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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 26, 2007 12:01 AM ET
UP AGAINST A BRICK WALL Inventory of unsold homes seen limiting new construction.
His offer of $22 a share to shareholders of home builder WCI Communities in April was ultimately thwarted by the board’s refusal to rescind a poison pill. With the stock now trading below $4.50, the busted deal saved Mr. Icahn—and cost WCI shareholders, who tendered 10.8 million shares—about $190 million. Now a board member after a lengthy proxy battle, Mr. Icahn and five other WCI directors recently agreed to forgo being paid for their services to help the company stave off bankruptcy. WCI, which does most of its building in the formerly torrid and now ice-cold Florida condo market, isn’t the only home builder hanging on for dear life. On Nov. 9, Levitt & Sons, the now-Florida-based builder of the archetypal Levittown suburb on New York’s Long Island, filed for bankruptcy protection. Neumann Homes, a large privately held home builder in the Midwest, did the same last month. Analysts expect another Florida builder, Tousa, to follow. The entire home-building industry is cutting staff and abandoning projects as would-be buyers cancel contracts and inventories of unsold homes swell. The latest figures from the U.S. Census Bureau show that inventories of single-family homes stood at more than eight months’ worth of sales as of September, double what they were in 2004. The numbers for existing homes on the market, which impact demand for new homes, are even worse, rising to more than 10 months’ inventory from four months’ three years ago, based on current sales volume. “We haven’t seen these levels of inventory since the 1970s and the oil embargo,” said Jeffrey Laverty, a senior vice president with Connecticut-based investment boutique J. Giordano Securities. “It took four years to work off that excess.” Mr. Laverty said he expects it may take that long to work down the current inventory bulge. As many of the companies gear up to start building in the spring, they have some tough decisions to make. “The companies don’t make money sitting still as a land bank,” he explained. “They have to decide whether they’ll lose more money by building or by doing nothing.” But they will lose money either way. After the headlong rush to build that was fueled by the easy credit available in the late, great mortgage market, many home builders are belatedly reining in their businesses, choosing not to exercise options on land for development and putting existing projects on hold. Dallas-based Centex, for example, which took impairment charges of $847 million on its housing inventory in the September quarter, also walked away from $38 million in deposits on land it planned to acquire for development. “They don’t need more land, they need more customers,” said Standard & Poor’s housing analyst Kenneth Leon. While all the large public builders like Centex have been booking huge write-downs of their inventories and have seen their share prices fall by more than 50% this year, most look prepared to weather the storm for the time being. The notable exception is Beazer Homes USA. Earlier this year, federal prosecutors in North Carolina subpoenaed documents relating to the Atlanta-based home builder’s mortgage finance business after default rates on Beazer loans in the state began rising rapidly. An internal audit committee investigation released by the company last month found that employees of the mortgage division had indeed violated Federal Housing Administration (FHA) lending rules by assisting home buyers with required down payments on FHA-insured loans. Those loans are more readily securitized and sold to investors. The company could be on the hook for losses on the securities backed by the loans, as well as penalties for the violations. The investigation also turned up accounting problems at Beazer involving improperly booked reserves and liability accruals going back as far as 1999 that were released into income last year. The company also improperly executed sale-leaseback agreements on model homes, which Beazer sold to finance companies and leased back. The transactions should have been accounted for as a financing, not a sale, according to the audit committee report. The company said it expected second-quarter income to be reduced by $20 million with corresponding increases in future periods. It will have to restate several years of financials, and Beazer bondholders have already given the company a default notice because of delayed Securities and Exchange Commission filings. Both federal prosecutors and the SEC are investigating Beazer, while the Federal Bureau of Investigations is looking at mortgage fraud more broadly. The question is whether other large builders, virtually all of which have finance arms like Beazer’s, may face similar issues with regulators. The sale-leaseback agreements are just one of a number of accounting issues that financial services industry consultant Bert Ely said may yet trip up other home builders. “It’s in downturns like this when the accounting problems come to the surface,” said Mr. Ely. “I expect that Beazer Homes isn’t alone in this.” That said, even opportunistic investors like Carl Icahn may want to wait until the dust clears before investing further in the industry. FW
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