TEXT-S&P rates Brookfield Residential Properties 'B+' CCR

Tue Dec 4, 2012 5:39pm EST

Overview
     -- Brookfield Residential Properties Inc. (BRP) is a North American 
homebuilding and land development company with land holdings that ranks among 
the largest of the homebuilders that we rate.
     -- We are assigning a 'B+' corporate credit rating to the company and a 
stable outlook. 
     -- We are also assigning a 'BB-' issue-level rating and a '2' recovery 
rating to the company's proposed $400 million senior unsecured notes.
     -- The stable outlook reflects our expectation that growth will largely 
come from U.S. homebuilding and land development as that market recovers and 
that the Canadian operations will remain stable.

Rating Action
On Dec. 4, 2012, Standard and Poor's Ratings Services assigned its 'B+' 
corporate credit rating to Brookfield Residential Properties Inc. (BRP). The 
outlook is stable. At the same time, we assigned a 'BB-' issue-level rating 
and a '2' recovery rating to the proposed offering of $400 million of senior 
unsecured notes due 2020, guaranteed by all the current and future restricted 
subsidiaries of the issuer other than U.S. project subsidiaries. The '2' 
recovery rating indicates prospects for a substantial recovery (70% to 90%) of 
principal in the event of payment default. The company plans to use proceeds 
from the notes to repay existing notes payable provided by Brookfield Office 
Properties Inc. ('BBB/Negative'), borrowings under an unsecured revolving 
facility provided by Brookfield Asset Management Inc. (A-/Negative/A-2), and 
other project and bank debt.   

Rationale
The ratings on BRP reflects our assessment of an "aggressive"  financial risk 
profile, reflecting weak EBITDA-based metrics (although book leverage is 
moderate), reliance on secured project level debt and potential near term 
refinancing risk due to on-demand secured credit facilities. We view the 
business risk profile as "weak". Brookfield's operations rely on the cyclical 
and capital intensive land development and homebuilding businesses. While we 
believe the nascent housing recovery in the U.S. will continue in 2013, we do 
acknowledge there are headwinds, and a significant proportion of BRP's future 
growth is reliant on growth derived from its U.S. operations, which is 
dependent on a continued recovery in the U.S. housing market and third party 
demand for lots. BRP's Canadian operations are heavily concentrated in Alberta 
but we expect BRP's operations in Alberta, as well as Ontario, will remain 
steady over the next one to two years.

Toronto, Ontario-based BRP is a land developer and homebuilder operating in 
three Canadian markets and seven U.S. markets. Brookfield entitles and 
develops land and constructs homes on a portion of its lots and sells the bulk 
of its lots to third-party builders. BRP was formed on March 31, 2011, when 
Brookfield Homes Corp. merged with the former residential land and housing 
division of Brookfield Office Properties. Brookfield Asset Management Inc. 
(BAM), the ultimate parent company, retains ownership of approximately 72% of 
Brookfield Residential Properties Inc. While we do not ascribe support from 
'A-'-rated Brookfield Asset Management's ownership of a large stake in BRP, we 
believe its significant stake may provide some incentive to support BRP in the 
event of temporary pressure.

BRP delivered 1,295 homes and sold an additional 3,474 lots in 2011 and has 
sold 1,083 homes and 1,123 lots through the first three quarters of 2012. 
BRP's five largest markets were Calgary (45%), Edmonton (17%), Toronto (16%), 
Washington, D.C. (8%), and San Diego/Riverside (6%). Brookfield's operations 
are heavily concentrated in the Western Canadian markets, which has exhibited 
strong performance, but is heavily reliant on the health of the energy sector. 
We would expect this concentration to decline as the U.S. housing market 
recovers and becomes a larger proportion of revenues and profits. Lots 
controlled by market show a more balanced mix with 52% of lots in Canada and 
48% in the U.S. It's likely that the revenue and profit mix over the next few 
years will skew more prominently toward the homebuilding operations, with 
greater growth out of the U.S. side of the business. We believe the company's 
mix of both homebuilding and land development, as well as its geographic 
footprint provides some additional diversity compared with many of its 
homebuilder peers. Notably, BRP's land development business remained 
profitable through the recent recession due primarily to the stability of the 
Canadian housing market.

BRP is the fifth-largest landholder among the homebuilders that we rate, with 
about 107,000 lots under control, of which roughly 85% are raw and 55% are 
unentitled. We estimate that Brookfield has about a 12-18 month supply of lots 
that are either finished or under development that do not require significant 
capital to monetize through land sales or homebuilding. Brookfield typically 
builds on about 15%-20% of its developed lots in a given year while the rest 
is sold to other homebuilders or commercial developers. However, in certain 
land constrained markets, such as Toronto and the San Francisco area, BRP will 
typically utilize its lots exclusively for its own homebuilding operations. 
Many U.S. homebuilders have reduced their platforms and lot holdings in 
response to the deep and protracted downturn. As a result, U.S homebuilders 
have been investing in new inventory in healthier markets to grow volume and 
strengthen margins as they strive to return to consistent profitability. 

As the U.S. housing market continues to recover, we expect builders will 
remain focused on acquiring new lots in healthier U.S. housing markets, which 
has become more competitive. This could be a competitive advantage for BRP, 
given its ability to be a supplier of lots to builders. Normalized land 
revenues, excluding impact from accounting changes, represented about 35%-40% 
of total revenues over the past three years. Normalized gross profit was more 
concentrated toward the land business over the past three years accounting for 
60-70% of gross profits, due to stronger land margins compared with the 
homebuilding margin. We expect profits from the homebuilding business will 
grow more rapidly and the mix will reverse in 2013 or 2014 with homebuilding 
accounting for the majority of BRP's profits. We think the company will also 
be able to generate cash in the near term as its land reinvestment needs are 
considerably lower than the peer group. However, the company will likely 
continue to be opportunistic, pursuing land acquisition and development, which 
requires significant capital. Brookfield's land development and homebuilding 
operations require significant capital to take raw land through the 
entitlement process and ultimately develop land into saleable/buildable 
developed inventory.

Recent operating performance has shown marked improvement, consistent with the 
rest of the sector. Home closings were up 27% for the three months ended Sept. 
30, 2012. The average sales price of a home edged up to $384,000, up from 
$366,000 a year earlier. Orders and sales backlog, which are fairly reliable 
indicators of future closings, were up 18% to 461 homes and 36% to 1,095 
homes, respectively. Brookfield also benefits from very low cancellations in 
the Canadian market (less than 1%) compared with the U.S. market due to 
structural differences in these housing markets. Cancellations in the U.S. 
market have been similar to peers (14% in California and 20% in Central and 
Eastern U.S. markets for the nine months ended Sept. 30, 2012). Third quarter 
gross margin for the combined Canadian and U.S. homebuilding operations was 
17%-18%, with Canada estimated to be closer to 20% and the U.S weaker in the 
15% range. Land sales have been consistent with the prior year, with gross 
margins near 50%. Aggregate gross margins have been around 28%, which is 
strong relative to most homebuilders, given stronger margins within the land 
development business. 

The company's asset base is $2.8 billion, 83% of which is land and housing 
inventory. BRP's debt, prior to the note issuance, consisted of $488 million 
of debt owed to Brookfield Office Properties, $282 million outstanding under 
an unsecured credit facility due to BAM, $357 million of project specific 
financings, $325 of secured bank credit facilities, and $9 million of 
additional unsecured credit facility borrowings. The equity base was $1.03 
billion at Sept. 30, 2012. Trailing-12-month debt-to-EBITDA was high at 6.6x 
as of Sept. 30, 2012, EBITDA interest coverage was 2.8x and 
debt-to-total-capitalization was 58%. Leverage metrics improved after the 
quarter ended when BRP issued $222 million of equity, with BAM taking half of 
the allotment in a private placement, using proceeds to repay debt. The 
company expects to use the proceeds of the notes issuance to extinguish most 
of the inter-company debt and a portion of the BAM borrowings and some project 
specific debt. Pro forma for the equity raise and proposed $400 million senior 
note offering, we expect BRP's debt to consist of $69 million of junior 
subordinated notes owed to Brookfield Office Properties, $117 million of 
credit facility borrowings due to BAM, $326 million of project specific 
financings, $325 million of secured bank debt, $9 million of unsecured credit 
facility borrowings, and the new $400 million of senior notes, totaling $1.25 
billion of debt. We estimate debt/EBITDA and interest coverage will improve 
modestly by year-end to around 6x and 3x, respectively.

Our base-case scenario analysis assumes that the homebuilding industry 
continues to recover in the U.S. and remains stable in Canada. Active selling 
communities gradually increase in both markets over the next two years and 
absorption of homes is flat in Canada and moderately increases in the U.S. 
Prices in Canada are unchanged over the forecast period and are up modestly in 
the U.S. (2%-3% per year). We anticipate that land constrained homebuilders 
will turn to BRP for land, which will also contribute to revenue growth from 
the land business (about 10% per annum). In contrast with previous years, we 
expect that the faster growing U.S. homebuilding business will affect gross 
profit mix such that homebuilding gross profit will eclipse 50% of total gross 
profits by year-end 2013. We also assume homebuilding gross margins remain 
flat in Canada and improve to 16.5% in 2013 and 17.5% in 2014, while land 
development margins are 35%-40%. SG&A/revenues are in the 9%-10% range. The 
inherent operating leverage in the business should contribute to growing 
profitability and we expect that based on our assumptions that leverage, as 
measured by debt/EBITDA and debt/book capital, will be about 5.7x and 54% at 
year-end 2013 and 4.6x and 50% at year-end 2014. We also estimate interest 
coverage will improve to 3.5x in 2013 and more thanb 4x in 2014. 

Liquidity
We believe that Brookfield's liquidity position is adequate, with sources 
adequate to cover uses by at least 1.2x over the next 12 months.
     -- We expect Brookfield will be profitable in 2013, generating funds from 
operations (FFO) of about $150-$200 million;
     -- We estimate Brookfield will end 2012 with cash holding in the vicinity 
of about $125 million;
     -- Brookfield has a $300 million unsecured credit facility due in 2015 
provided by BAM. We expect that the facility will have $233 million available 
after the note issuance;
     -- Debt maturities are significant in 2013 comprised primarily of $319 
million of Canadian bank secured facilities with short debt durations that 
have historically rolled over every year and $200 million of project level 
financings. For purposes of this liquidity analysis, we assume the secured 
credit facilities are repaid with existing liquidity. We assume project debt 
is extended or repaid with cash flow from the related projects; 
     -- We also assume roughly $400 million of land acquisition and 
development spend (net of any project level financing); and
     -- We believe that sources would cover the company's capital needs even 
if EBITDA were to drop by 30%.
 
While we do not factor in availability under BRP's secured credit facilities 
as a source of liquidity due to the short tenor of those facilities, the 
company did have about $220 million of availability under these facilities. We 
also acknowledge that the company has historically renewed these facilities 
annually. Large land acquisitions would affect liquidity, which is possible 
considering the company's strategy as a large master planned land developer. 
However, we also expect the company to continue to finance land acquisitions 
with equity or seller financing and development with nonrecourse project-level 
debt. Liquidity could become constrained should demand for housing and land 
deteriorate. BRP was in compliance with all financial covenants as of Sept. 
30, 2012. BRP doesn't currently pay a dividend.

Recovery analysis
Our rating on the company's senior unsecured notes is 'BB-' (one notch higher 
than BRP's corporate credit rating). The '2' recovery rating indicates our 
expectation for a substantial (70%-90%) recovery in the event of a payment 
default. For the complete recovery analysis, see our recovery report on BRP to 
be published after this report.

Outlook
The outlook is stable. We expect continued stability in BRP's Canadian markets 
and the steady recovery in the U.S. housing markets to support revenue and 
EBITDA growth leading to steadily improving credit metrics and continued 
adequate liquidity. The land development business, while cyclical, should 
support BRP's growth as many homebuilders continue to invest in new land to 
support future growth. We would consider raising the rating if housing demand 
recovers more quickly in the U.S. and remains stable in Canada, resulting in 
improved cash flow such that debt/EBITDA improves to the 3x-4x range. 
Alternatively, we could lower the ratings if the recovery in the U.S. falters 
or the Canadian housing market softens such that debt/EBITDA doesn't improve 
over the next two years and/or liquidity becomes constrained.

Temporary telephone contact numbers: George Skoufis (201-470-2589); Susan 
Madison (201-259-1034).

Related Criteria And Research
     -- Key Credit Factors: Global Criteria For Single-Family Homebuilders, 
Sept. 27, 2011
     -- Industry Report Card: U.S. Homebuilders Pivot Toward Growth, Oct. 17, 
2012
     -- Issuer Ranking: U.S. Homebuilders, Strongest To Weakest, Oct. 12, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' 
Speculative Grade Debt, Aug. 10, 2009

Ratings List

Ratings Assigned

Brookfield Residential Properties Inc.
  Corporate credit              B+/Stable/-- 
  Senior unsec. notes           BB-
  Recov. Rtg.                   2


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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