Oil Prices Hurting Homebuilders [Housing Tracker]

by: Judy Weil

Quotes of the Day


"The settlement is really about paperwork and process rather than actual pollution.” - Eric Bruner, a Centex spokesman based in Dallas. Centex Homes (CTX) was among four homebuilders who reached a $4.3 million settlement with the Environmental Protection Agency and Department of Justice over alleged environmental violations at sites in 34 states.  (Herald Net, June 14th

“Their approach has been to reappraise the land, say ‘here’s the margin’ and then ‘please remit $9 million.’  They’ve been very difficult.”  – Jim Chapman, president of the now bankrupt Legend Homes, about Key Bank. Legend had borrowed $22.3 million from Key Bank and Chapman said they used “desperate” measures to get their money back from Legend. (Builder Online, June 13th)


Homebuilder Stocks


South Side Condo Project Shifts To Rentals. “Plans for condos on the Near South Side have been modified to a mixed-use apartment project. The Chicago City Council last month approved the plans to build two 42-story towers on the southwest corner of Polk and Clark Streets. Each will have 492 apartments. Avalon Clark and Polk LLC will build the project. "We bought the property from a Lennar joint venture," said Walt Rebenson, VP, AvalonBay's Midwest, a unit of AvalonBay Communities Inc. (NYSE:AVB). Avalon modified plans for condos with an average of 1,200-sf to two-bedroom apartments with an average of 810-sf.” (Chicago Tribune, June 15th)


CEO Pay Chugs Up In '07 Despite Economy.Collectively, the 10 best-paid CEOs made more than half a billion dollars last year. Yet half [of them] were leading companies whose profits shrank dramatically. SEC proxy statement: KB Home (NYSE:KBH) CEO Jeffrey Mezger is entitled to a cash bonus based on a percentage of KB's profit. [But] KBH lost almost $930 million in 2007 and its stock lost 60% of its value. Mezger still made $24.4M including a $6M cash bonus… because he exceeded certain objectives the board had set out for him. Among them were improving performance on a customer satisfaction survey and developing senior leadership in his first year as CEO.” (Associated Press, June 15th)

Condo Associations Face New Issues As They Get Older.  “The planned communities of Southwest Florida are aging — and past problems [are] coming back to haunt… the associations that run them. For example, luxury condo development Gulf Harbour in south Fort Myers found out in 2007 that many of the lakes in the project were rapidly eroding because they were incorrectly dug or maintained… The Gulf Harbour Master Association… turned over an engineering report detailing the problems to Lee County officials, thinking [current owners] WCI Communities (WCI), would be responsible. Instead, the county issued 19 citations against WCI and various associations within Gulf Harbour… Repairs could run into millions of dollars.” (News Press, June 15th)


Making Themselves Feel At Home.  Habitat for Humanity, working with Pulte Homes (NYSE:PHM), Mid-Atlantic Division, made homeownership possible for… three single mothers… Pulte has, for the third consecutive year, participated in a nationwide building blitz, organized by Habitat, a nonprofit organization that provides home-ownership opportunities to families in need… The homes bring to six the number that Pulte has built in Harford County for the organization… Habitat: "The economy is affecting everything and making it harder for organizations like ours to raise money. We really only had enough money this year for one home, but Pulte said it would build all three." (Baltimore Sun, June 15th)


Centex Subdivision Springs Up Around Hillsboro ParkOregon: Centex Homes will hold the grand opening for The Parks at Laurel Oaks, a new community in Hillsboro, on Sunday, June 15. The grand opening began June 14… Homes at The Parks at Laurel Oaks range in size from 1,800 to 3,200-sf, and are priced from $259,000 to $395,000.” (The Oregonian, June 15th)


EPA Stormwater Settlements Hit Home.  “A settlement [was] announced this week between the Environmental Protection Agency and four national homebuilders for alleged violations of the Clean Water Act. Centex Homes; MDC Holdings Inc. (NYSE:MDC), the parent company of Richmond American Homes; KB Home; and Pulte Homes, have agreed to pay a total of $4.3 million in fines for failing to control stormwater runoff at more than 2,200 construction sites between 2001-2005. The settlements cover 34 states and the District of Columbia. A total of 116 sites are named in Virginia, including 12 in Frederick, Warren and Clarke counties.” (NV Daily, June 14th)


High Oil Prices Hit Homebuilding Sector.  “The surge in oil prices is driving up the cost of key construction materials [like] steel, aluminum, copper, concrete, brick, asphalt and plumbing fixtures, among other materials, and homebuilders are feeling pressure from suppliers to foot the bill. Labor Department: The wholesale cost of building materials for new home construction rose 3.4% overall in April from a year earlier. "Any material that is petroleum-based or transportation-intensive will have pricing pressure during periods of rising oil prices," said Tony Callahan, SVP of Purchasing, Planning & Design for Beazer Homes (NYSE:BZH). "Manufacturers are trying to push cost increases through for materials like asphalt roof shingles, carpet, insulation." (Int’l Herald Tribune, June 13th)


Inflation News Hits N.J. Index.  “The Asbury Park Press/Bloomberg 75 index declined last week as investors weighed news about rising inflation and the slumping housing market. The index [is] made up of 75 companies either based at the Shore or with significant operations in New Jersey… Forty-four companies lost ground, and 31 companies advanced. The index has fallen 14.8% since the beginning of the year… [Among] the companies with the biggest losses: Hovnanian, New Jersey's biggest homebuilder, [who] faces a housing market that will be even more challenging than previously anticipated, and new home activity declining well into 2009, according to Fitch Ratings, a bond ratings agency.” (Asbury Park Press, June 13th)


Another Way To Play Homebuilders.  “Richard Potter, Antares Capital Management: You can find some decent yields of 8% or more [on short-dated homebuilder corporate bonds: Lennar's (NYSE:LEN) October 2010 bonds now offer a yield to maturity of about 11%. KB Home's February 2010 bonds yield 8.9%. Toll Bros' (NYSE:TOL) February 2011s recently traded with a yield to maturity of 9.45%. For the really cautious, some bonds come due sooner. KB Home has a December 2008 bond with an annualized yield of 6.37%... Bond market guru Dan Fass at Loomis Sayles says one of the challenges of investing in homebuilding bonds is actually finding any in the market.” (Wall St. Journal, June 13th)


Group Nears Goal To Preserve Historic Lodge.  Nevada:  An anonymous donor has emerged to underwrite a majority of a $5 million endowment fund to preserve the historic Thunderbird Lodge at Lake Tahoe, the curator at the estate said. The Thunderbird Lodge Preservation Society was charged with raising the funds by June 20 so Pulte Homes would forgive a $10M lien against the property.” (SF Gate, June 13th)


Excess Land Up For Grabs.  “RREEF, the real-estate investment arm of Deutsche Bank: The 10 largest public homebuilders reduced the number of lots in their inventory by 39% last year. The majority of the decreases came from write-offs of land options… Denver is among the markets considered a good place to invest because its excess inventory is expected to be absorbed within the next three years. Other markets that could be good places to invest include Atlanta; Fort Lauderdale, Fla.; Los Angeles; Minneapolis; and Oakland and Orange County, Calif. As of January, Denver showed an 8.2-month supply of homes, lower than the median of 13.6 months for the markets RREEF surveyed.”  (Denver Post, June 13th)


Lennar Files For Bankruptcy At Mare Island.  “Folks in San Francisco are beginning to wonder if Lennar is planning to mothball the Hunters Point Shipyard in face of a $25 million funding gap [and] Lennar Mare Island’s June 8 bankruptcy… Lennar executives insist that they are committed to moving ahead with a massive condominium project at Hunter’s Point Shipyard in San Francisco, although public records suggest otherwise and cast serious doubts as to whether Lennar has the financial wherewithal to develop the Shipyard and Candlestick... Barclays Bank has given Lennar Mare Island LLC a $135M line of credit to help fund operations during its Chapter 11 process.” (San Francisco Bay Guardian, June 13th)


WCI Communities Forms Special Committee.  “WCI Communities, Inc. today announced that the Board of Directors has formed a Special Committee of disinterested members of the Board of Directors to review and evaluate alternative restructuring proposals that the Company may receive from potential investors, including affiliates, on behalf of the Board of Directors and WCI. The Company previously disclosed that it has retained Lazard Freres & Co. LLC as its financial advisor to assist the Company in developing various restructuring alternatives, which would include addressing its 4.0% Contingent Convertible Senior Subordinated Notes due 2023, which become puttable to the Company at par on August 5, 2008.” (Fox Business, June 13th)


Ill-Timed Growth Led to Legend Homes' Fall. “At its bankruptcy, Legend had 362.75 acres of raw land in four states… 770 vacant lots, 97 completed homes and 30 other homes under construction. The company filed bankruptcy with an estimated $258 million in assets and $198M in liabilities. Jim Chapman, president of Legend Homes: Legend was not in default on any of its loans. However, some large banks… leaned on Legend… through margin calls that can be triggered when the value of properties collateralizing those loans falls… Chapman says Key Bank attempted to use an earlier margin call to coerce cross-collateralization. “They wanted to take 100% of the closings on homes they didn’t even have construction loans for.” (Builder Online, June 13th)


Bakersfield, Shafter Settle One Of Three Water Lawsuits.  Bakersfield, Shafter and Oildale Mutual Water Company have settled two of three lawsuits over Shafter’s plans to provide water for development… Bakersfield [claimed] Shafter didn’t have the right to use [Bakersfield’s] water for development — only Bakersfield does. Under the settlement, Oildale Mutual withdrew the document certifying its water supply, and Shafter promised not to use the same approach for at least six months. In October, developer SunCal Companies pulled out of a Shafter project, blaming the uncertainty of the water supply. The company also defaulted on a loan payment, and the company’s 515 acres transferred back to Lennar Homes, according to Californian archives.” (Bakersfield Californian, June 13th)


KB Home Calls for Redemption of Its 7 3/4% Senior Subordinated Notes Due 2010.  “KB Home announced today that it is calling for the redemption on Monday, July 14, 2008 of all of its outstanding 7 3/4% Senior Subordinated Notes due 2010 (the "2010 Notes"). The aggregate principal amount of 2010 Notes to be redeemed is $300 million, at a price equal to $1,019.38 per $1,000 principal amount, plus all accrued interest to the date of redemption.”   (Fox Business, June 12th)


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