A Wrath to Remember

Florida Trend, May 2008 by Vogel, Mike

Depressing facts are a growth industry for Florida's publicly traded home builders. Miami-based Lennar's 2007 loss all but canceled out its profit from 2005 and 2006. Tousa, the Hollywood company that builds under the brands Engle, Newmark and Trophy, wiped out its shareholder equity when it went into Chapter 11 in January. Bonita Springs-based WCI Communities employed 3,900 at its peak in 2006. By March, it had cut that number to 2,065, and its 2007loss offset its combined annual profits since 2001. WCI might face bankruptcy unless it can resolve a debt issue coming to a head in August. "They're not even close to out of the woods," says Morningstar analyst Eric Landry.

Aside from plenty of individual blunders in structuring borrowing and in off-balance sheet dealings, many builders overcommitted to land to increase growth to satisfy analysts and investors, drive higher multiples for their stock and secure market share, Landry says. But not all did. Denver-based M.D.C. Holdings and Reston, Va.-based NVR are fairly liquid.

Going forward, Landry expects to see fundamental changes in how home builders operate. For one, he expects them to move to eland light" strategy in which they no longer carry large inventories of lots for building. That will drive up their cost of acquiring and but lessen the risk. Landry argues that it will be a "fantastic tradeoff" because it will allow them to turn their assets faster, offsetting whatever higher prices they pay for lots. He foresees an end to the current form of joint ventures to supply land. The new ones won't have builders in the driver's seat and will be led by pension funds and investment banks.

WCI CEO Jerry Starkey says he believes that WCI and other builders have been more focused on limiting land risk, "but this downturn was extremely sudden and deep. I don't think we've seen cycles where 40% or 50% of purchasers would walk away" from their commitments.

Lennar for the first quarter reported revenue fell 62%. It employs 6,200, down from a peak of 14,100. Last year it took steps to improve its liquidity - Lennar has $1.1 billion in cash and chopped the number of home lots in inventory by 200,000 - but still is exposed to $917 million in debt in 180 joint ventures. CEO Stuart Miller told analysts that market conditions "continue to deteriorate." Lennar's average sales price was down 8% to $278,000 (including $48,000 in incentives per home) in the first quarter.

"The wrath that this downturn is going to subject the big builders to is something they're not going to forget for years," Landry says.