Doug Poretz

Homebuilder Bankruptcies: Who Might Be Next?

I joined NVR after the IPO, shortly after they (NVHomes at the time) launched the acquisition of Ryan. So, I was not involved in what was being said at that time. However, using options instead of buying land was a core feature of NVR prior to the troubles in the late 1980s and, of course, subsequent to them coming out of Chapter 11 -- and it is still apparently a core operating premise. So what happend? Basically two things, in my opinion -- others may disagree with justification but this is the way i saw it. First of all, when NVHomes went after Ryan Homes in a classic minnow swallowing the whale case history it was a small company with a small administrative staff -- bright, adept, entrepreneurial, but not with the Wall Street "creds" that the executive staff of Ryan had. When the two companies began to merge there was the traditional issue of how the administrative staff would be re-established, and no position was more debated than the role of CFO. The CFO of Ryan became the CFO of the new NVRyan (later renamed NVR). He brought the creds we needed to get the right banking relationships and do two major bond deals and an equity deal that was necessary to close the acquisition and then operate the new company. The former CFO of NVHomes needed a significant job, so in the process he became head of a new entity that was called NVR Development, which would invest in land -- the idea was that they would use off balance sheet non-recourse loans. Speaking very personally, I believe that if there was never the issue of creating a job for the "second" CFO, there never would have been NVR Development and thus there never would have been land acquisitions. But there was a second reason as well -- land positions that the company bought at the operating level were escalating in value so high and so fast that the margins increased on home sales, boosting the results and hence the bonuses for the operating entities. It really wasnt a problem when the market was super hot at the end of the '80s -- you'd use your operating LOC to buy a land position and you'd sell it shortly thereafter in the form of a house sale. These were land positions not acquired at the corporate level or even at NVR Development, but at a limited number of homebuilding operations, using short term operating lines of credit from the banks. I guess the moral of the story is that you can use short term borrowings to buy long term assets as long as you can flip those assets (land positions) quickly. But those assets weren't turned around quickly or even at all when the market quickly went to ruin. And that gave rise to problems with the banks -- but that policy produced great margins while the system worked. By the way, that was not Dwight's policy but it was done by homebuilding operating execs and squeeked through corporate controls, which i think became an easier task when the results were so positive. Also, the first person I saw call the real estate crash of the late 1980s was Dwight Schar himself -- he was presceint then and i think he remains a brilliant businessman -- take a look at the record he has produced over the past almost two decades since coming out of Chapter 11 for each of his constituents: shareholders, employees, customers, suppliers, and the communities where they do business and where NVR and its operations are major contributors to charitable and related efforts.

As to Dwight's large position in the company subsequent to the emergence from Chapter 11: I do not believe you are right -- i do not think he had a very large position at that time, at least compared to his enormous position prior to the debt-for-equity cram down. There was a reverse split after the debt-for-equity swap and that caused bondholders to become the major equity holders. But as the equity began to recover, the company started buying back its own stock (something it has done for years). The former bondholders, largely vulture investors who bought the bonds at dramatically depressed prices, were thrilled with the ability to sell back their equity to the company in big orderly blocks. And, in the process, it was an anti-dilutive event for all shareholders, including Dwight. Hope that helps. I haven't been involved with NVR for over 15 years or so, so these are memories that may be somewhat faded and inaccurate. But that is how i would answer your questions -- and I think these are fairly accurate.

Homebuilder Bankruptcies: Who Might Be Next?

Among the most likely to go Chapter 11 -- CHCI -- smaller than other homebuilders and already on the brink.

Least likely to go Chaper 11/most likely to succeed: NVR. Virtually no land position (options only), great market positions, very smart management who went Chapter 11 in earluy 1990s, learned major lessons, not going there again.

(Fair disclosure: i was vp at NVR from 1986-1990)

Bernanke to the Rescue: Homebuilders Bounce - For Now

I have a brother in the mortgage business. His phone is going off the hook too. Yay! The market has already hit bottom and is starting a movement back north. Unfortunately, my brother can't get very many of those loans to actually happen, and you won't get many of your leads to become buyers. When you take off your tinted glasses, look at virtually every trend line that exists from the price of oil to what's happening with jobs, cars, housing, financial crisis, etc. etc., and see that they are continuing to go further south, you better buckle your seat belt and become highly defensive of your capital. It is going to be worse than people currently dare to think -- cash will be king like never before.