The Case of 8990 Holdings Inc.'s Disappearing Past Due Installment Contract Receivables Gets Curiouser and Curiouser

In 2014, we first broached the idea that 8990's past due installment contract receivables (ICRs) problem was about to explode. Since then, past due and/or impaired ICRs ballooned from just 0.32% of total ICRs in 2013 to a peak of 18.85% of total ICRs in 2015. Since then, the company has managed to trim its receivables problem to 10.12% in 2016 and to just 2.40% in 2017. In 2018, the receivables problem worsened, almost doubling to 4.67% of total ICRs.

Total ICRs are also down significantly since 2017. In 2018, ICRs were just Php 17.6 billion, down almost 20% from Php 21.2 billion in 2017.

Reduced Disclosure

But the company failed to provide an aging analysis of its past due but not impaired ICRs for 2018.

Level 3 Assets


It also decided to emulate Vista Land by classifying almost all of its ICRs as Level 3 Assets. Beginning in 2017, it classified Php 19.9 billion in 2017 and Php 16.1 billion ICRs in 2018 as Level 3.

What is meant by Level 3?

According to its Fair Value Hierarchy, 8990's Level 3 Assets are assets in which the inputs for those assets are not based on observable market data. The inputs for Level 1 Assets are market prices for those assets. The inputs for Level 2 Assets are more indirect. The exact definitions are as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or financial
liabilities that an entity can access at the measurement date;

Level 2: inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from
prices); and,

Level 3: inputs for the asset or liability that are not based on observable market data
(unobservable inputs).

Now what exactly is an unobservable input to an ICRs of 8990? ICRs are essentially a loan from the developer (8990 Holdings) to the buyer so that the buyer can purchase the residential unit from the developer. The ICR is collateralized by the title to the property itself and is held by the developer until the ICR is paid off by the buyer. All the inputs are observable: the amount of the ICR, the monthly installment, the imputed interest rate, etc. The ICRs have to be simple enough for the buyer to understand what he/she is buying. Otherwise, if the ICRs are structured in a complicated fashion, the buyer will not buy the property. 8990 Holdings customers are simple end-users. They buy the homes they will live in. And most are not financially sophisticated buyers. So valuing the ICRs is not rocket science. The ICRs should be classified as Level 1. All of them.


Dearborn Resources Holdings, Inc.

In early 2018, 8990 Holdings sold a huge chunk of its ICRs to an entity called Dearborn Resources and Holdings, Inc. (Dearborn). The sale was without recourse. But the sale was much more complicated than a simple transaction. From 8990's 2018 Annual Report, we get this tidbit:

"On January 29, 2018, the Group entered into an agreement with Dearborn Resources and Holdings, Inc. (Dearborn) to sell its contracts-to-sell (CTS), with a total face value or principal amount of up to P10.0 billion, without recourse. Subsequent to the sale of the CTS, Dearborn shall be primarily responsible for servicing, administrating, and collecting these receivables. On the same date, the Group was appointed as the sub-servicer and the remarketing agent of Dearborn. Total amount of CTS sold to Dearborn in 2018 is P10.0 billion. The related receivable arising from this transaction amounting to P165.5 million is presented as part of Other receivables as at December 31, 2018.

On December 29, 2017, a loan facility agreement between Dearborn and certain lenders was executed to provide a loan facility in the aggregate principal amount of P1.4 billion for the purpose of partially financing Dearborn’s acquisition of certain CTS of the Group. Under the loan facility agreement, the Parent Company also committed to lend Dearborn the principal amount of up to but not in excess of P300.0 million which bears 16% interest per annum, payable monthly. The loan granted under the facility agreement is unsecured and has a term of five years counting from the date of initial drawdown. However, the principal amount of the loan and any related accrued interest will be due and demandable in the event of default. As of December 31, 2018, the Parent Company has already extended P314.0 million financing to Dearborn. Interest earned and received from this loan receivable amounted to P16.2 million, which is presented as part of Interest income under Other Operating Income in the 2018 consolidated statement of profit or loss (see Note 23.1)."

This disclosure raises a lot of questions:

1. What is Dearborn Resources Holdings, Inc.? A firm with the ability to buy ICRS with a total face value of Php 10 billion has to be a substantially well capitalized firm. Is it a financial firm, a vulture fund, a subsidiary of a universal bank? It seems to have no website, no listed owners. It's an unknown entity.
2. Were the receivables sold at a loss? How much cash did 8990 actually receive on the sale? The face value is Php 10.0 billion and the remaining receivable from Dearborn is Php 165.5 million. Maybe I'm not reading this correctly but the step-by-step mechanics of the transaction are not clear.
3. Is Dearborn related to 8990? Do or did they have common stockholders?
4. Why is 8990 lending Php 300.0 million to Dearborn on an unsecured basis if this is an arm-length transaction with a completely independent entity? 8990's management would not lend Dearborn Php 300.0 million unless they knew the Dearborn and its management well and they have had an existing relationship with that firm.

The more I look at it, the more Dearborn looks like an off-balance sheet vehicle designed to take problematic ICRs off 8990's books. It's an SPV (Special Purpose Vehicle) used by 8990 to defer or delay the recognition of losses on its ICRs. Such SPVs were used by a lot of Universal Banks to clean their balance sheets in the 2000s. (See BSP's Ampaw Accounting System). And just like those banks, the value of those ICRs could be "ampaw" or puffed up.

Read:

Has the Philippine Real Estate Bubble Already Burst?

8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables

The Philippine Real Estate Bubble Has Already Burst for HOUSE (8990 Holdings, Inc.)

The (Un)Steady State of Philippine Real Estate in 2016

At 109.77%, 8990 Holdings still has the most Real Estate Receivables relative to its Stockholder's Equity in 2016. Next is Century Properties at 70.49% of Stockholder's Equity, followed by Ayala Land at 46.92% of Stockholder's Equity.

Naturally, 8990 Holdings still has the most problematic Real Estate Receivables. Problem Real Estate Receivables amount to 11.10% of its Stockholder's Equity as of 2016. Believe it or not, this figure is way down from the 20.40% it posted in 2015.  Ayala Land's Problem Real Estate Receivables amount to 6.72% of its Stockholder's Equity in 2016. Neck and neck for third place are SM Prime Holdings and SM Investments with Problem Real Estate Receivables amounting to 3.68% and 3.61% of their respective Stockholder's Equity.

 SM Prime Holdings also holds the dubious distinction of having the highest percentage of Past Due But Not Impaired Real Estate Receivables relative to Total Real Estate Receivables in 2016. This is closely followed by Ayala Land with 14.63% of its Real Estate Receivables in Past Due status. Both Vista Land and 8990 Holdings have similar ratios with 9.58% (Vista Land) and 9.44% (8990 Holdings) of its Real Estate Receivables falling Past Due in 2016.

Related Posts:

Ayala Land's Real Estate Receivables Problem Has Gotten Worse, Not Better

8990 Holdings Inc.'s 2016 Annual Report: What a Difference an Auditor Makes!

8990 Holdings Inc.'s Impaired Installment Contracts Receivable (ICRs): The Pig Has Finally Broken Out of the Python!

The Philippine Real Estate Bubble Has Also Burst For... Ayala Land!

The Philippine Real Estate Bubble Has Also Burst for Vista Land

The Philippine Real Estate Bubble Has Already Burst for HOUSE (8990 Holdings, Inc.)

8990 Holdings Inc.'s 2016 Annual Report: What a Difference an Auditor Makes!

On May 18, 2016, 8990 Holdings Inc. finally filed its 2016 Annual Report with the Philippine Securities and Exchange Commission as well as the Philippine Stock Exchange. The said Annual Report looked fine, albeit slightly disappointing. The company's "problem accounts," meaning both Past Due But Not Impaired as well as Impaired Installment Contract Receivables had gone down by almost 40% (39.54% to be exact) or Php 1.39 billion since 2015.  The pig was almost out of the python!

It was all good. Except for one thing. The so-called "problem accounts" for 2015 had undergone a major revision as well in the 2016 Audited Financial Statements. What was once in the "Impaired" column was reclassified as "Past Due But Not Impaired", resulting in an astounding 95.80% reduction in Impaired Installment Contract Receivables in 2015. (Note: This is not the first time this has happened)

What could account for the difference? For one thing, there was a change in external auditors last July 29, 2016 from Sycip Gorres Velayo & Co. (SGV) to Punongbayan & Araullo (Punongbayan).

"The appointment of the external auditors of the Company is presented for approval of the stockholders annually. In the last annual stockholders' meeting held on 25 July 2016, the Management considered the options available to the Company in relation to the appointment of external auditors. Instead of renewing the engagement of the former external auditors, the Management recommended the delegation to the Board of Directors of the authority to appoint the external auditors for the fiscal year 2016. Pursuant to such authority, the Board appointed Punongbayan & Araullo."

And Punongbayan saw things differently. They largely deferred to management's judgment on the matter, subject, of course, to their own audit procedures.

From Punongbayan's 2016 Auditor's Report:

Realizability of Installment Contract Receivables 

Description of the Matter 

As at December 31, 2016, the Group's installment contract receivables amount to Php 21.1 billion, net of allowance of impairment of Php 143.5 million, which details are disclosed in Note 9 to the consolidated financial statements. The installment contract receivables, which represent 44% of the total assets, are the most significant assets of the group at the end of the reporting period. The Group's management exercises significant judgment and use subjective estimates in determining when and how much to recognize impairment loss on receivables. These judgment and estimates, which are detailed in the Group's significant accounting policies, judgments and estimates in Notes 2 and 3 to the consolidated financial statements, including the identification of objective evidence that such assest is impaired (e.g. indications of significant financial difficulty, default or delinquency in interest and principal payments, etc. of the buyer) and estimation of future cash flows based on payment history, past due status and term, including the net realizable value of the related real estate inventory, which serves as collateral. 

Because of the significance of the amounts involved and subjectivity of managment's judgment and estimates used, we identified the valuation of installment contracts receivables to determine its realizability as at the end of the reporting period as a significant focus area during our audit. 

How the Matter was Addressed in the Audit 

Our audit procedures to determine the realizability of installment contract receivables and the adequacy of the allowance for credit losses on installment contract receivables included, among others, the following:

• obtaining an understanding and testing the application of the Group's policy on impairment of installment contract receivables; 
• checking the mathematical accuracy of the aging of installment contract receivables and testing the accuracy of the aging classification of selected buyer's accounts; and 
• determining the net realizable value of real estate inventories collateralized against selected past due or delinquent buyers' accounts.

And this is how management makes those judgments:

From Note 2 of the 2016 Audited Financial Statements:

Impairment of Financial Assets 

The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is determined to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of buyers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. 

Loans and receivables 

For loans and receivables, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If there is objective evidence that an impairment loss has been incurred, the amount of loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is charged to profit or loss in the consolidated statement of comprehensive income. Interest income continues to be recognized based on the orignal EIR of the asset. Financial assets, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If subsequently, the amount of the estimated impairment loss decreases because of an event occuring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the profit or loss, to the extent that the carrying value of the asset does not exceee its amortized cost at the reversal date. 

If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognized are not included in a collective assessment for impairment. 

For the purpose of a collective evaluation of impairment, financial assets are group on the basis of such credit risk characteristics as type of counterpary, credit history, past due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

From Note 3 of the 2016 Audited Financial Statements:

Significant Accounting Judgments and Estimates 

Impairment of Loans and receivables 

The Group 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, judgment 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 a number of factors including, but are not limited to payment history, past due status and term. Actual results may also differ, resulting in future changes to the allowance. 

The disclosures on the carrying values of trade and other receivables, and amount of impairment losses recognized and the details of receivables written-off are in Note 9.
The Group had directly written-off receivables amounting to Php 3.8 million in 2015  (nil in 2016 and 2014), recorded as Write-off of assets under Operating Expenses in the 2015 consolidated statements of comprehensive income (Note 23).

As of December 31, 2016 and 2015, trade receivables used as collateral to secure borrowings from banks amounted to Php 4.4 billion and Php 3.8 billion, respectively (Note 18). 

Had those impairments continued in 2016, 8990 Holdings most likely would have been forced to write-off a significant chunk of the impaired assets. After all, the longer an asset is impaired, the lower its realizability.

It could very well be the case that a fresh new set of eyes was all that was needed to settle the matter. Maybe 8990 Holdings Inc.'s fortunes are improving and these assets have improved in their realizability. But there are also some indications that these impaired assets have begun to hamper the company's liquidity and growth.

 For instance, the company barely grew in 2016. For all of last year, the company grew by 2.31% from Php 10.63 billion in revenues in 2015 to just a smidge over Php 10.87 billion in 2016.  This happened despite being a dominant player in mass housing in a red-hot economy which grew by 6.8% in real terms, the fastest in three years. Moreover, the housing market itself was robust both in terms of sales volumes and house prices.

The company likes to blame delays in securing permits as a major factor in its anemic growth in 2016. That may very well be true. But liquidity could also be a factor. The money that was supposed to be sloshing around in the company's financial ecosystem may have been severely reduced by the impaired assets that could still be present on its balance sheet.

In 2017, this has already translated to a 21.91% dip in sales for the first quarter of 2017 when compared to the same period in 2016. Revenues now amount to Php 2.04 billion as of March 31, 2017 vs. Php 2.61 billion as of March 31, 2016.

The company is already talking about "sacrificing growth for liquidity" because it expects its interest expense to double this year as interest rates rise. What has been left unsaid is that the company has already breached some of its debt covenants on its bonds. Its debt to equity ratio now stands at 1.65 to 1.0 vs. a maximum of 1.0.  It is also dangerously close to breaching another debt covenant - that of a minimum current ratio of 1.0. That ratio now stands at 1.06 to 1.0 as of March 31, 2017, which is a drop from the already low level of 1.10 it posted at the end of 2016.

For all we know, the company may already be in technical default as we speak.  The company has around Php 7.6 billion in loans due this year. That money can be raised but it can induce a nail-biter of a cash crunch throughout the year.

The company is already talking of partially abandoning its much-vaunted Contract-To-Sell (CTS) In-house financing (the very business model that propelled it to the top of the mass housing market) for buyers funded by housing financing agencies like Home Development Mutual Fund (HDMF) or PagIBIG fund - all in the name of efficiency and cash generation. That model made it easier for its buyers to obtain homes with very little equity and bypass the bureaucracy of the housing finance agencies. But the CTS model also exposed the company to a whole lot of credit and liquidity risk. Under this model, the company spends a large chunk of money upfront to build and sell the homes and gets back a trickle of that each year in terms of monthly installments that can go on for as long as 25 years.

What's worse is that the company recognizes revenue from these sales up front using the full accrual method at the discretion and judgment of management. Any error in the application of these judgments could result in a material misstatement of the company's financial statements.

While this post may be characterized as unduly alarmist and 8990 Holdings may very well muddle through its challenges, the Philippine real estate market has been littered with the bodies of once high flying real estate companies. Fil-Estate, anyone? If 8990 Holdings falters, it could very well become the proverbial canary in the Philippine real estate coal mine.

Related Posts:

8990 Holdings Inc.'s Impaired Installment Contracts Receivable (ICRs): The Pig Has Finally Broken Out of the Python!

The Philippine Real Estate Bubble Has Already Burst for HOUSE (8990 Holdings, Inc.)

8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables

Has the Philippine Real Estate Bubble Already Burst?

8990 Holdings Inc.'s Impaired Installment Contracts Receivable (ICRs): The Pig Has Finally Broken Out of the Python!

For the past two years, we have noted the sharp uptick in delinquencies in installment contracts receivables (ICRs) in 8990 Holdings Inc. (otherwise known by its ticker: HOUSE).

In 2014, in a post entitled "Has the Philippine Real Estate Bubble Already Burst?", we noted a very sharp uptick in HOUSE's ICRs that were over 90 days past due.  The marked change was very evident during the period from December 31, 2012 to September 30, 2013.






Impairments of these past due receivables were minimal, climbing from an absolute zero in 2012 to just Php 7.2 million in 2013 or a negligible 0.07% of 8990's total ICR portfolio.

Shortly after that post was published, those past due ICRs mysteriously disappeared in the company's audited 2013 Annual Report (See  8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables).  ICRs that were over 90 days past due dropped from a reported Php 236.0 million as of the September 30, 2013 (Unaudited Interim Report) to just Php 16.0 million as of December 31, 2013 (Audited Annual Report).

Those disappearing past due ICRs miraculously reappeared in the 2014 Annual Report, when HOUSE report that Php 177.4 million or 1.26% of its ICRs were over 90 days past due (See: "The Philippine Real Estate Bubble Has Already Burst for HOUSE (8990 Holdings, Inc.)".

These are the money shots:

Impairments showed "hockey stick"-like exponential growth, jumping from just Php 7.2 million or 0.07% of Total ICRs in 2013 to Php 1.4 billion or a staggering 9.84% of Total ICRs as of year-end 2014.








Today, the pig is out of the python.  The "pig" of Impaired ICRs has almost doubled to more than 18.14% of the total ICR portfolio (the python).

But ICRs that are over 90 days past due has dropped considerably from Php 177.4 million or 1.26% of total ICRs in 2014 to just Php 100.6 million in 2015 or 0.53% of total ICRs in 2015.  This could mean that the pipeline of incoming impairments (meaning 90-day past due ICRs) may have stalled or even dropped.

This could mean that 8990 now has a better handle on screening its customers for credit worthiness.  It could also mean that the Philippine real estate market has stabilized.  Volumes for the overall market have remained stable and home prices have continued their upward trend.

Socialized housing, the market space where 8990 predominantly operates has also done well in 2015.  So this could be a factor as well.

8990 remains heavily exposed to areas outside Metro Manila.  Over 50% of its ICRs are in Davao and Cebu.  Exposure to the Metro Manila market is minimal, only 2.11% of ICRs are originated in Metro Manila.

And that could be a good thing.




Source: 8990 Annual Reports, 2012 to 2015; HLURB, edge.pse.com.ph

The Philippine Real Estate Bubble Has Already Burst for HOUSE (8990 Holdings, Inc.)

The information has been out for almost two weeks now.  It was disclosed deep in the bowels of the 2014 Annual Report of 8990 Holdings, Inc. (HOUSE).  The real estate bubble has burst ...at least for HOUSE.  There was a marked deterioration in 2014 in 8990 Holdings' Past Due but Not Impaired Installment Contract Receivables both in absolute numbers and relative to its total portfolio of Installment Contract Receivables (ICRs).  An aging analysis buried in the 2014 Annual Report showed that delinquencies jumped by a minimum factor of 10 in all aging categories, whether the unimpaired but past due ICRs were delinquent for: 1) less than 30 days; 2) 31 to 60 days; 3) 61 to 90 days; 4) over 90 days.


A few charts tell the story:

Total Past Due But Not Impaired ICRs now comprise 2.45% of 8990 Holdings Total ICR portfolio as of 2014, an exponential jump from 0.25% in 2013 and 0.77% reported in 2012.

This, by itself, is not worrying.  What is worrying is that 8990 Holdings also reported a gargantuan hockey stick type increase in its Impaired ICRs, both in absolute value and relative to total ICRs.

So now we can see that both Past Due But Not Impaired ICRs as well as Impaired ICRs collectively comprise 12.29% of 8990 Holdings Total ICR portfolio of Php 14.113 billion as of December 31, 2014.

But what does this all mean?

Under 8990 Holdings' business model, the company functions like an in-house bank or mortgage lender, providing a substantial amount of financing to its customers so that these customers in turn can buy their homes.  This model is great... when it works.  For undertaking the risk of financing its customers, the company earns interest income from its customers over and above the gross profits it earns from the sale of a property.  Under this model, the company owns the title to the properties it sells until the property is fully paid off, obviating the need for an expensive and protracted foreclosure process when a customer defaults.

Unlike a bank, 8990 Holdings has a higher cost of funds because not only does it borrow money from banks to finance the development of its properties, it also borrows money from banks to finance its loans to its customers, often by assigning its ICRs to a bank in exchange for ready cash.  A bank has a much cheaper source of funding: its depositors who these days, are paid almost nothing for keeping their money in the bank.  In order to earn a profit on its financing operations, the home financing provided by 8990 Holdings tends to be much more expensive than the home loans provided by banks. Also, the customers of 8990 Holdings tend to me much more marginal and less credit-worthy than bank customers.  After all, why would anyone go to 8990 Holdings if they can get a much cheaper loan from a bank?

Has the company been too aggressive in its focus on sales to the point of sacrificing credit quality? Perhaps.  Have home prices gone up so much past the point of affordability?  Maybe.  Have the company's customers been hit with an economic shock in the past year?  If they have, it is not obvious because the nation's GDP grew at a decent 5.30% clip in 2014. But according to the Philippines Housing Land Use Regulatory Board (HLURB), there was a 16% drop in HLURB's Licenses to Sell in 2014 in the Socialized Housing space, 8990's market niche.

With 12.29% of its customers not paying off their properties on a timely basis means that as a bank, 8990 Holdings would rank as the 19th worst bank in the country in terms of Gross NPLs/Gross Total Loan Portfolio. 

Around 80% of these past due borrowers are in severe default, hence the impaired status.  In other words, these borrowers are in the process of being evicted from their homes and their homes repossessed by the company.

The company has already made provisions of Php 130.857 million for impairment losses and has recognized a loss of Php 56.972 million on property repossessions.  Expect more to come as the "pig" of impaired ICRs" winds through the "python" of the company's eviction and repossession process.

See Previous Blog Posts:

Has the Philippine Real Estate Bubble Already Burst?

8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables

8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables

In a previous blog post titled "Has the Philippine Real Estate Bubble Already Burst?", we wrote on a little known factoid buried deep within the bowels of the financial statements of 8990 Holdings, Inc. (otherwise known through its stock ticker "HOUSE"), that HOUSE's level of Installment Contract Receivables (ICRs) that are over 90 days past due jumped 500% in the nine months from December 31, 2012 to September 30, 2013.

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%

These figures were taken from HOUSE's interim financial statements as of September 30, 2013 which contained audited figures for December 31, 2012 and interim figures for the nine months since then.  The document can be found here and also on the website of the Philippine Stock Exchange.  The Annual Report can be found here and here.

Today, those figures are very much gone or reduced.  The level of past due ICRs were reduced by almost 80% for the very same figures that were audited as of December 31, 2012.  

8990 Holdings Inc.
Installment Contract Receivables, Past Due but Not Impaired
In Php
	Interim Report	Annual Report
	Audited	Audited
	December 31, 2012	December 31, 2012	Variance	% Variance
Less than 30 days	76,438,532	18,426,966	-58,011,566	-75.89%
31 - 60 days	31,128,884	5,049,846	-26,079,038	-83.78%
61 -90 days	26,930,290	5,910,360	-21,019,930	-78.05%
Over 90 days	39,365,086	6,357,158	-33,007,928	-83.85%
Total	173,862,792	35,744,330	-138,118,462	-79.44%

Despite an almost 40% jump in sales, the level of past due ICRs were even lower at year end 2013 than they were at year end 2012.

8990 Holdings Inc.
Installment Contract Receivables, Past Due but Not Impaired
In Php
	Interim Report		Annual Report
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Less than 30 days	76,438,532	102,996,723	18,426,966	3,824,739
31 - 60 days	31,128,884	30,426,033	5,049,846	2,403,551
61 -90 days	26,930,290	10,163,708	5,910,360	2,177,276
Over 90 days	39,365,086	236,008,574	6,357,158	15,993,266
Total	173,862,792	379,595,038	35,744,330	24,398,832

HOUSE dependence on ICRs to fuel sales has only increased since December 31, 2012.

8990 Holdings Inc.
Installment Contract Receivables/Sales
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990	4,672,109,197	9,777,920,990
Sales	2,888,596,423	4,367,429,533	3,830,644,048	5,356,098,815
Days Sales	437	505	329	493

So has the risk to its stockholders. 8990 Holdings Inc.
Installment Contract Receivables/Stockholders Equity
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990	4,672,109,197	9,777,920,990
Stockholders Equity	3,948,015,021	6,049,131,256	3,948,015,021	6,595,847,184
Installment Contract Receivables/Stockholders Equity	118.34%	134.98%	118.34%	148.24%

8990 Holdings Inc.
Real Estate/Stockholders Equity
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Real Estate Inventories	2,040,532,596	2,081,143,259	2,040,532,596	2,243,559,834
Land held for Future Development	1,010,474,241	3,605,811,050	1,010,474,241	3,784,727,576
Investment Properties	142,365,067	140,860,631	142,365,067	141,928,584
Total Real Estate	3,193,371,904	5,827,814,940	3,193,371,904	6,170,215,994
Stockholders Equity	3,948,015,021	6,049,131,256	3,948,015,021	6,595,847,184
Real Estate/Stockholders Equity	80.89%	96.34%	80.89%	93.55%

8990 Holdings Inc.
ICRs & Real Estate/Stockholders Equity
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990	4,672,109,197	9,777,920,990
Real Estate	3,193,371,904	5,827,814,940	3,193,371,904	6,170,215,994
Total	7,865,481,101	13,993,014,930	7,865,481,101	15,948,136,984
10% Losss	786,548,110	1,399,301,493	786,548,110	1,594,813,698
Stockholder's Equity*	3,948,015,021	6,049,131,256	3,948,015,021	6,595,847,184
Impact of 10% Loss	19.92%	23.13%	19.92%	24.18%

* Excludes Proceeds from Follow-on Offering

Impairment Losses

Based on its Annual Report, the company has now made provisions for impairment losses of Php 2,795,106 as of December 31, 2013, whereas they recognized none in the years before.  This is a step in the right direction.

Meanwhile, what happened to all those past due ICRs?

Has the Philippine Real Estate Bubble Already Burst?

Last May 2013, Eduardo Francisco, the President of BDO Capital and Investment Corporation - the country's largest investment house, urged the BSP to "tighten its watch over over lending activities by nonbank entities, including real-estate developers, to ensure that the country would avoid a bubble in the property market."  He said that "the major banks in the country have kept their credit standards unchanged and fears that banks might be over-aggressive in lending, especially to individuals trying to secure real-estate loans, were unfounded.  However, he also emphasized that non-bank entities, such as real estate developers, have also increased their real estate lending to individuals and that these activities should also be assessed by the BSP.

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:

1. An Impairment of Installment Contract Receivables
2. 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.