Exhibit (c)(2)
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
Project Bow River
Special Committee
Discussion Materials
Morgan Stanley
15 December 2014
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
Project Bow River
Table of Contents
Section 1
Section 2
Section 3
Appendix A
Situation Overview
Banff Overview
Banff Preliminary Valuation
Supplemental Materials
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Section 1
Situation Overview
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Project Bow River
On October 23, 2014, Blue Mountain announced that it proposed to acquire the approximately 30% of common shares of Banff that it did not currently own
Morgan Stanley has been engaged as financial advisor to the Special Committee of Banff and asked to provide a preliminary valuation of Banff
Unless indicated otherwise, all references in these materials to $ are US$
SITUATION OVERVIEW
Situation Overview
Introduction
Banff is a public North American land developer and homebuilder with operations in three active operating segments and 11 major markets
- Canada: Calgary, Edmonton, Greater Toronto Area
- California: Greater Los Angeles Area, Sacramento, San Diego, San Francisco Bay Area
- Central and Eastern U.S.: Austin, Denver, Phoenix, Washington D.C. Area
Banff is dual-listed on the Toronto Stock Exchange and New York Stock Exchange
Background
On October 23, 2014, Blue Mountain announced that it had made a proposal to Banff’s Board of Directors to acquire the approximately 30% of common shares of Banff that it did not already own for $23.00 per share in cash
- In response to this announcement, the Board of Directors of Banff established a committee of Independent Directors (the “Special Committee”) to review and consider the proposal
As of November 24, 2014, Morgan Stanley was engaged as exclusive financial advisor to the Special Committee of Banff
We have been asked to provide a preliminary valuation and, if requested, a formal valuation of the common shares of Banff in accordance with the requirements of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (“MI 61-101”) of the Ontario Securities Commission and the Autorite des marches financiers
- The following pages contain our preliminary valuation report based upon information provided to us by Banff’s Management as of December 15, 2014
- We have prepared this report solely for informational purposes for the Special Committee and it is preliminary in nature
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SITUATION OVERVIEW
Overview of Current Blue Mountain Proposal
Proposal Overview
On October 23, 2014 Blue Mountain announced that it had made a proposal to Banff’s Board of Directors to acquire the approximately 30% of common shares of Banff that it did not own for $23.00 per share in cash
Represents an offer to purchase approximately 36.8MM shares (1) for total consideration of approximately $846.4MM
NYSE Listed Shares
Represents a 21% premium to prior day’s close ($19.01)
Represents a 25% premium to average stock price for the 10 trading days ending five trading days prior to the transaction announcement ($18.46)
Represents a 19% premium to 30 day volume weighted share price ($19.28)
TSX Listed Shares (2)
Represents a 21% premium to prior day’s close ($19.08)
Represents a 24% premium to average stock price for the 10 trading days ending five trading days prior to the transaction announcement ($18.53)
Represents a 16% premium to 30 day volume weighted share price ($19.81)
Combined Basis
Represents a 21% premium to prior day’s close ($19.01)
Represents a 25% premium to average stock price for the 10 trading days ending five trading days prior to the transaction announcement ($18.46)
Represents a 19% premium to 30 day volume weighted share price ($19.33)
1. Per Blue Mountain’s October 23, 2014 press release
2. TSX shares thinly traded 30 day average daily volume of 13k shares vs. NYSE listed daily volume of 123k
3. Price converted from CAD to USD daily
4. Banff’s current stock price as of December 12, 2014
NYSE: Banff
Previous 30 Trading Days Prior to Offer Share Price, $ Volume, 000’s 23.00 0.4
21.50 0.3 20.00 0.2 18.50 0.1
17.00 0.0 9/11/14 10/1/14 10/22/14
TSX: Banff
Previous 30 Trading Days Prior to Offer Share Price, $ (3) Volume, 000’s 23.00 0.4
21.50 0.3 20.00 0.2 18.50 0.1
17.00 0.0 9/11/14 10/1/14 10/22/14
Source Capital IQ
Project Bow River
Post announcement of Blue Mountain proposal, Banff stock has traded consistently above $23 per share
VWAP post announcement has been $23.36
NYSE: Banff
5 Days Prior to Offer to Current (4)
Share Price, $ Volume, 000’s
26.00 5.0
23.00 3.3
20.00 1.7
17.00 0.0
10/20/14 12/12/14
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As financial advisor to the Special Committee of Banff, Morgan Stanley has conducted extensive due diligence on Banff
- Diligence remains ongoing
SITUATION OVERVIEW
Summary of Diligence To-Date
Diligence / Interactions with Banff Management
Morgan Stanley has held eight scheduled calls / meetings with Banff to discuss its land and housing inventory, capital structure, financial projections model, business plan, and corporate strategy, among other topics
- Does not include frequent one-off and follow up communications
We have participated in asset tours of projects in the Calgary, Greater Los Angeles, Greater Toronto Area, and Washington D.C. area markets
Key Information Reviewed To-Date
Management’s five-year business plan
- Key assumptions and financial projections
Individual project financial projections for all land / housing assets
Individual asset summaries for all land / housing assets
We have also reviewed public filings, earnings call transcripts, equity research, and data room contents covering topics such as corporate records, financings, material agreements, corporate and management information, among others
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Section 2
Banff Overview
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Banff is a North American land developer and homebuilder with operations in 11 major markets
– Entitles and develops land to create master-planned communities and build and sell lots to third-party builders, as well as to Banff’s own homebuilding division
– Also participates in select strategic real estate opportunities, including in-fill projects, mixed-use developments, infrastructure projects, and joint ventures
Morgan Stanley
BANFF OVERVIEW
Banff Overview
Business Model Geographic Overview—Major Markets
Land Acquisition
Entitlement Process
Develop Land
Consumer Deliverables
Build Homes Sell Lots to Third-Party Builders
1 2
3
8 4 5 9 6
7
1 2
3
8 4 5 9 6
7
Total Single Family Lots
As at September 30, 2014 Total Lots and % of Total Lots (1)
1 Edmonton 15,804 15%
2 Calgary 27,651 26%
3 Ontario 10,384 10%
4 Denver 9,800 9%
5 Washington, DC 4,429 4%
6 Phoenix 5,196 5%
7 Austin 12,746 12%
8 Northern California 8,920 8%
9 Southern California 12,450 11%
0% 10% 20% 30%
% of Total Lots
Source Company Filings
Land and Housing Inventory
Owned and Optioned Lot and Lot Equivalents (2)
115,000
110,817
109,826 108,919
110,000 108,391 108,197 107,611
104,359 7,865 7,543
105,000 7,543
9,095 7,858 7,532
100,000 7,932
95,000
100,339 102,952 102,283 101,376
99,296 100,079
90,000 96,427
85,000
3/31/2011 12/31/2011 12/31/2012 12/31/2013 3/31/2014 6/30/2014 9/30/2014
Owned Optioned
Source Company Filings
Notes
1. Represents total lots / lot equivalents: does not include 231 lots in ‘other’ category
2. Includes single family housing, land under and held for development
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Banff’s share price has slightly underperformed the homebuilder comps since its formation
– Recent outperformance following Blue Mountain’s offer announcement
Morgan Stanley
BANFF OVERVIEW
Banff Historical Relative Performance and Valuation
Historical Performance (1)
Banff Banff Pre-Offer(3) Comps Comps Pre-Offer (3)
Since 4/1/11 89.2% 56.3% 67.0% 68.7%
Last 3 years 202.0% 180.0% 77.0% 101.9%
YTD (4.9%) (21.4%) (16.4%) (15.5%)
Stock Price Performance
Indexed to April 1, 2011 = 100 (2)
250
200 +89.2%
+67.0%
150
100
23-Oct-14
Blue Mountain Offer
50
0
04/01/11 11/09/11 06/21/12 02/04/13 09/13/13 04/25/14 12/12/14
Comps (4) Banff
Price / NTM Earnings
Since March 2013 (5)
25.0x
23-Oct-14
20.0x Blue Mountain Offer
15.0x 13.6x
12.5x
10.0x
5.0x
03/28/13 08/28/13 01/30/14 07/02/14 12/12/14
Comps(4) Banff
Price / Book Value
Since April 1, 2011
3.0x
23-Oct-14
2.5x Blue Mountain Offer
2.0x
1.8x
1.5x 1.5x
1.0x
0.5x
04/01/11 03/05/12 02/06/13 01/08/14 12/12/14
Comps(4) Banff
Notes
1. Banff’s current stock price as of December 12, 2014
2. Banff was formed on March 31, 2011
3. As of October 22, 2014, one trading day prior to Blue Mountain’s offer for the shares of Banff it did not already own
4. Comps includes: DHI, LEN, MDC, MTH, PHM, RYL, SPF, TMHC, TOL, and TPH
5. Broker estimates for Banff began in March 2013
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Besides Blue Mountain, there are a six top accounts which represent at least a 1% ownership stake
– Horizon Kinetics JP Morgan Asset Management
– Peter B. Cannell & Co
– PCJ Investment Counsel
– Baron Capital Management
– FOURPOINTS Investment Managers
Morgan Stanley
BANFF OVERVIEW
Banff Shareholder Analysis
Top 20 Institutional Holders in Banff (1)
% of TSO excluding % of TSO (Avg in
# Institution % of TSO Blue Mountain Homebuilders) (2) Style Country
1 Blue Mountain 69.1 — 00. Yield Canada
2 Horizon Kinetics LLC 3.9 13.4 0.3 Core Growth United States
3 JP Morgan Asset Management 2.2 7.6 0.7 GARP United States
4 Peter B. Cannell & Co. Inc. 1.7 5.8 0.0 Core Value United States
5 PCJ Investment Counsel Ltd. 1.4 4.7 0.0 Growth Canada
6 Baron Capital Management, Inc. 1.3 4.5 0.1 Growth United States
7 FOURPOINTS Investment Managers 1.0 3.4 0.0 GARP France
8 WEDGE Capital Management, L.L.P. 0.7 2.5 0.0 Core Value United States
9 Connor, Clark & Lunn Investment Management Ltd. 0.7 2.5 0.0 Core Value Canada
10 Millennium Management LLC 0.5 1.7 0.3 Hedge Fund United States
11 RBC Global Asset Management Inc. 0.4 1.3 0.0 Core Value Canada
12 SeaBridge Investment Advisors LLC 0.3 1.1 0.0 GARP United States
13 The Boston Company Asset Management, LLC 0.3 1.0 0.3 Deep Value United States
14 AllianceBernstein L.P. 0.3 1.0 0.8 Core Growth United States
15 CPP Investment Board 0.3 0.9 0.1 Core Value Canada
16 Eagle Global Advisors, LLC 0.2 0.8 0.0 Core Growth United States
17 JPMorgan Private Bank (United States) 0.2 0.8 0.2 Core Value United States
18 Harvest Capital Strategies LLC 0.2 0.6 0.1 Hedge Fund United States
19 Neuberger Berman, LLC 0.1 0.5 1.1 GARP United States
20 Invesco PowerShares Capital Management LLC 0.1 0.5 NA Index United States
Total / Avg 84.9 54.7 0.2
Banff Geographic Shareholder Breakdown
As of 3Q14
Other
13%
United States
13%
Canada
73%
Sources Thomson, Capital IQ, SNL Financial
Banff Shareholder Mix
As of 3Q14
Institutional
18%
Insider/Retail
82%
Notes
1. As of September 30, 2014
2. Represents the average % investment in homebuilder universe
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Banff Observations
A significant land owner with one of the longest years of land supply in the industry
Expertise and long track record in land entitlement and development
Highest revenue contribution from land revenues versus peers
Typically develops and sells ~80% of its land to other homebuilders with the remaining ~20% sold to its homebuilder division
Operates in 11 markets with
~75% of total lot inventory in top 6 markets
– Large concentration (~40%) in Alberta markets (Calgary and Edmonton)
Morgan Stanley
BANFF OVERVIEW
Public Homebuilder Landscape
Portfolio Metrics
Years of Land Supply (1)
Years
25 20 19 18
20 16 15
15 13
10 9 8 8 8 8 7 7 6 6
10 6 6 5 4 4 4
5
0
WCIC NWHM Banff UCP CCS WLH TOL TPH LEN PHM SPF KBH TMHC HOV MHO NVR RYL BZH MTH DHI LGIH MDC
Revenue Mix (2)
%
100%
80%
60%
40%
20%
0% (3) (3) (3) (3)
NWHM WCIC Banff UCP LEN WLH TOL TPH BZH MDC MHO DHI RYL HOV PHM TMHC SPF NVR MTH LGIH CCS KBH
Homebuilding Land Other
Number of Markets (4)
# ($MM)
100 800
79
80 600
60 50
34 400
40 28 24 21 21 20 19 16
20 14 13 13 13 11 11 10 10 88 77 200
0 0
DHI TOL HOV PHM RYL MTH LEN NVR TMHC BZH MDC MHO TPH NWHM LGIH Banff KBH WCIC UCP CCS SPF WLH
No of Markets TMC / No. of Markets
Notes
1. Years of land supply (based on total lot equivalents) per company filings, or calculated using total number of lot equivalents as of 9/30/14 divided by LTM deliveries
2. Represents FY2013 revenue
3. Revenue mix includes: UCP – homebuilding and land development; LEN – homebuilding, land development, financial services, real estate services and other investments; WCIC – homebuilding, real estate services and amenities; NWHM – homebuilding and fee building
4. As disclosed where disclosure provided, otherwise represents number of cities in which each company operates
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Banff Observations
Product mix and market locations drive top tier average sales price versus peers
– Banff’s U.S. portfolio focused on coastal markets (Bay Area, Southern California) and select growth markets (Austin, Denver) drives higher average sales price compared to its Canada portfolio
Highest gross margin in the homebuilder sector primarily due to higher revenue contribution from land sales vs. homebuilding, long-dated land supply at lower cost basis, and more stable Canadian land business
SG&A generally in-line with sector peers
Morgan Stanley
BANFF OVERVIEW
Public Homebuilder Landscape (cont’d)
Operational Metrics (1)
Average Sales Price (2)
($000s)
800 704
571 564
600 480 443 435 428 409
400 373 369 357 357 351 347 316 313 308 305 303 285 276
200 156
0
TOL TPH NWHM Banff SPF WLH WCIC TMHC CCS UCP MDC NVR MTH HOV PHM RYL LEN KBH MHO BZH DHI LGIH
Gross Margins
%, LTM EBIT / Revenue Land – 49%
Housing – 23%
40%
29% 27% 27%
30% 24% 23% 23% 23% 22% 22% 21% 21% 21% 21% 20% 19% 19% 19% 19% 18% 18% 17%
20%
10%
10%
0%
Banff LGIH SPF PHM LEN CCS WLH MTH TMHC DHI RYL TOL MHO TPH WCIC KBH NVR BZH MDC UCP HOV NWHM
SG&A as % of Revenues
%, LTM SG&A / Revenue SG&A / land + housing revenue, estimated allocated SG&A as %
of homebuilder only revenue range: 15-12% (3)
25% 20%
20% 16%
15% 14% 14% 14% 13% 13% 12% 12% 12% 12% 12% 12% 12% 12% 12% 11% 11% 10% 10% 9%
10% 8%
5%
0%
UCP LGIH CCS MHO NWHM BZH Banff KBH HOV MDC WCIC MTH PHM LEN SPF RYL WLH TOL DHI TPH TMHC NVR
Notes
1. Data from company filings
2. Average home sales price for full year 2013 and nine months ended September 30, 2014, pro-forma for subsequent events
3. Allocation of between $16MM of G&A to $50MM of G&A to land business with 100% of marketing costs allocated to homebuilder
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Sector Backdrop
Sector has weathered the crisis and is approaching a more normalized operating environment
- Earnings expected to return to “normalized” levels into 2016
- Deferred tax assets from losses / impairments in downturn largely utilized
Recent expansion with ~8 new IPOs since 2013
- Primarily regional players without the scale / reach of the mid-to-large cap homebuilders
- New entrant equity market capitalizations largely well below
$1.0Bn
Homebuilders have been going “long” land as the market recovers, volumes increase, and land becomes more constrained
- “Land developers like Banff are positioned to capture the majority of the benefit from rising home prices because of the highly fragmenting and intensely competitive homebuilding industry.”
- RBC, Sept. 23, 2013
BANFF OVERVIEW
Homebuilding Sector Backdrop and Banff Review
Banff Summary Observations
Unique vertically integrated business model - land developer and homebuilder
- High relative ASPs driven by U.S. product mix and market locations
- Best-in-class gross margins driven by lot sales activity, longer dated land supply at lower cost basis, and more stable Canadian land business
- Recent emphasis on growing U.S. homebuilder operations, which provides for strong growth trajectory
(i.e., in Denver, Austin, Phoenix markets), but comes with execution risk
Large land inventory with one of the longest years of supply (~18 years) in the sector
- Vast majority of lot equivalents inventory represents land held for development (~90k of the total ~107k) versus land under development / optioned lots (~15k) and housing units or model homes (~2k)
- Portfolio features several large, MPC projects with long-term (10+ years) sell-out periods
A national builder with a focused geographic footprint (operates on both coasts, select growth markets, and Canada - but in targeted markets in these broad regions) and large concentrations in its top 5 / 6 markets
- U.S. market fundamentals generally continue to recover / improve post-crisis, although 2014 has been at a more measured pace
- Canadian markets did not experience the same degree of slowdown that the U.S. did and fundamentals have been stable / positive, although potential concern that the Alberta markets (~40% concentration) could be impacted in the event of a prolonged decline in oil prices
Given its business model, land inventory profile, and its large presence in both the U.S. and Canada, there is no true “comp” for Banff, although a box can be drawn around select public homebuilders with certain portfolio / financial / operational characteristics similar to Banff
- Capital structure and size / scale also inform the selection of comparable companies and point toward the more established mid / large cap homebuilders versus the recent micro / small cap homebuilder entrants to the sector
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Section 3
Banff Preliminary Valuation
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BANFF PRELIMINARY VALUATION
Introduction to Valuation: Summary of Approaches
Reference Point
1 52-Week and 30-Day Trading Ranges
2 Research Analyst Price Target
3 Research Analyst Net Asset Value Estimate
Description / Comments
Market valuation of shares over the last twelve months and last 30 days
Includes volume-weighted average price
Examines undiscounted price targets from Wall Street Analysts
Generally forward-looking metric
Examines NAV estimates from Wall Street Analysts
Assessment of current value of the portfolio
Valuation Methodology
4 Comparable Companies Analysis
5 Precedent Transactions
6 Discounted Cash
Flow (“DCF”)
7 Net Asset Value (“NAV”)
Description / Comments
Estimate of value based on unlevered and levered trading metrics (e.g., P / E, Agg Val / EBITDA, P / BV, P / Adj. BV) of selected peers
Subjectivity involved in selection of comparable companies; no perfect comparable
Examine historical trading multiples of peers (e.g., P / E, Agg Val / EBITDA, P / BV)
Looks at similar transactions to estimate value
- Focus on premium to unaffected share price
- Both homebuilder / land heavy companies
Values future unlevered free cash flow and terminal value discounted at the company’s weighted average cost of capital (“WACC”)
WACC calculated using the capital asset pricing model (“CAPM”) for the cost of equity; terminal value determined by utilizing an exit P / E multiple
Bottoms-up, “sum-of-the-parts” methodology - intended to arrive at a private market valuation; does not include costs to liquidate
Utilizing a range of discount rates and revenue / cost inflation to determine sensitivities
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Over the 12 months prior to the Blue Mountain announcement on October 23, 2014, Banff’s stock price has traded between $17.69 and $24.25 with a mean of $20.82 (2)
– 1-day prior to announcement: $19.01
– 10-day average ending five days prior to announcement: $18.46
– 30-day average prior to announcement: $19.22
Banff Trading Range on NYSE (2)
Price per Share, $
Time
Period Min Max Mean VWAP
LTM17.6924.2520.82 20.76
Last 30
17.69 20.5319.22 19.28 Days
Morgan Stanley
BANFF PRELIMINARY VALUATION
1 Historical Share Price Trading
NYSE
Share Price Performance
From Banff Formation (1)
Announcement
$ of Blue
28.00 Mountain Offer
Current Price:
24.00 $23.01
23.00 YTD Avg: VWAP since
$20.99 announcement:
$23.36
20.00
LTM avg prior to Last 30 day avg
announcement: prior to
$20.82 One day prior to announcement:
announcement: $19.22
16.00 $19.01
10 day avg. ending five days
prior to announcement: $18.46
12.00
8.00
4.00
1/04/11 26/08/11 20/01/12 15/06/12 9/11/12 5/04/13 30/08/13 24/01/14 20/06/14 12/12/14
Source Capital IQ
Notes
1. From April 1, 2011 through current date of December 12, 2014
2. Banff’s trading range prior to the announcement date on October 23, 2014
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Over the 12 months prior to the Blue Mountain announcement on October 23, 2014, Banff’s stock price has traded between $17.80 and $24.26 with a mean of $20.82 (2)
– 1-day prior to announcement: $19.08
– 10-day average ending five days prior to announcement: $18.53
– 30-day average prior to announcement: $19.25
Banff Trading Range on TSX (2)(3)
Price per Share, $
Time
Period Min Max Mean VWAP
LTM 17.80 24.26 20.82 20.89
Last 30
17.80 20.63 19.25 19.81 Days
TSX shares thinly traded – 30 day average daily volume of 13k shares vs. NYSE listed daily volume of 123k (2)
Morgan Stanley
BANFF PRELIMINARY VALUATION
1 Historical Share Price Trading
TSX
Share Price Performance
From Banff Formation (1)
Announcement
$ of Blue
28.00 Mountain Offer
Current Price:
24.00 $23.21
23.00 VWAP since
YTD Avg: announcement:
$20.99 $23.35
20.00
LTM avg prior to Last 30 day avg
announcement: prior to
$20.82 announcement:
One day prior to $19.25
announcement:
16.00 $19.08
10 day avg. ending five days prior
to announcement: $18.53
12.00
8.00
4.00
1/04/11 26/08/11 20/01/12 15/06/12 9/11/12 5/04/13 30/08/13 24/01/14 20/06/14 12/12/14
Source Capital IQ
Notes
1. From April 1, 2011 through current date of December 12, 2014
2. Banff’s trading range prior to the announcement date on October 23, 2014
3. Banff’s historical trading prices converted from CAD to USD using historical exchange rates
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Since Blue Mountain’s proposed offer to purchase the shares of Banff it doesn’t already own, Banff’s research analyst price target has increased 9.1% to $24.00
– Current value of offer is $23.00 cash per share
Banff’s research analyst NAV estimate has changed from $24.75 to $24.90 since Blue Mountain’s proposed offer on October 23, 2014
Some of the considerations for Banff are performance-related (e.g., lot count and home deliveries) whereas others (e.g., interest rate risk, oil prices) are more macro in nature
Morgan Stanley
BANFF PRELIMINARY VALUATION
2 3 Banff Research Analyst Highlights
Research Views
Pre Post
Offer Offer
Research Analyst Price Target (1)
Price Target $ 22.00 $ 24.00
Research Analyst NAV Estimate (2)
NAV Estimate $ 24.75 $ 24.90
Source Research reports
Analyst Ratings
100%
25%
80% 50%
60%
50%
40%
20% 50%
25%
0%
Before Offer After Offer
Buy Hold Sell
Source Bloomberg
Key Themes – Attributes
Strong gross margin performance. Banff’s preferred land position gives management confidence that the company can sustain a gross margin in excess of 20% in the home building operation
Increased new residential construction activity and better financial performance represent potential catalysts for share price appreciation
Potential for home deliveries to double (from ~2,500 currently to ~5,000 in three to four years)
Sustained consumer demand translating into a high absorption rate in Canadian markets
Key Themes – Considerations
Above average geographic concentration (Alberta) and potential impact from any slowdown in natural gas/oil demand
Smaller scale homebuilding operations in the United States
Potential for outsized balance sheet impairments if home prices decline
Limited secondary liquidity
Interest rate risk, making home ownership more expensive
Notes
1. Research price target contributor includes one research analyst
2. Estimated NAV used by one research analyst
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BANFF PRELIMINARY VALUATION
2 Analyst Commentary Following Blue Mountain’s Offer
“Investor Focus: 1) New order trends & ASP growth; 2) Operating margin performance; 3) Material and labor costs; 4) Land prices; and 5) The board of directors for Banff has established a special committee to review the proposed acquisition of the remaining 30% of the company’s shares not currently owned by Blue Mountain.”
- RBC, Nov. 4, 2014
“We are maintaining our Sector Perform rating and raising our price target to $24. We believe that the special committee might ask Blue Mountain to pay a premium to the current offer of $23/share.”
- RBC, Nov. 4, 2014
“With shares trading slightly above the offer price, we do not see significant further upside. Our fundamental estimated valuation range is $24 - $25.”
- Wells Fargo, Oct. 24, 2014
“We view today’s announcement that Blue Mountain (Baa2/A-) has proposed to acquire the 30% of Banff (B1/B+) it does not already own as a credit positive for Banff (B1/B+).”
- Citi, Oct. 23, 2014
“We believe that it is more likely than not that the transaction goes through. However, we imagine investors may push back on valuation given the stock traded as high as $24.25 in January 2014.”
- Citi, Oct. 23, 2014
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Stabilized P / E multiples seen in the 10x + / - range with P / BV of 1.75x
– Analysts will provide EBITDAx in their summary of valuation materials, but not normally utilized in determining price targets / valuation (heavy reliance on P / E and P / BV)
Canada’s housing market is observed to have less risk than U.S., given stricter lending business practices
Land development is seen as possessing higher risk than homebuilding
Move-up / higher income customers viewed largely as a positive
BANFF PRELIMINARY VALUATION
2 Analyst Commentary On Homebuilder Valuation
Pricing Metrics
“The earliest data we have shows that homebuilder forward P/Es traded in a range around 10x after housing had recovered from the trough in the 1990s.”
– Barclays, Oct. 22, 2012
“In a normal environment, we typically see homebuilding stocks trading at 9 to 10 times forward earnings.”
– Credit Suisse, May 20, 2013
“The (homebuilding) group should trade in a range of 10x – 14x during a peak environment”
– JMP, July 2014
“We begin by assuming that the builders should trade at a base recovery multiple of 1.75x book value. For each company in our coverage universe we then adjust this multiple up or down depending on profit, growth, risks and other factors.”
– Deutsche Bank, Feb. 25, 2013
Canadian Housing Market
“Canada’s mortgage market possesses several attributes that positively distinguish it from the U.S. market, in our view, which in turn should help prevent a material decline in home prices as seen in the U.S. from 2006-2009.”
– J.P. Morgan, May 20, 2013
Land Development / Purchasing Raw Land
“However, this strategy also carries significant risk, as land values are highly volatile and levered to changes in home prices, moving 2-4% for every 1% change in home prices. This occurs since land is typically valued on a residual basis and development and direct construction costs tend to be stickier than home prices (both on the way up and on the way down).”
– Credit Suisse, May 20, 2013
“Our gross margin assumptions are: 25% for properties purchased during the boom (2004-2007), 50% for properties purchased in 2000, and 80% for properties purchased before 1985.”
– Deutsche Bank, Jan. 5, 2014
“We then discount those cash flows at a discount rate of 12% to find the present value of the property.”
– Deutsche Bank, Nov. 5, 2014
Higher Income Earning Demographic
“Moreover, given the wealth of this demographic, the broader macro picture has less of an impact to some extent on their purchase decisions (excluding the Great Recession when fear drove this demographic to keep capital on the sidelines). And, the high income demographic in the US has been growing at a faster rate than all households combined.”
– Bank of America, Jan. 20, 2013
Morgan Stanley
20
Project Bow River
BANFF PRELIMINARY VALUATION
4 Comparable Companies
Based on Portfolio / Financial / Size Characteristics and Capital Structure
Homebuilder Benchmarking Analysis
LTM as of 9/30/2014
Taylor Morrison
Toll Brothers Standard Home TRI Pointe Ryland Group Meritage Homes MDC Holdings Average
Banff Lennar Corp. DR Horton Inc. Inc. PulteGroup, Inc. Pacific Corp. Corporation Homes, Inc. Inc. Corporation Inc. Excluding Banff
LEN DHI TOL PHM SPF TMHC TPH RYL MTH MDC
Portfolio Characteristics
Top 5 Markets
South Central—
#1 Calgary—27,651 East—56,217 West—15,508 Southwest—31,995 Florida—12,683 East—28,484 California—18,992 North—14,261 Texas—7,568 Colorado—5,400
39,200
#2 Edmonton—15,804 West—45,953 Southeast—36,500 Mid-Atlantic—14,729 Florida—27,956 California—9,881 West—11,565 Nevada—2,089 Southeast—12,722 Arizona—7,402 Arizona—2,511
#3 Austin—12,746 Central—28,895 West—23,900 South—11,070 North—27,021 Texas—4,986 Canada—2,894 Arizona—2,024 Texas—7,205 Florida—3,456 Nevada—1,912
Southern California—
#4 Houston—13,990 East—13,700 North—9,928 Texas—20,079 Carolinas—4,278 Washington—1,752 West—6,662 California—2,774 California—1,902
12,450
South Florida—
#5 Ontario—10,384 Southwest—6,300 Southeast—16,720 Arizona—2,173 Texas—1,583 Colorado—2,170 Florida—1,171
12,145
Average Sales Price ($000’s) (1) 480 308 276 704 316 443 409 571 313 351 357 405
Total Lots (Owned / Controlled) 107,611 165,984 124,600 51,235 134,228 36,307 42,943 30,111 40,850 25,662 16,342 66,826
Years of Supply (owned /
controlled) (2) 18 8 4 10 8 8 7 9 6 5 4 7
Financial Metrics
Equity Market Capitalization 2,716 9,266 9,074 5,655 7,551 2,718 2,059 2,300 1,742 1,333 1,217 4,291
($MM)
Revenue 1,439 7,111 8,025 3,912 5,655 2,287 2,734 1,778 2,444 2,016 1,661 3,762
Gross Margin (%) 28.6% 23.5% 21.4% 21.7% 23.8% 26.6% 21.6% 20.1% 21.4% 21.9% 18.4% 22.1%
Net Income 239 559 534 340 477 216 259 81 176 139 79 286
Credit Statistics
Debt / TMC 34.2% 36.7% 28.9% 38.1% 20.1% 44.9% 47.8% 32.5% 45.8% 40.8% 48.3% 38.4%
Debt / EBITDA 4.5x 5.1x 3.5x 5.2x 2.2x 4.7x 4.4x 3.8x 4.7x 3.6x 6.0x 4.3x
Morgan Stanley
Notes
1. Average home sales price for full year 2013 and nine months ended September 30, 2014, pro-forma for subsequent events
2. Years of supply from investor presentations or calculated using total lots (owned/controlled) divided by LTM deliveries from company filings as of September 30, 2014
21
Project Bow River
BANFF PRELIMINARY VALUATION
4 Comparable Companies (cont’d)
Based on Portfolio / Financial / Size Characteristics and Capital Structure
Homebuilder Comparables Analysis
Trading as of December 12, 2014 (Including Share of Joint Ventures)
(in $MM, except per share and multiple data)
Valuation Metrics Credit Statistics
% Change since Equity Aggregate Agg Value / EBITDA(3) Price / Earnings Current Book Valuation Debt / Total Market Debt/ Net Debt/ Credit Rating
Price/Adj.
Selected Comparables Ticker Price 10/22/2014 Mkt. Cap.(1) Value(2) 2015E 2016E 2015E 2016E Price / Book (4) Capitalization EBITDA EBITDA S&P / Moody’s / Fitch
Book
Lennar Corp. LEN 42.31 (1.1%) 9,265.9 14,016.3 10.7x 9.4x 13.0x 11.2x 2.1x 2.1x 36.7% 5.1x 3.9x BB / Ba3 / BB+
DR Horton Inc. DHI 23.99 5.7% 9,074.0 11,612.0 9.8x 8.4x 13.0x 11.2x 1.8x 1.8x 28.9% 3.5x 2.4x BB / Ba1 / BB+
Toll Brothers Inc. TOL 31.56 (0.9%) 5,654.9 8,635.8 11.9x 9.6x 15.6x 12.4x 1.5x 1.5x 38.1% 5.2x 4.5x —/—/ BBB-
PulteGroup, Inc. PHM 20.19 5.3% 7,550.6 7,966.3 7.6x 6.6x 14.2x 11.9x 1.6x 1.6x 20.1% 2.2x 0.5x BB+ / Ba1 / BB+
Standard Pacific Corp. (7) SPF 6.95 (11.6%) 2,717.6 4,572.6 8.8x 7.5x 11.2x 9.6x 1.7x 1.7x 44.9% 4.7x 4.0x B+ / B1 / B+
Taylor Morrison Home Corporation TMHC 16.62 (7.0%) 2,059.3 3,661.8 8.3x 7.8x 8.2x 7.2x 1.2x 1.2x 47.8% 4.4x 3.7x BB- / B2 / -
TRI Pointe Homes, Inc. (5) TPH 14.15 4.7% 2,300.3 3,281.8 9.3x 8.0x 11.0x 9.4x 1.6x 1.6x 32.5% 3.8x 3.3x —/ B1 / -
Ryland Group Inc. RYL 36.41 4.7% 1,741.7 2,739.2 7.6x 6.6x 10.4x 8.9x 1.7x 1.7x 45.8% 4.7x 3.1x BB- / B1 / -
Meritage Homes Corporation MTH 33.23 (10.6%) 1,333.2 2,157.1 8.9x 7.9x 8.6x 7.7x 1.3x 1.3x 40.8% 3.6x 3.2x BB- / Ba3 / BB-
MDC Holdings Inc. MDC 24.76 (5.4%) 1,216.8 1,814.0 10.8x 7.8x 12.9x 10.9x 1.0x 1.0x 48.3% 6.0x 3.1x BB+ / Ba1 / BBB-
Mean: (1.6%) 4,291.4 6,045.7 9.4x 8.0x 11.8x 10.0x 1.5x 1.5x 38.4% 4.3x 3.2x
Median: (1.0%) 2,509.0 4,117.2 9.1x 7.9x 12.1x 10.2x 1.6x 1.6x 39.4% 4.5x 3.2x
Max: 5.7% 9,265.9 14,016.3 11.9x 9.6x 15.6x 12.4x 2.1x 2.1x 48.3% 6.0x 4.5x
Min: (11.6%) 1,216.8 1,814.0 7.6x 6.6x 8.2x 7.2x 1.0x 1.0x 20.1% 2.2x 0.5x
Banff—Post Offer (Management) 23.01 2,715.8 4,045.6 9.3x 7.3x 13.3x 10.3x 1.8x 1.8x 34.2% 4.5x 4.0x BB- / B2 / -
Banff—Pre Offer (Management)(6) 19.01 2,232.9 3,562.7 8.9x 7.0x 10.9x 8.4x 1.5x 1.5x 38.7% 4.5x 4.0x BB- / B2 / -
Banff
Post-Offer 13.7x 11.8x
(Consensus)
Banff
Pre-Offer 11.3x 9.7x
(Consensus) (6)
Morgan Stanley
Notes
1. Includes shares, RSUs, PSUs, and dilution associated with stock options and convertible securities (both debt and preferred securities)
2. Aggregate Value equals equity market capitalization plus debt, non controlling interest, and preferred securities (at liquidation preference) less cash and marketable securities
3. Aggregate Value / EBITDA (including share of JV debt)
4. Adjusted Book Value equals book value of equity plus deferred tax valuation allowance
5. Pro forma for closed Reverse Morris Trust merger with Weyerhauser Real Estate Company (WRECO)
6. “Banff – Pre Offer” price as of October 22, 2014, one day prior to Blue Mountain’s offer announcement
7. Includes dilution associated with the outstanding convertible preferred securities and stock options (add an additional 109.8MM shares to fully diluted share count)
22
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
Project Bow River
BANFF PRELIMINARY VALUATION
4 Comparable Companies (cont’d)
Aggregate Value / NTM EBITDA
30.0x 20.0x 10.0x 0.0x
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
(1)
6.1x
Financial Crisis:
Multiples Inflated / Negative Due to Industry Downturn
13.5x 11.7x 9.7x
Peers(1)
2002—2014 Avg.
2012—2014 Avg.
2002—2006 Avg.
18 Months Avg.
x Price / Book Value
x 3.0x
2.0x 1.0x 0.0x
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
1.8x
1.8x 1.5x
Peers(1) 2002—2014 Avg. 2012—2014 Avg. 2002—2006 Avg.
Price Peers / NTM Earnings 2002 -
x 30.0x
20.0x 10.0x 0.0x
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
7.8x
Financial Crisis:
Multiples Inflated / Negative Due to Industry Downturn
17.4x 14.3x 13.1x
Peers(1) 2002—2014 Avg. 2012—2014 Avg. 2002—2006 Avg. 18 Months Avg.
Note
1. Peers includes: DHI, LEN, MDC, MTH, PHM, RYL, SPC, TMHC, TOL, and TPH
23
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
Project Bow River
2015 seen as a “ramp” year with earnings still growing for homebuilders
Price / 2016E Earnings viewed by research analysts as a “stabilized” year with a return to “normalization” for earnings multiples
– As such, 2016 earnings multiples utilized for valuation purposes
Due to higher margins, anticipated growth and longer land supply being beneficial at this point in the housing cycle, slightly higher than mean multiples selected
Banff capital structure generally in-line with selected comparables so no adjustments made for purposes of application of levered multiples
BANFF PRELIMINARY VALUATION
4 Comparable Companies (cont’d)
Implied Valuation Range
Valuation Rationale
Levered Metrics – Primary Valuation Metrics
Price / Earnings
2015: Comps range 8.2x to 15.6x – selected midpoint of 12.0x, +/- 2.0x to account for wider band given disparate growth rates
2016: Comps range 7.2x to 12.4x – selected midpoint of 10.5x multiple, +/- 2.0x
Price / Book Value
Comps range 1.0x to 2.1x - given longer land supply and older / lower cost basis land bottom of range narrowed upwards to 1.4x to 2.1x
Unlevered Metric – Secondary Valuation Metric
Aggregate Value / EBITDA
2015: Comps range between 7.6x to 11.9x – higher margin business justifies midpoint of 10.0x, +/- 1.5x
2016: Comps range between 6.6x to 9.6x – midpoint of 8.5x, +/- 1.0x
Implied Valuation Range
Valuation Metric
Selected Range of Multiples Implied Share Price
Low High Low High
P / 2015 E 10.0x 14.0x 17.33 24.27
P / 2016 E 8.5x 12.5x 19.07 28.04
P / BV 1.4x 2.1x 17.71 26.56
AV / 2015 EBITDA 8.5x 11.5x 16.06 25.01
AV / 2016 EBITDA 7.5x 9.5x 19.37 27.01
Morgan Stanley
24
Project Bow River
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
BANFF PRELIMINARY VALUATION
5 Banff Precedent Transactions
Reflects select homebuilder and land heavy companies transactions since 2000
Premium applied to Banff’s unaffected stock price
– Represents average stock price for the 10 trading days ending 5 trading days prior to the announcement of the transaction
Based on premiums paid in selected homebuilder and land heavy companies precedent transactions, the implied valuation range is from $23.04 to $26.42
Select Homebuilder and Land Heavy Transactions
As of December 2014, Transactions Since 2000
Transaction Size Premium to Unaffected Announcement Acquiror / Target Consideration ($MM) (2) Share Price (1)
4/8/2009 Pulte Homes / Centex Stock $3,100 28.8% 3/17/2006 General William Lyon and the Lyon Family / William Lyon Homes Cash $295 39.4% 7/21/2003 Lennar Corporation / Newhall Land and Farming Company Cash $1,150 24.8% 1/30/2002 Beazer Homes / Crossman Communities Cash/Stock $603 42.2% 10/23/2001 D.R. Horton / Schuler Homes Cash/Stock $1,200 31.5% 5/1/2001 Pulte Homes / Del Webb Stock $1,700 36.6% 2/17/2000 Lennar / U.S. Home Corporation Cash/Stock $1,800 43.1%
Mean 35.2% Median 36.6% High 43.1% Low 24.8%
Source Company Filings
Precedent Transactions Analysis
As of December 2014, Transactions Since 2000
# of Selected Range Banff Unaffected Implied Share Price Transactions Low Median High Share Price (1) Low Median High
Summary of Select Transactions
Premium / (Discount) to Unaffected Price 7 24.8% 36.6% 43.1% $18.46 $23.04 $25.21 $26.42
Notes
1. Represents average stock price for the 10 trading days ending 5 trading days prior to the announcement of the transaction
2. Represents equity value plus assumed debt
25
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
Project Bow River
Business Plan Strategy
Increasing the housing business across the board
– Goal to drive each business group to 400 to 500 home closings per year (~5,000 units in totality)
– Majority of lot sales will continue to be to third-party builders
Increasing the volume of annual lot sales
– Goal to reach ~5,000 lot sales per year
– Focus will be normal course lot sales (with a focus on driving growth in markets like Denver and Austin), but will also include some opportunistic land sales once value has been created through the entitlement process
Overall, the Company expects to increase its pace of monetization and reduce its land supply over the next several years to an 8-10 year of supply of land
Morgan Stanley
BANFF PRELIMINARY VALUATION
6 Banff Discounted Cash Flow Analysis
Management Projections Key Assumptions – Based on 2015 to 2019 Business Plan
Management’s 2015-2019 business plan represents management’s best currently available estimates and judgments of the future five-year financial performance of the Company
The business plan is a bottoms-up consolidation of the project-level projections provided on a region-by-region basis
– Canadian markets assumed to be at similar levels to 2014 throughout the projections period, with no inflation built into the Canadian projects
– U.S. markets assumed to be at similar or marginally better levels to 2014 throughout the projections period
The business plan includes all projects currently owned as of the business plan and also assumes $1.7Bn of gross acquisitions throughout the projections period (with approximately $200MM of committed acquisitions and approximately $1.5Bn of uncommitted acquisitions)
– The total number of active housing communities continues to increase through 2015 and averages 76 throughout the projections period (with a peak of 82 active housing communities in 2017)
Interest expense on project debt on land held for development is expensed in the projections, interest expense on the $500MM of U.S. unsecured notes is capitalized to active projects, and existing capitalized interest is expensed throughout the projections period as assets are sold
The tax rate in the U.S. is assumed to be 39.0%, Alberta 25.0%, and Ontario 26.5%; taxes assumed to be paid in cash with no tax liability established in the projections
Canadian dollar amounts are converted at 0.90:1 throughout the five-year projections period
Operational Highlights
Total home closings double from ~2,900 in 2015 to ~5,600 in 2019
Total lot closings (excluding bulk sales transactions) are generally in the 4,000 to 5,000 range each year
Bulk sales transactions assume the monetization of 6,335 lots and 3,760 acres, generating approximately $375MM of cash proceeds
Absorption rate (sales per community per week) ranges from 0.9 to 1.4, with an average of 1.2
Total lot equivalents inventory reduced from 107,611 to approximately 63,500 at the of the projections period
26
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
BANFF PRELIMINARY VALUATION
6 Banff Discounted Cash Flow Analysis (cont’d)
Detailed Company Financial and Operational Projections – Income Statement Summary
Five Year Model Overview
$MM, unless otherwise noted CAGR
2013 2014 (7) 2015 2016 2017 2018 2019 ‘14-‘19
Housing Revenue 983 1,201 1,435 1,964 2,324 2,227 2,307 14% Growth % 22% 19% 37% 18% (4%) 4% Unit Growth % 5% 22% 35% 25% 3% 10% ASP Growth % 16% (2%) 1% (6%) (7%) (6%)
Land Revenue 373 392 566 475 576 604 553 7% Growth % 5% 44% (16%) 21% 5% (8%) Unit Growth % 33% 236% (46%) 43% 0% (1%) Price Per Lot Growth % (21%) (57%) 55% (15%) 4% (8%)
Other Revenue (1) — (0) 2 2 —
Total Revenue 1,356 1,593 2,001 2,441 2,902 2,830 2,860 12%
Growth % 18% 26% 22% 19% (2%) 1%
Housing Gross Margin 202 290 342 462 536 499 501 12%
Growth % 44% 18% 35% 16% (7%) 0% Margin % (2) 21% 24% 24% 24% 23% 22% 22%
Land Gross Margin 173 188 282 240 249 303 313 11%
Growth % 9% 50% (15%) 4% 22% 3% Margin % (2) 46% 48% 50% 51% 43% 50% 57%
Total COS (981) (1,133) (1,442) (1,818) (2,200) (2,108) (2,127) 13%
Marketing Costs (50) (54) (78) (100) (116) (115) (115) General & Administrative (120) (142) (153) (159) (165) (172) (178) Other Income (3) 37 66 72 147 125 144 163
Adjusted EBITDA 241 331 (4) 400 510 546 579 603 13%
Growth % 37% 21% 28% 7% 6% 4% Margin % 18% 21% 20% 21% 19% 20% 21%
Net Income 142 277 205 265 284 312 327 3%
Growth % 95% (26%) 29% 7% 10% 5% Margin % 10% 17% 10% 11% 10% 11% 11%
Property Sales (5)
Homes 2,275 2,390 2,906 3,926 4,925 5,088 5,611 19% Lots 2,641 3,538 4,714 4,419 9,141 5,547 7,189 15% Acres 31 34 1,910 561 100 1,010 583 76% Implied ASP per Home ($000’s) 432 503 494 500 472 438 411 -4% Implied Price per Lot ($000’s) (6) 135 107 46 71 60 63 58 -11%
Sources Company projections and Company Filings
Project Bow River
Historical Pro Forma Financial Information Reference Points (for last 9 years)
Total Revenues ($MM)
– Average: $1,167
– Peak: $1,535 (’05)
Housing Gross Margin
– Average: 19%
– Peak: 28% (’05)
Land Gross Margin
– Average: 33%
– Peak: 46% (’13)
Home Sales
– Average: 1,793
– Peak: 2,529 (’05)
Lot Sales
– Average: 2,843
– Peak: 4,243 (’05)
Acre Sales
– Average: 211
– Peak: 543 (’12)
– Peak: 543 (’12)
Notes
1. Includes sale of income producing properties
2. Margins for the projections per corporate model, do not include the allocation of interest capitalized into the projects; reported margins projected to be in the 43% on average range for land and the 21% on average range for housing from ’15 to ‘19
3. Includes rental income, interest income, JV income, and other income
4. Excludes one time gain from land sale of $33MM
5. Includes JV sales at Banff’s proportionate share
6. Blended price per lot of finished lots and acreage (acreage converted into lots on a 1 to 4 conversion)
7. Represents nine months of historical data and three months of projections
27
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
BANFF PRELIMINARY VALUATION
6 Banff Discounted Cash Flow Analysis (cont’d)
Management Cash Flow Projections
Project Bow River
Banff Discounted Cash Flow Analysis $MM, unless otherwise noted Terminal Yr CAGR
12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 ‘15-‘19 Income Statement Projections
Revenue 1,356 1,593 2,001 2,441 2,902 2,830 2,860 9%
% Growth 18% 26% 22% 19% -2% 1%
EBITDA (1) 241 331 400 510 546 579 603 11%
% Margin 18% 21% 20% 21% 19% 20% 21% 111 bps
% Growth 37% 21% 28% 7% 6% 4%
3 Month Stub Cash Flow Projections (2) Inflows / (Outflows)
(+) Real Estate Sales 620 1,750 2,370 2,860 2,702 2,686 11% (+) A/R & Metro / CFD Receivables 50 260 282 256 214 226 (3%)(3) (+) Other 5 59 73 43 57 52 (3%) (+) Investment in JVs (Net) 10 (15) 78 36 80 107 11% (-) Housing Development (200) (837) (1,096) (1,130) (1,159) (1,203) 10% (-) Commercial Development (4) (40) (42) (47) (56) (20) (16%) (-) Land Development (163) (537) (461) (466) (390) (360) (9%) (-) Marketing Costs (4) (19) (78) (100) (116) (115) (115) 10% (-) General & Administrative (4) (42) (153) (159) (165) (172) (178) 4%(3) (-) Other COS Expenditures (4) 3 (11) (16) (15) (23) (19) 14% (-) Income Taxes (5) (23) (95) (132) (141) (146) (160) 14% (-) Other (5) (36) 1 (55) (29) (44) (66) 7% (-) CapEx (1) (5) (2) (2) (2) (1) (32%) (-) Committed Land Acquisitions (6) (44) (85) (48) (18) (14) (15) (35%) (-) Uncommitted Acquisitions (6) (27) (294) (297) (386) (347) (204) (9%)
Unlevered Free Cash Flows 128 (78) 395 680 586 731
Sources Company projections and Company Filings
Notes
1. Includes JV income
2. Excludes debt draws, repayments, and interest expense
3. ’16-’19 CAGR due to sign change in ‘15
4. Marketing Costs and General & Administrative expenses are broken out per income statement projections; Other COS Expenditure plus these are grouped together in cash flow projections
5. Income Taxes are broken out per income statement; Other plus Income Taxes grouped together cash flow projections
6. Excludes land acquisition financing / VTB (net)
28
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
BANFF PRELIMINARY VALUATION
6 Banff Discounted Cash Flow Analysis (cont’d)
Banff Cost of Capital Analysis
Weighted Average Cost of Capital (WACC) Analysis
Assumption Notes Low Mid High
Market Risk Premium (MRP) Morgan Stanley estimated market risk premium (1) 6.00% 6.00% 6.00%
Risk Free Rate (Rf) Spot rate 10-year U.S. Treasury—Dec 12, 2014 2.10% 2.10% 2.10%
(7)
Levered Predicted Beta US local predicted barra beta for Banff 1.23 1.23 1.23
Sensitivity Adjustment +/- 1.0% from base (1.00%)—1.00%
Cost of Equity (KE) Calculated using the Capital Asset Pricing Model 8.46% 9.46% 10.46%
Pre-tax Cost of Debt (KD) Estimated cost to issue new 10 year unsecured notes (2) 5.63% 5.63% 5.63%
Blended US / Canada statutory tax rates weighted by 2015 Net
Tax Rate (t) (3) 31.6% 31.6% 31.6% Income contribution by segment
Post-tax Cost of Debt (KD) 3.85% 3.85% 3.85%
Debt / Total Capitalization (4) Based on current or expected capital structure 34% 34% 34%
Weighted Average Cost of Capital
KE * E/(D+E) + KD * (1-t) * D/(D+E) 6.88% 7.54% 8.19% (WACC)
Notes
1. Morgan Stanley estimate – based on a review of recent academic evidence
2. Weighted average blended interest rate on two outstanding unsecured notes of 6.33%
3. Tax rate assumption provided by Banff
4. Based on current capital structure
5. As of December 12, 2014
6. Includes non controlling interest
7. US barra beta was selected due to most trading of common stock occurs on the NYSE, other betas were obtained and excluded due to lack of liquidity on TSX
Project Bow River
CAPM is the primary method utilized to calculate Banff’s cost of equity
– Sensitizing the cost of equity by + /—1% to arrive at an estimated cost of equity between 8.46% to 10.46%
– Estimated cost of debt of 5.63% impacted by an estimated blended Canadian
/ US tax rate of 31.6%
Weighted average cost of capital between 6.88% to 8.19%
Capital Structure $MM, unless otherwise noted Share Price (6) 23.01 (x) FDSO 118 Equity Value 2,716 (+) Preferred -(+) Debt 1,441 (+) NCI 52 Total Market Cap 4,209
Equity (6) 66% Debt 34% Total Cap 100%
29
PRELIMINARY DRAFT
HIGHLY CONFIDENTIAL
BANFF PRELIMINARY VALUATION
6 Banff Discounted Cash Flow Analysis (cont’d)
Discounted Cash Flow Sensitivities
Discounted Cash Flow Sensitivity Analysis
Price Per Share, AV / 2015 EBITDA / AV / 2016 EBITDA, P / 2015 Earnings / P / 2016 Earnings, P / Book Value
Weighted Average Cost of Capital Range Applied Exit Implied P / E Exit Implied Exit Multiple EBITDA P / BV
Range (1) Multiple Multiple (1) 6.88% 7.54% 8.19%
$21.15 $20.42 $19.73 Implied Price
Per Share
9.6x / 7.5x 9.4x / 7.3x 9.2x / 7.2x AV / EBITDA
10.0x 5.3x 1.2x
12.2x / 9.4x 11.8x / 9.1x 11.4x / 8.8x P / E
1.7x 1.6x 1.6x P / BV
Implied Price
$25.33 $24.49 $23.70 Per Share
10.8x / 8.5x 10.6x / 8.3x 10.3x / 8.1x AV / EBITDA
12.0x 6.4x 1.5x
14.6x / 11.3x 14.1x / 10.9x 13.7x / 10.6x P / E
2.0x 1.9x 1.9x P / BV
Implied Price
$29.51 $28.57 $27.67 Per Share
12.0x / 9.4x 11.8x / 9.2x 11.5x / 9.0x AV / EBITDA
14.0x 7.5x 1.7x
17.0x / 13.1x 16.5x / 12.7x 16.0x / 12.3x P / E
2.3x 2.3x 2.2x P / BV
Sources Company projections and Company Filings
Note
1. Levered exit multiple shown utilizing year end 2018 balance sheet projections provided by Banff Management
Project Bow River
Based on Management projections provided by Banff
Key assumptions:
– P / E multiple range of 10.0x to 14.0x
– Implied Exit EBITDA multiple range of 5.3x to 7.5x and P / BV range of 1.2x to 1.7x
– Discount rate assumption reflects an estimated range of Banff’s weighted average cost of capital (“WACC”) of 6.88% to 8.19%
Going concern valuation: no transaction costs assumed
Resulting implied per share range of $19.73 to $29.51
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BANFF PRELIMINARY VALUATION
7 Net Asset Value Analysis
Valuation Approach Summary
Methodology Summary
Project-by-project discounted cash flow analysis was used to value Banff’s land and housing assets
Other assets and liabilities are valued at their current book value as of 9/30/14, except where noted (i.e. Banff’s notes payable which include a mark-to-market adjustment)
Net asset value analysis conducts valuation of Banff on its current portfolio, and therefore does not include franchise value and future growth activities
Discounted Cash Flow Framework
Future cash flows were based on management projections
Discount rate methodology:
– Length of project: higher discount rates were used for projects that have a longer-term projections period
– Status of entitlement: unentitled projects were then given an incremental discount rate increase to account for entitlement risk
– Sale type of project: land / lot projects were then assigned a marginal discount rate increase versus home sale projects
– Macro / market observations: further incremental adjustments (increase or decrease to discount rates) were also made based on a subjective assessment of certain economic, macro fundamentals, and / or market factors impacting Banff’s projections
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BANFF PRELIMINARY VALUATION
7 Net Asset Value Analysis (cont’d)
Discount Rate Methodology – Key Buckets
Project Bow River
Bucket Description / Rationale Discount Rate Assumptions / Impact
Base line discount rate determined by Yrs 1-3: 8% length to sell through project – Yrs 4-6: 10% projects with longer time horizon more Yrs 7-9: 12%
1) Length of Project likely to experience a down cycle and discount rates should reflect this • Yrs 10-14: 15% increased risk
Yrs 15+: 18%
Discount Rate Range: 8%—18%
Resulting Discount Rates:
Weighted Average: 10%
Additional risk added to projects for Fully Entitled: +0% entitlement risk – often can add Partially Entitled: +2% additional time and uncertainty of cash Unentitled: +4%
2) Status of Entitlements flows
Discount Rate Range: 8%—22%
Resulting Discount Rates:
Weighted Average: 11%
Underlying economic / macro Subjective range: fundamentals, and / or market factors
– (2%) will impact the outlook assigned to – 0%
3) Macro / Market each project location
Observations – +2%
Discount Rate Range: 6%—22%
All-in Discount Rates:
Weighted Average: 10%
Note
1. Average across all lengths of project, weighted by discounted values per project
Project-by-project all-in discount rates summary (1)
162 fully entitled projects
– 83 Homes: 8%
– 71 Lots: 9%
– 8 Mixed: 9%
3 partially entitled projects
– 3 Lots: 11%
38 in-process / unentitled projects
– 13 Homes: 12%
– 24 Lots: 17%
– 1 Mixed: 17%
Regional adjustment
– Projects in Bay Area, Austin, Southern California, and Toronto are then adjusted lower by 2%
– Phoenix projects adjusted higher by 2%
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7 Net Asset Value Analysis (cont’d)
Macro Observations / Economic Drivers
Historical Employment Growth (1) Population Growth Projections (2)(3)
Y-o-Y % Change 000’s
MSA / Region Oct-14 Oct-13 Oct-12 Oct-11 Oct-10 Average
Region 2013 2038 % Change
Austin 3.4% 4.3% 4.5% 3.0% 3.0% 3.7% Phoenix 4,329 6,898 59% Bay Area 2.8% 3.4% 4.5% 2.2% -0.1% 2.6% Denver 2.6% 3.5% 3.5% 1.7% 0.9% 2.4% Alberta 4,025 6,225 55%
Phoenix 2.6% 2.5% 2.8% 2.0% 0.2% 2.0% Washington D.C. Region 949 1,304 37%
So Cal 2.5% 2.1% 3.6% 0.7% 0.7% 1.9% Denver 649 847 31% Maryland 0.9% 1.4% 1.6% 1.5% 1.1% 1.3% Sacramento 1,451 1,877 29% Hawaii 0.8% 1.4% 2.3% 1.2% 0.7% 1.3% Ontario 13,538 16,552 22% Sacramento 2.4% 2.2% 2.8% 0.2% -1.6% 1.2% Hawaii 1,364 1,658 22% Washington 0.1% 0.5% 1.8% 1.4% 1.3% 1.0%
San Diego 3,171 3,705 17%
MSA / Region Dec-14 Dec-13 Dec-12 Dec-11 Dec-10 Average Austin-Roundrock 1,770 2,050 16%
Edmonton NA 3.4% 3.5% 5.7% -0.5% 3.0%
Anne Arundel County, MD 538 618 15%
Toronto NA 3.5% 1.5% 1.4% 2.6% 2.2% Bay Area 7,346 8,376 14% Calgary NA 3.0% 3.7% 3.2% -1.0% 2.2%
Source BLS, Statistics Canada Data Source Regional Demography Departments, Census Bureau, Statistics Canada Data
Housing Permits Trend (4)
Number of Housing Units Units (000s)
40 37 34
35 28
30 27
23 22
25 21
20 17 15 17 17 17
13 13 15
10 10
8 8 7 7 7 10 4
5 2 1 0 Toronto Phoenix Washington Austin Calgary Denver Edmonton Bay Area Sacramento So Cal Maryland Hawaii
10 Year Average 2014 Annualized
Source US Census Bureau, Statistics Canada Data
Notes
1. BLS data presented on an MSA basis
2. Washington region includes DC, Arlington, and Alexandria; Bay Area includes counties of San Francisco, Alameda, Contra Costa, Marin, Napa, San Mateo, Santa Clara, Solano, and Sonoma
3. Hawaii and Washington area statistics from 2010 to 2035
4. Total building permits for housing units
5. BLS and Statistics Canada data
Project Bow River
Banff’s markets generally display positive economic fundamentals
– Employment growth has picked up since 2010
– US nationwide population projected to grow by 19% between 2013 and 2038
Unemployment Rate (5)
As of October 2014
Region Rate
Denver 3.7% Hawaii 3.9% Austin 4.0% Calgary 4.6% Washington 4.7% Bay Area 5.0% Edmonton 5.4% Maryland 5.6% Phoenix 5.7% So Cal 5.8% Sacramento 6.6% Toronto 7.9%
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BANFF PRELIMINARY VALUATION
7 Net Asset Value Analysis (cont’d)
Home Price Appreciation Projections and Volatility
Regional Housing Price Growth Projections (1)
Ranked by CAGR
Midpoint DCF Banff Region 2015 2016 2017 2018 CAGR (4) Values ($MM)
Toronto (3) 4.1% 3.4% 3.0% NA 3.5% 346 Phoenix 3.4% 3.3% 3.2% 2.2% 3.0% 56 Calgary (2) 3.5% 2.5% NA NA 3.0% 728 Bay Area 5.4% 2.9% 2.2% 1.3% 2.9% 374 Sacramento 3.6% 3.3% 2.7% 1.6% 2.8% 69 Edmonton (2) 2.9% 2.3% NA NA 2.6% 523 So Cal 4.4% 3.2% 1.9% 0.5% 2.5% 953 Other 4.5% 2.5% 1.5% 0.5% 2.2% 68 Washington 3.0% 2.0% 1.0% 0.0% 1.5% 289 Denver 2.0% 2.0% 1.0% 0.0% 1.2% 237 Austin 2.0% 1.0% 0.5% 0.5% 1.0% 175
Weighted Average 3.7% 2.6% 1.8% 0.6% 2.5% 3,817
Historical Monthly Housing Price Change Volatility (5)
Annualized; Ranked by 10Y Change
10-Year High-to-Low % 5-Year High-to-Low % Banff Region 10-Year Volatility 5-Year Volatility Change Change
Phoenix 5.5% 3.7% 69% 40% Sacramento 3.9% 3.4% 66% 34% Calgary 4.8% 1.3% 65% 16% Edmonton 5.1% 0.9% 63% 4% So Cal 3.7% 2.5% 55% 29% Bay Area 3.7% 3.0% 49% 36% Austin 1.4% 1.6% 42% 24% Toronto 1.0% 1.0% 30% 17% Washington 2.6% 1.1% 27% 17% Denver 1.4% 1.6% 24% 24% Other 2.1% 1.0% 20% 13%
Median 3.7% 1.6% 49% 24% High 5.5% 3.7% 69% 40% Low 1.0% 0.9% 20% 4%
Project Bow River
US housing price forecasts show approximately 2.5% growth across Banff’s markets
Highest housing price fluctuation over the last 10 and 5 years was displayed in Phoenix, in both volatility and absolute % change perspective
Notes
1. US data from JBREC
2. Alberta data per Canada Mortgage and Housing Corporation forecasts as of Fall 2014
3. Toronto data per CREA and Central 1 Credit Union projections
4. CAGR over available forecast period (US CAGR out to 2018, Alberta out to 2016, and Toronto to 2017)
5. US historical housing price index data per JBREC; Calgary, Edmonton, and Toronto data per Bloomberg and Statistics Canada New Housing Price Index
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BANFF PRELIMINARY VALUATION
7 Net Asset Value Analysis (cont’d)
Regional Discount Rate Summary
Regional Land and Housing Asset Value Summary $MM
Weighted Average Mid Point Discounted
Region Book Value Discount Rate (2) Values Implied Multiple to BV
So Cal 556 7% 953 1.7x Calgary 466 13% 728 1.6x Edmonton 308 11% 523 1.7x Bay Area 246 7% 374 1.5x Toronto 230 9% 346 1.5x Washington 279 11% 289 1.0x Denver 196 10% 237 1.2x Austin 126 12% 175 1.4x
(1)
Other 75 10% 68 0.9x Sacramento 103 12% 69 0.7x Phoenix 53 12% 56 1.1x
Total 2,638 10% 3,817 1.5x
Notes
1. Other includes Hawaii and Suburban Maryland projects
2. Weighted by discounted present values
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Project Bow River
Project-by-project DCF was utilized to arrive at Land and Housing Assets valuation
Based on management projections provided by Banff
Range in land and housing values derived by adjusting discount rates
Low: 14%
Mid: 10%
High: 6%
NAV analysis does not include franchise value / future growth activities
BANFF PRELIMINARY VALUATION
7 Net Asset Value Analysis (cont’d)
NAV Summary and Comparison
Net Asset Value (1)
$MM unless otherwise noted
Component Low Mid High
Land and Housing Assets 3,341 3,817 4,422
(+) Cash and Cash Equivalents 164 164 164
(+) Net Other Assets (2) 47 47 47
(=) Gross Asset Value 3,552 4,028 4,633
(-) Notes Payable (1,100) (1,100) (1,100)
(-) MTM (3) (62) (62) (62)
(-) Other Financings (258) (258) (258)
(-) Other Interests in Consolidated Subsidiaries (17) (17) (17)
(=) Net Asset Value (pre tax) 2,115 2,590 3,196
( / ) Shares (MM) - Fully Diluted (4) 118 118 118
NAV per Share (pre tax) (5) $17.92 $21.95 $27.08
Source Company projections and filings
Notes
1. USDCAD spot rate of 1.1540 (Bank of Canada Noon rate as of 12/12/2014)
2. Net other assets include receivables, other assets including net deferred tax assets (inclusive of anticipated valuation allowance add-back of
~$25MM), payables and other liabilities, excluding development costs payable
3. Mark to market of unsecured notes estimates per Morgan Stanley’s Capital Markets desk
4. Common shares outstanding, escrowed stock not owned by company, and in-the-money stock options outstanding using Treasury Stock Method
5. NAV analysis does not include frictional costs that may be incurred in liquidation of assets such as transactional costs or tax leakage
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Project Bow River
Discount rates are sensitized in 200 bps increments across all projects
Net cash flows are grown or reduced at a per annum compounded-rate in 5% increments for each case
For the second sensitivity, cash flows were accelerated or delayed in different increments to illustrate the impact of potential absorption slippage
Notes
1. Over projects’ life
2. All cash flows projected beyond 2014 were accelerated or delayed; 4Q14 projected cash flow was kept static in all cases
BANFF PRELIMINARY VALUATION
7 Net Asset Value Analysis (cont’d)
NAV Sensitivity Analysis
Banff Project DCF Sensitivity - Cash Flow Growth
Change in NAV per Share from $21.95 ($)
(1)
Discount Cash Flow Growth (CAGR)
Rate -10% -5% 0% 5% 10%
14% (12.54) (8.76) (4.03) 1.94 9.59
12% (11.44) (7.32) (2.13) 4.48 13.02
10% (10.23) (5.72) 0.00 7.35 16.92
8% (8.88) (3.93) 240 . 10.61 21.42
6% (7.38) (1.91) 5.13 14.35 26.61
Banff Project DCF Sensitivity - Absorption
Change in NAV per Share from $21.95 ($)
(2)
Discount Cash Flow Timing Slippage
Rate -6 Months No Change 6 Months 1 Year 2 Years
14% (2.21) (4.03) (5.70) (7.22) (10.00)
12% (0.44) (2.13) (3.69) (5.12) (7.78)
10% 1.54 0.00 (1.43) (2.75) (5.22)
8% 3.77 2.40 1.13 (0.04) (2.27)
6% 6.28 5.13 4.05 3.06 1.15
Source Company projections
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Appendix A
Supplemental Materials
Morgan Stanley
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Project Bow River
Potential downside exposure in Alberta to oil prices can be isolated by sensitizing Alberta cash flows while holding other regions’ net cash flows constant
– 10% compounded reduction in Alberta cash flows over the projection period leads to a range of changes of ($7.00) -
$0.70 / share NAV (pre-tax)
SUPPLEMENTAL MATERIALS
7 Net Asset Value Analysis (cont’d)
Potential Downside Risk from Oil Price Sensitivity - Illustrative
Consensus Crude Oil Price Forecast (1)
ICE Brent Price, USD / Barrel
Spot 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
Median 82.0 75.3 78.0 83.0 85.0 90.0 Mean 82.9 78.6 80.0 83.6 86.2 89.3 High 108.0 98.0 94.0 97.0 98.0 101.0 Low 68.0 67.5 68.0 70.0 70.0 75.0
Current Forward 63.5 77.9 65.0 67.0 68.4 69.6 71.0
Source Bloomberg
Alberta Cash Flow Impact on Banff NAV
Change in NAV per Share from $21.95 ($)
(2)
Discount Alberta Cash Flow Growth (CAGR)
Rate -20% -10% 0% 10% 20%
14% (8.89) (7.00) (4.03) 0.92 9.69
12% (7.43) (5.39) (2.13) 3.40 13.39
10% (5.81) (3.59) 0.00 6.21 17.65
8% (3.99) (1.57) 2.40 9.42 22.59
6% (1.93) 0.70 5.13 13.10 28.36
Relative Performance vs. SNL US Homebuilders Index since Aug. 1st: LGIH (33%), MTH (20%)
Recent Crude Selloff (3)
Equity Market Reaction Index 120
100
80
60
Jan-14 Apr-14 Aug-14 Dec-14 LGIH MTH WTI (Crude)
Source CapIQ, Bloomberg, SNL
Source Company projections
Notes
1. Bloomberg data as of 12/12/2014
2. CAGR over projects’ life
3. Data as of 12/12/2014
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Project Bow River
Incorporation of Banff’s housing business into their current land development platforms in Austin and Phoenix has the potential to increase future cash flows
– Housing division in Austin will begin delivering homes in 4Q’14, per Banff management
– Housing division in Phoenix will be developed in-house
Shifting the current cash flow projections higher by 21% across Austin and Phoenix results in a per share NAV change of $0.41 at the midpoint
SUPPLEMENTAL MATERIALS
7 Net Asset Value Analysis (cont’d)
Austin and Phoenix Cash Flow Sensitivity - Illustrative
Incremental Cash Flow Calculation
Price per Home Incremental NCF Current Total
Project Name Region Total Lots Converted Lots ($000) ($000) (1) NCF ($000) % Change
Addison LUD Austin 131 43 250 $1,081 $5,289 20% Blanco Vista LUD Austin 284 94 200 $1,874 $10,109 19% Addison LHFD Austin 438 145 250 $3,614 $10,766 34% SE Communities LHFD Austin 1,774 585 300 $17,563 $93,632 19% Easton LHFD Austin 4,475 1,477 300 $44,303 $238,520 19% Blanco Vista LHFD Austin 942 311 200 $6,217 $43,377 14% Paso Robles LHFD Austin 2,800 924 334 $30,862 $130,402 24% San Tan Gross Net Phoenix 687 227 300 $6,801 $21,164 32% Eastmark Investment Phoenix 2,192 723 350 $25,318 $93,576 27% Vista Verde Invesment Phoenix 608 200 300 $6,014 $30,126 20%
Total / Wtd. Avg. 14,331 4,729 304 $143,646 $676,962 21%
Incremental Austin and Phoenix Cash Flow Sensitivity
Change in NAV per Share from $21.95 ($)
Discount Incremental Cash Flow (Parallel Shift)
Rate -10% 0% 10% 21% 50% 14% (4.18) (4.03) (3.88) (3.71) (3.28) 12% (2.30) (2.13) (1.96) (1.77) (1.27) 10% (0.20) 000. 020. 041. 098.
8% 2.18 2.40 2.63 2.87 3.52
6% 4.87 5.13 5.39 5.67 6.42
Source Company filings and projections
Note
1. Assuming home sales net margin (including incremental G&A) of 10%, and 33% of current lot sales projection sold as homes. Home price is multiplied by the number of units sold as homes (33% of total lots projected) and the 10% margin applied, with land assumed to be purchased at market
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Project Bow River
Current issuance rates of Banff’s unsecured notes would indicate a mark-to-market adjustment of $62MM
SUPPLEMENTAL MATERIALS
NAV Back-Up Details
Unsecured Notes MTM
Fair Value Impact of Mark to Maturity Coupon Notional ($MM) Market Yield Market Price ($MM) Market ($MM)
12/15/2020 6500% . 600 4817% . 106.125 637 37
7/1/2022 6.125% 500 5.061% 105.125 526 26
Total 1,100 1,162 62
Note
1. Per MS Capital Markets as of 11/24/2014
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SUPPLEMENTAL MATERIALS
NAV Back-Up Details (cont’d)
Net Other Assets Details
$MM unless otherwise noted
As of Component 9/30/2014
Real estate receivables 132 Development recovery receivables 76 Proceeds and excrow receivables 18 Sundry receivables 18 Refundable deposits 9 Receivables from other interests in consolidated subsidiaries 3 Taxes receivable 0
Receivables 255
Net Deferred Tax Assets & Valuation Allowance 75 Transaction costs 19 Capital assets 15 Non-refundable earnest funds and investigation fees 8 Prepaid expenses 5 Swap contracts 4 Other 2
Other assets 128
Trade payables and other accruals 126 Customer deposits 54 Interest on notes payable 19 Due to related party 16 Current incomes taxes payable 2
Accounts payable (1) 217
Accrued and deferred compensation 31 Consolidated land option contracts 29 Share-based compensation (2) 38 Warranty costs 15 Swap contracts 5 Loans from other interests in consolidated subsidiaries -
Other liabilities 119 Net Other Assets 47
Project Bow River
Notes
1. Excludes development costs payable
2. Based on current Banff share price of $23.01
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Disclaimer
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