WCI Communities, Inc. Q1 2008 Earnings Call Transcript

| About: WCI Communities, (WCIM)

WCI Communities, Inc. (WCI)

Q1 2008 Earnings Call

May 7, 2008 1:00 pm ET


Jim Collins – Vice President, Deputy General Counsel

Jerry Starkey – President, Chief Executive Officer

Ernest Scheidemann – Vice President, Chief Financial Officer


Robert Manowitz – RBS

Larry Taylor – Credit Suisse

Eric [Arion] – Deutsche Bank

Analyst for Ivy Zelman – Zelman & Associates

Alex Barron – Agency Trading Group

Sean [Falow] – Deutsche Bank


Good afternoon ladies and gentlemen and welcome to the WCI first quarter earnings conference 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 morning and welcome to the WCI Communities first quarter 2008 conference call. Speaking today will be Jerry Starkey, President and CEO of WCI and Ernest Scheidemann, Vice President and Chief Financial Officer. Jerry will start with an overview, followed by Ernest with financials. We’ll wrap up the call with a question and answer session.

Before we begin I would like to remind everyone that certain information we will be sharing with you today will represent forward-looking information. This may include statements about the company’s anticipated operating results, financial resources, revenue, profitability and cash flow, as well as its ability to acquire land, sell and deliver homes and its ability to secure materials and subcontractors. These forward-looking statements involve risks and uncertainties that could significantly affect results and may cause them to differ materially from expectations that we express here today.

Those risks are outlined in today’s news release and other SEC filings. I encourage you to review these matters and caution you about placing undue reliance on these forward-looking statements. I would also like to point out that the slides that go along with this call can be accessed at our website, wcicommunities.com in the investor relations section. With that I’d like to turn the call over to Jerry Starkey, President and CEO of WCI.

Jerry Starkey

Good day I appreciate you joining in on the call. Another very tough and disappointing quarter for WCI in what continues to be a very tough market. A loss of $2.00 a share or $84.1 million on revenue of $137.1 million. Cash flow, favorable, positive cash flow of $67.4 million for the quarter.

As I mentioned it continues to be a tough market, really no signs of firming demand. Some smart and courageous buyers are snapping up bargains, particularly in Florida, but most shoppers that we see in our sales centers are concerned about the direction of prices and more and more the direction of the overall economy.

We did see a seasonal lift in traffic in Florida, traditional homebuilding traffic was up about 21% which enabled us to reduce our spec inventory by about 25% from 610 units at the end of the year to about 460 units at the end of the quarter. It did reflect lower pricing, though, generally about 20% discounts compared to about 12% discounts for the period last year.

Notwithstanding this seasonal lift in traffic, our gross and net orders were both below our performance last year, gross orders down about 6% in Florida and net orders down about 21% as cancellations continue to exceed traditional historical levels.

Traffic for our tower business in Florida was also up about 31% compared to last year and that traffic coupled with lower pricing, in many cases where we’ve had defaulted units, pricing that’s below our original cost, did produce 97 new tower orders during the quarter, gross, compared to 11 gross orders last year. But those 97 orders were offset by 56 defaults for a net of 41 compared to negative net orders of 6 last year.

So some seasonal lift in Florida but overall order performance below last year’s first quarter and really no signs that we’ve reached a firm demand level or any change in consumer psychology, buyers still very, very concerned about the direction of pricing. Of course inventories overall continued to grow on the resell market, prices continued to fall there as well.

In the Northeast and Mid-Atlantic, we also saw a decline in traffic, a 17% decline in Northeast and a 68% decline in the Mid-Atlantic. Gross and net orders were also extremely low in both of those regions. In the Mid-Atlantic we have 26 spec homes in nine communities and we have come to the conclusion and taken action during the recent weeks to essentially mothball all of our communities except two in the Northeast.

That would be one community in Loudoun County and one community in Fairfax County where we have seen order activity that is moving specs but also taking new orders at reasonable margins in today’s market, but that will result or has resulted in us reducing our workforce down to just a handful of folks, single digits in the Mid-Atlantic region.

At this time we believe that our Northeast region is sustainable and we have three communities in the Northeast, principally a retirement community out on Long Island, a large [plank] community that’s just getting started in Danbury, Connecticut and a community for families in Duchess County and we believe that the activity will be sustainable and that we’ll continue our operations there.

We also have a mid-rise site in Bronxville, New York that has seen a lot of premarketing activity and we may well test the market in the near future [inaudible] orders in that mid-rise in Bronxville, a good community location to Manhattan.

Let me turn to the slides, if you’re following, on the slide, slide 3, first substantive slide, a summary of the first quarter. I’ve mentioned the loss of $2.00 a share at $84.1 million on $137.1 of revenue. Drill down a little bit, total homebuilding revenue was down $66.7, down two-thirds to $96 million compares to last year that was total homebuilding revenue, traditional homebuilding revenue was down almost 57%. We closed 170 homes in the first quarter compared to 306 in the first quarter last year.

We sold 210 spec homes during the quarter and managed to reduce our net specs from 610 down to 460. The revenue for towers was down 95.6%, the revenue of $50.5 million from 56 spec units sold out of inventory closed during the quarter was offset by the reversal of $55.4 million from 54 defaulted units where previously under percent of completion accounting, we had to reverse our revenue.

We sold 100 spec tower units during the quarter, 97 of those were Florida as I mentioned earlier with three in the Northeast. And we started closing on the watermark in the Northeast during the first quarter with about nine closings and have closed 33 of those units to date.

As I mentioned, net loss of $84.1 million, margins in both traditional and tower homebuilding declined. The tower margins included $14 million of margin reversal from the defaulted units I just mentioned and the traditional homebuilding included about $7 million, $6.9 million of inventory impairments, principally from units that were in backlog and cancelled during the quarter and they were marked down to like [inaudible] when they were returned to inventory.

We also had a $9.5 million non-cash charge for a mark to market on an interest rate swap instrument and we also had no tax benefit for the quarter as we posted a reserve that Ernie will talk about a bit later. Quarters overall particularly in Florida were pretty much in line with our expectations, although in the Northeast and Mid-Atlantic they did fall below our expectations.

Cash flow, I mentioned, $67.4 million and there’s a recap of the closings, 170 traditional home closings, 139 tower closings generating $162 million of proceeds on the towers and just over $88 million for proceeds from homebuilding. No land purchases during the quarter and if you’re following along with the charts you can see that land spending, development spending dramatically, $11 million spent in the first quarter of this year compared to $38 million last year but from a historic perspective, significantly down on all accounts.

Little details on traffic I think I’ve pretty well hit these highlights, the next slide overall Florida traffic was up, for the quarter 23% and you can see the breakdown, all of our regions in Florida did experience a lift in traffic and the Mid-Atlantic and Northeast down as I mentioned 68% and 17%.

Little more detail on the orders and backlog on the next slide. Total gross orders for the quarter 335 and gross orders for the first quarter of last year was 316, although that was offset by cancellations and defaults to create net orders in the quarter of 183 compared to 237 last year.

The gross orders were up 6% but as I mentioned net orders down 22.8%. The average first quarter new order price gross declined to $611,000 which was about a 17.4% decline. Both mix and discounts impacted those average prices on the traditional homebuilding side, the gross new order value was $501,000 which was down 28.3% from the same period last year. And the cancellations had a [inaudible] average price, so the units cancelled just about $100,000 average higher than the new orders brought in on a gross basis.

Tower gross orders, $871,000 was down 51% from last year which was about $1.2 million average. And as I mentioned, the net traditional homebuilding orders declined about 41% and the cancellation rate during the period was 39%. Tower homebuilding defaults continues to remain higher than the historic level and we’ve reserved for about 23.7% so almost a quarter of the units are in backlog, have been reserved with low visibility on closings and the direction of the economy and consumer sentiment.

We did accomplish as we mentioned a higher percentage of the orders were from spec sales and at least in Florida on the to be built orders, very small percentage, less than 10% of our orders were orders for new built homes and I think that again reflects the fact that most folks are out looking for the big bargains and the deep discounts and less likely to pay up for the price to sustain the to be built business going forward.

As we look forward we don’t have any signs of that change of consumer sentiment but obviously at some point as the builders deplete their standing inventory we would expect that the buyers would begin to pay greater prices for to be builts once builder prices and builder spec inventories are lowered.

Speak a little bit about the traditional homebuilding business. Revenues of $73.9 million in Florida compared to $137.3 last year and gross margin before impairments of about 9% which is about half of the margins last year of 18.2% in the first quarter. The Northeast and Mid-Atlantic you can see revenues of $11.8 and $7 million respectively and that created a total homebuilding revenue for the period of $92.7 million.

I mentioned that we had $6.9 of impairments to inventory, principally spec homes that were cancelled or homes that were cancelled during the first quarter and returned to inventory and 82% of the closings were from spec sales and the sales on those specs was just below 5% on those spec homes.

Tower division first quarter revenues fell to $3.3 million and there was a lot of moving parts associated with percent of completion revenues there’s a box on the slide number 7, revenue from finished units was $50.5 million and $4.4 million from percent of completion revenue, we retain deposits of about $3.8 million and so that would bring the revenue before recording the impact of the defaults of $58.7 million and then the defaults in the tower business reversed revenue $55.4 million bringing down the total revenue reported of $3.3 million.

The gross margin on the specs that 56 specs that closed during the quarter was 19%, those are accounted for in the same manner as the traditional homebuilding business. Contract closings generating the revenue and then recognizing the margin on those sales. We also had negative impacts from two hotel operations and our condo hotels during the quarter, $3.1 million of hotel deficits principally associated with the startup of our one Bal Harbour hotel down in Miami in Bal Harbour.

That building, just to reflect your member is made up of 185 condominium units that averaged about $2 million and we’ve closed 173 of those 185 units and it’s made up of 115 hotel units and we’ve closed to date about 63 of those 115 units that were originally sold.

We had a $14 million impact to gross margin from the 52 defaults that I mentioned just a moment ago and then $10.9 million of adjustments lowered margins from a $2.3 million increase to the tower default reserve, $7.2 million of cost increases on completed towers and under construction, principally that would be about $6 million of cost associated with extended construction times and cost at our Watermark tower in North Bergin as well as some trailing cost at Bal Harbour and some of our other towers and then about $1.4 million related to additional interest and insurance and other estimates for discounts etc. on inventory going forward.

Real estate services, land sales and other items, real estate services first quarter revenues were down almost one-third to $17.3 million. Our transaction level declined about 16% and the value declined about 20%, so obviously it’s average prices out in the resale market dropped that has an impact on our Prudential Realty business.

The business generated just about breakeven, gross margin of 1.3% compared to 8.2% last year and that’s principally due to lower volume on fixed cost of even though we’ve had a significant amount of consolidation in our Prudential and our real estate services business, we haven’t fully recognized the benefit of some of the additional consolidation that occurred during the quarter and at the end of last year.

No land sales during the first quarter and SG&A declined about $7.4 million to $39.5 million and it principally is a reduction of salary costs and a reduction in marketing cost. Our sales and marketing costs were reduced by about 31% compared to last year.

We still have incurred severance costs associated with some of our more recent layoffs and trailing benefit cost associated with some of those recent layoffs and would expect our run rate on SG&A to drop slightly as we move through the year from this $39.5 million.

As I mentioned earlier, the interest rate swap mark to market $9.5 million charge and in the first quarter of last year we did have a recovery of $1.5 million associated with hurricanes of the prior two years. Before Ernie gets into some of the more specifics of the financial statements, I just would mention that liquidity continues to be tight and will continue to be tight in the future absent changes in the markets which we certainly aren’t expecting in the near term.

We do have the converts coming due August 5 and as I mentioned on the last quarterly call, at this point we don’t have visibility into the liquidity that would enable us to satisfy those $125 million of converts for cash and so we’ll be looking for other alternatives in dealing with those converts and we expect to engage in discussion with the convert holders in the near future and have retain a financial advisor to assist us with that restructuring of the converts that again have a put date in August of this year. Ernie.

Ernest Scheidemann

Good afternoon everyone, let me start by making a few comments on the financials which are on pages 8 and 9 of the slide deck and hopefully while I’ll probably repeat a few things Jerry said, give you some additional clarification, some additional color. Starting with the income statement on page 9, the gross revenue for the quarter was $137 million and that compares to $338.2 million in the first quarter of 07.

Within that we closed a total of 309 homes during the quarter compared to 560 in the same quarter last year. And this year’s numbers, 170 of those were traditional and 139 were tower home units. Within the next line, the traditional homebuilding revenue, $92.7 million in the quarter which includes $1.6 million of lot sales and that compares to the $214.2 million in the first quarter of last year.

Of the 170 traditional homes closed during the quarter, 82% were in Florida and of the year over year decrease of $123 million, approximately 45% was due to volume, approximately 45% to mix and another 10% to pricing.

And generally speaking backlog margins were in the 12-13% range on traditional and on the spec homes sold were a bit lower, just under 5%. As we’ve mentioned earlier, discounts and incentives in traditional homebuilding averaged about 20% for the quarter. That compared to about 18-19% in the fourth quarter of last year at about 12% a year ago.

Just to reiterate a little bit about traditional homebuilding orders, in traditional homes we had a cancellation rate of 39.1% in the quarter and that compares to a cancel rate of about 109% in the fourth quarter of last year and about 19.7% in the year ago quarter, so the first quarter of 07.

Cancellation rates in Florida this quarter were slightly better than the overall average at just under 35%. Margins on the to be built orders that we took in the quarter were in line with long term historical trends you know in the 20% range plus or minus, but such orders were only about 11% of the total orders taken in the quarter.

And in contrast margins on spec orders remain in the mid to high single digits. For the quarter spec orders accounted for about 89% of the traditional orders, traditional homeowners. Moving down to tower home build revenue, in the quarter $3.3 million in total and that compared to $74.0 million in the first quarter of 2007.

We closed 139 tower unit contracts in the quarter, 83 of those were backlog, 56 from units from orders against our spec inventory that closed in the quarter. And in total that 139 closings compared to 254 in the first quarter of 2007.

The revenue from the percent complete backlog was about $4.4 in the quarter, revenue from spec units closing of those contracts was about $50.4 million and then offsetting these amounts as Jerry commented was about $55.4 million of revenue reversed on about 52 units that defaulted in the quarter.

And additionally $3.8 million of deposits were retained on those defaulted units in the quarter. Moving down to real estate services revenue, $17.3 million in the first quarter, that compared to $8.3 million or 32% lower than a year ago. Again as mentioned 15.8% reduction in transaction volumes and about 20% reduction in average price per transaction and is sort of reflective of the continuing decline or the softening in the pricing and the markets here in Florida.

I’m going to move down to the cost of sales sections or say cost of sales numbers that are inherent in the P&L. The cost of sales of about $138.2 million in the quarter and that compared to about $298.5 in the first quarter of 2007. Again the notable impacts we’ve seen here from traditional homebuilding impairment charges taken during the quarter, tower unit reversals and from defaults and tower unit cost adjustments that were booked.

Just to jump into a little more detail, on the traditional side, again, as required by FAS 144 recorded about $6.9 million of impairment charges and these impairments relate to homes that were previously in backlog subject to cancelled orders or cancelled contracts and or they were homes that were in backlog but had a negative margin.

And as those homes that subject to cancel contracts are returned to inventory, we had to reduce the carrying value of those homes to reflect the current carrying value of like units that were in our inventory at the end of the quarter.

Within tower, cost of sales was negatively impacted by about $8.6 of cost adjustments which includes about $6 million for the Watermark building and about $2.5 million for other buildings that have previously closed. And in addition the default reserve was increased by about $2.3 million mostly to reflect higher default assumptions for sold but unclosed units at one Bal Harbour hotel and the Watermark.

The result in gross margin, negative $1.1 million for the quarter compared to $39.7 in the year ago quarter. Traditional homebuilding margin was $0.4 million or $400,000 said another way compared to about $35.5 million in the year ago quarter.

Within traditional homebuilding gross margin, again the spec homes went for about 4.7% in gross margin and if you do a little math and exclude the effect of the impairment charges for the quarter, gross margin on traditional homes closed was about 7.8% and again applying the same sort of math to prior quarters, last quarter it was about 15.5% and we reported that and about 16.6% in the first quarter of 2007. Again that’s removing the effect of the impairment charges.

Tower homebuilding gross margin was a negative 4.7% for the quarter and that compared to a positive 836,000 in the year ago quarter. This year tower gross margin was negatively affected by the $8.6 million of cost adjustments and in addition the default reserve and the delay in the opening of the hotel at one Bal Harbour which opened later in the quarter and that resulted in about a $3 million negative impact on margin.

And the margins on the spec units that we closed during the quarter were about 18-19%. Gross margin in real estate services, positive $0.2 million or 1.3% of revenue and again it’s just to do with the volume and volume drops and drops in average pricing and that’s obviously spread over a certain amount of fixed costs that we haven’t quite realized the benefits of the consolidation there yet. And we’ll expect to continue to see some improvement there.

Amenities gross margin was $2.8 million in the first quarter or 12.4% of revenue and that showed some improvement to the $1.2 million or 5.3% of revenue in the first quarter of 2007 and again that reflects benefits from cost reduction measures taken in that area.

Moving along to the line items below gross margin and the other income and expenses section, again the $9.5 million non-cash charge is a big impact in the quarter and that’s a mark to market adjustment for the swap agreement and related to the $300 million interest rate swap agreement that the company entered into in later 2005 as a measured head against interest rate fluctuations on the company’s variable rate bank debt.

It’s obviously no longer a perfect hedge as we’ve reduced the amount of that term loan and therefore we are realizing these mark to market adjustments and there’s a lot of leverage to the $300 million instrument and we continue to see it move with the movement in the treasuries, in fact coming back a little bit even since the end of the quarter.

This $9.5 million charge in the quarter was slightly offset by some higher interest income, sort of in that same line item, same area. Selling, general and administrative expenses, if I can move along to that were $39.5 million on the quarter, that was $7.4 million or about 15.8% lower than the year ago.

Contributing to these decreases was a 20% reduction in general administrative including our corporate overhead expenses and within that lower salary and benefit costs as a result of force reductions over last year as well as reductions in other costs such as insurance.

Offsetting the benefit in actually both years is as you might expect due to difficult conditions, higher professional fees in each year. Last year we were impacted by the Goldman Sachs engagement and this year higher professional fees due to some financial advisors and legal fees.

Within G&A also sales and marketing expenses are significantly lower than the year ago quarter, 31% lower. Again, reductions in response to weak market conditions and as we continue to migrate away from some of the more traditional channels and with some our direct marketing expenses into some more internet based advertising and the like.

Net interest expense of about $30.5 million was about $14 million higher in the first quarter of 2008 when compared to the first quarter of 2007. 2007 it was $16.4 million yet interest incurred was $35.9 million for the first quarter of 08 which is fairly flat with the $35.0 for the first quarter of 2007.

So although the average loan balances were lower in the first quarter of this year that you would have expected to see lower interest incurred higher interest rates on the variable rate bank debt offset that improvement. And the different of the $14.1 million increase in net interest expense was primarily due to less interest capitalized as fewer projects are under development this year versus last.

And factoring all that together it results in a pretax loss of $83.9 million for the quarter and that’s compared to about $27 million of pretax loss last year. The provision for income taxes in the first quarter was positive but it was an expense of $200,000 compared to a benefit of $10.5 million recorded against the loss in the first quarter of 2007.

The $200,000 tax was driven by a small state tax provision booked for New Jersey related to the Watermark project in that jurisdiction. We would have had a tax benefit of approximately $26 million that we’ve computed would have normally been computed on the company’s operating loss for the quarter. But again we’ve offset that with a corresponding increase to the deferred tax asset allowance which brings the balance in that reserve from $150 million at the end of 2007 to $176 million at the end of the first quarter this year.

And again in accordance with accounting pronouncements FAS 109 in particular, the company must assess the realizability of each tax asset in light of future income and loss and that could reasonably be expected and in this prolonged period of downturn we are reserving again those assets.

Finally that brings us to a net loss of $84.1 million for the quarter and again compared to $15.8 of a year ago. Turning to page 10, balance sheet and cash flow data, there are just a couple things I’d point out. Total assets down about 10.7% from December 31 as a result of about $155 million decline in contracts receivable which is reflective of the collection receivables in the quarter from the backlog closings, 83 units that closed out of backlog and the defaults that were recorded in the quarter.

The other driver of the reduction in total assets is a $140 million reduction in cash, as the cash balance of 12/31 was used to pay down the senior debt upon closing of the loan amendments that were finalized in January of this year and we previously think reported that on our call in March.

Liability decreases since the beginning of the year primarily due to debt reduction, about $200 million in senior debt reductions for the first quarter, $88 million reduction revolver, $19 million pay down to the term loan and then $92 million reduction to the tower construction revolver.

In addition, obviously customer deposits decreased for the closings out of backlog and defaults and the reduction there was about $34 million. Moving or moving ahead to the cash flow statement, just a couple of things to point out there, cash flow from operating investing activities combined was $66.4 million for the first quarter compared to $94.6 million in the first quarter of 07.

Overall this is consistent with our expectations, I’d say however it’s reflective of more spec sale closings in both traditional and tower divisions than we had originally anticipated. Perhaps fewer Watermark closings than we had originally anticipated.

And as we said before, tower closings from one Bal Harbour and spec sales, while spec sales in previously completed projects continued to generate cash in the first quarter. The next slide in the package should be slide 11, that’s our [spinach] spec unit inventory as of March 31.

So the breakdown here is 402 units in traditional homebuilding units, value $199 million, that’s a decrease of about 75 units from December 31. Florida continues to be the lion’s share of that, accounting for about 87% of the traditional spec inventory at March 31 and again most of the reduction that we saw in the first quarter came out of Florida.

There were 341 tower homebuilding specs as of the end of the first quarter and the net spec increase in tower units of about 50 from December 31. So all totaled up, compared to the fourth quarter, our specs decreased by 125 units and about $34 million or $35 million in cost value.

The last slide that we’ve included in the up front section prior to the appendix is a tower status, hopefully this helps provide a little bit of additional color. We’ve actually [danced] the date to a current date to show you all the activity within as well as since the quarter ended and you can see there that we’ve closed additional units in Florencia, we’re up to about 67% sold and closed there, Bal Harbour condo about 94% of that part of that building is now sold and closed and about 54% or 62 units of the hotel units there have closed.

And then as we’ve said before, Oceanside B and Watermark are just getting underway and in the process and you can see the history to date of closings there. With that, what I will do is, and just again I don’t want to overlook the appendix. The appendix has the typical supplementary disclosures, land holdings, asset opportunity pool, we don’t usually take too much timing going through those on the call. So I’ll let you do that after the call, we’ll leave a little time here for questions and answers and with that I’ll turn the call over to the moderator to queue up those questions from participants.

Question-and-Answer Session


(Operator instructions) Your first question comes from Robert Manowitz – RBS.

Robert Manowitz – RBS

On liquidity, I was a little confused on the wording in your press release regarding what’s actually available to you under the line, is it the $115 that’s [inaudible] or is it the $115 less the $53.4 of letters of credit?

Ernest Scheidemann

It’s the $115 less the letters of credit plus the cash.

Robert Manowitz – RBS

Your comments about the cash balance at the end of the fourth quarter and how there was a timing lag between the collection and the actual pay down of debt, was that true also in the first quarter, should we expect some of that $48 million of cash to have since been channeled toward debt repayment?

Ernest Scheidemann

Some of it could have been and we sort of monitor that regularly, it’s $48, wasn’t as large as we ended the year so some of that might have been.

Robert Manowitz – RBS

Could you give a little bit of detail on the incentives in the tower, you provided lots of detail on the traditional homes and compared it to the fourth quarter and the year earlier period, I was wondering if you could help us understand what’s happening pricing wise in towers.

Jerry Starkey

Sure, on the towers side as we mentioned in Florida we sold about 97 towers and in most of the activity, although the activity was spread throughout most towers in the state that have standing inventory, in many cases we were selling inventory that had previously been impaired with price reductions in the 20-30% area. And so last year a tower may have been selling for $1 million average and a similar tower next door this year is selling for about $700,000.

So that seemed to spurn some activity among those retirees and second homeowners looking to snap up a bargain. In some towers like Bal Harbour where we had defaults, we were actually able to sell, resell, we’ve been reselling the units at prices equal to the original prices and in some cases slightly higher. So again each tower and each community is sort of a unique location. That Bal Harbour location is a pretty special location in a very affluent neighborhood and a wonderful beachfront location with sort of an international jet set destination.

And so the supply has been limited, as Ernie said, we closed 172 of the 185 units so far, 173 and so not a lot of supply but obviously a good value and little if any discounts. In fact, as I said, generally higher prices. But up in the panhandle of Florida we took impairments at the end of the year and marked down that inventory and someone that may have previously paid $600,000 for a unit we’re able to pick up that unit in the $450-$500,000 range.

Southwest Florida at the colony we have a couple of towers and down in Marco Island a couple of towers and again that’s where our discounts typically were about 30%, although when you move up and down a tower, a 30% average might yield a low floor discount of 40% and a high floor discount of only 10-15% as people typically pay a premium for moving higher in a building.


Our next question comes from Larry Taylor – Credit Suisse.

Larry Taylor – Credit Suisse

I wonder if you guys could give us a little more detail on this reappraisal that’s taking place. You referred to it in the press release with respect to the bank that you would, facing a reappraisal, I wondered if you could give us some details on, as to the timing and the mechanics of that please.

Jerry Starkey

Sure, when the loan went secure last year it also came with the requirement that the real estate assets be appraised and those appraisals are in process and some final appraisals are coming in and will be coming in in the near future. And the provisions of the bank agreements state that if the final appraisal is less than the book basis then the inventory would be or the asset would be marked down to the appraised value.

It’s the lower of appraised or book. So obviously with such a wide array of assets we expect that there will be some appraisals that come in below book and that will require us to mark down our borrowing based under the credit agreements and would further limit our liquidity beyond the capacity of the loan.

Larry Taylor – Credit Suisse

So two follow ups if I could, one is, is there an opportunity for the bank to mark up anything that was purchased some time ago and might actually be worth more or is it only if there’s a detriment to book value?

Jerry Starkey

Yes typically it’s a one way street.

Larry Taylor – Credit Suisse

You said in the near future, is that 30 days, 60 days, 90 days?

Jerry Starkey

During this quarter and probably, I would suspect during this quarter and maybe into next quarter.


Your next question comes from Eric [Arion] – Deutsche Bank.

Eric [Arion] – Deutsche Bank

A follow up on the appraisals, were appraisals done a year ago or are these the first appraisals getting done?

Jerry Starkey

These are the initial appraisals. We were unsecured previously and didn’t have any requirements for appraisals. They’ve just been going off of book value to this point.

Eric [Arion] – Deutsche Bank

I wanted to talk about the Watermark certificate of occupancy, is that strictly limited to the 43 sold or is there a chance if that follows through that it goes all the way over to the 120 city units?

Jerry Starkey

No that’s limited to the 43. The 126 basically we have a CO for the building, we closed 33 units, we have 126 units remaining in backlog. Of the 126 units, 83 units have COs in hand and the remaining 43 units have either COs pending with the city or final inspections pending with the city and about 15 or so of those units have some minor construction remaining, the penthouse units and some of the units on the top floor which again we expect to have those COs hopefully in hand by the May 26 date.

Certainly would expect to have most of them but there could be some that aren’t delivered at that time. We’ve had some ongoing construction delays there, we’ve also had capacity delays with the municipal inspectors and the city’s administration on the timeframe between submitting final inspections, receiving final inspections and then turning around the COs.

Eric [Arion] – Deutsche Bank

Do you guys have any updated cash flow projections guidance for the year?

Jerry Starkey

On the last call I think we indicated that the cash flow would be.

Ernest Scheidemann

We provided a range of $300-$450 million. We don’t have an update to that, we’re still focused on it.

Eric [Arion] – Deutsche Bank

Who did you guys hire as the financial advisor to deal with the convert?

Jerry Starkey



Your next question comes from Ivy Zelman – Zelman & Associates.

Analyst for Ivy Zelman – Zelman & Associates

This is actually Denis [McGillin] for Ivy. I’m sorry if I missed this at the beginning, it sounds like you guys talked about the convert a little bit, but can you share with us any conversations you may have had with the bond holders, what their incentive would be to put it back to you and whether you’ve had those types of conversations?

Jerry Starkey

We haven’t had any significant conversations. We’ve had some of the convert holders reach out to use and we plant to begin meaningful discussions imminently following our release. So we mentioned at the last call that as we look forward we don’t anticipate the liquidity to satisfy the converts for cash give the bank restrictions and their first dibs on all the cash that comes into the operations and the sort of super liquidity requirements that are in our credit agreement.

And nothing has changed during the first quarter from that view. So we’ll be meeting with the convert holders and I’m sure throughout this quarter and hopefully we can come to some creative compromise to deal with the converts.

Analyst for Ivy Zelman – Zelman & Associates

And a compromise would likely entail some sort of compensation for pushing out the convert date or some pricing that could provide a buffer for you guys?

Jerry Starkey

We’re open for creative solutions.

Analyst for Ivy Zelman – Zelman & Associates

And then just separately thinking about some of the inventory units that you guys have on the towers side and I realize it’s going to vary by some of the regions so maybe you could talk about the towers were you have the more significant inventory, what level of price pressure can you absorb from this point forward before they become cash neutral at sale?

Jerry Starkey

I think generally the inventory is priced in the $500,000 say $450,000-$500,000 in the panhandle of Florida to still close to $1 million in some of our east coast towers with averages in the $700,000 area. So there’s a lot of room between there and cash neutral if your closing costs are 5-7% transaction costs.

So what we’ve done is the pricing seems to have been appropriate for the end consumer but most of the venture funds that are snapping up inventory are typically in the 30-40% of original retail price and given the tradeoffs we’re continuing to market directly to the end consumer.

Analyst for Ivy Zelman – Zelman & Associates

I guess I’m thinking relative to your cash flow guidance for the year of $300-$450 million and I’m sure you have some spec unit forecasts within there, what level of pricing pressure would you have to see relative to your expectations to wipe away those cash flow expectations?

Jerry Starkey

I would say at this point it’s hard to address because the volume of closings versus the price, there’s a couple of equations there, so far we’ve sold more homes out of inventory than anticipated so if we can continue that trend, that’s a favorable trend and pricing so far has been in line with our expectations for the year because we anticipated marking that inventory down to spur retail absorption.

So the key really is to continue and we had reversed all the revenue at Oceanside and we’re anticipating low levels of closings at Oceanside and nothing really has changed our expectations there and once we’ve moved through all of the contracts and backlog there, the opportunity probably is to see what prices can stoke some incremental demand at Oceanside.


Our next question comes from Alex Barron – Agency Trading Group.

Alex Barron – Agency Trading Group

I wanted to ask you if you could help me with your accounts payable, I guess you didn’t exactly give a breakdown of what was accounts payable, customer deposits, etc. But can you tell me of your accounts payable, how much of that is due to payoff what you owe subcontractors on the towers versus what’s single family.

Jerry Starkey

I’m not sure we have that readily available.

Alex Barron – Agency Trading Group

You don’t have any ballpark in terms of percent?

Jerry Starkey

Let Ernie move through the financials after the call and if that’s something available by looking at various balance sheet accounts he can provide that to you. That’s something we’ve not broken out in the past so it’s not something we have readily available at the call.

Alex Barron – Agency Trading Group

My other question was I wasn’t exactly sure I understood what caused the state of New Jersey to make you guys give back the money of some of the Watermark buyers?

Jerry Starkey

It was just the time of the construction delay for some of the buyers.

Alex Barron – Agency Trading Group

You said that the max risk would only be to those 40 something that you have to give back in terms of deposits?

Jerry Starkey

I’m not going to get into a lot of legal interpretation, I think our release speaks for itself and those are the sold units and backlog that don’t have certificates of occupancy and the date that we agreed to have all the units ready for closing was May 26.

Alex Barron – Agency Trading Group

Just generally speaking, now that the line is secured, I guess my general understanding is some portion of that cash received from each condo closing goes back to the banks, how does that work?

Ernest Scheidemann

The net proceeds from those closings would go back to the banks because that tower is secured and it always has been since it was constructed in the tower construction revolver, that has been secured, those towers have always been secured. And so the net cash proceeds from closings go to pay down that line.


Your last question comes from Sean [Falow] – Deutsche Bank.

Sean [Falow] – Deutsche Bank

To clarify one point on the liquidity, I just wanted to make sure, so the $115 available based on the borrowing base would be reduced by the $53 million of the letter of credit, is that correct?

Ernest Scheidemann

Plus the cash.

Sean [Falow] – Deutsche Bank

So that’s how it would be defined as far as the amendment on the bank facility so liquidity would be $115 less the $54 plus the $48?

Ernest Scheidemann


Sean [Falow] – Deutsche Bank

Do you see any changes in those LCs going forward or anything that could change those, what makes up those LCs?

Ernest Scheidemann

Some of those are just letters of credit put out on either from insurance contracts or insurance policies to performance related obligations in the core business, so it’s a variety of different things.

Sean [Falow] – Deutsche Bank

You don’t see that likely changing much over the next couple quarters or year?

Ernest Scheidemann

It could come down a little bit.

Sean [Falow] – Deutsche Bank

And then on the appraisals, as those appraisals come in, I assume the auditors will probably look at those in some way, do you think that could impact impairments in any way?

Ernest Scheidemann

I think it’s sort of an appraisal concept is different than a GAAP concept and so we don’t have an expectation and we had some conversations internally but we don’t have an expectation that those two concepts are related.

Sean [Falow] – Deutsche Bank

And then I know you talked just briefly about the Oceanside B, do you guys have any concept over any expectations for what you expect to close before you have to go out and mark those down and try and move some of those units, any of those defaulted units?

Jerry Starkey

Due to the retail nature of that we really don’t at this point. We offered incentives to the backlog across the board of about 15% to close and as we move through those closings we’ll assess the market conditions and where we might need to go and whether it makes sense to mark that down or mothball that building and absorb some carrying costs for a better market if things appear to be turning around. So we’ll play that one by ear throughout this quarter.

Sean [Falow] – Deutsche Bank

On tax refunds, are you guys expecting any tax refunds this year? Do you think you have the ability to get any next year?

Ernest Scheidemann

We are expecting a tax refund this year, about $60 million and it could be during this quarter but it’s hard to predict the speed of the IRS. Next year obviously we need to see how the rest of the year plays out, there should be something available there too but we are expecting one this year.

Jerry Starkey

Thank you very much for joining the call today and we look forward to following up next quarter.

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