Brookfield Homes continued to close on its profitability gap, reporting a $3 million, or $0.27 per diluted share, loss for its fiscal 1Q2010, compared with a $10 million quarter loss a year ago. The earnings improvement was primarily driven by a significant reduction in impairments--the company recorded no charges during the quarter, compared with $16 million in impairments during 1Q2009--rather than any material operational improvement.
Company revenues grew during the period, thanks to a 20% bump in housing revenues to $42 million from a year ago, a small increase in land revenues to $4 million, and a small bit of fee-building activity. However, most of the revenue improvement on the housing side of the business was owed to a 27% jump in average selling price to $531,000 from a year ago rather than a higher volume of deliveries, suggesting that product mix was likely a big factor in the equation. Closings for the quarter were up 9% to 81 homes from a year ago.
Given the company's closing volume, analysts were quick to point out that the company's backlog conversion rate had slipped during an earnings-related conference call April 30. Management gave no guidance on whether it expected to improve that metric going forward, with company president and CEO Ian Cockwell saying only that the rate was negatively affected by "lower spec inventory and, on the East Coast in [Washington,] D.C., the weather was a big factor."
At quarter's end, the company counted roughly 600 units under construction, 65 of which were models.
Net new order results were similarly lackluster, growing marginally during the quarter to 158 contracts versus 153 during the same period a year ago. Brookfield management said the federal home buyer tax credit proved to be a lukewarm incentive, particularly for first-time buyers. "The percentage [of first-time buyers] wasn't as high as we anticipated," Cockwell said.
However, management appeared hopeful that the company could benefit from the second round of the California state home buyer tax credit, which took effect May 1. In fact, management indicated that several of its cancellations during the quarter were linked to the state credit coming online; buyers cancelled on their contracts so that they could close later, qualifying for the state credit rather than the federal credit.
The company's cancellation rate was 15% for the quarter.
Gross margins also came in at the 15% mark, down slightly sequentially. Executive vice president and CFO Craig Laurie said he expected margins to continue to fluctuate somewhat quarter to quarter, reflecting shifts in product mix. Moreover, margins also were affected by a rise in total SG&A dollars, which Laurie said reflected a $700,000 one-time restructuring charge.
However, management seemed happier with margins on its land business. Although the company sold just 71 lots to home builders during the quarter--management mentioned one deal in San Diego/Riverside and another in the Washington, D.C., market--overall gross margins hit 22%.
In anticipation that demand for its lots will continue to grow, as well as pricing, the company entitled 281 lots during the quarter. Management indicated that 80% of the company's roughly 12,600 owned lots, including joint ventures, were entitled; however, roughly 18% could be considered finished lots.
The company's total lot count, including both owned and optioned land, was 24,077 at quarter's end.
Between home and land sales, the company's business activities generated roughly $21 million in operating cash flow, which management said it used to continue to pay down the company's debt. At quarter's end, the company had a total debt-to-capitalization ratio of 41%.
Cockwell said he felt "comfortable that we're on track" to meet its 2010 goals, which focus on returning the company to profitability, mainly through improving margins, growing lot count in strategic markets, and monetizing the company's inventory with the goal of generating $90 million in net cash for the year.