One such non-bank entity is the low-cost residential developer 8990 Holdings Inc (also known by its ticker "HOUSE"). HOUSE extends financing to the individual buyers of its residential units. The financing is made in the form of Installment Contract Receivables or "...receivables from the sale of residential houses and lots, condominium units and timeshares which are collectible in monthly installments over a period of 2 to 25 years. Receivables bear annual interest ranging from 8.5% to 20% for the period ended September 30, 2013 and 2012. Titles to real estate properties are transferred to the buyers upon full payment of the contract price."
Based on its unaudited financial statements as of September 30, 2013, HOUSE has Php 8.166 billion of Installment Contract Receivables, which represents more than a years worth of revenue.
| 8990 Holdings Inc. | ||
| Installment Contract Receivables/Sales | ||
| In Php | ||
| Audited | Unaudited | |
| December 31, 2012 | September 30, 2013 | |
| Installment Contract Receivables | 4,672,109,197 | 8,165,199,990 |
| Sales* | 2,888,596,423 | 4,367,429,533 |
| Days Sales | 437 | 505 |
| * Sales Figures for 2012 are for the Nine Months ended September 30, 2012 | ||
Installment Contract Receivables (ICR) of HOUSE have jumped considerably in 2013, rising 74.76% from Php 4.672 billion as of December 31, 2012 to Php 8.165 billion as of September 30, 2013. The bulk of the ICRs, around Php 7.110 billion are noncurrent, leaving Php 1.055 billion as current.
| 8990 Holdings Inc. | |||
| Installment Contract Receivables, Current and Noncurrent | |||
| In Php | |||
| Audited | Unaudited | ||
| December 31, 2012 | September 30, 2013 | % Change | |
| Current | 266,090,280 | 1,054,802,352 | 296.41% |
| Noncurrent | 4,406,018,917 | 7,110,397,638 | 61.38% |
| Total | 4,672,109,197 | 8,165,199,990 | 74.76% |
Approximately 4.65% of the ICRs as of September 30, 2013 have been classified as past due. The bulk of the increase in past due ICRs came from ICRs that were delinquent for over 90 days. The 90-day delinquency rate jumped roughly 500% in the nine months since December 31, 2012. ICRs over 90 days past due increased from only Php 39.365 million on December 31, 2012 to Php 236.008 million as of September 30, 2013. Although this is a very substantial increase in such a short span of time, the "Group did not recognize any impairment losses on its trade and other receivables for the period ended September 30, 2013 and 2012."
| 8990 Holdings Inc. | |||
| Installment Contract Receivables, Past Due but Not Impaired | |||
| In Php | |||
| Audited | Unaudited | ||
| December 31, 2012 | September 30, 2013 | % Change | |
| Less than 30 days | 76,438,532 | 102,996,723 | 34.74% |
| 31 - 60 days | 31,128,884 | 30,426,033 | -2.26% |
| 61 -90 days | 26,930,290 | 10,163,708 | -62.26% |
| Over 90 days | 39,365,086 | 236,008,574 | 499.54% |
| Total | 173,862,792 | 379,595,038 | 118.33% |
The sudden jump in very delinquent ICRs indicates that credit quality of the portfolio may not have been very good to begin with. Based on the payment terms described on HOUSE's website, it seems that buyers can basically put almost no money down to purchase a residential unit. Thus, buyers have little or no equity in their properties and can easily walk away the moment they can no longer service their debt obligations.
| 8990 Holdings Inc. | ||
| Payment Terms | ||
| Pavia Regular Unit Price | ||
| In Php | ||
| Amount | % | |
| Reservation Fee | 5,000 | 0.59% |
| CTS Gold Processing Cost: | 15,000 | 1.76% |
| Loan Value: | 830,000 | 97.65% |
| Total Package | 850,000 | 100.00% |
In environment of constantly rising housing prices, this payment scheme can entice a lot buyers to buy and "flip" a property to another buyer for a quick profit. Indeed this has been the case for a number of years:
Buyers who cannot pay the loan amortization can sell their properties into a rising market, thus keeping delinquencies to a minimum. But the moment housing prices stall or financing becomes difficult, delinquencies can accelerate at a rapid clip. This is what happened in the US subprime housing market and it could happen as well in the Philippines.
In the case of HOUSE, the company retains the title to the real estate properties until the buyer has fully paid the contract price, removing the need for the company to undergo an expensive and prolonged foreclosure process on the property.
If delinquencies continue to increase at an alarming pace, the company may have to recognize an impairment of a significant chunk of its ICRs. According to the company's guidelines on accounting estimates, it:
"reviews its receivables at each reporting date to assess whether an allowance for impairment losses should be recorded in the consolidated statement of financial position and any changes thereto in profit or loss. In particular, judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about number of factors. Actual results may differ, resulting in future changes to the allowance."
As it currently stands, management has determined that there should be no provision for credit losses on its ICRs. But that may change once the delinquencies are too large to ignore. And when that happens, the resulting adjustment to profits may eat into the stockholders equity of the company.
As of September 30, 2013, ICRs represent 134.98% of stockholders equity, an indication of the risk the company has undertaken to finance the sale of its real estate properties.
| 8990 Holdings Inc. | ||
| Installment Contract Receivables/Stockholders Equity | ||
| In Php | ||
| Audited | Unaudited | |
| December 31, 2012 | September 30, 2013 | |
| Installment Contract Receivables | 4,672,109,197 | 8,165,199,990 |
| Stockholders Equity | 3,948,015,021 | 6,049,131,256 |
| Installment Contract Receivables/Stockholders Equity | 118.34% | 134.98% |
This risk, by itself, is not alarming. But the company also carries another risk intrinsic to its business: a decline in real estate values.
As of September 30, 2013, the companies real estate properties had a combined value of Php 5.827 billion or 96.34% of the company's stockholder's equity.
| 8990 Holdings Inc. | ||
| Real Estate/Stockholders Equity | ||
| In Php | ||
| Audited | Unaudited | |
| December 31, 2012 | September 30, 2013 | |
| Real Estate Inventories | 2,040,532,596 | 2,081,143,259 |
| Land held for Future Development | 1,010,474,241 | 3,605,811,050 |
| Investment Properties | 142,365,067 | 140,860,631 |
| Total Real Estate | 3,193,371,904 | 5,827,814,940 |
| Stockholders Equity | 3,948,015,021 | 6,049,131,256 |
| Real Estate/Stockholders Equity | 80.89% | 96.34% |
Thus, a real estate downturn has the potential to deliver a "double whammy" to the company's bottom line:
- An Impairment of Installment Contract Receivables
- A Decline in Real Estate Values
Just a 10% across-the-board decline in both ICRs and Real Estate Values can wipe out as much as 23% of the company's capital. A 20% decline will double that to almost 50% of the company's capital, a virtual death sentence for the company.
| 8990 Holdings Inc. | ||
| ICRs & Real Estate/Stockholders Equity | ||
| In Php | ||
| Audited | Unaudited | |
| December 31, 2012 | September 30, 2013 | |
| Installment Contract Receivables | 4,672,109,197 | 8,165,199,990 |
| Real Estate | 3,193,371,904 | 5,827,814,940 |
| Total | 7,865,481,101 | 13,993,014,930 |
| 10% Losss | 786,548,110 | 1,399,301,493 |
| Stockholder's Equity | 3,948,015,021 | 6,049,131,256 |
| Impact of 10% Loss | 19.92% | 23.13% |
Nevertheless, the company remains upbeat about its prospects and has, in fact, added around Php 2.2 billion to its existing landbank. The company has hedged this expansionary bet with a follow-on offering of shares that is estimated to bring in Php 6.35 billion in cash to bolster the company's capital base. However, the company's major stockholders and officers plan to cash out on Php 4.7 billion in shares in the same follow-on offering, bringing the company's free float of shares to the 20% level.
Do they know something we don't? That remains to be seen.
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