Housing Market Tracker - Homebuilders: Spotlight on Hovnanian

Quotes of the Day

"To conclude that our outside board members abdicated their responsibility to minority shareholders and to conclude that our CEO was overpaid is just a ridiculous, absurd point of view." - Hovnanian CFO Larry Sorsby said, in response to Proxy Governance complaints that CEO Ara K. Hovnanian's fiscal 2007 salary of $1.09 million was unjustified because they included stock options that are mostly worthless given the stock's performance this year. Sorsby said Ara Hovnanian received "zero salary increase and zero bonus." Sorsby said Ara Hovnanian's salary and bonus was $11.9 million in F2005 and $6.9 million in F2006. (APP.com, Mar. 11th)

“Now the question is, who has enough cash to hold on and make it through the end of 2009?” - Vicki Bryan, a home-building industry analyst for the credit rating firm Gimme Credit, who expects some homebuilders and their suppliers will either go out of business or merge in the next few years. (Financial Week, Mar. 10th)

Homebuilder Stocks

Hovnanian Predicts Freedom from Bank Debt by December. "K. Hovnanian Enterprises, Inc. (HOV) expects to be bank-debt free by the end of the year after reporting a net loss of $130.9 million in Q1. "We expect to come through this year with absolutely zero bank debt," Hovnanian Group President Joe Riggs said at the NJBIZ Real Estate Symposium. Riggs said Hovnanian would have "a chunk of cash" at the end of 2008 in addition to no bank debt... Riggs: "The current housing market presents an "arbitrage" opportunity. Home sellers may need to take less on a resale but then can enter the new-home market at a good price." (NJ Biz, Mar. 12th)

Builder Wrote Off 1,345 Lee Homes. "Hovnanian Enterprises wrote off 1,345 houses in Lee County... Lawyers filed a class action lawsuit against Hovnanian... alleging fraud and misrepresentation... in the failure of those [houses] to go through... Hovnanian CFO and EVP J. Larry Sorsby: Buyers purchased the houses with construction loans that paid for the lot - then Hovnanian would take draws from the loan to pay for the house's construction. Buyers were originally supposed to convert the construction loan to a mortgage on completion of the house but many were unwilling or unable to do that... For accounting purposes the result was the same as if the buyers had closed on them." (News Press, Mar. 12th)

Bernanke to the Rescue: Homebuilders Bounce - For Now. "What makes the homebuilder stocks so difficult to buy even at these levels, [is] because as a heavily cyclical industry the builders are ready made value traps as their revenues decline and their earnings turn negative... Wall Street came to believe that these were growth stocks instead of cyclical companies. The result has been an overvaluation that continues to this day, even though these stocks look like 'bargains' now. In fact, according to historical analysis, on average the sector still has a risk of about 50% to the downside as gross revenues fall, margins shrink, and their PEs return to 'normal'." (Steve Christ in Seeking Alpha, Mar. 12th)

Toll Brothers Hopes To Get Northside Piers Back In Fashion. "With sales slowing at Toll Brothers City Living's Northside Piers and a second tower under construction, the developer has devised a way to draw fashion-savvy buyers... out to its waterfront sales office. Toll, known for its sprawling, suburban enclaves, has donated the cavernous parking garage at Northside Piers for the BK-Fashion Week{end}, an annual, three-day fashion show that starts on Friday evening. Northside's raw space has also hosted the buttoned-down Opera Company of Brooklyn, and the developer has arranged to curate shows for Slate Gallery in the lobby... [Toll] will try to position the waterfront project as the haven of hip." (The Real Deal, Mar. 12th)

Hovnanian's Net Loss Widens. "Hovnanian Enterprises Inc.'s fiscal first-quarter net loss widened as the company recorded $94 million in write-downs: $74M in land impairments, a $16M write-off of predevelopment costs and deposits on land it had an option to buy, and $4M from unconsolidated joint ventures… Hovnanian's home-building margin before interest expense dropped to 6.7% from 18%... [On] 306 homes [delivered] in Florida, the gross margin was "only 2%." The average price of homes sold in Q1 fell 15% y/y, while home deliveries rose 5.7%. The number of contracts signed fell 41% to 1,511, while the cancellation rate rose to 38% from 36% a year earlier, [vs.] 40% in Q4'07." (Wall St. Journal, Mar. 11th)

Hovnanian Surges After Reaching New Loan Agreement. "Hovnanian Enterprises rose 16% after reaching an agreement with banks on new lending terms. The accord allows Hovnanian's tangible net worth to fall to lower levels before the company is considered in default, reduces the amount of revolving credit to $900 million, keeps the maturity date at May 2011 and now requires collateral on that debt... CFO Larry Sorsby: The new credit line is secured with first-lien mortgages on Hovnanian-owned properties. About $306M of the $900M is available for Hovnanian to borrow. CEO Ara Hovnanian: The company will generate $100M in [F2008] after negative cash flow in the first three quarters." (Bloomberg, Mar. 11th)

Toll Warns of Risk Tied to Ventures. "SEC filing: Homebuilder Toll Brothers (TOL) warned that it could suffer "significant" losses if its joint-venture partners don't honor their obligations to certain development projects... Toll CFO Joel Rassman: "We have had a number of partners who have had visible financial stress." Toll Brothers and Kimball Hill Homes and several other large builders [are] developing a 2,000-acre community in Las Vegas named Inspirada that was expected to give rise to 13,500 homes... Kimball Hill [recently] warned it was considering restructuring under... bankruptcy-court protection... The Inspirada Website [says] KB Home (KBH) and Beazer Homes USA (BZH) are also... involved in the project." (Wall St. Journal, Mar. 11th)

Harbour Expansion Plans To Be Presented. Florida: "After more than six months of postponements and negotiations with East Manatee residents, developer Lennar Homes (LEN) is finally expected to present its plans for the next phase of Heritage Harbour to the Manatee County Commission today. If approved by the commission, Lennar could add 288 acres... to its massive development near State Road 64 and Interstate 75. The new residential project would include extending the existing Stoneybrook subdivision east to Upper Manatee River Road. [As of] last year, Lennar's plans included a total of 2,450 homes in the second and final phase of Heritage Harbour." (Bradenton Herald, Mar. 11th)

Epperson Developer Seeks Changes. "Metro Development Co. submitted its list of... proposals [that] would reverse conditions county officials imposed on the Epperson Ranch project [that Metro bought from] Lennar last fall... Metro is asking to drop the 2012 deadline [for] the Curley Road realignment... wants the county to kick in funding [or] impact-fee rebates, for giving additional right of way for widening [and improving] Curley Road... And Metro would like to finance the Curley Road realignment and other improvements through a special taxing district that could borrow against the future value of the finished project. The money would be repaid by property owners in the development." (Tampa Bay Online, Mar. 11th)

Debts Mount At Golf Course Development. California: "As of Tuesday, almost $15 million worth of liens and lawsuits have been filed in recent months by construction companies that have worked on the planned 6,000-home golf-course community... Separately, the Irvine-based developer behind the project, SunCal Cos., had a $74M loan foreclosed on last week for a project in Shafter... The 2,070-acre site at the northeast corner of Panama Lane and South Allen Road features a golf course designed by Greg Norman." (Bakersfield Californian, Mar. 11th)

How Building Slump Hurts Nearly Everyone. "Many [homebuilders] tried to make up for revenue share lost to the big banks and mortgage finance firms on the residential front by loading up on high-margin construction loans. FDIC, Foresight Analytics: The delinquency rate for all construction loans rose to $31.3 billion, or 5% of the $628.9B of such loans outstanding, at the end of 2007, a doubling of delinquencies from mid-year to a rate not seen in 14 years... Gimme Credit homebuilder analyst Vicki Bryan: “[Homebuilders] went to banks to get covenants amended to get through 2008,” in hopes the markets would turn, but since that hasn't happened, “there's about $9B in debt being renegotiated right now.” (Financial Week, Mar. 10th)

Developers Stuck With Land They Have No Use For. Florida: "Hundreds of residential parcels in South Florida are for sale. Some have been on the market for more than a year, a few for as long as two years... Lennar, Centex Homes and Standard Pacific have dumped tracts for much less than what they paid during the housing boom, and have written off millions of dollars in deposits... Many smaller, private developers, however, are still “hoping for a miracle,” said Ronnie Issenberg of commercial brokerage Marcus and Millichap’s land division. “ Land marketer Manuel Chamizo III, commercial director for Fortune International said... he turns away about three sellers a week." (Daily Business Review, Mar. 10th)

Developers Put Hawthorne Housing Construction On Hold. California: "The slumping real estate market has brought Hawthorne's housing boom to a standstill, interrupting plans for about 800 new luxury homes that were set to go up for sale this year. Three high-density housing developments have been derailed since last year, when the nationwide subprime lending crisis spurred flocks of foreclosures and a decrease in the value of homes... Some projects in Hawthorne are moving forward. Fusion at South Bay, a project comprising 280 condominiums... is nearly sold out, according to its advertisements... Centex Homes (CTX) [is] the project's developer." (Daily Breeze, Mar. 10th)

D.R. Horton Reports Sales Figures. Las Vegas: "Jeff Ward, D.R. Horton's (DHI) director of sales and marketing: D.R. Horton recorded 101 sales in January and an additional 106 sales in February... A 180% increase over November and December sales. "March and April have traditionally been very strong months for buyers entering the new homes market. Our strategy has been to continue to build homes despite the national media's insistence that the sky is falling. Those people outside our market don't see and feel the tremendous pent-up demand for new homes in the valley. Too many people are moving here daily for our market not to be the very first to heat up again." (Las Vegas Review Journal, Mar. 8th)

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