Pulte Stock Options Raise Questions For Other Homebuilders

Among the interesting points to think about from homebuilder Pulte Homes Q3’08 Conference Call: One analyst suggested banks are using TARP funds to hold land prices steady and avoid writeoffs. Pulte says it doesn’t matter, no one is buying anyway.

Execs reassure that cash flow is spread out in safe banks, but they don’t give a clear answer on an executive's stock options that are pledged to other loans. That was a big problem for Chesapeake Energy (CHK) shares and others. Should be an interesting question to ask other homebuilder execs on upcoming conference calls. Centex Homes (CTX), MDC Holdings (MDC), Palm Harbor Homes (PHHM) and M.I. Homes (MHO) report this week.

On Pricing:

CEO: Richard Dugas Jr.:

New home pricing fell more aggressively earlier in the downturn, and existing home pricing needed to catch up. That is now happening… [and] will likely continue and as stated is necessary to eventually reach a bottom in the housing market.

Steven C. Petruska, EVP, COO:

A year ago, we were able to generate significant improvement in sales paces where we made some price adjustments. At this point… we’re not seeing much hit for anything that we do… We’ve tried to stay very close to what’s going on in the foreclosure market… The reality is that we’re selling houses today probably below the replacement cost.

On Arizona and Las Vegas, two of the hardest hit U.S. housing markets:

SP: Where we can get price competitive with the foreclosures, we compete fairly well. And that’s in the markets like Phoenix and Las Vegas. We’ve been kind of holding our own as we’ve repositioned our product down [smaller houses].

On market share:

Roger A. Cregg. EVP, CFO:

We’re picking up market share in a lot of markets because a lot of people are pulling out of those markets. It’s not that our business is that robust in that market, but… because other builders are leaving.

On government help:

RD: The $7,500 credit that was passed at the end of July… was resoundingly rejected by buyers.

What kind of government help could work?

RD: A one time tax credit of $20,000 or more for all homes, not just first time buyers or new home buyers. This tax credit should contain no repayment provision and should be in effect for a relatively short period to heighten buyer urgency.

The tax credit should be combined with a temporary mortgage rate buy down of 150 to 250 basis points. This exact combination strategy was employed during the severe housing correction in 1975 and it worked.

On land:

 

James Mccanless – Ftn Midwest Securities Corp.

We’ve heard anecdotal reports that now that the TARP money may be flowing to some of the banks, that banks have decided to start holding [land] prices.

RC: Banks have not written down the assets to the way I think the builders have... There’s unrealistic expectation on the bid and the ask there still… Some hedge funds… are out there buying up some of the land, [but] there’s just not a lot of land being acquired by builders today.

What if a bank with a homebuilder's cash deposits goes under?

RC: We’ve got [our cash] spread out through all [over 25] of our relationship banks… Our money is invested in money market funds and coordinated through our banking relationships… There are daily communications with the banks and also with the various fund managers to make sure that our investments are as safe as possible.

On leveraged executive stock options:

 

Alex Barron – Agency Trading Group

Barron’s [said] your chairman has like 12% of the outstanding shares pledged? …Is there some price threshold at which he might be forced to have to sell those?

RC: Earlier this year we put out the press release and a public filing on what that was, and it’s a forward contract on a stock… It’s hard to tell again the future.