CalAtlantic says convertibles are misunderstood, foresees big impact

By Devika Patel

Knoxville, Tenn., May 18 – CalAtlantic Group, Inc. management says that the company’s convertibles, which have upcoming puts and significant economic impacts, are misunderstood.

“We’ve got about $1.3 billion of debt that’s maturing in the next 12 months,” chief financial officer Jeff McCall said at the 10th Annual J.P. Morgan Homebuilding & Building Products Conference in New York on Thursday.

“A $230 million 8.4% bond came due and was repaid on the 15th.

“What I really want to focus on is the converts,” McCall said.

“I think that’s where we’re least understood.

“The converts that we have are physical settlement, or all-stock settlement converts, which are treated a little bit different than the more common marketplace, where you have the net share settlement.

“So I want to highlight the economic impact of these converts,” he said.

McCall said that its 2022 convertible has a put/call date in August and will likely be put or called on that date.

“Right now, we’ve got a convert that when we look up Bloomberg I think it shows up as a 2022 convert.

“It actually has a put/call date in August of this year and at today’s price, it’s a couple [of] dollars out of the money.

“At today’s price it will likely either be put to us or the company would likely call it.

“The impact of doing so would be to lower our fully diluted share count, 6.3 million shares, by the entire share count” on conversion since it is currently included the company’s total of fully diluted shares.

“The impact of that would be, no other changes, to increase our earnings per share by 5% or increase our tangible book value per fully diluted share by 5%.

“That happens basically in August and I don’t think that’s fully understood,” he said.

McCall also highlighted another convertible due in May 2018 that is likely to be converted before maturity.

“We have one other convert which comes up, we have two other converts, another convert comes up in May of next year.

“That converted also [to] a physical settlement, all stock convert.

“That is well in the money right now and so, looking at the same thing ... if it converted, which is the case right now, the impact of that convert would be to lower debt, increase our equity and no change obviously in share count because it’s already included in our fully diluted share count.

“So when you add that together, what you have is you’ve got another almost 7% increase in tangible book value per fully diluted share which is no change for the business,” he said.

McCall noted that the company’s return on tangible equity, which he called one of the best in the industry, is beneficial when considering the impact of conversions.

“When you look at our business, one of the benefits of having one of the highest returns on tangible equity in the industry – I think we’re number two trailing – is that return really adds pretty quickly.

“Over the next two years, just through the current analysts’ expectations, given the high return on tangible equity and the high return on converts, our tangible book value will increase 38% and our tangible book value per fully diluted share would increase 45%.

“I think if you look out over a lot of the models out there right now and a lot of the questions that I get, you can tell those converts aren’t being appropriately factored in,” he said.

CalAtlantic is an Arlington, Va.-based home builder.

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