BRP Group, Inc. (BRP) on Q1 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference operator. Welcome to the Brookfield Residential Properties First Quarter 2021 Investor Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Thomas Lui, Executive Vice President and CFO for opening remarks. Please go ahead.
Thomas Lui: Thank you, and good morning. Thank you for joining us for Brookfield Residential’s 2021 first quarter conference call today. With me today is, Alan Norris, our Chairman and Chief Executive Officer. The call is intended for current holders and beneficial holders 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 that 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 their potential impact on our company, please see our historical filings with the securities regulators in Canada and the U.S. and information available on our website.
Alan Norris: Thank you, Thomas, and good morning. Brookfield Residential’s land and housing business remains in a strong position with positive underlying fundamentals and demographic shifts in place driving household formation. We see our U.S. markets continuing recent home sale trends similar to the second half of 2020 with increased pricing and absorptions. While Canadian markets are experiencing similar activity in the first quarter of 2021 with higher activity in our Alberta markets from improved consumer confidence arising from increased personal savings and low interest rates as well as improved energy prices. Housing market conditions resulted in higher demand for lands in many of our U.S. and Alberta master-planned communities as our homebuilding partners look to secure additional lots. The U.S. housing market is showing a great deal of resiliency during the pandemic where we saw the return of the home buyer driven by pent-up demand, historical low interest rates and shift in consumer behavior with some degree of a flight to the suburbs. Due to the strong housing demand, many homebuilders have recently intensified their efforts to intensely slow sales to address inflationary pressures on materials particularly lumber and to prevent further supply side constraints. Land continues to be undersupplied with many builders attempting to secure supply of additional lots. Home pricing is – has grown across the U.S. market which also benefits the residual land pricing. However, cost pressures remain widespread across the industry, but there was a lumber and labor challenges could therefore arise as cost pressures could threaten affordability. Home sales increased during the first quarter building upon our already strong backlog with a total of 985 home sales, a 7% increase when compared to Q1 2020 due to increased sales in both our U.S. and Canadian markets. As home buyers continued to display the pandemic has not altered their desire to purchase a home, additionally we continue to execute on a strong backlog entering the year with 690 closings and a 19% gross margin and 28% increase in units and a 2% improvement in housing gross margin from the first quarter of 2020. Overall land activity increased with 588 lot closings, a 252% increase when compared to the same period last year due to increased demand for lots across our land development operations. Lastly, we held the successful grand opening of our Fifth + Broadway mixed use project in Nashville which saw greatest in our retail space in the first few weeks of operations with the completion of construction which continues to advance the leasing of our primary retail market family and office space.
Operator: We have a question from John Colantuoni with Muzinich & Co. Please go ahead.
John Colantuoni: Hey guys. Thanks for taking the question. I had a question maybe to clarify when you talk about matching your capital structure, can you just talk about like the – and I think you said before about for raw lands you want to fund that with a 100% equity, but can you talk about the target leverage on land development and then target leverage on homebuilding, just to get a sense of where those – how those add up?
Alan Norris: Yes, John. Definitely glad to answer that question there. In terms of that philosophy, as you mentioned, you are right, we typically look at Brookfields’ equity to match with the raw unentitled land that’s being held for development. The riskier part of our portfolio, but it’s also a pretty significant piece of our portfolio as you are familiar, our value creation approach is really taking that raw unentitled land working through that entitlement process that generate value then to monetization, we would typically then match essentially all our active inventory and then utilizing our working capital and the debt that we have to basically use that leverage to apply to the land that’s under development and our housing inventory. We would say, that’s being essentially fully leveraged, but that when you line everything up, that’s how we get to the targeted 40% to 50% debt to capitalization ratio as our range.
John Colantuoni: Got it. Okay. Thanks for clarifying that. And then, actually one other question, can you just kind of talk about what the plans are for fits and broad range, just as it starts to move towards rent stabilization. Do you expect that to stay in the portfolio? Do you expect to sell it? I know there is still some restricted payments capacity they have even after the dividend this quarter. So, like would you say that like being paid out as like a dividend to Brookfield just any guidance you could give around that would be helpful.
Alan Norris: I’ll just touch on that.
Thomas Lui: Sure.
Alan Norris: I mean, obviously, we are still, we are just getting into sort of operations just opened last month, six weeks ago. So, early days, it was still we are finishing off aspects on the retail, the office and the apartments. It’s a little bit too early to say exactly, but I mean, it probably doesn’t may have been on our balance sheet on the long haul, but we haven’t come up with a decision with respect to whether we venture our sale or keep in some other form with the Brookfield side of things.
Thomas Lui: Yes. I would add very sooner to Alan’s comments that we traditionally looked at it from the perspective of some of our master-planned communities that we’ve done in Alberta where we have built some of these commercial properties we looked just to monetize the asset after the stabilization period. So it’s really getting our leasing rates up to that kind of 80% threshold and then we evaluate the market at that time. So, as we work towards that over the next 12 to 18 months we’ll continue to evaluate our options there as Alan mentioned. And in regards to your second question around the restricted payments for our capacity and just whether future dividend approach there, as we indicated, we did provide a dividend to Brookfield Asset Management here in the first quarter of 2021 and it was $350 million dividend. The last time we provided a dividend was in March of 2015. So, we have done historically is more in a special dividend nature. Obviously, it tends to be for Brookfield Asset Management, but we continue to have regular conversations with them and they are clearly aware of where we stand with the negotiated payments, basket availability. How we look at it going forward, we have continued support from Brookfield Asset Management in our capital structure and looking at it very similarly to how we capitalize the organization and having that debt-to-cap range between the 40% and 50% any future approach there is aligned to what we did here to be within that range for our structure going forward.
John Colantuoni: Got it. Okay. Thank you guys very much.
Operator: There are no questioners from the telephone lines. This concludes the Question-And-Answer Session. I would like to turn the conference back over to Alan Norris, Chairman and CEO for any closing remarks.
Alan Norris: Thanks, operator. Thanks very much for joining us today and we hope you join us for the Q2 call. And it’s a very exciting year for us with lots of things going on and as you could see, we’ll be glad to report on all the different developments in Q2 at our next call. Thanks again.
Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
