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| BHS > SEC Filings for BHS > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
This discussion includes forward-looking statements that reflect our current
views with respect to future events and financial performance and that involve
risks and uncertainties. Our actual results, performance or achievements could
differ materially from those anticipated in the forward-looking statements as a
result of certain factors including risks discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward-Looking
Statements" and Item 1A - "Risk Factors" elsewhere in this report and in our
Annual Report on Form 10-K/A for the year ended December 31, 2007.
Outlook
During the second quarter of 2008, we continued to experience challenging
housing market conditions as a result of a continuing excess supply of housing
inventory and the ongoing disruption in credit markets that began in 2007.
Despite these challenging market conditions which are negatively affecting our
current housing operations, we continue to focus on the monetization of our
approximately 3,600 lots ready for house construction to generate significant
cash flow to repay debt in the interim, and to redeploy to assets with higher
expected returns. In addition, we continue to focus on our core strategies,
including controlling land through option contracts and adding value by
entitling raw land and creating communities.
Overview
We entitle and develop land for our communities and sell lots to third parties.
We also design, construct and market single and multi-family homes primarily to
move-up and luxury homebuyers.
We operate in the following geographic regions which are presented as our
reportable segments: Northern California (San Francisco Bay Area and
Sacramento), Southland / Los Angeles, San Diego / Riverside and Washington, D.C.
Area. Our other operations that do not meet the quantitative thresholds for
separate disclosure in our financial statements
under US GAAP are included in "Corporate and Other."
Our goal is to maximize the total return on our common stockholders' equity over
the long term. We plan to achieve this by actively managing our assets and
creating value on the lots we own or control.
For the period 2003 through the second quarter of 2008, cash provided from
operations was $432 million, which was used primarily to return cash to
stockholders through the repurchase of shares and the payment of dividends.
Despite the continuing challenges of the United States housing market, we
believe our business is positioned to create further shareholder value over the
long term through the selective control of a number of strategic projects and
the overall level of lots controlled.
The 25,957 lots that we control, 14,826 of which we own directly or through
joint ventures, provide a strong foundation for our business and visibility on
our future cash flow. We believe we add value to the lots we control through
entitlements, development and the construction of homes. In allocating capital
to our operations we generally limit our risk on unentitled land by optioning
such land positions in all our markets, thereby mitigating our capital at risk.
Option contracts for the purchase of land permit us to control lots for an
extended period of time.
Homebuilding is our primary source of revenue and has represented approximately
90% of our total revenue since 2002. Our operations are positioned to allow us
to close up to 1,500 homes annually. Our average sales price for the six months
ended June 30, 2008 of $558,000 was well in excess of the national average sales
price as we operate in markets with higher price points and cater to move-up and
luxury buyers. We also sell serviced and unserviced lots to other homebuilders
generally on an opportunistic basis where we can redeploy capital to an asset
providing higher returns or reduce risk in a market.
Our housing and land inventory, investments in housing and land joint ventures,
and consolidated land inventory not owned together comprised 92% of our total
assets as of June 30, 2008. In addition, we had $102 million in other assets,
which consist of homebuyer receivables of $3 million, deferred income taxes and
income taxes receivable of $69 million and mortgages and other receivables of
$30 million. Homebuyer receivables consist primarily of proceeds due from
homebuyers on the closing of homes.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and
estimates during the three months and six months ended June 30, 2008 compared to
those disclosed in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our annual report on Form 10-K/A
for the year ended December 31, 2007.
Results of Operations
Three Months Ended Six Months Ended
Selected Financial Information (Unaudited) June 30, June 30,
($US millions) 2008 2007 2008 2007
Revenue:
Housing $ 115 $ 155 $ 181 $ 259
Land 5 2 8 6
Total revenues 120 157 189 265
Direct cost of sales (105 ) (129 ) (164 ) (216 )
Impairments and write-offs of option
deposits (17 ) - (23 ) -
Gross margin / (loss) (2 ) 28 2 49
Equity in earnings from housing and land
joint ventures 2 - 2 -
Impairments of investments in housing and
land joint ventures (10 ) - (10 ) -
Other (expense) / income 9 6 - 6
Selling, general and administrative
expense (15 ) (18 ) (31 ) (34 )
Operating (loss) / income (16 ) 16 (37 ) 21
Minority interest 2 (1 ) 3 (1 )
(Loss) / income before taxes (14 ) 15 (34 ) 20
Income tax recovery / (expense) 5 (6 ) 13 18
Net (loss) / income $ (9 ) $ 9 $ (21 ) $ 38
Segment Information
Housing revenue ($US millions):
Northern California $ 38 $ 30 $ 47 $ 40
Southland / Los Angeles 31 53 56 105
San Diego / Riverside 19 35 32 50
Washington D.C. Area 24 35 43 53
Corporate and Other 3 2 3 11
Total $ 115 $ 155 $ 181 $ 259
Land revenues ($US millions):
Northern California $ - $ - $ - $ -
Southland / Los Angeles - - - -
San Diego / Riverside - - - -
Washington D.C. Area 5 2 8 6
Corporate and Other - - - -
Total $ 5 $ 2 $ 8 $ 6
Impairments and write-offs of option
deposits ($US millions):
Northern California $ - $ - $ - $ -
Southland / Los Angeles - - - -
San Diego / Riverside - - - -
Washington D.C. Area 17 - 23 -
Corporate and Other - - - -
Total $ 17 $ - $ 23 $ -
Gross margin ($US millions)(1):
Northern California $ 2 $ 6 $ 3 $ 7
Southland / Los Angeles 5 9 8 20
San Diego / Riverside 4 8 8 12
Washington D.C. Area (12 ) 4 (16 ) 8
Corporate and Other (1 ) 1 (1 ) 2
Total $ (2 ) $ 28 $ 2 $ 49
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Three Months Ended Six Months Ended
Selected Financial Information (Unaudited) June 30, June 30,
2008 2007 2008 2007
Home closings (units):
Northern California 40 31 50 43
Southland / Los Angeles 77 70 131 142
San Diego / Riverside 39 61 61 84
Washington D.C. Area 54 72 85 102
Corporate and Other 4 2 4 13
Consolidated total 214 236 331 384
Joint ventures 2 1 5 4
Total 216 237 336 388
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Average selling price ($US):
Northern California $ 939,000 $ 975,000 $ 935,000 $ 931,000
Southland / Los Angeles 410,000 761,000 430,000 739,000
San Diego / Riverside 497,000 566,000 528,000 593,000
Washington D.C. Area 445,000 488,000 513,000 520,000
Corporate and Other 679,000 718,000 679,000 837,000
Consolidated average 538,000 655,000 549,000 674,000
Joint ventures 1,378,000 1,025,000 1,236,000 948,000
Average $ 548,000 $ 657,000 $ 558,000 $ 676,000
Net new orders (units): (2)
Northern California 38 34 70 63
Southland / Los Angeles 80 53 159 134
San Diego / Riverside 41 25 89 89
Washington D.C. Area 74 79 145 187
Corporate and Other 3 6 4 10
Consolidated total 236 197 467 483
Joint ventures 1 15 1 18
Total 237 212 468 501
Backlog (units at end of period): (3)
Northern California 47 37
Southland / Los Angeles 73 92
San Diego / Riverside 36 40
Washington D.C. Area 112 160
Corporate and other 19 17
Consolidated total 287 346
Joint ventures - 26
Total 287 372
Lots controlled (units at end of period):
Lots owned:
Northern California 1,275 1,352
Southland / Los Angeles 1,465 1,393
San Diego / Riverside 8,030 6,130
Washington D.C. Area 3,781 3,916
Corporate and Other 275 143
14,826 12,934
Lots under option (4) 11,131 14,639
Total 25,957 27,573
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(1) Gross margin includes impairments and write-offs of option deposits.
(2) Net new orders for any period represent the aggregate of all homes ordered by customers, net of cancellations.
(3) Backlog represents the number of new homes subject to pending sales contracts.
(4) Includes proportionate share of lots under option related to joint ventures.
Three Months and Six Months Ended June 30, 2008 Compared with Three Months and
Six Months Ended June 30, 2007
Net (Loss) / Income
Net loss was $9 million and $21 million for the three months and six months
ended June 30, 2008, a decrease in income of $18 million and $59 million,
respectively, when compared to the same periods in 2007. The decrease for the
three months ended June 30, 2008 primarily relates to impairments and option
write-offs of $17 million and impairments of investments in housing and land
joint ventures of $10 million as a result of lower than anticipated revenues.
The decrease for the six months ended June 30, 2008 primarily relates to
impairment charges previously outlined and a reversal of an uncertain tax
position that contributed $26 million to net income during the six months ended
June 30, 2007.
Results of Operations
Company-wide: Housing revenue was $115 million and $181 million for the three
months and six months ended June 30, 2008, a decrease of $40 million and
$78 million, respectively, when compared to the same periods in 2007. The
decrease in housing revenue was primarily a result of a decrease of 18% and 19%
in the average selling price during the three months and six months ended
June 30, 2008 when compared to the same period in 2007. In addition, 22 and 53
fewer homes were closed in the three months and six months ended June 30, 2008
when compared to the same periods in 2007. The gross margin on housing revenue
for the three months ended June 30, 2008 was $14 million or 12% compared with
$28 million or 18% for the same period in 2007. The decrease in the gross margin
was due to fewer home closings, continued homebuyer incentives, and/or reduce
average selling prices.
Land revenue totaled $5 million and $8 million for the three months and six
months ended June 30, 2008, an increase of $3 million and $2 million,
respectively, when compared to the same periods in 2007. Our land revenues may
vary significantly from period to period due to the timing and nature of land
sales as they generally occur on an opportunistic basis and additionally such
revenues are also affected by local market conditions which continue to be weak.
During the three months and six months ended June 30, 2008, we recognized
$17 million and $23 million of impairment charges and write-offs of option
deposits compared to nil for the same periods in 2007. The impairment charges
and write-offs for the three months ended June 30, 2008 relates to 581 lots and
108 optioned lots primarily in the Washington D.C. Area. The impairment charges
and write-offs for the six months ended June 30, 2008 relate to 803 lots and 108
optioned lots primarily in the Washington D.C. Area.
A summary of our gross margin is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Housing $ 14 $ 28 $ 24 $ 48
Land 1 - 1 1
Impairment charges and write-offs (17 ) - (23 ) -
$ (2 ) $ 28 $ 2 $ 49
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Northern California: Housing revenue was $38 million and $47 million for the
three months and six months ended June 30, 2008, an increase of $8 million and
$7 million when compared to the same periods in 2007. The gross margin on
housing revenue for the three months ended June 30, 2008 was $2 million or 6%
compared with $6 million or 19% for the same period in 2007. The gross margin on
housing revenue for the six months ended June 30, 2008 was $3 million or 7%
compared with $7 million or 18% for the same period in 2007. The decrease in the
gross margin percentage was a result of reduced average selling prices and/or an
increase in homebuyer incentives.
Southland / Los Angeles: Housing revenue was $31 million and $56 million for the
three months and six months ended June 30, 2008, a decrease of $22 million and
$49 million when compared to the same periods in 2007. The decrease in revenue
was primarily attributable to a decrease in average selling price. The gross
margin on housing revenue for the three months ended June 30, 2008 was $5
million or 15% compared with $9 million or 18% for the same period in 2007. The
gross margin on housing revenue for the six months ended June 30, 2008 was
$8 million or 15% compared with $20 million or 19% for the same period in 2007.
The decrease in the gross margin percentage was primarily a result of an
increase in homebuyer incentives and product mix.
San Diego / Riverside: Housing revenue was $19 million and $32 million for the
three months and six months ended June 30, 2008, a decrease of $16 million and
$18 million, respectively when compared to the same periods in 2007. The gross
margin on housing revenue for the three months ended June 30, 2008 was
$4 million or 21% compared with $7 million or 21% for the same period in 2007.
The gross margin on housing revenue for the six months ended June 30, 2008 was
$8 million or 25% compared with $11 million or 23% for the same period in 2007.
While our gross margin percentage is
high relative to our other geographic areas, our current backlog of homes
indicates our margins will decrease in future periods.
Washington D.C. Area: Housing revenue was $24 million and $43 million for the
three months and six months ended June 30, 2008, a decrease of $11 million and
$10 million, respectively, when compared to the same periods in 2007. The gross
margin on housing revenue before impairment charges for the three months ended
June 30, 2008 was $4 million or 13% compared with $4 million or 12% for the same
period in 2007. The gross margin on housing revenue before impairment charges
for the six months ended June 30, 2008 was $6 million or 13% compared with
$7 million or 14% for the same period in 2007.
Other Income and Expenses
Equity in earnings from housing and land joint venture for the three months and
six months ended June 30, 2008 was $2 million, an increase of $2 million when
compared to the same periods in 2007. The impairments of investments in housing
and land joint ventures of $10 million for the three months and six months ended
June 30, 2008 primarily relates to 907 lots in the Inland Empire of California.
Other (expense) / income for the three months and six months ended June 30, 2008
totaled income of $9 million and nil, an increase of $3 million and a decrease
of $6 million, respectively, when compared to the same periods in 2007.
Selling, general and administrative expenses was $15 million and $31 million for
the three months and six months ended June 30, 2008, a decrease of $3 million
when compared to the same periods in 2007. Included in selling, general and
administrative expense was net stock compensation expense of $1 million and nil
for the six months ended June 30, 2008 and 2007, respectively.
Sales Activity
Net new home orders for the three months and six months ended June 30, 2008
totaled 237 and 468 units, an increase of 25 units or 12% and a decrease of 33
units or 7%, respectively, compared to the same periods in 2007.
Liquidity and Capital Resources
Financial Position
Our assets as of June 30, 2008 totaled $1,354 million, consistent with
December 31, 2007. Our housing and land inventory and investments in housing and
land joint ventures are our most significant assets with a combined book value
of $1,242 million or approximately 92% of our total assets. Our housing and land
assets have increased by $33 million in 2008 when compared to December 31, 2007.
The increase was primarily due to the acquisitions of our partners' 50%
interests in two joint ventures for $39 million, of which $7 million was paid in
cash and $32 million was financed by project specific debt and other
liabilities. In addition, as at June 30, 2008, we have consolidated these two
former joint venture entities which resulted in a further increase in our
housing and land inventory of $32 million related to our share of debt in these
entities. The increase of $71 million in housing and land assets as a result of
these two acquisitions was offset by impairments and write-offs of option
deposits of $33 million during 2008. Our housing and land assets include homes
completed and under construction and lots ready for construction, model homes
and land under and held for development. A summary of our lots owned and their
stage of development at June 30, 2008 compared with December 31, 2007 follows:
June 30, December 31,
2008 2007
Completed homes, including models 288 477
Homes under construction 195 91
Homes with foundations / slabs 147 165
Total housing units 630 733
Lots ready for house construction 2,944 2,683
3,574 3,416
Graded lots and lots commenced grading 1,354 1,552
Undeveloped land 9,898 8,110
14,826 13,078
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Our total debt as of June 30, 2008 was $792 million, an increase of $57 million from December 31, 2007. Total debt as of June 30, 2008 consists of $549 million related to project specific financings and $243 million related to amounts drawn on our unsecured revolving credit facility with a subsidiary of our largest stockholder, Brookfield Asset Management Inc.
Our project specific financings consist primarily of construction and
development loans that are generally repaid from home and lot proceeds. As new
homes are constructed, further loan facilities are arranged. Each of our project
loans have maturity dates and usually contain extension provisions in the event
a project does not meet its absorption targets. Our lenders periodically require
an independent appraisal of the project they finance and this may result in
valuation adjustments resulting in incremental draws or repayments.
Our project specific financings as of June 30, 2008 were $549 million, a
decrease of $156 million from December 31, 2007 when the impact of the
acquisition of our former partners' joint venture interests of $61 million
referred to above are excluded.
As of June 30, 2008, the average interest rate on our project specific
financings was 5.4%, with maturities as follows:
Maturities
($ millions) 2008 2009 2010 Post 2010 Total
Northern California $ 46 $ 68 $ - $ - $ 114
Southland / Los Angeles 3 4 52 20 79
San Diego / Riverside 55 134 18 - 207
Washington D.C. Area 25 90 - 18 133
Corporate / Other 7 - 9 - 16
Total $ 136 $ 296 $ 79 $ 38 $ 549
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As of June 30, 2008, we had available project specific debt lines of
$270 million that were available to complete land development and construction
activities.
Our major project specific lenders are Bank of America, Housing Capital
Corporation, Wells Fargo and Union Bank of California.
The balance on our credit facility with a subsidiary of Brookfield Asset
Management Inc. as of June 30, 2008 was $243 million, an increase of $41 million
during the quarter ended June 30, 2008. This facility has served as our main
source of short term liquidity for our operations in 2008. In July 2008, this
facility was increased by $25 million to $275 million and it matures in
September 2009.
Cash Flow
Our principal uses of working capital include purchases of land, land
development and home construction. Cash flows for each of our communities depend
upon the applicable stage of the development cycle and can differ substantially
from reported earnings. Early stages of development require significant cash
outlays for land acquisitions, site approvals and entitlements, construction of
model homes, roads, certain utilities and other amenities and general
landscaping. Because these costs are capitalized, income reported for financial
statement purposes during such early stages may significantly exceed cash flows.
Later, cash flows can significantly exceed earnings reported for financial
statement purposes, as cost of sales include charges for substantial amounts of
previously expended costs.
Cash provided by our operating activities during the six months ended June 30,
2008 totaled $17 million compared with cash used of $99 million for the same
period in 2007. We normally invest capital in the first half of a year as we
build out our backlog of homes. However, our inventory levels continue to be
elevated relative to current home deliveries and therefore we invested
significantly less in the first half of 2008 when compared to the first half of
. . .
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