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Edited Transcript of BRP.TO^C15 earnings conference call or presentation 5-Mar-20 6:30pm GMT

Q4 2019 Brookfield Residential Properties Inc Earnings Call

CALGARY Mar 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Brookfield Residential Properties Inc earnings conference call or presentation Thursday, March 5, 2020 at 6:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Norris

Brookfield Residential Properties Inc. - Chairman & CEO

* Thomas Lui

Brookfield Residential Properties Inc. - Executive VP & CFO

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Brookfield Residential Properties Inc. Fourth Quarter 2019 Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Mr. Thomas Lui, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

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Thomas Lui, Brookfield Residential Properties Inc. - Executive VP & CFO [2]

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Thank you, and good afternoon. Thank you for joining us for Brookfield Residential's 2019 Fourth Quarter and Year-end Conference Call. With me today is Alan Norris, our Chairman and Chief Executive Officer.

This call is intended for current holders and beneficial owners of Brookfield Residential's debt securities as well as prospective investors, securities analysts, market makers and other interested parties.

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, including forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. These statements reflect predictions of future events and trends and do not relate to historical events, are subject to known and unknown risks, and future events may differ materially from such statements. For more information on these risks and the potential impact on our company, please see our historical filings with the securities regulators in Canada and the U.S. and the information available on our website.

I'll now pass the call to Alan, who will provide an overview of our operations and markets.

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Alan Norris, Brookfield Residential Properties Inc. - Chairman & CEO [3]

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Thanks, Thomas, and good afternoon. As we reflect back on 2019, Brookfield Residential had a positive year with the achievement of our home and block close -- closing guidance and the accomplishment of several strategic corporate and capital initiatives. Our operating and financial performance was lower in 2019 when compared to 2018, which is primarily attributable to a lower housing backlog entering the year as a result of the slower net new home orders in the U.S. housing market experienced in the latter half of 2018 and early 2019, and the ongoing economic and regulatory challenges experienced in the Alberta market and the operational focus of limiting sales activity in Ontario in 2018. Although our overall results were low, we are encouraged with recent market activity as we ended the year with growth in our net new home orders in both countries. We are optimistic that this momentum will help fuel a positive spring selling season as we look ahead to 2020.

We remain encouraged with the U.S. housing market conditions as it continues to be supported by positive economic fundamentals. We have experienced recent improvements in consumer confidence, partially due to lower mortgage rates with a 21% increase in our net new home orders during the 3 months ended December 31, 2019 compared to 2018. However, we remain cautious as affordability continues to be a key consideration in the long term, particularly in markets such as California and Denver, with an ongoing trend towards lower-priced homes.

The overall Canadian market continues to be impacted by government changes to mortgage rules as homebuyers have had to adjust to what they can qualify for as there is a little bit of implemented stress test. Recently, the federal government announced modifications to this stress test, and while the impact of these changes are expected to be minimal, they are somewhat positive changes for the consumer. There are individual leasing markets that continues to be a growing market conditions here in Alberta and Ontario operations.

In Alberta, the economic environment continues to remain challenged, with limited investment in the energy sector as a result of the uncertainty relating to pipeline approvals and overall federal policy towards the energy sector and climate change. However, we have still experienced order growth in the Alberta market in 2019 compared to 2018.

In Ontario, with the opening of several new communities in 2019, we saw an increase in net home orders with terra firma on house prices. As a result, our net new home orders in Canada for the fourth quarter of 2019 increased 54% when compared to 2018.

We extend our sincere thanks to all our team members and support of stakeholders for your continued support of our business and in our endeavors related to the strategic corporate initiatives and execution of our capital plan. With the current market conditions experienced in the U.S. and in Ontario, we are encouraged and hopeful that this momentum will continue into the spring selling season.

And as a quick aside, we have not seen any impact at this point on traffic related to coronavirus at this time. And obviously, with mortgage rates coming down, that is actually helped -- very, very helpful. No impact on supply chain at this point either but more than willing to elaborate somewhat during Q&A, just to put that on the table.

I'll now pass the call on to Thomas, who will provide an overview of our financial and operating results.

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Thomas Lui, Brookfield Residential Properties Inc. - Executive VP & CFO [4]

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For the year ended December 31, 2019, Brookfield Residential recorded consolidated net income of $198 million compared to $182 million for the same period last year. The increase of $16 million is primarily the result of a decrease in selling, general and administrative expenses of $52 million primarily due to the formation of the management company, Brookfield Properties Development and the fair value changed to our share-based compensation plans.

There's also a decrease in income tax expense of $35 million, an increase in equity earnings from unconsolidated entities of $40 million and a decrease in interest expense of $1 million. This was partially offset by a decrease in gross margin of $86 million due to the lower housing and land gross margins, an increase in lease expense of $12 million, a decrease in the gain on sale of commercial assets of $6 million and a decrease in other income of $8 million.

Housing revenue and gross margin were $1.6 billion and $268 million, respectively, for the year ended December 31, 2019, compared to $1.8 billion and $344 million in 2018. The decrease in housing revenue was due to the lower home closings across all 3 land and housing operating segments.

Housing gross margin decreased primarily as a result of lower closings primarily from all our California and -- primarily from our California and Ontario operations and increased incentives provided on the homes closed due to a slower market in 2018 that affected our backlog entering 2019.

When lowering -- looking at our housing activity by operating segment, our Canadian segment had 215 fewer home closings and 3% lower average home selling prices when compared to 2018. The decrease in home closings was primarily a result of fewer home closings from Ontario market, largely due to a mid-rise building closing in 2018 with no comparable closings in 2019. Our California segment decreased through to 211 fewer home closings, with the largest decrease coming from our Southern California market as a result of weaker market conditions from home orders in the last half of 2018 and in early 2019. The Central and Eastern U.S. segment had 55 fewer home closings, partially offset by a 6% increase in the average home selling price.

At December 31, 2019, we had 1,273 units in our backlog, with a value of $603 million compared to 1,137 units with a value of $612 million at December 31, 2018. The increase is primarily due to a higher net new homeowners, mainly in our Canadian operating segment.

Our Canadian segment at December 31, 2019 increased by 105 units when compared to the prior year primarily due to the higher net new homeowners across all our Canadian markets. Our California segment decreased by 42 units, mainly due to a decrease in net new home orders in 2019. The Central and Eastern U.S. segment increased by 73 units primarily as a result of higher units in backlog from our Austin region when compared to 2018.

Land revenue totaled $388 million for the year ended December 31, 2019, an increase of $20 million and land gross margin totaled $119 million, a decrease of $10 million when compared to 2018. When we look at our operating segments for 2019, land revenue and gross margin for our Canadian segment decreased primarily as a result of fewer single-family lot closings with lower single-family lot selling prices primarily due to the mix of land sold. This was partially offset by closing 134 raw and partially finished acres in 2019 with 19 comparative acre sales in 2018.

In California, land revenue increased $4 million, while gross margin decreased $3 million primarily due to 68 additional single-family lot closings, so slightly lower average lot selling prices.

Our Central and Eastern U.S. land revenue and gross margin decreased primarily due to lower single-family lot closings due to a bulk sale in Phoenix in 2018 with no comparable sale in the current year.

Moving to our balance sheet, as of December 31, 2019, our assets totaled $5.6 billion. Our land and housing inventory and investments in land and unconsolidated entities are our most significant assets with a combined book value of $3.4 billion or approximately 61% of our total assets.

Land and housing assets increased when compared to December 31, 2018, due to land acquisitions of $400 million and land development home construction activity, partially offset by sales activity. Our investments in land and housing unconsolidated entities increased as a result of continued development of land and construction of our inventory within our joint ventures.

We continue to execute on our capital plan in 2019 with the issuance of $600 million unsecured senior notes with an interest rate of 6.25% due in 2027. And subsequent to the end of the year, we issued $500 million unsecured senior notes with an interest rate of 4.875% due in 2030. The proceeds from both of these offerings, together with cash on hand, were used to fund the redemption of our senior unsecured notes due in 2020 and 2022. The successful completion of both offerings allows the company to maintain existing debt levels, reduce annual interest costs as well as favorably extend our debt maturity profile, with our unsecured notes now maturing in 2023, 2025, 2027 and 2030.

The liquidity available at December 31, 2019, include $110 million of cash and $610 million available on our North American unsecured revolving credit facility.

At December 31, 2019, we had no borrowings outstanding on our North American credit facility. Our net debt to total capitalization ratio at December 30, 2019, was 36% compared to 44% at December 31, 2018.

That wraps up our formal remarks relating to our results. Thank you for joining us on the conference call. I'll now turn it back to the operator who will moderate questions.

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Operator [5]

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(Operator Instructions) There appear to be no questions at this time. I would like to turn the conference back over to Mr. Alan Norris for any closing remarks.

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Alan Norris, Brookfield Residential Properties Inc. - Chairman & CEO [6]

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Thank you very much, operator. I appreciate everybody attending the call again today, and look forward to chatting with you after our Q1 results, sometime April, early May. Thank you very much, indeed.

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Operator [7]

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