At the UBS conference held on Feb. 23, Joseph Snider, vice president and senior credit officer for Moody's Investors Services, ruffled more than a few investor and home builder feathers as he challenged current off-balance-sheet accounting practices. He explained that because of inconsistent and inadequate disclosure of joint ventures and land options, Moody's must adjust builders' recorded numbers for better analysis.
In a follow-up conversation, Snider says that the reaccounting simply allows Moody's to compare home building companies as apples to apples. “Moody's doesn't believe that companies that use joint ventures or land options are sinister or nefarious,” he says. “It's just that you have to adjust financial statements to put all the companies on the same playing field.”
Option structures are of particular concern, as their complex nature often masks a greater ownership. But Snider says the smoke and mirrors are a defensive strategy to protect land position.
“The reason they are not disclosing in detail the options is that they want to keep it from their competitors,” Snider explains. “You don't want to open up the kimono.”
However, until that first home builder shows Moody's the full Monty, paving the way for others to do the same, the organization will continue to perform consistent balance-sheet adjustments. Snider says he expects that the adjustments will have minimal effect on builders' ratings. “There are many options structures that appear to be more ownership that may prevent some companies from rising as fast as they have,” Snider says. “[But] we don't anticipate any downgrades to happen.”