013. The improvement was due to improved housing and land gross margin percentages, as our overall gross margin percentage for the year ended December 31, 2014 increased to 30% from 28% in 2013. Net income for the year end December 31, 2014 was $274 million, or $2.33 per diluted share compared with the $142 million, or $1.21 per diluted share in 2013. Included in net income was the release of the valuation allowance on our U.S. deferred tax assets, which resulted in a recovery of income taxes of $45 million in the third quarter of 2014. In 2014, we also increased our active housing community count to 61 at the end of 2014, from 47 at the end of 2013, as we brought a number of new projects to market in both the US and Canada. Our net new home orders also increased to 2,382 units. This in turn increased both the number of units in our backlog and a total backlog value to 1,005, and $497 million, respectively. We also expanded our portfolio of well-located land assets with a completion of $224 million of strategic fund acquisitions during 2014. At year end we controlled approximately a 1,600 lots. These results and achievements continue to reinforce our long-term approach to the business of securing assets in growth markets, adding value to our land through the entitlement process and then realizing that volume during appropriate times in the housing market cycle. This year we're able to deliver strong performance amidst uneven market conditions, particularly in the US. While the housing market recovery continued in 2014, it was at a measured and sometimes bumpy pace. Credit and mortgage qualification challenges, lagging household formations and continued trepidation amongst first-time home buyers contribute to a continuation of historically low levels of home ownership on a national basis. However, the recent announcement related to changes in the lending standards and the proposed reductions in FHA premiums will address some of those concerns. In addition the specific geographic markets we operate in fare better with demand remaining healthy in most of our markets. In Canada, the economy remains stable with a low inflation rate and a continuation of the low interest rate environment. Our presence in the Alberta and Ontario markets position us in two of the country’s strongest real estate markets contributing to solid income and cash flow from our Canadian operations. While we do recognize it the recent decline in oil prices may have a significant impact on Alberta’s economy as new oil and gas projects are deferred and Highland freezes go into effect. We believe consumers in our other Canadian and US markets are viewing the oil price drop as a tax cut. This could ultimately help to stimulate home-buying in those markets. I'll now pass the call to Craig to speak to our financial results.

Thank you, Alan and good morning everyone. As Alan outlined Brookfield Residential had strong results in 2014. Net income attributable to Brookfield Residential for the 12 months ended December 31, 2014 was $274 million or $2.33 per diluted share in increase of a $132 million over those $142 million or $1.21 per diluted share for the same period in 2013. The increase in net income for the 12 months ended December 31, 2014, was partially the result of an increase in the net income tax recovery of $30 million, which was mainly due to a reversal of the valuation allowance on our U.S. deferred tax assets in the third quarter of 2014. Additionally, there was $70 million increase in gross margin primarily from improved housing margins, an increase in equity earnings from unconsolidated entities of $17 million, an increase in other income of $10 million, a gain on sale of commercial assets of $33 million and a decrease in other income in consolidated subsidiaries of $5 million. This was partially offset by higher general and administrative expense of $17 million, an increase in interest expense of $11, an increase in sales and marketing cost of $1 million, and a decrease in a change of fair value of the equity swap of $4 million. Land revenues totaled $340 million for the year ended December 31, 2014, a decrease of $33 million when compared to the same period of 2013, and then gross margin decreased $1 million to $172 million. The decrease in land revenue and gross margin for the year ended December 31, 2014 was due to 293 single-family lot closings and 216 fewer raw and partially finished acre closings. This was partially offset by an increase in the gross margin percentage resulting from higher average single-family lot selling prices, higher raw and partially finished acre selling prices and from profit participation revenue collected. Our land revenue may vary significantly from period to period due to the nature and timing of land sales. Revenues are also affected by local product mix and market condition which have an impact on the selling price per lot. When we look at our operating segments for the year ended December 31, 2014, land revenue in Canada for the year ended December 31, 2014 was $270 million, a decrease of $29 million when compared to the same period in 2013. The decrease was result of the mix of lot land sold with 216 fewer raw and partially finished acre parcel closings being sold at 2014 when compared to the same period in 2013 partially offset by 84 additional single-family lots sold. Gross margin increased $4 million to $154 million when compared to the 2013, primarily as a result of lower raw and partially finished acre sales and lower average selling prices for multi-family industrial and commercial acre sales in 2014. The lower average per acre selling price for multi-family industrial and commercial due to mix of land sold. For most multi-family acre parcels have lower average selling prices in general when compared to commercial parcels. Land revenue in California for the year ended December 31, 2014 was $13 million a decrease of $20 million when compare to the same period in 2013. This was primarily the result of a decrease 264 Single family lot sold in 2014 compared to 2013, partially offset by an increase in the average life selling price and profit participation revenue collected on past land sales. For the year ended December 31, 2014, revenue in the Central Eastern U.S. segment increased by $16 million to $57 million and gross margin increased by $6 million to $9 million. This was due to an increase in average lot selling prices related to the mix of lots sold in different communities across the segment, partially offset by 150 few lot closing when compared to the same period in 2013. Housing revenue in gross margin $1.1 billion and $273 million respectively for the year ended December 31, 2014 compared to $983 million from $202 million for the same period of 2013. The increase was a result of a 16% increase in the average home selling prices, due to both price escalation and the mix of home growth partially offset by 1% decrease in home closings when compared to the same period in 2013. In Canada, housing revenues for the year ended December 31, 2014 increased $27 million to $499 million when compared to the same period in 2013. This resulted from 58 additional home closing and a slight increase in the average home selling price for the year ended December 31, 2014, compared to the same period in 2013. The increase in the average home selling price was attributable to price escalation primarily in Calgary market as a result of market conditions and product mix between segments. As a result of increased closings and higher average selling price, gross margin increased by $15 million to $113 million for the year ended December 31, 2014 when compared to the same period in 2013. Our California segment had housing revenue of $488 million for the year ended December 31, 2014 an increase of $118 million when compared to the same period in 2013. The increase in revenue was due to 48% increase in the average home selling price for the year ended December 31, 2014 compared to the same period in 2013, partially offset by 56 fewer home closings. Gross margin increased $56 million when compared to the same period of 2013 as a result of the increase in the average home selling price which was primarily driven by product mix where a large portion of homes close in 2014 were higher priced homes, with selling prices over $1 million from our San Francisco Bay area and Southern California communities for the year end December 31, 2014. The Central and Eastern US housing revenue increased $8 million to $149 million for the year end December 31, 2014. When compared to the same period of 2013 as a result of an increased in the average home selling price. Partially offset by 14 fewer home closing. The decline in closings was due to 49 fewer home closings in Washington DC market. Partially offset by an increase in closings in the Denver market which had 53 home closings for the year end December 31, 2014, compared to 18 closings in the same period in 2013. Our Denver housing operations began in 2013 and did not start having closings until the third quarter of 2013. Gross margin remain consistent at $23 million when compared to the same period in 2013, due to product mix and higher selling prices offset by fewer closing. The increase in the average that home selling prices due to product mix of home closings in different communities across the segment when compared to 2013. As at December 31, 2014 the backlog of housing unit including our share of unconsolidated entities increased 10% to 1,005 units. While backlog value increased 11% to $497 million when compared to December 31, 2013. Moving to our balance sheet, our asset as of December 31, 2014 total $3.4 billion. Our land and housing inventory and investments in unconsolidated entities are our most significant assets with the combined book value of $2.8 billion or approximately 82% of our total assets. Land and housing assets increased when compared to December 31, 2013, due to acquisition of $224 million, development activity and stronger backlog, partially offset by sales activity. Thank you for joining us in our quarter end conference call. I will now turn the call back to the operator who will moderate question.

Thank you. [Operator Instructions] Our first question from Samuel McGovern with Credit Suisse, please go ahead.

Hi, guys. Thanks for taking my question. Just on the Canada market in your comments and I apologize if you guys discussed in this earlier I just tops on the call a little later than I hope initially. If you has actually seen any slowdown in the Alberta markets or it’s just sort of the expectation. Can you talk a little bit about how you see that sort of playing out overtime?

Yes, good morning, Sam. It’s Alan here. Yes, I mean I think we definitely with the volatility in the oil prices we’ve definitely seen the listings have increased in the Calgary market by a significant amount just over the [indiscernible] the Christmas period. And I think just given some indication even just at least early part of the year I mean there could be an issue with consumer confidence. I mean there is a lot of talk about it, but candidly our sales in the early part of the year are some what on track albeit would incentivized a little bit more on some of the single family product, but not really much on our multi-family for sale product. So there’s no question I think it would be naïve of just to think there is not going to be an impact of this. The volatility in oil prices is so great, most of the companies are obviously deferring some projects and so it’s a little bit of lag effect I think, but nothing significant at this point. We will just try to - I mean we’ve seen some of these ups and downs before in that marketplace. So we are not too concerned, but obviously it’s a more an issue of a consumer confidence than anything else.

Got it. And then in the Ontario market with the lower or weaker Canadian currency relative to the dollar and some other currencies. Have you seen any impact from that in terms of foreign investors perhaps either accelerating or sort of maintaining their purchasing in that market.

Yes, I’m not sure we can anecdotally speak to any additional foreign investors. I mean the reality is in Ontario and every other market where we do - I would talk to Ontario mostly on the FX side, but I mean it is like a little bit of tax cut with respect to oil pricing and obviously the FX will help the Ontario export markets. So generally we are seeing nothing negative at all. More positive I would say in the Ontario markets.

Got it, and in terms of 2015 overall I mean what you guys are thinking in terms of land and development spending and how that rolls out versus 2014?

I think we’ve been on a path with respect to increasing our emphasis on building up our housing business and you can see that’s in our housing and continue to increase our community counts. So we will continue to do that from a U.S. perspective. I would say as the Canadian one is still relatively stable with respect to that something to the volatility of oil prices and what I just touched on.

Okay, great, so the mix in community count shifts towards the U.S. away from Canada is that right?

Not away from Canada, but just we continue to book a business from the U.S. that’s really they [indiscernible] declining anything in Canada really just increasing our position in most of our existing markets in the U.S.

Got it. Understood. Great, thank you guys and I’ll pass it on.

Thanks Sam.

[Operator Instructions] The next question is from Joe Matthews with Wells Fargo Securities. Please go ahead.

Hi, question on your gross margins this quarter and going forward like you performed a little better than some of your other public peers this quarter seeing a nice gain year-over-year, some of your peers however are expecting some moderation or even a decline in 2015 I was wondering if you have the same sentiment towards your future gross margins?

Sure, hi Joe. This is Craig, how are you?

Great.

In terms of - I couldn’t comment on all of 2015 I could tell you that our current gross margin percentage has been our backlog is consistent at about 24% that we averaged for 2014 that is certainly on the sales that we have today we are consistent.

Okay, and then just looking back over the past year your single-family lot closings and your U.S. markets was well below kind of what you are guided to initially and I was wondering if that’s a timing issue or if that’s there were delays developing those lots and getting them delivered to your builder customers or how should we think about that. Is it that you wanted to hold on to them and just get a better return over the long term?

No, it’s a good Joe; for the most part it was really just a question of getting them to that finished service fleet with the loaners to transfer them as finished lots to our customers. So mostly for the most part actually it was just a timing issue, I mean there was two of them, two trenches of them in Southern California and another group of lots in Austin, Texas and some of was really just a question of slight delays in approvals, but the rest of it was mostly just fiscally getting the servicing done to get them to that finish that allowed us to convey them as finished lots to our customers. So it’s mostly a timing issue I would suggest.

Great. Thank you.

Thanks very much. End of Q&A

There are no more questions at this time. I will hand the call back over to Mr. Norris for closing comments.

Thank you. Just we wanted to thank you for joining us today on the call. If the private transaction occurs, this maybe our last call with you and we want to thank you for your support. If you did acquire the share at the time of March 31, 2011 merger at a price of $10 per share, you will have realized an annualized return of approximately 25% on your investment. So we are extremely pleased with your confidence in us which rewarded. So thanks again, and speak to you with respect to the going updates with respect going private transaction with a scheduled shareholder meeting from March 10, 2015. So thank you one again.

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