BHS Brookfield Homes Corp

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

Commission File Number: 001 – 31524

BROOKFIELD HOMES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		37-1446709 (I.R.S. Employer Identification No.)
8500 Executive Park Avenue Suite 300 Fairfax, Virginia (Address of Principal Executive Offices)		22031 (Zip Code)

(703) 270-1700
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes      þ		No      o

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes      o		No      o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    o		Accelerated filer      þ
Non-accelerated filer      o    (Do not check if a smaller reporting company)		Smaller reporting company      o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      o		No      þ

As of November 1, 2010 the registrant had outstanding 29,655,691 shares of its common stock, $0.01 par value per share.

 

 

INDEX

BROOKFIELD HOMES CORPORATION

PART I.		FINANCIAL INFORMATION		PAGE
Item 1.		Financial Statements
		Consolidated Balance Sheets — September 30, 2010 and December 31, 2009			1
		Consolidated Statements of Operations — Three Months and Nine Months Ended September 30, 2010 and 2009			2
		Consolidated Statements of Stockholders’ Equity — Nine Months Ended September 30, 2010 and 2009			3
		Consolidated Statements of Cash Flows — Three Months and Nine Months Ended September 30, 2010 and 2009			4
		Notes to the Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			29
Item 4.		Controls and Procedures			29
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			30
Item 1A.		Risk Factors			30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3.		Defaults Upon Senior Securities			30
Item 4.		Removed and Reserved			30
Item 5.		Other Information			30
Item 6.		Exhibits			30
SIGNATURES					31
EXHIBITS

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED BALANCE SHEETS

(all dollar amounts are in thousands of U.S. dollars)

				(Unaudited)
				September 30,				December 31,
		Note		2010				2009
Assets
Housing and land inventory		2, 13		$	854,012			$	835,263
Investments in unconsolidated entities		3			129,318				92,477
Receivables and other assets		4			19,014				61,744
Restricted cash		5			7,351				7,485
Deferred income taxes		8			39,075				40,112
				$	1,048,770			$	1,037,081
Liabilities and Equity
Project specific and other financings		6		$	392,060			$	381,567
Accounts payable and other liabilities		7			126,950				122,190
Total liabilities					519,010				503,757
Other interests in consolidated subsidiaries		10			43,873				47,011
Commitments, contingent liabilities and other					—				—
Preferred stock — 10,000,000 shares authorized, 9,999,440 shares issued (December 31, 2009 — 10,000,000 shares issued)		11			249,675				249,688
Common stock — 200,000,000 shares authorized, 32,075,780 shares issued (December 31, 2009 —32,073,781 shares issued)					321				321
Additional paid-in-capital					142,861				142,106
Treasury stock, at cost — 2,420,089 shares (December 31, 2009 — 3,671,482 shares)					(110,807	)			(166,113	)
Retained earnings					197,353				252,994
Noncontrolling interest		10			6,484				7,317
Total equity					485,887				486,313
				$	1,048,770			$	1,037,081

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(all dollar amounts are in thousands of U.S. dollars, except per share amounts)

				(Unaudited)								(Unaudited)
				Three Months Ended								Nine Months Ended
				September 30,								September 30,
		Note		2010				2009				2010				2009
Revenue
Housing				$	63,753			$	88,402			$	199,749			$	205,814
Land					10,834				10,141				16,180				25,009
					74,587				98,543				215,929				230,823
Direct Cost of Sales
Housing					(52,994	)			(75,767	)			(166,017	)			(182,657	)
Land					(8,500	)			(8,579	)			(12,654	)			(20,801	)
Impairment of housing and land inventory and write-off of option deposits		14			—				(9,580	)			—				(17,738	)
					13,093				4,617				37,258				9,627
Selling, general and administrative expense					(12,559	)			(11,504	)			(38,692	)			(36,778	)
(Loss) / equity in earnings from unconsolidated entities		3			(228	)			(535	)			(285	)			1,593
Impairment of investments in unconsolidated entities		3			—				(1,268	)			—				(12,886	)
Other (expense) / income		10, 13(c)			(799	)			(1,035	)			769				9,915
Loss Before Income Taxes					(493	)			(9,725	)			(950	)			(28,529	)
Income tax (expense) / recovery					(179	)			6,169				(256	)			12,373
Net Loss					(672	)			(3,556	)			(1,206	)			(16,156	)
Less net loss attributable to noncontrolling interest and other interests in consolidated subsidiaries					120				2,646				778				5,124
Net loss attributable to Brookfield Homes Corporation				$	(552	)		$	(910	)		$	(428	)		$	(11,032	)
Loss Per Share attributable to Brookfield Homes Corporation Common Shareholders
Basic		12		$	(0.19	)		$	(0.22	)		$	(0.53	)		$	(0.73	)
Diluted		12		$	(0.19	)		$	(0.22	)		$	(0.53	)		$	(0.73	)
Weighted Average Common Shares Outstanding (in thousands)
Basic		12			29,655				26,777				28,894				26,770
Diluted		12			29,655				26,777				28,894				26,770

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(all dollar amounts are in thousands of U.S. dollars)

		(Unaudited)
		Nine Months Ended
		September 30,
		2010				2009
Common Stock		$	321			$	321
Preferred Stock
Opening balance			249,688				—
Preferred stock issuance, net of issuance costs of $312			—				249,688
Conversion of preferred stock			(13	)			—
Ending balance			249,675				249,688
Additional Paid-in-Capital
Opening balance			142,106				141,286
Adjustment to stock-based compensation plan			—				145
Stock option compensation costs			742				468
Conversion of preferred stock			13				—
Ending balance			142,861				141,899
Treasury Stock
Opening balance			(166,113	)			(238,957	)
Stock option exercises			93				66
Dividend			55,213				—
Ending balance			(110,807	)			(238,891	)
Retained Earnings
Opening balance			252,994				356,981
Net loss attributable to Brookfield Homes Corporation			(428	)			(11,032	)
Preferred stock dividends			(10,000	)			(3,500	)
Treasury stock issued			(45,213	)			—
Ending balance			197,353				342,449
Total Brookfield Homes Corporation stockholders’ equity		$	479,403			$	495,466
Noncontrolling Interest
Opening balance		$	7,317			$	2,888
Net loss (Note 10)			(1,132	)			(431	)
Contributions			299				3
Ending balance		$	6,484			$	2,460
Total Stockholders’ Equity		$	485,887			$	497,926

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(all dollar amounts are in thousands of U.S. dollars)

		(Unaudited)								(Unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Cash Flows From / (Used in) Operating Activities
Net loss		$	(672	)		$	(3,556	)		$	(1,206	)		$	(16,156	)
Adjustments to reconcile net loss to net cash from operating activities:
Distributed / (undistributed) income from unconsolidated entities			254				859				306				(1,362	)
Deferred income taxes			(1,843	)			(3,160	)			1,037				(9,556	)
Impairment of housing and land inventory and write-off of option deposits			—				9,580				—				17,738
Impairment of investments in unconsolidated entities			—				1,268				—				12,886
Stock option compensation costs			314				76				742				468
Other changes in operating assets and liabilities:
(Increase) / decrease in receivables and other assets			(436	)			(4,529	)			42,730				58,769
(Increase) / decrease in housing and land inventory			(8,925	)			17,235				(20,688	)			17,267
Increase / (decrease) in accounts payable and other liabilities			2,678				10,136				10,979				(11,484	)
Net cash (used in) / provided by operating activities			(8,630	)			27,909				33,900				68,570
Cash Flows From / (Used in) Investing Activities
Investments in unconsolidated entities			(29,153	)			(2,705	)			(41,733	)			(5,638	)
Distribution from unconsolidated entities			1,314				12				1,320				1,790
Decrease / (increase) in restricted cash			134				(7,483	)			134				(7,483	)
Net cash used in investing activities			(27,705	)			(10,176	)			(40,279	)			(11,331	)
Cash Flows From / (Used in) Financing Activities
Net borrowings / (repayments) under revolving project specific and other financings			38,778				(18,588	)			10,493				(304,496	)
Net (distributions) / contributions to noncontrolling interest			(2,443	)			325				(4,207	)			1,003
Preferred stock issuance			—				—				—				250,000
Preferred stock issuance costs			—				—				—				(312	)
Preferred stock dividends paid in cash			—				—				—				(3,500	)
Exercise of stock options			—				66				93				66
Net cash (used in) / provided by financing activities			36,335				(18,197	)			6,379				(57,239	)
Decrease in cash and cash equivalents			—				(464	)			—				—
Cash and cash equivalents at beginning of period			—				464				—				—
Cash and cash equivalents at end of period		$	—			$	—			$	—			$	—
Supplemental Cash Flow Information
Interest paid		$	7,185			$	8,723			$	22,925			$	27,707
Income taxes recovered		$	—			$	323			$	42,766			$	61,023

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Note 1.		Significant Accounting Policies

(a)		Basis of Presentation

Brookfield Homes Corporation (the “Company” or “Brookfield Homes”) was incorporated on August 28, 2002 in Delaware and thereafter acquired all the California and Washington D.C. area land development and homebuilding operations of Brookfield Properties Corporation. The Company began trading on the New York Stock Exchange on January 7, 2003, under the symbol “BHS.”

These unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the consolidated accounts of Brookfield Homes and its subsidiaries and investments in unconsolidated entities and variable interest entities in which the Company is the primary beneficiary.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Since they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, they should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments necessary for fair presentation of the accompanying unaudited consolidated financial statements have been made.

The Company historically has experienced, and expects to continue to experience, variability in quarterly results. The consolidated statements of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.

(b)		Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now incorporated in Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (formerly Statement of Financial Accounting Standards “SFAS” 167) amending the consolidation guidance applicable to variable interest entities and the definition of a variable interest entity, and requiring enhanced disclosure to provide more information about a company’s involvement in a variable interest entity. This guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. This guidance is effective for the Company’s fiscal year beginning January 1, 2010. The Company has adopted this guidance in its unaudited consolidated financial statements. See Notes 2 and 3 for disclosure regarding its impact on the consolidated financial statements.

(c)		Reclassification

Certain prior period amounts in the consolidated balance sheet have been reclassified to conform with the September 30, 2010 presentation. Specifically, consolidated land inventory not owned, which had previously been shown as a separate line, is now shown as a component of housing and land inventory. Other revolving financings, which had previously been shown as a separate line, is now shown as a component of project specific and other financings. These reclassifications had no impact on the Company’s results from operations.

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Note 2.		Housing and Land Inventory

Housing and land inventory includes homes completed and under construction and lots ready for construction, model homes and land under and held for development which will be used in the Company’s homebuilding operations or sold as building lots to other homebuilders. The following summarizes the components of housing and land inventory:

		September 30,				December 31,
		2010				2009
Housing inventory		$	328,684			$	359,132
Model homes			24,123				32,542
Land and land under development			501,205				443,589
		$	854,012			$	835,263

The Company capitalizes interest which is expensed as housing units and building lots are sold. For the three and nine months ended September 30, 2010, interest incurred and capitalized by the Company was $7.2 million and $22.9 million, respectively (2009 — $8.7 million and $27.7 million, respectively). Capitalized interest expensed as direct cost of sales for the same periods was $4.8 million and $13.7 million, respectively (2009 — $8.0 million and $16.6 million, respectively).

No impairment charges were recognized related to the Company’s housing and land inventory during the three and nine months ended September 30, 2010 (2009 — $1.9 million and $10.1 million, respectively).

In the ordinary course of business, the Company has entered into a number of option contracts to acquire land or lots in the future in accordance with specific terms and conditions and the Company will advance deposits to secure these rights. Effective for the Company’s fiscal year beginning January 1, 2010, the Company is no longer required to follow quantitative guidance determining the primary beneficiary of a variable interest entity (“VIE”), but is required by ASC Topic 810 “Consolidation” to qualitatively assess whether it is the primary beneficiary based on whether it has the power over the significant activities of the VIE and an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The Company has evaluated its option contracts in accordance with this revised guidance and determined that for those entities considered to be VIEs, it is the primary beneficiary of options with an aggregate exercise price of $25.3 million (December 31, 2009 — $25.4 million), which are required to be consolidated. In these cases, the only asset recorded is the Company’s exercise price for the option to purchase included in housing and land inventory, with an increase in accounts payable and other liabilities of $25.3 million (December 31, 2009 — $25.4 million) for the assumed third party investment in the VIE. Where the land sellers are not required to provide the Company financial information related to the VIE, certain assumptions by the Company were required in its assessment as to whether or not it is the primary beneficiary.

Housing and land inventory includes non-refundable deposits and other entitlement costs totaling $50.6 million (December 31, 2009 — $42.6 million) in connection with options that are not required to be consolidated in terms of the guidance incorporated in ASC Topic 810 “Consolidation” (formerly FASB Interpretation (“FIN”) No. 46(R)). The total exercise price of these options is $205.5 million (December 31, 2009 — $156.9 million) including the non-refundable deposits identified above. The number of lots which the Company has obtained an option to purchase, excluding those already consolidated and those held through unconsolidated entities, and their respective dates of expiry and exercise price are as follows:

		Number				Total
Year of Expiry		of Lots				Exercise Price
2010			561			$	11,963
2011			901				71,836
Thereafter			5,435				121,694
			6,897			$	205,493

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

The Company holds agreements for a further 4,561 acres of longer term land, with non-refundable deposits and other entitlement costs of $5.5 million, which is included in housing and land inventory that may provide additional lots upon obtaining entitlements with an aggregate exercise price of $36.0 million. However, given that the Company is in the initial stage of land entitlement, the Company has concluded that at this time the level of uncertainty in entitling these properties does not warrant including them in the above totals.

Investments in housing and land unconsolidated entities include $28.4 million of the Company’s share of non-refundable deposits and other entitlement costs in connection with 1,987 lots under option. The Company’s share of the total exercise price of these options is $87.0 million.

Note 3.		Investments in Housing and Unconsolidated entities

The Company participates in nine unconsolidated entities in which it has less than a controlling interest. Summarized condensed financial information on a combined 100% basis of the unconsolidated entities follows:

		September 30,				December 31,
		2010				2009
Assets
Housing and land inventory		$	271,714			$	235,864
Other assets			31,677				6,722
		$	303,391			$	242,586
Liabilities and Equity
Project specific financings		$	31,725			$	52,175
Accounts payable and other liabilities			22,508				14,082
Equity
Brookfield Homes’ interest			129,318				92,477
Others’ interest			119,840				83,852
		$	303,391			$	242,586

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue and Expenses
Revenue		$	3,065			$	4,895			$	11,115			$	8,233
Cost of sales			(3,635	)			(4,864	)			(13,589	)			(7,814	)
Other income / (expense)			(57	)			(5,098	)			2,970				(6,129	)
Net (loss) / income		$	(627	)		$	(5,067	)		$	496			$	(5,710	)
Company’s share of net (loss) / income		$	(228	)		$	(535	)		$	(285	)		$	1,593
Impairment of investments in housing and land unconsolidated entities		$	—			$	(1,268	)		$	—			$	(12,886	)

In reporting the Company’s share of net (loss) / income, all inter-company profits or losses from unconsolidated entities are eliminated on lots purchased by the Company from the unconsolidated entities. For the three and nine months ended September 30, 2010, the difference between the Company’s share of the net (loss) / income of its investments in unconsolidated entities and equity in earnings from unconsolidated entities primarily arises from differences in accounting policies followed by unconsolidated entities.

During the three and nine months ended September 30, 2010, in accordance with ASC Topic 323 “Investments — Equity Method and Joint Ventures” (formerly Accounting Principles Board 18) and ASC Topic 360 “Property, Plant and Equipment” (formerly SFAS 144), the Company recognized impairment charges of nil (September 30, 2009 — $1.3 million and $12.9 million).

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Unconsolidated entities in which the Company has a noncontrolling interest are accounted for using the equity method. In addition, the Company has performed an evaluation of its existing unconsolidated entity relationships by applying the provisions of ASC Topic 810 “Consolidation” (formerly SFAS 160).

The Company and/or its unconsolidated entity partners have provided varying levels of guarantees of debt in its unconsolidated entities. At September 30, 2010, the Company had completion guarantees of nil (December 31, 2009 — $7.9 million) and limited maintenance guarantees of $13.1 million (December 31, 2009 — $15.3 million) with respect to debt in its unconsolidated entities.

Note 4.		Receivables and Other Assets

The components of receivables and other assets included in the Company’s balance sheet are summarized as follows:

		September 30,				December 31,
		2010				2009
Proceeds and escrow receivables		$	3,642			$	1,414
Refundable deposits			917				4,815
Notes receivable			2,425				2,425
Prepaid expenses			1,122				2,970
Miscellaneous receivables			9,053				5,261
Swap contract (Note 13 (d))			990				—
Other assets			865				4,857
Taxes receivable			—				40,002
		$	19,014			$	61,744

Note 5.		Restricted Cash

At September 30, 2010, the Company had restricted cash of $7.4 million (December 31, 2009 — $7.5 million). During 2009, the Company entered into a total return swap transaction (see Note 13(d)) which required the Company to maintain cash deposits as collateral equivalent to 1,022,987 shares at $7.31 per share, the prevailing share price at the date of the transaction. During August 2010, the total return swap matured and the Company entered into a new total return swap transaction (see Note 13(d)) which requires the Company to maintain cash deposits as collateral equivalent to 1,022,987 shares at $7.18 per share, the prevailing share price at the date of the transaction.

Note 6.		Project Specific and Other Financings

Project specific financings of $217.1 million (December 31, 2009 — $231.6 million) are revolving in nature, bear interest at floating rates with a weighted average rate of 3.9% as at September 30, 2010 (December 31, 2009 — 4.2%) and are secured by housing and land inventory. The weighted average rate was calculated as of the end of each period, based upon the amount of debt outstanding and the related interest rates applicable on that date.

Project specific financings mature as follows: 2010 — $73.0 million; 2011 — $134.3 million; and 2012 — $9.8 million.

The Company’s project specific financings require Brookfield Homes Holdings Inc., a wholly-owned subsidiary of the Company, to maintain a tangible net worth of at least $250 million, a net debt to capitalization ratio of no greater than 65% and a net debt to tangible net worth of no greater than 2.50 to 1. As of September 30, 2010, the Company was in compliance with all of its covenants.

Other financings of $175.0 million (December 31, 2009 — $150.0 million) consist of amounts drawn on two unsecured revolving credit facilities due to subsidiaries of the Company’s largest stockholder, Brookfield Asset Management Inc.

The revolving operating facility is in a principal amount not to exceed $100.0 million, matures December 2011 and bears interest at LIBOR plus 3.5% per annum. During the three and nine months ended September 30, 2010, interest of $1.0 million and $2.9 million, respectively, was incurred related to this facility (2009 — $0.9 million and $5.1 million, respectively). As at September 30, 2010, $100.0 million was drawn on this facility.

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

The revolving acquisition and operating facility is in a principal amount not to exceed $100.0 million, matures December 2012 and initially bears interest at 12% per annum. This facility is available for the acquisition of housing and land assets and for operations. During the three and nine months ended September 30, 2010, interest of $1.4 million and $4.2 million, respectively, was incurred related to this facility (2009 — $1.1 million and $2.0 million, respectively). As at September 30, 2010, $75.0 million was drawn on this facility.

The covenants with respect to these facilities are to maintain a minimum stockholders’ equity of $300.0 million and a consolidated net debt to book capitalization ratio of no greater than 70%. As of September 30, 2010, the Company and Brookfield Homes Holdings Inc. were in compliance with all of their covenants with respect to these facilities.

Note 7.		Accounts Payable and Other Liabilities

The components of accounts payable and other liabilities included in the Company’s balance sheet are summarized as follows:

		September 30,				December 31,
		2010				2009
Trade payables and cost to complete accruals		$	39,748			$	37,518
Warranty costs (Note 13 (b))			13,309				13,126
Customer deposits			3,653				3,357
Stock-based compensation (Note 9)			6,880				5,878
Accrued and deferred compensation			1,257				3,268
Swap contracts (Note 13 (c), (d))			19,632				14,192
Loans from other interests in consolidated subsidiaries			12,211				17,118
Consolidated land option contracts			25,290				25,434
Other			4,970				2,299
		$	126,950			$	122,190

Note 8.		Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The temporary differences that give rise to the net deferred tax asset are as follows:

		September 30,				December 31,
		2010				2009
Differences relating to properties		$	17,592			$	23,388
Compensation deductible for tax purposes when paid.			3,373				2,641
Differences relating to derivative instruments			7,084				5,235
Loss carry-forward			11,026				8,848
		$	39,075			$	40,112

As at September 30, 2010, the Company had no unrecognized tax asset or liability (December 31, 2009 — nil).

In accordance with the provisions of ASC Topic 740 “Income Taxes”, the Company assesses, at each reporting period, its ability to realize its deferred tax asset. In determining the need for a valuation allowance at September 30, 2010, the Company considered the following significant factors: an assessment of recent years’ profitability and losses, adjusted to reflect the effects of changes to the Company’s capital structure that have resulted in a significant reduction in the amount of interest-bearing debt; the Company’s expectation of profits based on margins and volumes expected to be realized (which are based on current pricing and volume trends) and including the effects of reduced interest expense due to the reduction in the amount of interest-bearing debt; the financial support of the Company’s largest stockholder as evidenced by the credit facilities in place; and the long period of 10 to 20 years or more in all significant operating jurisdictions before the expiry of net operating losses, noting further that a substantial portion of the deferred tax asset is composed of deductible temporary differences that are not subject to an expiry period until realized under tax law. The

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Company’s tax effected loss carry-forwards of $11.0 million expire between the years 2028 and 2029 and based on the more likely than not standard in the guidance and the weight of available evidence, the Company does not believe a valuation allowance against its deferred tax asset is necessary. However, the recognition of deferred tax assets is based upon an estimate of future results and differences between the expected and actual financial performance of the Company could require all or a portion of the deferred tax asset to be expensed. The Company will continue to evaluate the need for a valuation allowance in future reporting periods.

Note 9.		Stock Based Compensation

Option Plan

Brookfield Homes grants options to purchase shares of the Company’s common stock at the market price of the shares on the day the options are granted. The Company’s 2009 stock option plan authorizes a maximum of three million shares for issuance. The fair value of the Company’s stock option awards is estimated at the grant date using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of the Company’s stock option awards is expensed over the vesting period of the stock options. Expected volatility is based on historical volatility of the Company’s common stock. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the stock option award granted. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The expected term of stock option awards granted for some participants is derived from historical exercise experience under the Company’s share-based payment plan and represents the period of time that stock option awards granted are expected to be outstanding. The expected term of stock options granted for the remaining participants is derived by using the simplified method.

During the three and nine months ended September 30, 2010, the Company granted a total of nil and 285,000 new stock options, respectively, to eligible employees which are subject to graded vesting. The significant weighted average assumptions relating to the valuation of the Company’s stock options granted during the nine months ended September 30, 2010 are as follows:

		2010
Dividend yield			—
Volatility rate			66%
Risk-free interest rate			3.69%
Expected option life (years)			7.5

The total compensation costs recognized in income related to the Company’s stock options during the three and nine months ended September 30, 2010 was an expense of $0.3 million and $0.7 million, respectively (2009 — $0.1 million and $0.3 million, respectively).

The following table sets out the number of common shares that employees of the Company may acquire under options granted under the Company’s stock option plans:

										September 30, 2010
														Total
														Weighted
														Average
		Exercise Price Range									Total				Per Share
		$1.74 – $2.65				³ $7.34				Shares				Exercise Price
Outstanding, December 31, 2009			1,591,000				564,000				2,155,000			$	10.21
Granted			—				285,000				285,000			$	7.34
Exercised			(38,000	)			—				(38,000	)		$	2.46
Cancelled			(24,000	)			(35,000	)			(59,000	)		$	6.16
Outstanding, September 30, 2010			1,529,000				814,000				2,343,000			$	10.09
Options exercisable at September 30, 2010			117,000				390,000				507,000			$	26.39

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

At September 30, 2010, the aggregate intrinsic value of options currently exercisable is $0.7 million and the aggregate intrinsic value of options outstanding is $3.8 million.

A summary of the status of the Company’s unvested options included in equity as of September 30, 2010 and changes during the nine months ended September 30, 2010 is as follows:

		September 30, 2010
						Weighted
						Average
						Fair Value
		Shares				Per Share
Unvested options outstanding, December 31, 2009.			1,815,800			$	1.51
Granted			285,000			$	5.00
Vested			(206,800	)		$	1.11
Cancelled			(58,000	)		$	3.44
Unvested options outstanding, September 30, 2010			1,836,000			$	2.30

At September 30, 2010, there was $2.4 million of unrecognized expense related to unvested options, which is expected to be recognized over the remaining weighted average period of 2.9 years.

Deferred Share Unit Plan

The Company has adopted a Deferred Share Unit Plan (“DSUP”) under which certain of its executive officers and directors may, at their option, receive all or a portion of their annual bonus awards or retainers, respectively, in the form of deferred share units. The Company may also make additional grants of units to its executives and directors pursuant to the DSUP. As of September 30, 2010, the Company had granted 1,213,993 units under the DSUP, of which 872,824 were outstanding at September 30, 2010, and of which 537,430 units are currently vested and 335,394 vest over the next five years.

In addition, the Company has adopted a Senior Operating Management Deferred Share Unit Plan (“MDSUP”), under which certain senior operating management employees receive a portion of their annual compensation in the form of deferred share units. As of September 30, 2010, the Company had granted 73,374 units under the MDSUP, all of which were vested and outstanding at September 30, 2010.

The liability of $6.9 million (December 31, 2009 — $5.9 million) which relates to 859,148 units under the DSUP and MDSUP is included in accounts payable and other liabilities. The remaining 87,050 units vest during the years ending December 31, 2011 to 2014. The financial statement impact for the DSUP and MDSUP for the three and nine months ended September 30, 2010 was expense of $1.8 million and $1.1 million, respectively (2009 — expense of $2.0 million and $2.1 million, respectively).

The following table sets out changes in and the number of deferred share units that executives, directors and senior operating management may redeem under the Company’s DSUP and MDSUP:

		September 30,
		2010
Outstanding, December 31, 2009			936,109
Granted			23,846
Redeemed			(13,757	)
Outstanding, September 30, 2010			946,198

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Note 10.		Other Interests in Consolidated Subsidiaries and Noncontrolling Interest

Other interests in consolidated subsidiaries includes ownership interests of certain business unit presidents of the Company totaling $43.9 million (December 31, 2009 — $47.0 million). In the event a business unit president (“Minority Member”) of the Company is no longer employed by an affiliate of the Company, the Company has the right to purchase the Minority Member’s interest and the Minority Member has the right to require the Company to purchase their interest. Should such rights be exercised, the purchase price will be based on the then estimated bulk sales value of the business unit’s net assets.

The following table reflects the changes in the Company’s other interests in consolidated subsidiaries for the nine months ended September 30, 2010 and the year ended December 31, 2009:

		September 30,				December 31,
		2010				2009
Other interests in consolidated subsidiaries, beginning of period		$	47,011			$	49,839
Net loss attributable to other interests in consolidated subsidiaries			(778	)			(4,316	)
(Distributions to) / Contributions from other interests in consolidated subsidiaries			(2,360	)			1,488
Other interests in consolidated subsidiaries, end of period		$	43,873			$	47,011

Noncontrolling interest includes third party investments in consolidated entities of $6.5 million (December 31, 2009 — $7.3 million).

In accordance with ASC Topic 810 “Consolidation” (formerly SFAS 160), noncontrolling interest has been classified as a component of total equity and the net loss on the consolidated statements of operations has been adjusted to include the net loss attributable to noncontrolling interest which for the three and nine months ended September 30, 2010 was nil (2009 — $0.4 million) and other interests in consolidated subsidiaries which for the three and nine months ended September 30, 2010 was $0.1 million and $0.8 million, respectively (2009 — $2.2 million and $4.7 million, respectively). The Company has recorded $1.1 million of income for the nine months ended September 30, 2010 relating to the forfeiture of another member’s interest in a consolidated entity, which has been included in other (expense) / income.

Note 11.		Preferred Stock

The Company granted rights to its common stockholders of record on April 3, 2009 to subscribe for 10,000,000 shares of 8% convertible preferred stock, par value $0.01 per share at a subscription price of $25 per share. On April 27, 2009, the stockholders of the Company fully subscribed for the 10.0 million shares of convertible preferred stock. The shares of convertible preferred stock are convertible into shares of common stock at a conversion rate of 3.571428571 shares of common stock per share of convertible preferred stock, which is equivalent to a conversion price of $7.00 per share, subject to future adjustment. Dividends on the convertible preferred stock are fully cumulative, without interest, from the date of original issuance of the convertible preferred stock and will be payable semi-annually in arrears, at the Company’s election, in cash, shares of common stock or a combination of cash and common stock. The Company’s Board of Directors paid a stock dividend of 1,213,393 common shares utilizing treasury stock to the preferred stockholders on June 30, 2010. There were no preferred stock dividends in arrears for the period ended September 30, 2010. The convertible preferred stock is perpetual and does not have a maturity date; however, beginning June 30, 2014, if the 90-day volume weighted average market price of the common stock is greater than $14 per share, the Company may, at its option, require all preferred stock to be automatically converted into common shares.

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Note 12.		Loss Per Share

Basic and diluted loss per share for the three and nine months ended September 30, 2010 and 2009 were calculated as follows (in thousands except per share amounts):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Numerator:
Net loss attributable to Brookfield Homes Corporation		$	(552	)		$	(910	)		$	(428	)		$	(11,032	)
Less: Preferred stock dividends			(5,000	)			(5,000	)			(15,000	)			(8,500	)
Net loss attributable to common stockholders		$	(5,552	)		$	(5,910	)		$	(15,428	)		$	(19,532	)
Denominator:
Basic average common shares outstanding			29,655				26,777				28,894				26,770
Net effect of stock options assumed to be exercised			—				—				—				—
Dilutive effect of preferred stock assumed to be converted			—				—				—				—
Diluted average shares outstanding			29,655				26,777				28,894				26,770
Basic loss per share		$	(0.19	)		$	(0.22	)		$	(0.53	)		$	(0.73	)
Diluted loss per share		$	(0.19	)		$	(0.22	)		$	(0.53	)		$	(0.73	)

For the three and nine months ended September 30, 2010, options to purchase 2.3 million (2009 — 2.2 million) common shares were outstanding and anti-dilutive and were excluded from the computation of diluted earnings per share. For the three and nine months ended September 30, 2010 and 2009, approximately 10.0 million preferred shares convertible into 35.7 million common shares were outstanding and anti-dilutive and were excluded from the computation of diluted earnings per share.

Note 13.		Commitments, Contingent Liabilities and Other

(a)   The Company is party to various legal actions arising in the ordinary course of its business. Management believes that none of these actions, either individually or in the aggregate, will have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

(b)   When selling a home, the Company’s subsidiaries provide customers with a limited warranty. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. In addition, the Company has insurance in place where its subsidiaries are subject to the respective warranty statutes in the State where the Company conducts business which range up to ten years for latent construction defects. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The following table reflects the changes in the Company’s warranty liability for the nine months ended September 30, 2010 and 2009:

		2010				2009
Balance, at beginning of period		$	13,126			$	13,123
Payments and other adjustments made during the period			(1,420	)			(1,723	)
Warranties issued during the period			1,603				1,556
Balance, end of period		$	13,309			$	12,956

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

(c)   The Company is exposed to financial risk that arises from fluctuations in interest rates. The interest bearing assets and liabilities of the Company are mainly at floating rates and, accordingly, their fair values approximate cost. The Company would be negatively impacted on balance, if interest rates were to increase. From time to time, the Company enters into interest rate swap contracts. As at September 30, 2010, the Company had five interest rate swap contracts outstanding totaling $150.0 million at an average rate of 4.8% per annum. The contracts expire between 2011 and 2017. At September 30, 2010, the fair market value of the contracts was a liability of $19.6 million (December 31, 2009 — liability of $14.2 million) and was included in accounts payable and other liabilities. Expense of $2.1 million and $5.4 million was recognized during the three and nine months ended September 30, 2010, respectively, (2009 — expense of $1.2 million and income of $8.0 million, respectively) and was included in other income / (expense). All interest rate swaps are recorded at fair market value and are presented in the consolidated statements of operations because hedge accounting has not been applied.

The fair value measurements for the interest rate swap contracts are determined based on notional amounts, terms to maturity, and the USD LIBOR rates. The LIBOR rates vary depending on the term to maturity and the conditions set out in the underlying swap agreements.

(d)   The Company is exposed to financial risk that arises from fluctuations in its common stock price. To hedge against future deferred share unit payments, in August 2009, the Company entered into a total return swap transaction at an average cost of $7.31 per share on 1,022,987 shares, which matured in August 2010. In August 2010, the Company entered into a new total return swap transaction at an average cost of $7.18 per share on 1,022,987 shares, maturing in August 2011. At September 30, 2010, the fair market value of the total return swap was an asset of $1.0 million and was included in receivables and other assets (December 31, 2009 — liability of $0.7 million included in accounts payable and other liabilities). Income of $1.4 and $0.1 million was recognized during the three and nine months ended September 30, 2010, respectively, (2009 — income of $2.8 million and $2.6 million, respectively) and was included in selling, general and administrative expense. This income for the three months and nine months ended September 30, 2010 was partially offset by expense of $1.8 million and $1.1 million, respectively, relating to the Company’s stock-based compensation plans. The total return swap is recorded at fair market value and is recorded through the consolidated statements of operations because hedge accounting has not been applied. See Note 14 for additional disclosure.

Note 14.		Fair Value Measurements

ASC Topic 820 “Fair Value Measurements and Disclosures” (formerly SFAS 157) provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which requires a company to prioritize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value.

The Company’s financial assets are measured at fair value on a recurring basis and are as follows:

		Fair Value Measurements
		Using Significant
		Observable Inputs (Level 2)
Interest rate swap contracts at September 30, 2010		$	(19,632	)

The fair value measurements for the interest rate swap contracts are determined based on notional amounts, terms to maturity, and the USD LIBOR rates. The LIBOR rates vary depending on the term to maturity and the conditions set out in the underlying swap agreements.

		Fair Value Measurements
		Using Significant
		Unobservable Inputs (Level 3)
Equity swap contract at September 30, 2010		$	990

The fair value measurement for the equity swap contract is determined based on the notional amount, stock price, the number of underlying shares and the three month USD LIBOR rate. The Company performed a sensitivity analysis of the estimated fair value and the impact to the consolidated financial statements using alternative reasonably likely assumptions on September 30, 2010 and the impact to the consolidated financial statements was nominal.

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

The fair value measurements for housing and land inventory were determined by comparing the carrying amount of an asset to its expected future cash flows. To arrive at the estimated fair value of housing and land inventory deemed to be impaired during the three and nine months ended September 30, 2010, the Company estimated the cash flow for the life of each project. Specifically, project by project, the Company evaluated the margins on home sales that have been closed, margins on sales contracts which are in backlog, estimated margins with regard to future home sales over the life of the projects, as well as estimated margins with respect to future land sales. The Company evaluated and continues to evaluate projects where inventory is turning over more slowly than expected or whose average sales price and margins are declining and are expected to continue to decline. These projections take into account the specific business plans for each project and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market area. Such projections generally assume current home selling prices, with cost estimates and sales rates for short-term projects consistent with recent sales activity. For longer-term projects, planned sales rates for 2010 and 2011 assume recent sales activity and normalized sales rates beyond 2011. If the future undiscounted cash flows are less than the carrying amount, the asset is considered to be impaired and is then written down to fair value less estimated selling costs.

There are several factors that could lead to changes in the estimate of future cash flows for a given project. The most significant of these include the sales pricing levels actually realized by the project, the sales rate, and the costs incurred to construct the homes. The sales pricing levels are often inter-related with sales rates for a project, as a price reduction usually results in an increase in the sales rate. Further, pricing is heavily influenced by the competitive pressures facing a given community from both new homes and existing homes, including foreclosures.

The Company has reviewed all of its projects for impairment in accordance with the provisions of ASC Topic 360 “Property, Plant and Equipment” (formerly SFAS 144) and ASC Topic 820 “Fair Value Measurements and Disclosures” (formerly SFAS 157). For the three and nine months ended September 30, 2010, no impairment charges have been recognized. For the three months ended September 30, 2009, housing and land inventory on one project with a carrying amount of $5.0 million was written down to its fair value of $3.1 million, resulting in an impairment charge of $1.9 million, which was included impairment and write-off of option deposits. For the nine months ended September 30, 2009, housing and land inventory on four projects with a carrying amount of $37.9 million was written down to its fair value of $27.8 million, resulting in an impairment charge of $10.1 million, which was included in impairment of housing and land inventory and write-off of option deposits.

Note 15.		Segment Information

As defined in ASC Topic 280, “Segmented Reporting”, the Company has five operating segments. The Company has four reportable segments: Northern California, Southland / Los Angeles, San Diego / Riverside, and the Washington D.C. Area.

The Company is a land developer and residential homebuilder. The Company is organized and manages its business based on the geographical areas in which it operates. Each of the Company’s segments specialize in lot entitlement and development and the construction of single-family and multi-family homes. The Company evaluates performance and allocates capital based primarily on return on assets together with a number of other risk factors. Earnings performance is measured using segment operating income. The accounting policies of the segments are the same as those referred to in Note 1, “Significant Accounting Policies.”

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues:
Northern California.		$	27,148			$	23,112			$	44,298			$	59,192
Southland / Los Angeles.			12,698				17,076				60,153				43,305
San Diego / Riverside			8,714				25,222				39,340				50,869
Washington D.C. Area			26,027				32,488				68,618				65,926
Corporate and Other			—				645				3,520				11,531
Total Revenues		$	74,587			$	98,543			$	215,929			$	230,823
Segment Income / (Loss):
Northern California		$	2,397			$	347			$	3,806			$	1,037
Southland / Los Angeles.			(96	)			245				3,938				(6,663	)
San Diego / Riverside			(309	)			1,292				2,229				(7,930	)
Washington D.C. Area			2,314				(6,455	)			6,398				(9,778	)
Corporate and Other			(4,799	)			(5,154	)			(17,321	)			(5,195	)
Loss before Income Taxes		$	(493	)		$	(9,725	)		$	(950	)		$	(28,529	)

		September 30,				December 31,
		2010				2009
Housing and Land Assets: 1)
Northern California		$	226,672			$	201,164
Southland / Los Angeles			146,469				122,504
San Diego / Riverside			331,936				336,458
Washington D.C. Area			234,414				226,768
Corporate and Other			43,839				40,846
		$	983,330			$	927,740

The following tables set forth additional financial information relating to the Company’s reportable segments:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Equity / (Loss) in Earnings from Unconsolidated Entities:
Northern California		$	25			$	(125	)		$	1,312			$	1,965
San Diego / Riverside			—				—				(1	)			—
Washington D.C. Area			(253	)			(312	)			(620	)			(172	)
Corporate and Other			—				(98	)			(976	)			(200	)
Total		$	(228	)		$	(535	)		$	(285	)		$	1,593
Impairment of Housing and Land Inventory
Southland / Los Angeles		$	—			$	—			$	—			$	2,600
Washington D.C. Area			—				7,301				—				8,959
Corporate and Other			—				2,279				—				6,179
Total		$	—			$	9,580			$	—			$	17,738
Impairment of Investments in Unconsolidated Entities:
San Diego / Riverside		$	—			$	—			$	—			$	9,243
Washington D.C. Area			—				1,015				—				3,390
Corporate and Other			—				253				—				253
Total		$	—			$	1,268			$	—			$	12,886

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

		September 30,				December 31,
		2010				2009
Investments in Unconsolidated Entities:
Northern California		$	—			$	—
Southland / Los Angeles			69,528				48,050
San Diego / Riverside			2,879				2,694
Washington D.C. Area			45,754				34,971
Corporate and Other			11,157				6,762
Total		$	129,318			$	92,477

Note 16.		Subsequent Events

On October 5, 2010, the Company announced that it had entered into a definitive agreement with Brookfield Properties Corporation (“Brookfield Office Properties”) to combine the Company and the North American residential land and housing divisions of Brookfield Office Properties (“BPO Residential”) into Brookfield Residential Properties Inc. (“Brookfield Residential”).

Completion of the transaction is subject to regulatory approval in the United States and Canada, the approval of the holders of a majority of the Company’s outstanding common stock and other customary closing conditions. Brookfield Asset Management Inc. beneficially owns, through Brookfield Residential, sufficient shares to approve the transaction and has agreed to vote in favor of the transaction at the Company’s stockholders meeting.

On October 12, 2010, Brookfield Residential filed a registration statement with the U.S. Securities and Exchange Commission, which includes a proxy statement / prospectus and other relevant documents concerning the proposed transaction.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion includes forward-looking statements that reflect our current views with respect to future events and financial performance and that involve risks and uncertainties. Our actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements as a result of certain factors including risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements” and Item 1A — “Risk Factors” elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2009.

Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the United States federal securities laws. The words “may,” “believe,” “will,” “anticipate,” “expect,” “planned” “estimate,” “project,” “future,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. The forward-looking statements in this quarterly report on Form 10-Q include, among others, statements with respect to:

•		ability to create shareholder value;
•		business goals and strategy;
•		our financial and lot position;
•		strategies for shareholder value creation;
•		effect of challenging conditions on us;
•		factors affecting our competitive position within the homebuilding industry;
•		ability to generate sufficient cash flow from our assets in 2010, 2011 and 2012 to repay maturing project specific and other financings;
•		the visibility of our future cash flow;
•		expected backlog and closings;
•		sufficiency of our access to capital resources;
•		the timing of the effect of interest rate changes on our cash flows;
•		the effect on our business of existing lawsuits;
•		the potential combination with BPO Residential; and
•		whether or not our letters of credit or performance bonds will be drawn upon.

Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the anticipated future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those set forward in the forward-looking statements include, but are not limited to:

•		changes in general economic, real estate and other conditions;
•		mortgage rate and availability changes;
•		availability of suitable undeveloped land at acceptable prices;
•		adverse legislation or regulation;
•		ability to obtain necessary permits and approvals for the development of our land;
•		availability of labor or materials or increases in their costs;
•		ability to develop and market our master-planned communities successfully;
•		ability to obtain regulatory approvals;
•		confidence levels of consumers;
•		ability to raise capital on favorable terms;
•		our debt and leverage;
•		adverse weather conditions and natural disasters;
•		relations with the residents of our communities;
•		risks associated with increased insurance costs or unavailability of adequate coverage;
•		ability to obtain surety bonds;
•		competitive conditions in the homebuilding industry, including product and pricing pressures;
•		ability to retain our executive officers;
•		relationships with our affiliates;
•		failure to obtain any required regulatory and shareholder approvals with respect to a transaction; and
•		additional risks and uncertainties, many of which are beyond our control, referred to in this Form 10-Q and our other SEC filings.

Except as required by law, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.

Overview

In the first quarter, we were encouraged by the improvement in sales and closings. However, since then, selling communities have seen a drop in the number of visits from potential homebuyers, which we believe is a result of expired government stimulus programs, together with continued uncertain economic conditions, which have negatively impacted homebuyer confidence. The United States homebuilding industry continues to face a number of challenges with home foreclosures and tight credit standards continuing to have an effect on inventory and new home sale rates and prices. Despite these challenging conditions, we believe the risk is mitigated by our assets which are largely located in geographic areas with a constrained supply of lots and which have demonstrated strong economic characteristics over the long term. The supply of finished lots has been depleted substantially over the last few years and negligible development has occurred since 2006. As a result, we believe our strong financial position and owning entitled and/or developed lots in supply-constrained markets places us in a solid position as the markets improve.

Through the activities of our operating subsidiaries, we entitle and develop land for our own communities and sell lots to third parties. We also design, construct and market single and multi-family homes primarily to move-up homebuyers.

We operate in the following geographic regions which are presented as our reportable segments: Northern California (San Francisco Bay Area and Sacramento), Southland / Los Angeles, San Diego / Riverside and Washington, D.C. Area. Our other operations that do not meet the quantitative thresholds for separate disclosure in our consolidated financial statements under U.S. GAAP are included in “Corporate and Other.”

Our goal is to maximize the total return on our common stockholders’ equity over the long term. We plan to achieve this by actively managing our assets and creating value on the lots we own or control.

The 26,510 lots that we control provide a strong foundation for our future operations and visibility on our future cash flow. We believe we add value to the lots we control through entitlements, development and the construction of homes. In allocating capital to our operations we generally limit our capital at risk on unentitled land by optioning such land positions. Option contracts for the purchase of land permit us to control lots for an extended period of time.

Operating in markets with higher price points and catering to move-up buyers, our average home selling price for the nine months ended September 30, 2010 of $515,000 was well in excess of the national average sales price. We also sell serviced and unserviced lots to other homebuilders, generally on an opportunistic basis where we can redeploy capital to an asset providing higher returns. The number of lots we sell may vary significantly from period to period due to the timing and nature of such sales which are also affected by local market conditions.

Our housing and land inventory and investments in unconsolidated entities together comprised 94% of our total assets of $1,049 million at September 30, 2010. In addition, we had $65 million in other assets. Other assets consist of restricted cash of $7 million, deferred taxes of $39 million and receivables and other assets of $19 million.

As at September 30, 2010, the market capitalization of our common stock was $243 million, compared to the book value of our common stock of $230 million. Market capitalization will vary depending on market sentiment and may not have a relationship to the underlying value of a share of our common stock over the longer term.

On October 5, 2010, we and Brookfield Properties Corporation (“Brookfield Office Properties”) announced that we had entered into a definitive agreement to combine our company and the North American residential land and housing division of Brookfield Office Properties (“BPO Residential”). In connection with the merger, each of our outstanding shares of common stock will be converted into 0.764900530 common shares of a new public company, Brookfield Residential Properties Inc. (“Brookfield Residential“), an Ontario, Canada corporation, plus a cash amount in lieu of fractional shares. In addition, each share of our outstanding 8% convertible preferred stock will be converted in the merger into one 8% convertible preferred share of Brookfield Residential with the same terms and conditions in all material respects as the terms and conditions of our 8% convertible preferred stock, except that they will be convertible into approximately 0.2 million Brookfield Residential common shares following closing to reflect the common stock exchange ratio referenced above.

Following successful completion of the transaction, it is expected that our stockholders will hold approximately 49% of the outstanding common shares of Brookfield Residential, and shareholders of Brookfield Office Properties will own approximately 51% of such common shares. It is expected that following the closing of the transaction, Brookfield Asset Management will beneficially own between 66% and 91% of the Brookfield Residential common shares on a fully-diluted basis,

Completion of the transaction is subject to regulatory approval in the United States and Canada, the approval of the holders of a majority of our outstanding common stock and other customary closing conditions. Brookfield Asset Management Inc. beneficially owns, through Brookfield Residential, sufficient shares to approve the transaction and has agreed to vote in favor of the transaction at our stockholders meeting. On October 12, 2010, Brookfield Residential filed a registration statement with the U.S. Securities and Exchange Commission, which includes a proxy statement / prospectus and other relevant documents concerning the proposed transaction.

Results of Operations

Selected Financial Information (Unaudited)		Three Months Ended								Nine Months Ended
		September 30,								September 30,
($US millions)		2010				2009				2010				2009
Revenue:
Housing		$	64			$	89			$	200			$	206
Land			11				10				16				25
Total revenues			75				99				216				231
Direct cost of sales			(62	)			(84	)			(179	)			(203	)
Impairment of housing and land inventory and write-offs of option deposits			—				(10	)			—				(18	)
Gross margin / (loss)			13				5				37				10
Selling, general and administrative expense			(13	)			(12	)			(39	)			(37	)
Equity in earnings from unconsolidated entities			—				—				—				2
Impairment from housing unconsolidated entities			—				(1	)			—				(13	)
Other (expense) / income			(1	)			(1	)			1				10
Loss before income taxes			(1	)			(9	)			(1	)			(28	)
Income tax recovery			—				6				—				12
Net loss			(1	)			(3	)			(1	)			(16	)
Less net loss attributable to noncontrolling interests.			—				2				1				5
Net loss attributable to Brookfield Homes Corporation		$	(1	)		$	(1	)		$	—			$	(11	)
Segment Information
Housing revenue ($US millions):
Northern California		$	27			$	23			$	44			$	59
Southland / Los Angeles			13				17				60				43
San Diego / Riverside			9				18				38				40
Washington D.C. Area			15				30				54				60
Corporate and Other			—				1				4				4
		$	64			$	89			$	200			$	206
Land revenues ($US millions):
Northern California		$	—			$	—			$	—			$	—
Southland / Los Angeles			—				—				—				—
San Diego / Riverside			—				7				2				11
Washington D.C. Area			11				3				14				6
Corporate and Other			—				—				—				8
		$	11			$	10			$	16			$	25
Gross margin / (loss) ($US millions):
Northern California		$	5			$	3			$	8			$	5
Southland / Los Angeles			2				2				9				—
San Diego / Riverside			2				4				7				8
Washington D.C. Area			4				(2	)			13				3
Corporate and Other			—				(2	)			—				(6	)
		$	13			$	5			$	37			$	10
Impairment of housing and land inventory and write-offs of option deposits ($US millions):
Northern California		$	—			$	—			$	—			$	—
Southland / Los Angeles			—				—				—				2
San Diego / Riverside			—				—				—				—
Washington D.C. Area			—				7				—				9
Corporate and Other			—				3				—				7
		$	—			$	10			$	—			$	18