Late Monday afternoon, Brookfield Homes will report its earnings for 4Q2008, and if the results of those builders who have released earnings for the quarter thus far are any indication, the numbers will not be pretty.
In 3Q2008, Brookfield CEO Ian Cockwell said the company was moving forward with a focus on monetizing its lot inventory and getting it ready for construction. The company reported having 25,678 lots--14,706 of which are owned or held by joint ventures. Moving forward, however, it needs to reduce its lot count. Although a relatively small company, Brookfield is sitting on enough land to place it in the same league as some bigger builders--Meritage controls 15,802 lots, and NVR reports 45,000 controlled lots--which simultaneously exposes the company to the potential of accruing impairments.
Positioning itself to reduce its lot count, Cockwell said the company is investing in its land in order to make it attractive to potential buyers. As transcribed by Seeking Alpha, Cockwell said during the company's 3Q2008 conference call that "the fundamental shift of economic ownership in land assets should work itself through the markets over the next 12 to 18 months, and we are aligning ourselves to participate in these changes in ownership."
Cockwell added that a number of larger development projects in California and Nevada faced debt repayment issues, and that the company was using operating cash flow to repay debt in the third quarter. "We see new sources of capital coming into the market to acquire this swift land opportunity," he said. "We are still unaware of any major land transactions that have closed in our markets, and at this stage, the sources of debt or capital are reassessing what is available in the market."
Company impairments for 3Q2008 were recorded as $27 million on 709 owned lots and write-offs of option deposits of $5 million on 606 optioned lots, compared to $34 million of impairments and write-offs primarily on 55 owned lots during 3Q2007. Also in 3Q2008, Brookfield recorded a $9 million impairment on an investment in an equity accounted joint venture in Inland Empire, up from a $2 million impairment on a joint venture in 3Q2007.
JMP Securities has Brookfield listed with $199.9 million in impairments to date and $1.09 billion in total current inventory--a 2.3% decline from its peak--with total estimated impairments to date of $342.8, giving the company a current book value of $12.29 and an estimated calendar year 2009 book value of $9.32 as of Jan. 26.
According to JMP analysts: "Impairment charges for the period have trended up in builders who have reported thus far, and we expect to see that trend play out in many of the other builders as well following a quarter of abysmal sales. That said, many builders have little inventory remaining to impair, and we continue to believe that the bulk of impairment charges are a thing of the past."
Said Cockwell during the 3Q2008 conference call according to the Seeking Alpha transcript, "The year ago fourth quarter lot sales would have been lots that were sold into joint venture with CalSTRS [California State Teachers' Retirement System], that is significant. We are continually looking at where there are opportunities to trade lots and have an economic interest in a certain number of lots, but being able to withdraw capital and the situation in the month of September is quite different to what has transpired in the first three or four weeks of October, or the month of October. At this stage [of] our projections, we're not building in anticipation of any meaningful lot sales. Lots are still being. Where we have projects, especially in the coastal area, people have been very interested in the lots, and from that aspect, yes, there could be lot sales in the fourth quarter."
In order to utilize capital internally, the company deferred payment of semi-annual dividends. In December 2008, it also announced a rights offering for stockholders, which the company expected to receive gross proceeds of $250 million upon issuance of the shares of convertible preferred stock. Proceeds were meant for general corporate purposes, including repayment on the credit facility of an affiliate of the builder's largest stockholder, Brookfield Asset Management Inc.
In regards to allowances against deferred tax assets, former CFO Paul Kerrigan said, "We would expect we would have taxable income in 2009, but it could possibly be something that we could address towards the end of next year."
Continuing the sales pace into 4Q2008, Cockwell exepected that remaining inline with 3Q2008 numbers was achievable, but only if sales were steady through October and November. In 3Q2008, the company reported that its sales pace increased from 163 units in 3Q2008 compared to 130 units in 3Q2007.
Brookfield also reported lower revenue numbers for 3Q2008--$110 million compared to $121 million in 3Q2007--due to change in product mix, larger home buyer incentives, and/or reduced sales prices, according to the company. The average sales price in 3Q2008 was $578,000, down from $667,000 in 3Q2007. The company also reported a loss before taxes of $41 million in 3Q2008, compared to $38 million in 3Q2007.