Long Brookfield Residential (BRP) Short Standard Pacific (SPF)
Investment Recommendation BROOKFIELD BUY BRP $8.07 Price Target (12 mo) $11.26 Return 40% STANDARD PACIFIC SELL SPF $3.13 Price Target (12 mo) $1.66 Return 47% Recommendation Summary Buying BRP takes advantage of a strong Canadian housing market Shorting SPF hedges out the uncertain US housing market Both are mispriced fundamentally and relative to peers given anticipated operational performance 2
Investment Recommendation BROOKFIELD BUY BRP $8.07 Price Target (12 mo) $11.26 Return 40% STANDARD PACIFIC SELL SPF $3.13 Price Target (12 mo) $1.66 Return 47% Why Are They Mispriced? BRP is underfollowed and intrinsic value is not fully recognized by the market due to recent merger SPF faces a tough operating environment and margin compression Catalysts: 1. BRP reporting first full-year consolidated earnings since recent merger 2. BPR receiving analyst coverage 3. Impact of FHA Loan Limit Reductions impacting SPF in 2H 2012 3
MACRO OVERVIEW 4
Feeble Employment Recovery in the U.S. Job loss from peak Source: Bureau of Labor Statistics - nonfarm payrolls seasonally adjusted,t2 Partners LLC 5
U.S. Existing Homes Inventory Still Elevated Existing Homes Inventory (mm) Source: National Association of Realtors Inventory still ~1mm above pre-2005 levels (Note: not including foreclosed homes sold via auction) 6
Differing Stories in Housing Starts U.S. Housing Starts Canada Housing Starts Canada is not stuck in a prolonged slow recovery like the US 7
Canada Maintained Conservative Lending Practices Prime Mortgage Default Rates Subprime Mortgage Default Rates ~14x Canadian Differences: Private Label mortgages only 3% of market vs. 40% of U.S. market Full recourse to the borrower Mortgage insurance is required on LTV >80% Shorter loan terms ~13x Source: Canadian Bankers Association, The Mortgage Bankers Association, DBRS 8
Canada is on strong economic footing Lowest Net Debt to GDP (35%) in G7 Suffered less severe recession Stable projected growth Canada Unemployment Rate (%) GDP Projections (YoY) 9
BROOKFIELD RESIDENTIAL PROPERTIES 10
Brookfield Residential Properties (BRP) - LONG Undervalued North American homebuilder trading at a discount to peers Asset quality and geographic mix provide stable earnings Strong operators with proven performance through the cycle Downside protection from largest shareholder Misunderstood due to recent merger and no analyst coverage 11
BRP Stock Price Price $8.07 LTM Revenue $943MM 52 Week High - Low $14.32 6.08 LTM Net Income $98MM Market Cap $817MM P/BV 0.9x $16.0 $14.0 BRP: Stock Price Since Inception (4/4/2011) Since Inception Performance: -34% $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 12
BRP Brookfield Residential Properties is the sixth largest North American residential homebuilder with over 109,000 controlled lots $2.5B in assets in 10 markets over three regions: Canada, California and Central & Eastern U.S. Average home selling price of $364,000 YTD Revenue by Region 19% 28% 20% 7% 74% LTM Lots by Location 52% Canada California Central & Eastern US Canada California Central & Eastern US 13
BRP Strategy Acquires and develops residential real estate in growth markets with potential for job creation Creates value through master planning, entitling and building homes in existing communities and by selling lots to third-party builders Lot sales gross margins have been very strong historically, and are 39% YTD Lots Balance as of 09/30/11 YTD Lot Sale Margins Lots Book Value Land & Land Under Development 99,423 $ 1,910 Optioned Lots 8,537 89 Housing Inventory 1,303 260 Model Homes 102 29 Unconsolidated Entity Debt - (17) Total Lots 109,365 2,288 Lot Sales Revenue Total Lot Closings 1,389 Revenue $ 206 Direct Cost of Sales (125) Gross Margin 81 % Margin 39% 14
Strong US Operators US operations has historically performed better than US peers on a ROE basis Exposure to strong US markets mitigated losses during the housing crisis US Lots by Location Total Lots % Total Los Angeles 4,625 10.5% San Diego 8,511 19.4% Denver 10,711 24.4% Austin 14,906 33.9% Washington, D.C. 5,223 11.9% Total 43,976 100.0% Annual ROE 2001 2010 100% 80% 60% 40% 20% 0% -20% -40% -60% Brookfield Residential Properties Median - US Homebuilders 15
Resilient Canadian Operations Operates in the Calgary, Edmonton and Toronto markets Maintained strong margin performance during the recession Canada Lots by Location Total Lots % Total Calgary 29,779 53% Edmonton 17,530 31% Toronto 9,366 17% Canada Total 56,675 100% Margins 2008 2010 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2008 2009 2010 Gross Margins EBIT Margins Net Income Margins 16
Merger Summary BRP created by merging Brookfield Home Corporation with Brookfield Office Properties residential business based in Canada Total consideration of the deal was $1.2B, or approximately 1.3x book value Common owner Brookfield Asset Management emerged with 72% of equity in Brookfield Management responsible for value creation from both organizations remained with the combined company and are properly incentivized 17
BRP Valuation Target price of $11.26 offers 40% upside from current trading levels Derived from DCF valuation Potential upside of 35% from increasing current multiple from 0.9x to competitor s average multiple of 1.2x Comparable Price / Book Multiples Gross Price / Company Ticker Margin BV Lennar LEN 20.8% 1.3x Toll Brothers TOL 15.2% 1.3x Standard Pacific SPF 22.2% 1.0x Meritage Homes MTH 18.5% 1.3x M & I Homes MHO 17.0% 0.9x Average 18.7% 1.2X Median 18.5% 1.3X Brookfield Residential Properties BRP 27.0% 0.9x Valuation Summary Value of Operating Assets of the firm = 2,440.03 Value of Cash & Non-operating assets= $1 Housing Recovery Year Value of Firm = 2,441.31 2014 $13.61 - Value of Outstanding Debt = $1,300 2015 $12.25 Value of Equity = 1,141.61 2016 $11.26 # of Shares (diluted) 101.3 2017 $10.73 2018 $12.40 Fair Value Per Share $ 11.26 Current Price $8.07 Price Appreciation 39.6% 18
BRP Fair Value $25.0 Bull: $14.75 (83% Upside) US Housing Market recovers by 2014 14% run-rate operating margins $20.0 $15.0 Base: $11.26 (40% Upside) US Housing Market recovers by 2016 13% run-rate operating margins $10.0 $5.0 Bear: $8.54 (6% Upside) US Housing Market recovers in 2018 7% run-rate operating margins $0.0 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 19
STANDARD PACIFIC CORP. 20
Standard Pacific Company (SPF) - SHORT History of poor operating performance and weak risk management Management is betting on a near-term housing recovery Gross margins are falling and we expect them to fall further Overpriced based on long-term cash flow generation capacity Market has not fully appreciated the impact of the recent FHA loan limit reduction 21
SPF Stock Price Price $3.13 LTM Revenue $812.1MM 52 Week (High Low) $4.98 2.08 LTM Net Income ($11.7MM) Market Cap $1.08B P/BV 1.1x SPF: 10-year Stock Price Returns $50.0 $45.0 $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $0.0 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 22
SPF Standard Pacific is one of the largest homebuilders in the U.S. New home communities concentrated in CA, FL, AZ, NC & SC, TX, CO, and NV Company also provides mortgage financing and title services 23
Geographic Business Mix California is the majority of their revenues Revenues have declined by 76% from 2005 peak 4,500 Discontinued Operations 4,000 Nevada 3,500 3,000 Colorado Arizona Texas 1% 2,500 2,000 1,500 Carolinas Florida California 14% 7% 4% 42% 1,000 500 15% - 2004 2005 2006 2007 2008 2009 2010 17% 24
SPF Strategy SPF concentrates on move-up buyers (62% of business) Average price of home is $343k vs median $249k CEO claims differentiation We are striving to position ourselves up market Company has no clear segment focus, company self-describes as constructs homes within a wide range of price and size targeting a broad range of homebuyers 25
Mar-96 Aug-96 Jan-97 Jun-97 Nov-97 Apr-98 Sep-98 Feb-99 Jul-99 Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 SPF Capital Allocation Track Record SPF has consistently had a Return on Capital lower than Cost of Capital It required the largest US housing boom since the great depression to push them into positive value creation 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Return on Capital (SMA 4 Quarters) Weighted Average Cost of Capital (SMA 4 Quarters) 26
SPF Capital Allocation Track Record SPF has successfully destroyed over $1bn of capital through their investments over the past 16 years 2,500.0 2,000.0 1,500.0 1,000.0 500.0 - (500.0) (1,000.0) BV of Equity corrected for Equtiy Issued / (Repurchased and Dividends) BV of Capital Corrected for Total Capital Raised / (Repaid) 27
Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 SPF is Investing Heavily in Land & Inventory SPF has grown inventory by $466mm in the past 7 quarters (45%) 1,600 1,400 1,200 1,000 800 600 400 200-109 929 877 972 587 649 742 802 444 408 410 380 416 454 371 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 Finished Homes and CIP Land Under Development Inv. Not Owned 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Sales Non cash Working Capital Significant recent investment in inventory 28
Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 1Q 2012E 3Q 2012E 1Q 2013E 3Q 2013E 1Q 2014E 3Q 2014E Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 SPF - Gross Margins are Falling SPF gross margins have recovered more than peers over past 2-3 years We expect margins to continue falling due to SPF s higher capitalized interest 35.0% Gross Margins: SPF vs. Peers Capitalized Interest as % of Inventory 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 16% 14% 12% 10% 8% 6% 4% 2% 0% SPF SPF Estimate Median SPF Median 29
FHA Loan Limit Changes New guidelines on October 1 st, 2011 New ceiling limit will be reduced from $729,750 to $625,500 Move-up buyers will be more affected by the change SPF is further affected due to its concentration in high-cost markets So how many SPF homes does this affect? Approximately 8% of our loans closed in Q3 2011 were above the new FHA or Conventional loan limits We believe this will increase as the affect of recent purchases flows through 30
SPF Relative Valuation Relative Valuation is tough need to look far out for meaningful comps Book Value is tough to judge have to rely on management mark to market judgment Enterprise Price / Tangible EV / 2013 EBIT Average Price of Relative Valuation Market Cap Value Book NTM P/E 2012 P/E Adj Home MDC Holdings Inc. 893.0 765.1 1.0x nm nm 6.8x $283,800 NVR Inc. 3,183.0 2,693.9 2.5x 22.4x 17.0x nm $297,100 Toll Brothers Inc. 3,267.5 3,734.3 1.3x 103.4x 60.0x 15.7x $565,000 Ryland Group Inc. 625.3 998.9 1.4x nm 32.3x 12.9x $242,000 KB Home 579.3 1,688.6 1.3x nm nm 31.2x $214,500 Lennar Corp. 3,297.8 6,949.5 1.3x 39.9x 24.1x 16.8x $243,000 PulteGroup, Inc. 2,139.7 4,332.6 1.2x nm 28.8x 10.7x $259,000 Meritage Homes 646.4 906.6 1.3x nm 31.2x 10.1x $254,200 DRHorton 3,646.8 4,324.1 1.4x 25.9x 14.6x nm $212,000 Brookfield Residential Properties Inc. 817.8 2,152.3 0.9x 8.1x 8.1x 9.9x $364,000 Median 1,516.4 2,423.1 1.3x 25.9x 26.5x 11.8x $256,600 Standard Pacific Corp.* 1,083.8 2,040.1 1.2x 27.3x 29.4x 36.1x $511,000 Implied Stock Price using Median $3.54 $2.96 $2.82 $1.03 Average: $2.59 *Tangible BV from analyst estimate 31
SPF Book Value Impairments We have doubts about SPF s management marks The below shows total impairments as a % of 2006 inventory for the 5 homebuilders with home prices closest to SPF 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Total Impairments as a % of 2006 Inventory SPF US Equity Average of Direct Comps 32
SPF Intrinsic Valuation Value of Operating Assets of the firm = $1,532 Year of Housing Recovery Value of Cash & Non-operating assets= $420 2014 $2.41 Value of Firm = $1,952 2015 $2.12 - Value of Outstanding Debt = $1,377 2016 $1.66 Value of Equity = $575 2017 $1.40 # of Shares (diluted) 346.3 2018 $1.15 Fair Value Per Share $ 1.66 Current Price $3.13 Price Appreciation (47.0%) Statistic Forecast Values Trials 10,000 Base Case $1.66 Mean $1.54 Median $1.52 Standard Deviation $1.25 33
SPF Fair Value $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 Bear: $3.42 (-9%) US Housing Market recovers by 2014 11% run-rate operating margins (historically 7.3%) Inventory falls to 80% of Revenues (historically 137%) Base: $1.66 (+47%) US Housing Market recovers by 2016 10% run-rate operating margins (historically 7.3%) Inventory falls to 84% of Revenues (historically 137%) Bull: $0.00 (+100%) US Housing Market recovers in 2018 9% run-rate operating margins (historically 7.3%) Inventory falls to 100% of Revs (historically 137%) 34
CONCLUSION 35
Standard Pacific Group PulteGroup KB Home M/I Homes Lennar Ryland Group St. Joe Company MDC Holdings Meritage Homes Redrow PLC Toll Brothers Barratt Developments Berkeley Group Bellway PLC Melcor Developments Brookfield Residential Properties Great Operator / Weak US Operator 25% 20% 15% 10% ROE LTM 5% 0% -5% -10% -8% *LTM data for BRP includes Canadian Operations 36
Great US Operator / Weak US Operator 100% Return on Equity 100.0% 50% 0% BRP Average: 18.3% 50.0% 0.0% SPF Average: (10.6%) -50% -50.0% -100% -100.0% -150% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 LTM -150.0% Brookfield Residential Properties (US Operations) Standard Pacific Group *LTM data for BRP includes Canadian Operations 37
Deep Value / Overvalued Using same macroeconomic assumptions: BRP is underpriced by 40% Value of Operating Assets of the firm = 2,440.03 Value of Cash & Non-operating assets= $1 Housing Recovery Year Value of Firm = 2,441.31 2014 $13.61 - Value of Outstanding Debt = $1,300 2015 $12.25 Value of Equity = 1,141.61 2016 $11.26 # of Shares (diluted) 101.3 2017 $10.73 2018 $12.40 Fair Value Per Share $ 11.26 Current Price $8.07 Price Appreciation 39.6% Value of Operating Assets of the firm = $1,532 Housing Recovery Year Value of Cash & Non-operating assets= $420 2014 $2.41 Value of Firm = $1,952 2015 $2.12 - Value of Outstanding Debt = $1,377 2016 $1.66 Value of Equity = $575 2017 $1.40 # of Shares (diluted) 346.3 2018 $1.15 Fair Value Per Share $ 1.66 Current Price $3.13 Price Appreciation (47.0%) SPF is overpriced by 47% 38
Geographical Overlay A great geographical hedge on the US housing market Click on a state to change color
Summary: Long BRP, Short SPF Opportunity to hedge out macro US housing risk Benefit from investing with a strong operator and shorting a weak operator EDGE: BRP is completely uncovered, recently underwent a complex transaction, and has not reported full-year financial data Recommended Trading Strategy: Short 1 share of SPF for every 2 shares long of BRP 40
APPENDIX 41
BRP Holders 42
SPF Holders 43
Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 SPF Capital Allocation Track Record ROE was considerably better until 2007 and then the impact of high financial leverage in a cyclical industry became apparent 50.0% 30.0% 10.0% -10.0% -30.0% -50.0% -70.0% -90.0% -110.0% -130.0% -150.0% ROE COE 44
SPF Performance vs. Index 400% SPF: 10-year Stock Price Returns 300% 200% 100% 0% -100% Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 SPF Industry Average 45
SPF Additional Information Lots Owned & Controlled 26,826 Lots Controlled (5,392) JV Lots (1,295) Lots Owned 20,139 Owned lots held for sale (3,668) Owned lots for future development 16,471 Lots held for future development (2,803) Owned lots - Actively selling or under developmen 13,668 Years Supply (based on TTM deliveries) 5.8x 250 200 150 100 50 Community Count Beginning backlog 781 Beginning backlog scheduled to close in quarter 497 Cancellations from beginning backlog (11) Closings moved to later date (66) Sold & Closed in Quarter 277 Deliveries 697 Delivery Growth 16% 0 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 Community Count 159 46
SPF Financials Year 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E Revenues 1,549.2 1,179.5 924.9 871.9 1,088.7 1,148.6 1,211.8 1,333.0 1,732.9 Less: COGS 2,232.5 1,024.6 710.6 695.5 881.5 952.6 986.1 1,070.3 1,366.3 Less: SG&A 318.1 203.0 161.3 153.0 133.3 139.4 147.1 160.5 207.1 EBIT (1,001.4) (48.1) 53.0 23.5 59.5 56.6 78.6 102.2 159.4 Less: Interest Expense 10.4 47.5 41.8 27.9 22.6 31.8 27.9 26.7 22.6 Less: Taxes (5.5) (96.3) (0.6) 0.4 - - - - - Net Income* ($1,006.3) $0.7 $11.8 ($4.9) $36.9 $24.7 $50.7 $75.5 $136.8 Diluted EPS (9.15) 0.00 0.03 (0.01) 0.11 0.07 0.15 0.22 0.40 Revenue Growth Rate YoY -46.7% -23.9% -21.6% -5.7% 24.9% 5.5% 5.5% 10.0% 30.0% Gross Margin -45% 12% 22% 19% 18% 16% 18% 19% 20% Operating Margin -65% -4% 6% 3% 5% 5% 6% 8% 9% ROE -247% 0% 2% -1% 6% 4% 7% 9% 14% ROC -31% -2% 2% 1% 3% 4% 5% 8% 11% Debt Principle Due 50.9 0.9 6.3 29.8 260.4 Non-Cash Working Capital 1,401.7 1,091.3 1,190.1 1,613.1 1,789.1 1,880.0 2,217.6 2,742.7 2,844.0 NOL 1,742.2 1,837.8 1,826.5 1,831.0 1,794.1 1,769.3 1,718.6 1,643.1 1,506.2 # of Shares Outstanding 110.0 252.7 342.1 342.1 342.1 342.1 342.1 342.1 342.1 EBIT (1-t) (620.9) (29.8) 32.9 23.5 56.6 78.6 102.2 159.4 220.0 Reinvestment 934.8 306.9 (101.9) (179.0) (93.2) (339.4) (526.3) (101.9) (340.0) FCFF 313.9 277.1 (69.0) (155.5) (36.7) (260.8) (424.1) 57.5 (120.1) 47
SPF Analyst Consensus - Annual 48
SPF Analyst Consensus - Quarterly 49
SPF Short Interest 50
Revenue Assumptions Standard Pacific Housing Recovery Year CAGR 2014 5.5% 20.0% 30.0% 30.0% 20.0% 2.0% 2.0% 2.0% 2.0% 6.8% 2015 5.5% 10.0% 30.0% 40.0% 25.0% 15.0% 2.0% 2.0% 2.0% 8.4% 2016 5.5% 5.5% 10.0% 30.0% 40.0% 25.0% 10.0% 2.0% 2.0% 9.0% 2017 5.5% 5.5% 5.5% 10.0% 30.0% 40.0% 25.0% 10.0% 2.0% 10.0% 2018 5.5% 5.5% 5.5% 5.5% 10.0% 30.0% 40.0% 25.0% 10.0% 11.2% Brookfield Residential Housing Recovery Year CAGR 2014 10% 20% 20% 13% 8% 2% 2% 2% 2% 6% 2015 3% 10% 20% 20% 13% 8% 2% 2% 2% 6% 2016 3% 3% 10% 20% 20% 13% 8% 2% 2% 6% 2017 3% 3% 3% 10% 20% 20% 13% 8% 2% 6% 2018 3% 3% 3% 3% 10% 20% 20% 13% 8% 7% 51