WCI Communities Inc Q4 2007 Earnings Call Transcript

Mar.17.08 | About: WCI Communities, (WCIM)

WCI Communities Inc (WCI) Q4 2007 Earnings Call March 17, 2008 3:00 PM ET


Jerry L. Starkey – President and Chief Executive Officer

Ernest J. Scheidemann – Interim Chief Financial Officer, VP and Treasurer

Jim Collins – Vice President and Deputy General Counsel


Ivy Zelman – Zelman and Associates

Ross Mardawase – Spellman Investment Management

Sean O’Ryan – Deutsche Bank

Michael Jackson – Jeffries

Brad Sweeney – Lehman Brothers

Alex Behring - Agency Trading Group


Welcome to the WCI Communities Inc Q4 2007 earnings call. (Operator Instructions) I would now like to turn the conference over to Jim Collins, Vice President and Deputy General Counsel. Please go ahead, sir.

Jim Collins

Good afternoon and welcome to the WCI Communities 2007 fourth quarter and Full Year Conference Call. Speaking today will be Jerry Starkey, President and CEO of WCI, and Ernie Scheidemann, Treasurer and CFO. Jerry will start with an overview, followed by Ernie’s financial update. We’ll wrap up the call with questions and answers.

Before we begin I would like to remind everyone that certain information that we will be sharing with you today will represent forward-looking information. This may include statements about the company such as operating results, financial resources, revenue and profitability and cash flow, as well as it’s inability to acquire land and sell its homes and its inability to secure materials and subcontractors. These forward-looking statements involve risks and uncertainities that conceivably affect results and may cause them to differ materially from specifications that we express here today. [inaudible] outlined in today’s news release and our SEC filings. I would encourage you to review those matters and caution you about placing undue reliance on these forward-looking statements. I would also like to point out that the slides to go along with this call can be accessed at www.wcicommunities.com in the Investor Relations section. And if you’ve been aboard for more than a few minutes, please hit the refresh button because we want to make sure you have the most up-to-date set of slides. With that I would like to turn the call over to Jerry Starkey, President and CEO of WCI.

Jerry L. Starkey

Good morning. We appreciate you joining us.

The company’s earnings release just crossed the wire. I apologize for the delay and the fact that you’re just now receiving them but I believe they just crossed the wire.

Our earnings for the fourth quarter and for the full year continue to reflect a very poor operation conditions, low level of command and the height of historic cancellation and default rates in our traditional and tower home building business. Our performance for the period fourth quarter and the full year was also significantly impacted by [inaudible] cash write downs in the reserves in several categories. For the year we had pre-tax impairments and write offs totaling $412.2 million and we will get into more detail about the make-up of those impairment and write off charges. We also had a [inaudible] to defer tax asset valuation reserve in the amount of $150.1 million. So two very significant, non-cash impacts to the quarter and the full year.

Additionally [inaudible due to beep in audio stream] during the fourth quarter that we should stop using percentage of completion accounting on one of our towers in Florida due to the lack of disability and the higher defaults that we’ve experienced in some our towers during 2007. This also resulted in a non-cash charge, or reversal, of $38.4 million of previously reported gross margin for that particular tower.

During the fourth quarter we also amended our revolving and current loan facilities. That has been published previously but it resulted in increased pricing and also provided the company a bit more latitude to operate during this downturn and Ernie may get into the details of that later in the call.

We also completed our audit recently for the full year and the fourth quarter and Ernst & Young’s opinion will be a qualified opinion referencing WCI’s going concern, and primarily that arises out of the fact that we have $125 million dollar convertible sub-notes that have a put date in August of 2008—August 5, 2008. The credit agreement of our [inaudible due to beep in audio stream] have significant liquidity restrictions and requirements that would affect our ability to pay off these converts if, in fact, they are put to us in August. We, therefore, will be entering into discussion with the various convert holders with the objective of either extending [audible beep in audio stream] the put date exchanging those notes, otherwise reaching mutually beneficial resolution, given the fact that our cash position is not likely to allow the payment of those converts when, and if, they are put to us in August. So, we do expect to begin discussions with the convert holders following this call.

Turning to more specific detail about the company’s performance in the fourth quarter of the year, if you’re following along with the slides posted on the company’s website, slide 3, which is the first substantive slide—basically the company had revenue in the fourth quarter of $191.6 million compared to $523.9 million last year, $936.4 million for the full year compared to just over $2 billion for the full year of 2006.

Income—net income was a loss for the fourth quarter of $459.8 million compared to a loss for the full year last year of $64.6 million—excuse me, fourth quarter last year—and for the full year a loss of $578.5 million compared to a full year profit last year of $9 million. So we have continued to see poor operating performance, again, impacted significantly by the write offs, ex-write offs—income for the fourth quarter would have been a loss of $120.6 million and for the full year negative $166.3 million compared to $92.7 million for the [inaudible due to beep in audio stream] loss in 2006.

Validity PS for the quarter, a loss of $10.93 and for the full year a loss of $13.77. I mentioned in the fourth quarter the pre-tax impairment and write offs of $339 million, plus the deferred tax assets valuation reserve of $150.1 million. The breakdown of the $339.2 million was $126.6 million of impairments related to traditional home building. That was relatively—just over $33 million relating to finished inventory of spec homes in traditional home building, $83.3 million of land impairments to communities under development and about $10.1 million of termination costs associated with traditional home options and abandonments, where we elected not to go forward with take downs because the economics of those option contracts no longer made sense in today’s—and expected future—operating environment.

And $21.4 million impairments were related to the tower business and that was $20.5 million in the spec [inaudible] of 196 units at the end of the year. $41.9 million was associated with expected defaults in one of our Florida towers, Oceanside, and $55.1 million related to the tower parcels that we hold for future development. And $3.9 million in, again, abandoned land acquisition or pre-acquisition costs associated with options that we had to acquire Tower sites that we elected to abandon during the quarter [audible beep in audio stream].

We also took a look at our goodwill and during the period we wrote down $59.5 million of goodwill, which is all of the goodwill associated with our homebuilding operations in Florida, the Northeast Mid-Atlantic, as well as our recreational amenities goodwill and the only goodwill remaining on the company’s balance sheet is currently the [audible beep in audio stream] goodwill associated with our real estate services business, which includes our traditional WCI Florida brokerage operation. And we concluded that there is not a impairment in that goodwill.

We also wrote down our amenities land holdings, joint ventures and other assets—a total of about $31.7 million—during the period.

As I mentioned earlier, we had a deferred tax asset valuation reserve for about $150 million and so that was run through the balance sheet at the fourth quarter and Ernie will provide more color on that, as well.

Turning to the next slide and just addressing the orders and backlog for the fourth quarter and the year, the combined home building gross orders for the fourth quarter declined 34.7% compared to the fourth [inaudible due to beep in audio stream] year and the full year was down 34.4 [inaudible due to beep in audio stream] compared to 2006.

In 2007 we didn’t release any towers, which was not expected and something we had indicated during the course of the year, that we wouldn’t be releasing any new Towers for marketing in to this slow operating environment. And during the year and certainly throughout the fourth quarter we continued to see low buyer urgency with fear of the prices that had been lowered in the market place, not only with WCI but among our competitors and on the resale market, as well as the difficulty in financing and the difficulty our purchasers had selling their existing homes before they could move forward with purchasing a new home.

Combined home building net orders declines about 68% for the full year. Traditional home building cancellation rate for the whole year was almost 50% compared to about 40% in 2006 and our default rate in 2007 for our towers averaged 24% for the full year compared to our historic pre-2006 level of about 1% to 2%. So we continue to see, again, negative environment for traditional home building and tower home building throughout 2007.

Traffic—on slide 5 you can see the traffic was negative in most quarters throughout 2007 and for the full year trended negatively, although the fourth quarter in Florida, for the total Florida market, was favorable—about 4% compared to the prior year—and that ranged from our tower business in Florida seeing about a 9% decline in the fourth quarter, Tampa fourth quarter was up about 21%, East Coast of Florida down about 6%--so all in all traffic continued to be negative for the full year.

2008 we have seen a slight improvement year-to-date in traffic. Florida home building traffic is up about 20%, Florida tower traffic is up about 30%, the Northeast and the Mid-Atlantic continue to trend negative for the first couple of months of 2008.

Traditional home building division—if you’re following along on the slides—some of the highlights—or some of the lowlights, if you will—2007 revenues of $712.4 million was down 35.6% in 2007 compared to prior year; we closed 992 homes compared to 1,577 traditional home closings in 2006, so order home closings down about 37% year over year.

2007 gross margin was negative 7.2%. If you adjust for the write offs—pre-write offs—the gross margins were 13.8%, which compared to 22.2% pre-write offs in 2006, so the write offs had a tremendous impact on the margins but so did the increased discounts and incentives, excluding the write downs during 2007 compared to 2006.

fourth quarter revenues of $162.2 million was down 53% compared to the fourth quarter of 2006 and we had 257 closings in the fourth quarter for traditional home building, which was made up of 187 in Florida, 55 in the Northeast, 15 closings in the Mid-Atlantic.

The fourth quarter gross margin, again, including write offs—not very meaningful—negative gross margin was 62.6%, ex-write off 15.5% compared to 19.8%, excluding write offs, in 2007 fourth quarter. And as I mentioned earlier, the total write offs in the fourth quarter for traditional home building business was $126.6 million.

The tower division 2007 revenues, $35.4 million, which was down almost a 100%--down 95%--there were eight towers completed during the year with no towers starting during the year. Gross margin was a loss of $237.4 million compared to $139.8 million of gross margin last year. The adjustments also related to finished towers or towers under construction for the full year was about $82.6 million and for the fourth quarter those adjustments totaled about $12.6 million, which was increased interest, insurance, construction costs and discounts, and others. Again, those four categories totaling about $12.6 million of adjustments to costs during the fourth quarter.

Excluding adjustments for the impairments, the gross margin of $7.6 million for the fourth quarter of 2007 was, again, impacted by the $12.6 million unfavorable cost adjustments. Also the fact that by $38.4 million in reversing the margin associated with the Tower Oceanside that we have elected to discontinue percentage of completion accounting and also $121 million of impairments run through the P&L and the gross margin in the fourth quarter.

We ended the quarter with 391 finished spec units in 17 buildings and we have made some progress in reducing those specs during the first couple months of 2008.

We also have begun closing our One Bal Harbour tower during the fourth quarter of 2007 and that was a large tower and comprised of 185 luxury condominiums and 115 luxury hotel condo suites. That building, you will recall, was 100% sold out prior to closing, and to date we have closed 157 of the 185 luxury condos and we’ve closed—which is about 85%--and we ultimately expect to close probably between 85% and 90% of those condo units. The hotel units, we have closed 48—or 42%--of the 115 units that were sold and on backlog. We have a reserve that would reflect about 1/3 default in the condo/hotel. We’ll continue to work through our backlog over the next 30 to 45 days.

We opened this five-star hotel at the beginning of this month and are now hosting guests—overnight guests and we expect that the opening of that hotel will encourage additional closings in the backlog as well as facilitate sales of any defaulted units. But ultimately we’re probably sixty days away from knowing the full performance of the hotel portion of that Bal Harbour.

We also received the approval from North Bergen in New Jersey to begin closings of our Watermark tower and those closings will occur beginning now through the second quarter and we expect to receive the approval to begin closing Oceanside within the next few days, as well. And those would be our last two high rises under construction, which again we would close principally beginning in the third quarter, mostly in the –excuse me, second quarter and have most of the closings occur in those two towers during the second quarter.

Just to clarify myself there, the Watermark will begin closings before the end of the first quarter and most of the closings will occur in the second quarter. Oceanside should begin closings in the second quarter of 2008.

Slide 8--as we reported throughout the course of 2007, we were aggressively trying to stay ahead of the slide in demand and restructure and reduce the size of our workforce and we have mostly accomplished that objective, although we continue to monitor demand and will be prepared to make additional reductions as appropriate. We combined some divisions in Florida, we combined the Northeast and Mid-Atlantic division. We now have tower and home building operations all under the executive leadership of David Fry, our Chief Operating Officer, and each of our division managers are fully responsible for home building and tower, with no duplication that we had when those businesses were larger and operating as two separate and distinct home building units. Now home building and tower, functionally operating under one group of executives and divisional managers.

At this point we’ve reduced our head count by about 600 compared to the last time that we updated you and now we have about 2,065 employees compared to about 3,900 at our peak. We’ve reduced our payroll to about just over $92.7 million compared to peak of $172.8 million. And if you are following along on the slide, you can see that a large percentage of our workforce--almost 2/3 of our work force—is in our real estate recreational amenities and real estate services and the balance of our work force—about 1/3 of our work force—is in our traditional/tower home building, sales and marketing, and G&A. We’ve reduced our home building and tower home building operations about 72% and they make up now about 12% of our workforce. We’ve reduced our sales and marketing workforce about 51% and our G&A has been reduced about 55%. So, again, we’re aggressively trying to stay ahead of the curve on reducing work force and diligently following that as we project the future and making sure that we are appropriately sized for where the business is headed.

With that I think I’ll turn it over to Ernie to get into more details of the financials.

Ernest J. Scheidemann

Thanks, Jerry. And good afternoon everyone.

I would like to start by making a few comments on the financial statements, which are on pages 9 and 10 of the slide deck. As Jerry mentioned, there are several one-time non-cash items that affected, or impacted, the financial statements in the fourth quarter and the year 2007. At eye-level those are the impairment charges, booked inventory, other assets and investments, the discontinuance of percentage of completion accounting, the Oceanside tower, which is under construction and nearing completion, the impact of a deferred tax asset allowance recorded to reflect the lower probability that the company will have the opportunity to take advantage of certain of the company’s deferred tax assets based on the increased risk of future losses and lower taxable income.

Moving to the income statements, taking a look at the revenue lines, the company closed a total of 422 homes during the quarter—257 of those being traditional homes and 165 of which were tower home units—generating $162 million, including lot sales on the traditional side and a negative $3.9 million of revenue on the tower side. For the full year the company closed a total of 1,657 homes—992 of those were traditional and 665 of which were tower home units. The revenue generated there was $712 million, again including lot sales for the traditional side of the business and $35.4 million for tower product during the year.

Traditional home building experienced a cancellation rate in its new orders in about 109% during the fourth quarter and resulted in a cancel rate of about 49.4% year ended 12/31. Additionally, as in prior quarters—recent quarters—recent pricing pressure and discounting in response to weak market demand resulted in lower margins on homes that closed, particularly on spec sales.

Discounts and incentives in traditional home building product sold during the quarter and the year averaged about 19% for the fourth quarter and 15% for the full year, which compares to about 9% in the year ago quarter and a little over 5% for the year ended 12/31/2006.

Tower home building experienced 35 defaults, which were recorded during the quarter and that resulted in the reversal of about $51.4 million of revenue and about $7 million in margin. The defaults were recorded primarily in our Florencia project and One Bal Harbour project in the fourth quarter, but as we’ve reported, One Bal Harbour, particular has continued closing through the first quarter of 2008, including the resale of some of those defaulted units.

Within cost of sales, the major impact seen is from the impairment charges, which were recorded during the quarter as inventory was evaluated, according to the requirements of FAZ 144 and where appropriate, those impairment charges were recorded on spec inventory, traditional homes, and tower home units, communities under development, and land held for future development, land contracts and options that we chose not to pursue, and amenity assets held for sale.

Traditional home building in the fourth quarter—impairments totaled, as Jerry mentioned, again, $126.6 million, $33.3 million of which was related to about 424 units spec inventory, $83.3 million which was primarily related to about 7 Florida communities under development and one in the Northeast and about $10.1 million in land acquisition termination costs. All these things impact the cost of sales.

Tower had impairments totaling $121.4 million in the fourth quarter, $20.5 million which was related to about 196 units of spec inventory, $55.1 million relating to towers under development and parcels held for future development. As mentioned again earlier, there was about $41 million impairment charge related to the Oceanside project, reflecting the increased default expectations and the projected resulting inventory the company will receive from defaulting purchasers and resale in future periods.

Amenity impairments totaled $19.8 million in the quarter, which is related to golf memberships held for sale at three Florida equity clubs.

I’m just going to drop down to gross margin. Traditional home building gross margin was a negative $101.6 million, or a negative 62%--as Jerry mentioned--for the fourth quarter; a negative $51.3 million for a negative 7.2% for the twelve months ended December 31st.

Excluding the impact of the impairment charges of $126 million for the quarter and $149 million for the full year--$149.6 for the full year—gross margin of traditional homes closed was about 15.5% and 13.8% for the fourth quarter and for the full year, respectively.

In the tower home building gross margin was $164.8 million for the fourth quarter and a negative $237.4 million for the 12 months ended December 31st.

Tower gross margin was negatively affected by impairment charges mentioned earlier in discussion of cost of sales. The $38.4 million related to the discontinuance of the percentage of completion accounting for the Oceanside project, costs adjustments to towers under construction, and increases on the default reserve primarily related to Oceanside and One Bal Harbour hotel units.

Again, as mentioned earlier, the company ceased the application of percentage of completion accounting for the Oceanside tower effective after the third quarter close in 2007. The reversal of the cumulative amount of margin booked for the Oceanside tower project directly reduced the tower gross margin reported by $38.4 million.

In addition, the default reserve for One Bal Harbour and the Watermark was also increased slightly, based on continual review of closing expectations and the impact there for the quarter was about $700,000 in total.

Again, dropping down a little bit to the real estate services line—real estate services gross margin a negative $2.3 million in the fourth quarter and positive $2.4 million for the year was negatively impacted by a $1.1 million charge related to the unoccupied lease space as we continue to consolidate certain operations. And that charge was taken in the fourth quarter.

In the amenities line item, gross margin of a negative $28 million for the fourth quarter and a negative $29.3 million for the year was negatively impacted by the $19.8 million of impairment charges that I mentioned earlier on the three equity golf clubs, resulting from softer demand and pricing of memberships which correlates to the overall weakness in the Florida real estate markets.

Below gross margin, other income and expenses includes approximately $10.7 million of impairment charges to reduce our investment in our joint venture in Ocala, Florida. Other income was also positively impacted by a gain of $2.4 million, related to insurance proceeds in the settlement of claims associated with Hurricane Ivan, which occurred in 2004.

Dropping down a little bit further to G&A—and G&A expenses for the quarter were about $45.6 million. That expense was about $2 million higher than the year ago quarter. Contributing to the increases were about $2.9 million of severance costs recorded during the period and higher real estate tax expense, largely due to less capitalization of these payments as a result of less development and fewer homes under construction.

Sales and marketing expenses were about $3 million lower in the quarter when compared to a year ago.

Looking at the interest expense—net interest expense of $34 million was about $13.5 million higher in the fourth quarter of 2007 when compared to the fourth quarter of 2006. Primarily, again, due to less capitalization driven by less development activities. When less asset value is under construction there is simply less interest to capitalize. Also, in accordance with county pronouncements about $4.1 million of previously capitalized debt interest—issuance cost, I should say—related to the company’s revolving facility internal loan were written off due to the recent amendments that reset certain key terms of those loans, including a reduction of commitments on those facilities.

All of that results in a pre-tax loss of $463.9 million for the quarter and $684.1 million for the full year.

The provision for income taxes line on the fourth quarter of about—which reflects a $3.2 million dollar expense, was recorded to bring full year provision to a benefit of about $81 million. Again, this includes, as mentioned earlier, a $150.1 charge related to a newly established reserve related to the company’s deferred tax assets.

Again, in accordance with the county pronouncements, FAZ 109 in particular, the company must assess the reliability of each tax asset in lieu of future income or loss that could reasonably be expected during a prolonged downturn of the home building industry. Prior to taking this reserve, the company had about $490 million of timing differences that would have resulted in about a $190 million of deferred tax benefit. So this reserve results in a net remaining benefit of about $52 million.

Finally, that brings us to the net loss on P&L of $459.8 million for the quarter and $578.5 million for the full year.

And turn your attention to the balance sheet. We’ll just touch on a couple of line items in the balance sheet. Total assets, down about 24.5% from the start of the year, mainly reflecting a $911 million decline in contracts receivable and compared to September 30 the decline was about $429 million. This reflects the collection of receivables in the quarter, primarily related—or associated—with One Bal Harbour. Approximately $51 million in defaults were recorded during the period--and the reversal of the receivables in the Oceanside project, which was discussed earlier. As a result of the closings toward the end of the quarter, cash of $189 million was $147 million higher than the start of the year and about $182 million than the September 30th balance.

Goodwill decreased during the quarter and from the start of the year as a result of the $59.5 million write off of goodwill, which, as Jerry mentioned, represented the entire amount of goodwill that was previously recorded for the company’s Florida home building operation and for both the Northeast and Mid-Atlantic regional operation acquisitions, which were consummated in 2004 and 2005, respectively.

Liability decreases since the beginning of the year were primarily due to $174 million of reductions in customer deposits as backlogged units closed throughout the quarter and the year.

The accounts payable decreases as a result of slowing operations.

Reductions in debt on the tower construction revolver and other project debt, which combined totaled about $90.3 million of reductions—term loan pay downs of about $37.5 million and the corporate revolver balance at December 31st was $42 million higher than at the beginning of the year, but again, there was $188 million of cash on the balance sheet, most of which was subsequently used to pay down the loan after January 1, 2008. Had all that cash been used to pay down debt at year end, total debt reduction would have been about $274 million.

We’ll move to the cash flow statements. Cash flow from operating and investing activities was about $228 million for the full year, which was toward the low end of the range of the $210 million to $460 million that was provided during our third quarter call and that lower cash flow, when compared to the high end of the range, primarily relates to delays that we had experienced at One Bal Harbour and the Watermark, in closing those tower projects, as well as the delay—or postponement—of a parcel sale that we had anticipated might have closed in the last quarter of the year.

That wraps up my comments on the financials.

The next slide in the deck shows the December 31st inventory of spec units. We are just updating you here with this. The spec units that were finished were 868 units as of December 31st. That breakdown is 477 traditional, most of which, again, are in Florida—about 90% of which are in Florida—and about 391 tower home building units, as of December 31st, which is an increase of 29 from September 30th.

So net compared to the third quarter specs increased by 122 units reflecting the fact that 171 homes that sold during the quarter were offset by defaults and cancellations. There were also units that were completed during the quarter and added to the finished unit counts.

I want to turn your attention to the next line, which is referred to, or titled, “Bank Loan Update”. This is an update to everyone--as we previously announced, as the result of a covenant violation that occurred through the EBITDAS, the fixed charge coverage in the third quarter of 2007, we had completed amendments for both the revolving facility and the term loan whereby the amended provisions for relaxed covenants are effective through mid-2009. As part of that agreement revolver capacity was immediately reduced by $25 million to $675 million, and again reduced on February 28th to $650 million. Other concessions included increased pricing and additional reporting requirements.

These amendments also, as Jerry commented earlier, place certain limitations on our ability to use cash to satisfy the option that the holders of the $125 million 4% convertible notes have to redeem their notes for par in cash in August of this year. Such limitations, as required by these bank amendments, result in a low likelihood the company will have adequate cash on hand in August and it will likely require the put to be addressed in a different manner.

As a result the company again received the going concern opinion—or is expected to file such with the 10-K today—and which, again, resulted in a default under the three senior bank loans because we were required to file a 10-K without any qualifications. However, as of today, March 17th, waivers for this default from all three facilities have been received by the company.

The next two slides—just to move along here so we can get to some Q & A—the next two slides are, I think, slides that we have typically placed into our Appendix. It just reflects for your information an update of the total closed units and remaining to close units of towers completed in 2007 and in 2008. And this is as of December 31st. I think, as Jerry commented earlier, he had updated you on the closings to date for Bal Harbour, which would be an update to what you see here.

On page 14 of your slide deck we have again updated our land position chart and at the bottom what we have done here is we’ve put a year-over-year change just to make it a little bit easier for the reader to obtain a comparison of owned versus optioned and 2007 versus the end of a year ago, 12/31/06. You can see from that little grid at the bottom that total home building owned is down—is reduced by about 18.9% and then the effect of the optioned land reductions of about 47%, brings you to a total on the controlled of 16,019 at the end of 12/31/07, a 21.8% reduction in the [inaudible].

I think with that what we’ll do is we’ll turn it back to the moderator to take questions and answers from our listeners.

Question-and-Answer Session


Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. (Operator Instructions) Ivy Zelman with Zelman and Associates, please go ahead with your question.

Ivy Zelman - Zelman and Associates

Good afternoon guys. It would have been helpful to have the press release a little earlier so maybe—did you have technical difficulties or something, getting the press release out?

Jerry L. Starkey


Ivy Zelman - Zelman and Associates

Okay. In any case, I’m looking at your leverage here today and I kind of want to understand, with the balance sheet as levered as it and expectations for, you know, to be challenging as it is, kind of hoping, as I understand, on a go-forward basis what you’re anticipating for absorption and some of your assumptions on pricing might enable you to get this balance sheet back in order and how you see yourself as a going concern continuing with these kind of debt levels?

Jerry L. Starkey

Sure. I think obviously the debt levels will be dependent upon selling inventory and that’s where most of our focus is for 2008 and we would expect to generate cash flow in the $300 million to $450 million area this year. And, again, that will come principally from closing the towers that we have just recently completed, principally the Watermark—we’re projecting high defaults over on Oceanside--and we’ll continue with the close out of the tower units in One Bal Harbour Hotel.

We additionally would expect to have about 400 to 450 closings out of inventory in traditional home building during the course of this year. Year-to-date our orders have been about 90% spec orders; we’re building and selling very few to-be-built homes. Our pricing is such that there’s very compelling benefit to the consumer to purchase a existing home for a quick closing and so that’s where we expect the emphasis to be and we’re seeing good progress in that area.

On the tower side we’re projecting around 275 to 300 units that are actually backlogged to close for the year with around 200 to 230 or 240 out of inventory to sell during the year. As you can imagine with the very significant write downs that we took on the standing inventory, we have, in fact, adjusted our pricing and so we are seeing good traction on moving inventory in Florida in both traditional home building and tower home building so far this year.

Of course, it seems that the macro-environment continues to get more negative, the credit crunch continues to be more negative, consumer sentiment and retail spending continues to appear more negative, so predicated upon the environment remaining about the same as it is now, maybe trending down slightly, but if the market continues to worsen then obviously there would be more problematic in generating that cash flow.

As I already mentioned, most of the cash flow delays last year were related to the construction delays at Bal Harbour and Watermark and now that those buildings are complete, you know, we feel that at least construction won’t be holding up the closing on those units.

We also would expect some moderate levels of land sales this year. You’ll note that our land sales last year and recreational sales, last year recreational amenity sales last year generated nice margins. To the extent we’re able to move some of those assets at reasonable margins then we would likely move forward with some of those commercial and recreational amenity orders as well.

So, your point that we’re highly leveraged is right on target and at this point the principle objective is to generate cash flow and reduce that debt. It obviously depends on 2008 and then moving toward 2009 in a similar fashion, reducing all non-mandatory expenditures and principally using all cash flow to pay down debt.

Ivy Zelman - Zelman and Associates

Can I ask another question?

Jerry L. Starkey


Ivy Zelman - Zelman and Associates

Okay, great. Realizing—you went through a lot of numbers and I appreciate it, Jerry, with respect to the cash flow from traditional versus from tower and selling back and moving and getting traction. And when you add it up the cash flow generation including the modest level of land sales is a projection , would be what for 2008?

Jerry L. Starkey

In the $300 million to $450 million range.

Ivy Zelman - Zelman and Associates

And contingent on getting that, how much of that would be from moderate land sales? Is it 10% or is it 20%, if you’re looking at the total cash flow generation?

Ernest J. Scheidemann

It’s in the 10% to 20% area. You’re right.

Ivy Zelman - Zelman and Associates

And I think that when you look at your debt to capital today and realizing you need to also fund your ongoing operations and be able to use your working capital lines, if you have an absorption pace that you’re using per project in traditional, you know, what level are you using on a per project basis for those traditional closings on the 400 to 450? Is it two a month that you’re making that assumption to get to that cash flow?

Jerry L. Starkey

No, it’s based upon detail expectations for each community and each market and you can imagine that there’s a variety of absorption assumptions, so at this point we’re not going to get into any more detail about the 2008 projections. You know, it varies by subdivision, by market, but it principally would be focused on areas where we have standing inventory. So, that’s . . .

Ivy Zelman - Zelman and Associates

Got it. Last question. Did you provide your Intangible Net Worth Covenant?

Jerry L. Starkey

The Tangible Net Worth Covenant is in the bank agreement that was filed recently, the amendment, right? So you can go to that prior filing and track those details.

Ivy Zelman - Zelman and Associates

You can’t just tell us and make our life a little easier, Jerry?

Jerry L. Starkey

I thought you wanted to know the calculation of the covenant.

Ivy Zelman - Zelman and Associates

No, I would like to know the absolute amount of the covenant.

Ernest J. Scheidemann

Ivy, I don’t have that with me in the room here but I can . . .

Ivy Zelman - Zelman and Associates

Roughly speaking?

Ernest J. Scheidemann

I don’t have it in the room with me. It’s—you know, from the most recent amendment details, it’s not an event of default in terms of the minimum tangible net worth, you know, sort of in any case. And there’s add backs for the non-cash impairment and deferred tax asset reserves.

Ivy Zelman - Zelman and Associates

Right. Thank you very much.


Your next question comes from the line of Ross Marawase of Spelman Investment Management.

Ross Mardawase – Spellman Investment Management

Can you give us an idea of how you can restructure this portable convert without the holders reducing part of their claim and might the equity holders not be better off by stopping interest payments on the debt and the liquidation and waiting out the current environment?

Jerry L. Starkey

I appreciate your question but we’re not going to get into any strategic discussions. So, thank you very much.

You know, strategic discussions as it relates to dealing with our convert holders.


Your next question comes from the line Sean O’Ryan with Deutsche Bank.

Sean O’Ryan – Deutsche Bank

I just wanted to see if you guys could break down your inventory balances a little bit, in a little more detail, as you guys have on previous . . . I know it might be in the Q but I just wanted to try and get that . . . or in the K.

Ernest J. Scheidemann

Okay. Just give us a moment.

[sound of paper rustling]

Okay, yeah, this is in the K. In terms of 12/31 balances, land and land improvements, totals about $834.2 million, investments and amenities is about $123.8 million, and we have work in progress in towers of about $322.6 million, and in traditional about $153.4 million. Completed inventories total about $180 million for towers and for traditional homes about $234 million.

[sound of intercom in distance]

Sean O’Ryan – Deutsche Bank

Okay, could you guys update us on—and I don’t know if you guys said it earlier and I might have missed it—the current closings at One Bal Harbour and Watermark—through today? I mean, have you guys started closing Watermark or where does that sit?

Jerry L. Starkey

Watermark received approval to start closings just last week and we’ll expect closings to begin this week and on One Bal Harbour we’ve closed 157 out of the 185 condos and we’ve closed 48 out of the 115 condo/hotels. I did address that earlier. We opened the hotel earlier this month and we would expect that the hotel opening would also stimulate some additional closings in the hotel and also stimulate orders for any of the defaults that we might have there. We’ve closed on the hotel side—excuse me, on the condo side, 85% of the units and we would expect to approach 90% closings on the condos as we still have units in backlog that we expect to close in the very near future.

On the hotel/condo side, we indicated earlier in the call that we expect about 2/3 of those 115 units to actually close and we’re projecting about 1/3 to be defaulted. Perhaps that will vary but we should know and a good idea of that within the next 45 to 60 days on the condo/hotel side.

Sean O’Ryan – Deutsche Bank

And one more question. Can you guys provide any clarity on the tower facility amendment? Were you guys . . .

Jerry L. Starkey

Yeah, that amendment will be filed, if not today, tomorrow, but basically it was a waiver for the going concern. There was no increase to the pricing, there was no fees associated with the amendment and there were some inner-creditor details that relate to the revolver and the term loan that will also be reflected in the amendment. So, rather than try to summarize it, it will be filed shortly and you can reference that online and se the details.

Sean O’Ryan – Deutsche Bank

But there was nothing specific for the tower facility itself? Other than just waiving the going concern?

Jerry L. Starkey

Waiving that and also addressing some of the future draw provisions as we’re paying this loan down between now and the end of the year and we have some borrowing base reductions tied in to the existing credit facility as we have finished inventory that becomes one-year old and we are clarifying some of the draw provisions between now and the time that items roll out of the [inaudible], so again, pretty non-discreet and you’ll be able to see the details in the amendment.

Sean O’Ryan – Deutsch Bank

Okay. Thank you.


Your next question comes from the line of Michael Jackson with Jefferies.

Michael, your line is now open.

Michael Jackson – Jefferies

Yeah, thanks. Can you hear me?

Jerry L. Starkey


Michael Jackson – Jefferies

As you’re looking to move some of your existing inventory in this market, can you comment on to what extent, if any, you’re seeing competition from stressed earlier buyers, or even defaulted earlier buyers who now may be in financial institutions’ hands?

Jerry L. Starkey

I think that generally speaking we’re priced below the resale market in most of our markets, with our standing inventory. And we don’t see the direct competition with units that were previously sold. So, I think in most cases where we’ve repriced our impairment, given our impairments, we’re priced favorably to resell listings. Obviously, there’s probably some exceptions, but by and large we don’t see significant issues with that. And we haven’t made large institutional sales of finished inventory.

Michael Jackson – Jefferies

Very good. Thank you.


Your next question comes from the line of Brad Sweeney with Lehman Brothers.

Brad Sweeney – Lehman Brothers

Yes, hello. I wanted to ask a quick question on One Bal Harbour. You gave us disclosure around the total units closed to date. Wondering if you could tell us what percentage of those closings came in the fourth quarter and what came in the first quarter. I’m trying to get at this question of how much cash from One Bal Harbour is reflected on the balance sheet at the close of the fourth quarter.

Jerry L. Starkey

Okay. There are 128 units closed by the end of the year in Bal Harbour Condo and 10 condo/hotels, so most of the condo/hotel cash will flow this year and 128 out of 185 closed in the condos last year and so we would expect—we’re at 157 and as I mentioned, we may ultimately end up close to 90% closed which would mean we would have somewhere between 18 and 20 units defaulted available for resale.

Brad Sweeney – Lehman Brothers

And in terms of cash on the balance sheet, are some of those closings that were done in the fourth quarter, are those reflected in an accounts receivable line? It seems that some of those closings were very late in the month of December so I was just wondering if that cash is actually on the balance sheet that we have in front of us.

Jerry L. Starkey

The cash on the balance sheet reflects just cash conservation mode that the company was in at the end of the year.

Ernest J. Scheidemann

It ended up being paid down the first week or two of January. We don’t typically have that much cash on hand.

Brad Sweeney – Lehman Brothers

Okay, but in general some of the closings from One Bal Harbour, the cash didn’t come in until early January?

Ernest J. Scheidemann

No, that’s not true. We’re just saying it hadn’t necessarily been paid down to the loan until early January.

Brad Sweeney – Lehman Brothers

Okay. Great. That answers my question. Thanks.

Jerry L. Starkey

Thank you.


Your final question comes from the line of Alex Behring with Agency Trading Group.

Alex Behring - Agency Trading Group

Hey guys. I guess--I don't know if you mentioned it, maybe I missed it, but what is the cash, I guess, at the current moment? Not at December 31st. Just after you, I guess, paid back some of the principle from what you collected at One Bal Harbour?

Ernest J. Scheidemann

Well, we didn't mention it. We don't typically update that kind of disclosure mid-quarter.

Alex Behring - Agency Trading Group

Okay. My other question was, why is it that the debt went up, I guess, sequentially this quarter, relative to last?

Jerry L. Starkey

Well, because we had a bunch of cash on the balance sheet so that cash was used to pay down debt early in the first quarter.

Alex Behring - Agency Trading Group

Right, but I'm saying that your line of credit looks like it went up about $450 million to $546 million. So what was the reason it went up?

Ernest J. Scheidemann

Again, there is cash on the balance sheet at the end of the year. And it was paid down, you know, early January.

Alex Behring - Agency Trading Group


Ernest J. Scheidemann

You really have to factor that cash in so you get to the net debt position, Alex. If you can do that comparison it's more of an element.

Alex Behring - Agency Trading Group

Okay. I guess my last question is, as it pertains to--I mean, obviously the market is pretty touch, so I'm just kind of wondering, you know, given that you guys have negative orders at the moment, is the thought process to lower the prices until you find out where the market is, kind of like what Lanair is doing or what are you guys thinking in those terms?

Jerry L. Starkey

Yes, on our standing inventory we've lowered prices to the point that we think will move significant amounts of our inventory this year and so that's the strategic direction we're headed, and I did mention that, perhaps before you got on the call, earlier.

Alex Behring - Agency Trading Group

Okay. Thanks a lot.


We have reached our allotted time for questions. I will now turn the call back over to Jerry Starkey for any closing remarks.

Jerry L. Starkey

Thank you for joining in on the call and we look forward to updating you at points in the future. Thank you very much. Good day.


Ladies and gentlemen, this concludes the WCI Communities fourth quarter and year end 2007 earnings conference call. You may now disconnect.

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