At yesterday's closing price of 20.90, SPF ostensibly trades at 0.75 times book value, compared to the 1.46 multiple for the Residential Construction sector. I think it's worth examining whether $20 for SPF stock is a price where you could pick up cheap land, or whether there is still risk of significant impairment to the book value.
We know (from CEO Scarborough's Wachovia presentation this month) that SPF bought $1B worth of land in '06 and, incredibly, plans to buy $500M more in '07.
For the entire year 2006 (which is the first year that the builders have really marked down land and walked away from options), SPF took charges of $370.6 million: $255.8 million for consolidated real estate inventories, $52.6 million related to the write-off of option deposits and preacquisition costs for abandoned projects, $42.5 million JV's, and $19.6 million of goodwill.
Let's look at this balance sheet and decide what a good bid would be as real estate bottomfishers.
- Writeoff the goodwill: -$1.59/sh.
- The JV investments. JV's are between SPF and land developers and other builders. The homebuilders leverage their equity investment by obtaining bank financing at the joint venture level. The JV's are probably levered 5 or 10 to 1. Let's take a look at an SPF JV: "In November 2005, our Las Vegas division entered into a JV... to acquire and develop a 2,675-acre community located in North Las Vegas. This JV plans to develop 15,750 homes... Construction is expected to begin in late 2007 and to continue over a six to eight year period." (10-k) SPF has already taken down 750 of these lots. The JV has 9300 left to sell. SPF carries its interest in the JV at $43.7 million. All told, SPF's JVs have 13,850 lots they need to get rid of. What if the value of the JVs' assets only depreciates 10% further, and they are only levered 5:1? That is a 50% haircut to the $310M balance sheet entry. -$2.41/sh
- Mortgage loans. Although I wouldn't touch them with a 10 foot pole, let's assume they have already been marked to a reasonable market value.
- Land owned. Interestingly, SPF's outright land purchases are most likely to be in the markets that were most overheated. Land sellers in those markets generally were not wiling to offer options or terms. That means that this position is unlevered. Still, land values are a residual of home values and builder profit margins. The residential RE market has worsened substantially since 31-Dec-06. Imagine if they only have to mark this land down 20% (and keep in mind that urban fringe land was going for 10x the late 90's prices). That's -$6.6/sh.
- Homes completed and model homes: perhaps a 10% off sale to get these out the door? -$1.77/sh
- The lot options. These are probably leveraged 10 or 20 to 1. I'm assuming these are essentially worthless (i.e. SPF is just going to walk away from the deposits because they (i) are out-of-the-money and (ii) don't have hundreds of millions in cash needed to exercise them). -$3.16/sh
That totals impairments of $16.35/sh, putting our bid at $11.04 - a 45% discount to yesterday's market value.
Disclosure: Author has no position in SPF