FDIC Release on $1.8B AmTrust Deal with Toll’s Gibraltar and Oaktree May Come Tomorrow

The Federal Deposit Insurance Corp. could announce as soon as tomorrow its auction of a $1.8 billion portfolio of distressed loans under the now-defunct AmTrust Bank to a joint venture of Toll Brothers’ new Gibraltar  Capital and Asset Management unit and Los Angeles-based private equity player Oaktree Capital Management, according to an executive familiar with the transaction.

“Normally, the FDIC would have put out an announcement by now, but they’ve been busy with a lot of issues these days,” said this executive, who asked to remain anonymous. “The press release may come as soon as Thursday this week. We think they’re paying about 30-plus cents on the dollar.”

Here’s an excerpt from an FDIC release on the award of another $898 million AmTrust pool of residential mortgages to a consortium of financial players led by Residential Credit Solutions, CarVal, and RBS Financial Products.

AmTrust bank failed on December 4, 2009, and the FDIC immediately entered into a purchase and assumption agreement with New York Community Bank, Westbury, New York, to assume all the deposits and approximately $9 billion of the assets. This transaction completes the sale of the majority of the remaining assets of AmTrust Bank.

Word is, the AmTrust 280 loan portfolio with an average of $6,000 per loan encompasses 1800 properties, primarily in the Nevada, Arizona, California, Florida, Georgia, and the D.C. Metro/Maryland markets.

The Oaktree-Gibraltar JV’s assumption is that, after combing through the 1800 properties, they–like Lennar’s Rialto–have an opportunity to profit at least three different ways on the financial disposition of the property assets covered under the loans.

The Gibraltar-Oaktree JV, just like in the Rialto case, will have to cover its nut with the F.D.I.C. before it can write profits on to its balance sheet and flow them through to Toll Brothers’ Corp.

We hear that Oaktree’s deal with Toll Brothers taps into a different fund than the acquisitions joint venture it had formed last year with Ryland Homes. “Other home builders are not part of this AmTrust/FDIC deal,” according to the executive we spoke to.

Now that Lennar has triggered a financial skill-set it had developed during earlier downturns and Toll Brothers has established a captive unit to play in the distressed paper and hard asset arena, it may be a question as to whether other home builders explore adding such capabilities to their repertoire. This question surfaces especially as conventional home building operations continue to battle lack of visibility and low absorption rates.

No doubt public home building companies will explore all means possible to generate cash and write new profitable business onto their balance sheets, but most are set up with more limited financial resources and expertise than Lennar and Toll, and would have too much to learn too quickly to avail of the opportunities in so sophisticated a financial/legal game.

We’ve head KB Home is taking a look at partnering and that M.D.C. Holdings has had a conversation or two, but most companies will focus short term on opening stores and taking share, primarily from the nine out of 10 home buyers these days who are opting for a resale vs. a new home.

“Problem is, we’re competing with resales that were built in more and more cases in 2005 and 2006, so we have to do better than ever at getting our share,” said the CEO of one of the nation’s leading public home building companies.

July 21, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Fare Share: Public Home Builders General Counsel Salary Rankings

We’re concluding our analysis of public home builders’ “named executive” compensation packages for the moment. That is, until we see additional SEC proxies filed by the likes of Comstock, Meritage, M/I, Pulte, and Standard Pacific. Once all those filings are in, we’ll do a retake, with complete rankings of CEOs, CFOs, COOs, and other top executives.

The list below features several executives who, in light of some of the sticky legal situations certain home building companies have found themselves in, have been earning their keep in a big way.

During the months ahead, as the economy, financial institutions, companies, and households continue to undergo forced recapitalization, attorneys of many stripes will be in demand. Whether it’s to deal with federal or state investigators who come a calling, aggrieved home buyer groups, organized labor, litigious lenders, or grouchy stockholders, a strong general counsel is a virtual necessity for the present and foreseeable future.

Here’s a ranking of comp packages for five companies whose corporate general counsels have risen to the ranks of “named executives.”  Note that a number of companies that have filed their proxies, such as D.R. Horton, Lennar, NVR, Ryland, and Toll Brothers, do not have general counsel who rank up there at the C-level.

Click on this chart twice to see an enlarged image.

March 24, 2010 | Filed Under Earnings, Home Builders | Leave a Comment 

Home Building CFO Pay By The Numbers

Even as public home building companies loosen their purse strings to invest in land they hope will turn into tomorrow’s cash flow, most of them are still cutting costs to their operations and overheads.

Where strategy focuses as much on cash preservation as it does on driving topline sales and revenue growth, the honcho who wields both the axe and the gift bag tends to be the chief financial officer.

CFOs as a group performed heroics in doing their part to retrieve a collective $2.3 billion in tax benefits traced to net operating losses in 2009.

Here’s a chart from SNL Financial that maps out how each builder did in its most recent financial reporting period:

Courtesy of SNL Financial

In 2010, a big issue for public home builders will be retaining the services of talents who provide credibility and integrity behind fairly complex financial performance reporting. Trust is in short supply at the nexus of Wall Street and Main Street, and a good CFO is often the only thing between keeping the trains running and total chaos.

Still, most CFOs compensation in 2009 reflected red ink performance of their respective mother ships, with few bonuses (in cash, especially), and stock and option awards blistered by the performance of stock prices that have taken major hits.

Still, in all, they’re not doing too badly. All in all, CFOs across our 9-company universe earned an average of $1.9 million in total compensation, versus $2.6 million in 2008, a plummet of about 26%

Base pay in most cases, held at 2007 and 2008 levels, with D.R. Horton CFO Bill Wheat’s $250,000 representing the low, and Joel Rassman at Toll Brothers the high at $1 million.

Consistent with the fact that its CEO Paul Saville ranked lowest in his peer group, NVR principal financial officer Dennis Seremet had the most modest total comp package of the pack.

Here’s the way they rank (note: we only have nine due to the fact that other public company proxy statements with information on the compensation of their named executives are still forthcoming).

Click twice on the table for a larger view.

Source: Big Builder analysis of company proxies.

March 18, 2010 | Filed Under Finance, Home Builders | Leave a Comment 

A Windshield View of Las Vegas Real and Unreal Estate and Housing

This week, we’re on the go to the nation’s annual home builder convention, the National Association of Home Builders’ International Builders Show. We’ll see some of you there, we hope. We’ll be in Las Vegas, that big bowl of steamrolled desert rimmed by ridges, sprawling in all directions with Mediterranean style roof tops.

Las Vegas, which enjoyed generations of ill repute, got a good halfway through its silly money financed extreme makeover redemption and rehabilitation before the economy in about 2008 shouted, “Move that bus!” When the bus moved, well, the picture wasn’t pretty like on Sunday nights on ABC.

Building Harmony Homes at Ladera

Yesterday, we arrived at McCarron, caught a bite to eat in a sports bar among Brett Favre haters and lovers alike, and took off by SUV with Rick Hildreth for a look-see, not only at what is going on, but at what’s in the pipeline to occur in new residential real estate in the year or more ahead.

A word or two about Rick Hildreth. If you’ve been in a car with a knowledgeable Realtor, driving neighborhoods where he or she has been doing business for years, you probably have a good idea of what it’s like touring the Las Vegas perimeter mosaic of master plans and not so master plans with Rick, who for just over six months has been the on-the-ground operative in Las Vegas for the Phoenix-based Land Advisors Organization.

Rick came to Las Vegas from his native Kentucky as part of a software company, one which eventually became a casualty of missteps that occurred during the great Tech bubble of the late 1990s into early 2K.

Since, Rick put in time as a land acquisitions pro for now-defunct Engle Homes (Technical Olympic USA), and later at the now-absorbed Centex Homes. As a home building company land executive, Rick made it his business to learn Las Vegas’ land grid inside out, backwards, in his sleep, etc.

For example, we’re driving past a tract of land that a commercial RE company paid $1.3 million an acre for during the run up. It was a piece of land Rick coveted as a potential site for a Centex multifamily active adult community during the first half of the just-finished insane decade. He lost out to the RE company, and now the commercial project is but a skeleton of rusting beams, back with the banks.

“I remember being so angry that I lost that bid,” Hildreth says, somewhat belying a mild manner you’d hardly associate with a bad temper. “I said to the seller, ‘I just don’t lose these bids.”

Spend a few hours with him on L.V.’s perimeter roads–now immensely improved after years of construction and detours–and you hear him quote lots, buyers, sellers, banks, legal status, potential deals, and dynamics for every piece of dirt out there in the vast desert Valley.

We start our odyssey out at Inspirada, where you see KB Home, Meritage, and Toll Brothers valliantly making a go of an MPC that has had to weather the three whammies…. an economy going upside down, a developer going broke, and several key builder partners imploding.

Still, it’s a workout, and there are deals going on for the lots that had been Kimball Hill’s.

This leads to the two large insights of our trip:

These two insights come out of Las Vegas, but they illustrate the questions we need to keep asking as we look at an overall economy going sideways thanks to an over-leveraged consumer and an uncertain jobs environment.

We haven’t got stability in home prices, partly because of defaults among borrowers who never should have borrowed, partly because of income and job loss, and partly because the deflation of home values is its own gravitational force.

Countering that lack of stability, we have “affordability,” which describes a relative set of circumstances that compare with phantasmagoric baselines of two to three years ago.

Will and can affordablity act as an economic catalyst, or will it work simply as a descriptive of a market that has finally corrected and cleansed and delveraged itself after a 15 year boom cycle that crescendoed with a bubble?

This is the question we see so clearly delineated in Las Vegas. We have an economy that relied heavily on construction and real estate speculation checking itself out as the dust settles to see what it’s made of. We have billions of bubble dollars out there in cast-iron beams, rusting in the sun, waiting for multiple forms of market impasses to clear before 1 or 2 becomes the new 10.

We have natural household and job formation thrown into a limbo of questions based on whether companies are actually hiring or firing, whether incomes are actually stabilizing or losing ground, whether population growth is netting positive or negative.

But affordability is a phenomenon of noteworthy-ness now.

And the companies that run on heft and scale need to start using it or losing it, one or the other.

So, Hildreth, the guy who probably knows more on a lot by lot basis about Las Vegas valley — he can tell you who sold, who bought, who flipped, who’s holding, who’s distressed, who’s angling to buy, and where the bodies are burried for just about every piece out there right now — claims that big builders may be in for a surprise if they think they’re going to be able to make their numbers by picking up finished lots in the Vegas market.

“They’re all talking about opening several more stores here in the valley in 2010,” he says. “They’re going to find that’s tougher than they think. They do that in a good year, but I don’t think there’s enough finished lot inventory here for them to assume that.”

We’ll see.

More later from our ramblings in the Valley after we go back out to Inspirada to take a closer look at what all the KB Home Open Series magic is all about.

Let us know if you’re out here, and we’ll try to say hello over at the Convention Center.

January 18, 2010 | Filed Under Financial Crisis, Home Builders | 3 Comments 

Single-family Housing 2010 Megatrends: Good Enough is the New Good, Better, Best

We’re going to give you a list as they say at the craps table–the hard way. One by one.

Per our list of 10 predictions for 2009 this time last year, we can’t be counted on for a great amount of precision in hindsight. Nevertheless, our guiding principle still holds that more of our forecasts will come true than not, but the timing of their totally vindicating our prescience may be off a bit. A decade or two in some cases, maybe.

At any rate, over the next 10 to 12 days, we’ll cobble together a series of observations that meld together what people in the home building business landscape have achieved in 2009 with what those accomplishments foretell about 2010. We figure, maybe if we slow our thought process down just a bit, the cycle of housing and business events may have a chance to keep pace.

One thing”s for sure. If “hang in there” was 2009’s mantra, 2010’s most repeated claims–true or not–may more likely fall evenly into the “I’m still here” bucket, or the “I’m back” one.

One of the stunning dawnings we had by the end of 2008 came with all the gentleness of one’s 9-year-old brother or sister waking us to get ready for school each day. This realization–compliments of one of our friends in the bankruptcy reorganization business–was that after the marathon land dance of 2003 through 2007, nary a real estate project in the nation, commercial, for-rent, or for-sale couldn’t get classified fairly as “in distress.”

Companies themselves, mind you, may not have been operating “in distress,” but their real estate projects on lots acquired during that land dance period were all hanging in loan-to-value limbo, where the loan represented a snapshot of insanity and value was doing its best imitation of a polar ice cap.

The achievement, then for 2009, was not a single product like KB Home’s Open Series, but rather a wave of initiatives across dozens of home building companies that succeeded in braking bad habits, wasteful processes, and uncoordinated operations to bring entry-level new home direct construction costs down to where monthly-payment sensitive buyers would again consider new versus a foreclosure bid and purchase.

Tim Eller, formerly CEO of the now-engulfed Centex and still a board member of Centex purchaser Pulte, talks of housing downturns as all having the same plot line. The differences from one downturn to another–from one who said he’d gone through at least four of them–are a matter of duration and severity. The story line, he’s said, is identical.

Eller said that what large volume home builders do when times are difficult is to scale back their pricing far enough and fast enough to reconnect with home buyers’ needs. With this advantage of price elasticity over sellers of existing homes, new home builders would restrike a balance in their businesses and pick up market share coming out of the lowest depths of the housing recession.

This time, with absolute housing unit vacancies so high, a consumer economy facing grave uncertainty, and a jobs picture that may slip, slide, gain, and fall choppily through the next several earnings seasons, the plot line Eller says is so consistant may get its real stress test.

High volume builders, particularly those whose capital structures allow them to use public credit and debt markets for operational financing, typically come out of downturns with more market share and greater clout, not just among buyers, but among subcontractors, distributors, and manufacturers of materials that go into building homes.

That part of the narrative plays out in the Great Recession only if companies can keep their excesses in the land dance of ‘03 to ‘07 from haunting them to death.

The achievement of KB Home and others who’ve borrowed liberally from the Rayco model of the S&L crisis-prompted downturn of yore (KB bought Rayco in 1996) right up through the Shea Spaces model we’ve remarked on in the past month is that they’ve neutralized the smothering effect of what a company agreed to pay for land with funny money that everyone knows is not around anymore.

Home builders need 2009 and 2010 to do two main things strategically. One is to leverage U.S. policy support for housing for all it’s worth. Second is to restore “new” as a focal point of desire among buyers of homes.

This is why the Open Series, Spaces, and all of the other monthly-payment sensitive offerings are significant looking ahead to 2010 as well as back to the past 12 months. They leverage policy in a minimum of two ways: both on the demand side with the tax credit and on the corporate tax side with a transaction that could turn into a Net Operating Loss refund.

They also turn inventory, generate cash, rid the operation of cost, and create need for a company’s operational fixed-cost structure.

Importantly, moreover, these products are essential initiatives around which companies can make themselves over. They’re a learn-by-doing tool, and the most important lesson to come out of being able to produce homes at a price and with a design customers want is the reframing of the “good, better, best” approach to positioning.

Even when it comes to the American Dream, “good enough” is where capability, cost, and aspirations meet. That buyer is not necessarily thinking of her home as a quick-return investment, but more of a buy and hold one, to grow into, enjoy, and then trade for value later.

“Good enough” may strike some as a come down from “you can have it all.” But it’s at the heart of the new normal, and good enough may just be good enough to ensure we’ll be hearing “I’m still here,” or “I’m back” from all of you in 2010.

Stay tuned for tomorrow’s 2010 Megatrend on the “Brief Life and Death of Confirmation Bias.”

December 28, 2009 | Filed Under Financial Crisis, Home Builders | 2 Comments 

A Big Builder Yuletide Yarn–Happy Holidays

Hark now, every home building management reader,
Tis season once more to frame out some lieder,
‘Pon what’s come and gone and o’er what lay ahead,
In good holiday’s spirit, none too gently we’ll tread.
How else, pray ye tell, could mere maker of poems
Distract, divert, and amuse titan builders of homes
As the Dons Tomnitz and Horton, Lennar’s sagest Miller
StanPac’s knighted Kenneth (no Wall Street empty suit filler);
Ara, ever noble scion of KHov’s still-solid stock,
Nary even needs wear his Guccis with socks;
Ryland’s well-apparent heir Lawrence of purse-strings so tight
As Counts Saville, Mandarich, and Mizel, who play asset-light
Like Amatis and Strads, not so R.I. Toll, maestro of go long and hold
For the years it oft takes well-placed dirt to morph into gold?
And how, we beseech ye, dare we snip bits of attention
From KB’s Next, Mezger J, whose ‘09 O-S invention
Caught the industry’s ear, and bred me-toos galore
As product and process each pry open a door
To directs rivals guess near $35 a foot square,
(Never mind counting windows–just don’t go there)?
What of Sir Steven Hilton, Lady Palmer, kindest Duc Orleans;
Two accented Lords Ian (Cockwell & McCarthy), and Baron Schottenstein;
N’oubliez pas le roi Richard Dugas, wearer of Pultex’s dazzling crown?
Each royal by nature, each took his or her knocks; but nobody’s down.
Down to the wire each pushed for lot transaction
As sell what-the-hell gave great satisfaction.
And the only thing that could stop their roll,
Was a 60-month limit on carry-back NOL.
Check most of their balance sheets, you’ll see what’s in store.
Dry powder is one thing that e’er proves to make less into more.
A note of regret, perhaps, and it’s only an if,
Is that none of their firms seems to rate T-B-T-F.
So as the global econ’ plunged from dire to worse,
Home builders mounted a clarion cry across industry sectors, fix housing first.
In spite of dogged efforts from Senator Johnny I,
Stimulus’ gains were scant on that first try.
At a moment the economy needed action most urgent,
The $8k tax credit extended only to home buying virgins.
When the President’s signature dried on that $789 bil,
The industry knew more diligent work might win over the Hill,
So they kept up the lobby and expanded the net
To propose a new bigger credit by November’s sunset.
As TARP dollars poured billions into the tubs of the banks,
Cash drained at twice the speed as CRE values sank.
Long loyal AC&D customers threw up their hands
As special services bureaucrats wrote down their land
And gave the privates tidings of a new world order
Where every stinking loan lay deep ‘neath the water.
From vertical to vertigo, privates pushed to drive  cash,
Only to find appraisers HVCC away  in a flash.
Bare consolation can be got late Friday aft-noon,
As Sheila Bair’s agents swarm bank presos’ room.
Meanwhile, in fits and starts, and Starts and permits,
News wasn’t all bad, even doomsayers had to admit,
You could tune them all in each day on CNBC,
Crowe, Lawler, and Yun, and ever Moody’s Zandi.
For gallows humor it’s Roubini, for sound bites it’s Zelman,
For thrills we’d take Shiller, for riposte Paul Krugman.
Each metric confirms what each expert affirms,
Things may be a bit better in some uncertain terms,
With potential for worse, but not nearly as steep
As the rate of decline year on year, or some such heap.
Where things were going was anyone’s guess,
Up, down, all around—so bounced NHS.
The spin doctors prone to red herrings absolute,
Concocted one for the moment, the famed green shoot.
What happened late Spring is what happens next,
When word of the bottom follows case study’s text.
There’s a rush to reload and land’s new reset price,
Even builders stressed for cash must roll the dice.
They clamor and claw with what resources they’ve got;
Not for Danish, nor Swedish, but for finished Lots.
Thronging to buy for cents on a dollar,
Bubble behavior grabs anew by the collar.
And back in the trenches, we blanched to report
The demise of big name builders the sort
You’d hardly believe bound for builder heaven,
But there they were in droves filing Chapter 11.
Down went Mercedes, Caruso, St. Lawrence, Fulton,
Kirk, McStain, Pasquinelli, Choice and Morgan.
Some of them would go the way of Kimball-Hill,
Others would fight the fight, by dint of their will.
They’d work with the trades, and work with the lenders,
They’d work overtime, 24/7 weekenders.
Others yet would emerge from out of the ash,
Refinanced and fit for a new dash for the cash.
And what of the buyer, the paralyzed, pulverized buyer,
Whose job might be at risk and whose debt’s never been higher?
One of the housing crisis’s most brutal pranks
Is to make so many home sellers the same banks
Who say they can’t fulfill the terms of construction loans
Because, you see, they utter in solicitous whispered tones,
Each project’s value has declined beyond repair,
In fact, they say, there is no there there.

So what will we see happen come 2010?
Will ‘09’s ups and downs play out all over again?
Will all that great talent we’ve had to let go
Get stuck floor managing Lowes and Depot?
Will Bernanke blink on his MBS plan?
Will inflation flair its ugly force again?
Will 3.5 be history in the FHA?
Will the econ trace a double-vay?
As the night before night before night before falls
We wish warmth, resolve, and resilience to you all.
No business compares, no folks so salt of the earth,
We want you to beat this thing and show what you’re worth.
Take an instant and remember what is sometimes unclear:
Good people are with you, behind you, here.

December 21, 2009 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Shea Homes’ Spaces Has Got the Home Building Industry’s Attention

Among 2010 New Year’s resolutions, perhaps consider this. Note to self if you’re a leading home building company senior-management executive spying floor plans, elevations, marketing, and sales efforts at what could be an inflection point new product strategy for American new home building in the 21st Century.

Don’t get caught by the CEO of the company whose homes you’re snooping around in.

But if you do get nabbed–as one top 100 home builder’s VP of sales and marketing did one pristine early December afternoon in the heart of California’s Inland Empire home building war zone–you might hope that it’s Shea Homes CEO Bert Selva who busts you, and that it’s in one of Shea’s just unveiled Spaces communities.

Said perpetrator’s name shall go unreported. It’s actually not that important. Espionage of this nature is part and parcel of the high volume home building game, and Bert Selva knows that. He took it all in stride and let his prisoner off gently when the fellow said, “Bert, you’re doing an amazing thing here. I’ve been here  four times now. I should probably buy one of these houses.”

“In what other manufacturing business do you have the ability to walk into your competition and pick up their trade secrets (i.e. floor plans and elevations) in their marketing materials? If it’s innovative, it doesn’t stay secret for long,” says Selva.

In fact, Selva’s pleased with the stir Shea’s introduction of Spaces homes has created. He’s had dozens of calls about Spaces, including a number from the CEOs of several public home building companies, and there’s a reason. Sleek, simple, functional, flexible, sustainable design. And, to boot, you can use those same descriptives for the operational process, which makes it low in variability, high in scaleability, and therefore affordable.

Affordable, cool, energy-efficient. That’s the thinking behind the Spaces homes. Take the process engineering revolution Jeff Mezger and his team at KB Home pulled off to make KB’s Open Series the talk of 2009 and give that whole initiative a demographic and psychographic pitch toward that generation of 77 million we’ve long referred to as “tomorrow’s home buyer.”

Think iPod or iPhone. Think W hotel. Think different.

“What did Apple do with the iPod that made it a great product?” says architect Mike Woodley, who entered the top-secret creative development of the Spaces project in late 2008. “They made it work really well at several functions; they streamlined the design, and they got rid of all the knobs. That’s what we’ve done with the Spaces homes. It’s flexible, clean, and it’s all about how people live in and use a house. We got rid of all the knobs.”

Woodley notes an important phenomenon that’s held from the time he was running charrettes on the project late last fall through the present, when he presents Spaces to everyone from Shea division presidents to local planning commissions. Not everybody likes it, and not everybody gets it.

“We actually know we’re onto something when we have the older school guys talking about how this or that doesn’t line up, or this is too thin, or that’s not enough,” says Woodley. “This really is new, and it’s got to appeal to buyers who don’t want what we’ve been doing for so long now.”

In doing so, Shea captured efficiencies enough to build profitably with a price tag to customers up to 15% below equivalent homes in the 2,000 sq. ft. range and below, whose prices are already 15% to 20% less than they were at their 2006 peak.

So Shea, which up to now could only compete by out-wowing its rivals with location, architectural panache, amenity, and quality, now can compete on price. Amid estimates that foreclosures and distressed sales will remain part of the fabric of real estate like an unwelcome visitor with no plans to leave, competing on price is not an option. This is especially true for private home builders whose capital structure won’t allow them to simply impair lot values and dump them on the cash-for-acres net operating loss tax carry back market.

So private home builders in particular face a 2010 that like the past 24 months or more means surviving on their wits. And that means gaining a desirability advantage over both foreclosures and competitors. The simplest equation here is winning on both price and design/engineering.

To do that, home building strategy must change both product and process. Spaces does that for Shea.

December 11, 2009 | Filed Under Financial Crisis, Legislation | 3 Comments 

Housing Scenario for 2010: Home Building 3.0

Here’s one installment in what will probably be a multi-part series extending into the year ahead, which no one will deny is going to be another rough one for residential construction companies. The theme here might be “how home building companies shift from a role as passive victims of housing’s 100-year storm to seizing control of their own destiny in a challenged GDP economy.”

The thought comes from the assumption that home builders’ early November Capitol Hill coup–the passage of the extension and expansion of home buyer tax credits through April 2010, and the telescoping of the Net Operating Loss tax carry back period to 60 months–is it as far as policy’s helping hand to stimulate demand.

May as well think of it this way. Run like hell to avail of every possible tax refund dollar, and cash generative dollar from home sales that will likely crescendo in February and March of next year. Then brace for dip number two–in sales volumes, prices, and possibly the broader economy.

You may have been through the worst of this, but nobody’s saying that getting better isn’t going to hurt.

At any rate, count out more policy care packages. Even interest rates have got to unglue once the trillion-plus in recently minted dollars start blowing around in the real economy. So that tail wind becomes another stiff blast in the face.

Where does this leave home builders’ odds of controlling their own destiny by the end of 2010?

If Moody’s chief economist Mark Zandi’s math works out correctly, 4.8 million homes are going into foreclosure and will come out as foreclosure sales in the years 2009 through 2011. That works out roughly to 4500 a day for the next 700 days or thereabouts.

So if taking control of your destiny is to be more than a pipe dream, fighting foreclosure sales is a fact of new home builder life that needs to get operationalized strategically, in design, in sales, in identifying the need you fill, in land selection, in quality construction, and in delighting your buyer. KB Home, Meritage, D.R. Horton, M/I Homes, and many others did brilliant things to design and operationalize foreclosure fighting home strategies around monthly payments for the entry level market.

We’re convinced of the notion Tim Sullivan of Sullivan Group Real Estate Advisors speaks of as “relative affordability,” [simply click the link, register, click on "Best Practices," scroll to Sales & Marketing, and select "What's Selling? Who's Buying?"] which suggests that there’ll be a foreclosure fighter [follow same directions above, click on Design and select Foreclosure Fighters] at multiple price points.

As we see it, there are two big inhibitors big builders face in fighting foreclosure sales. One is cost and the other is value. Lets consider cost first.

Fletcher L.  Groves III does a marvelous job of  mapping the cost flow for an enterprise builder in words in an analysis titled “Three Ways to Measure the Pipeline. ” Imagine a dialogue–consultant and CFO.

“Well, we have never thought about it that way”, the CFO responded. “I suppose the cost would be whatever we spend to have a pipeline in place. The nature of a production pipeline is that of a relatively fixed object, heavy and difficult to move. I would say that the cost of our pipeline is all of the non-variable cost we incur every year, to have the capacity to build homes.”

“Yes”, she [intrepid consultant] replied. “The cost of the pipeline is what RB Builders pays every year, in the form of operating costs and resources, to have the use of it. You pay for the cost of the pipeline, whether you use it or not. That puts the cost of the pipeline squarely in the category of non-variable costs.

“In order to understand productivity and production capacity, you must first understand how costs behave in relation to Revenue, and, more importantly, how you manage those costs on the basis of that behavior.

“On the one hand, you want to control your direct, variable costs — you want to reduce the cost. Really, though, what you want to do is extract maximum value from it. Value is the difference between the price you sell a house for, and what it cost you to deliver it.

“On the other hand, you want to leverage your indirect, non-variable costs. Those are the costs you expect to incur regardless of the Revenue you generate, and you want to produce as much output — as much Revenue, as much Gross Income — as you can from them.

The issue, vis a vis the industry’s fight against foreclosures is this: on a macro basis, there’s too much pipeline. There are too many invariable costs going into too much operational capacity right now. We’re probably paying for SG&A at the expense of actually employing talent that would create long term value.

Variable direct costs, construction time and labor efficiency, first-time quality can be managed for greater improvement, and land costs can and should be managed down to achieve foreclosure-fighting relative affordability at every price point.

But the glaring fact is, too many markets have too much home building operational infrastructure in place at too high an aggregate cost for new home building to gain a secular advantage over  foreclosure sales.

The simplistic answer here is that consolidation will correct for the excess pipeline capacity, take out the redundant overheads and the market will find equilibrium.

But that discounts the importance of the other big inhibitor we mention above: value.

And here’s where the real opportunity is for home builders to gain control of their own destiny. Cost and its relation to a buyer’s price is but one part of the solution. The buyer, after all is not only buying on price, he or she is buying on value–present and future–and to fight foreclosures, relative affordability means that value is factored into the equation.

So, here’s the idea. In markets where there are national builders, which have access to capital, and local builders who don’t have access to capital, the opportunity would be to capture overheads and invariable infrastructure costs across multiple companies, and set management, local real estate, and design talent to the task of developing the value side of the equation. A national builder would underwrite the development, design, and process engineering work of a private home building company, which would keep its brand trust mark and its incubator business alive but get rid of fixed costs.

The model works in the pharmaceuticals sector, where mega companies partner with entrepreneurial biotechs skilled at identifying and meeting the evolving need for innovative new medications.

Amid the emergence of NewCo executives from the woodwork and the ever-fainter pulse of private companies who’ve been living on their cash reserves, alliances like these could break up the logjam on distressed land pricing because the cost and value equation would add up.

That’s one way home builders begin to grab control of their destiny irrespective of  the cycle’s hesitant move toward recovery.

December 3, 2009 | Filed Under Financial Crisis, Home Builders | 2 Comments 

KB’s Mezger Emerges from the Shadow of His Former Boss

KB Home chief executive officer Jeff Mezger is a cautionary tale incarnate, in a positive sense. He succeeded the larger-than-life Bruce Karatz as KB chief, just as 2006 shut its eyes on all that was home building’s halcyon era three years and a life-time ago. Almost like an understudy thrust suddenly into a lead role on Broadway, the limelight was all Mezger’s.

What a tough act Mezger had to follow in terms of the legend Karatz had become. If there were doubts about Mezger’s ability to step out of the shadow of his former boss, they should be fading memories by now.

Inside of a year, Mezger–who’d gotten credit for developing an internally vaunted KB Next program for transforming construction operation management, product offerings, and overhead costs inertias around a streamlined organization–was retooling KB’s skill set. Gone was the strategic prong focused on elevating KB Home’s average selling price from the bottom of the cellar among its peers. Gone was the have-it-anyway-you-want-it infinitude of choices, options, and upgrades, in favor of a manageable spectrum of choices based more on monthly-payment reality vs. constant house price appreciation fantasy.

KB Home bee-lined for its roots in entry level, and having picked up word that at least some home builders in some markets were reshaping product offerings down to the square foot based on real money monthly payments–Meritage, for example–KB swung for the fences in its value engineered offering. The Open Series was born.

What Mezger did earlier on than most of his CEO peers was to act rather than to watch. If one was a spectator for too long into 2007–believing that a tide of worldwide liquidity was due to reinforce demand the way it had again and again from 2003 to 2006, one got stuck in the financial maelstrom that became the global economic crisis of 2008.

If you were Jeff Mezger, you got ahead of the curve. You were looking at the same data he was in 2006 and 2007–foreclosures were a wave that was rising, the economy was weakening, and credit and jobs were going to come under severe stress.

To cut his land losses, keep the company focus on moving inventory, and do what he knew how to do well from his time in KB’s far-flung trenches, he ratcheted up emphasis on construction speed and lowering cost. He wanted to own the new-home alternative to foreclosures, and he knew his boys in the field could get KB there if they had to. And they did.

For more than a year–mostly in 2008–Mezger took a fair amount of grief on orders, overheads, and financial performance decline. About the only positive piece of the KB Home story from an outsider’s perspective was the sale of KB Home’s French unit, the one-time benefit of which saved a quarter’s worth of profitability and became KB’s dry powder for times ahead.

Right out of the gate as KB launched its Open Series, it found success.

At least one or two of every 10 prospective home buyers who were looking to move into homeownership for the first time wanted a new home, vs. a financially distressed home.  The Open Series not only did well in its own right, it attracted copy-cats–low-cost, simplified, reduced square footage homes that would be built to fend off foreclosure sales from complete domination of the landscape.

Of course, privately funded home building companies found it unfair. The terms of their bank loans prevent them from writing down their land costs, lowering the direct construction costs and price of the home, and pressing “unload.” The same impairment that hits public companies’ shareholder equity can take away everything a private home builder owns 10 times over.

But what Mezger and those others who’ve come into the market with me-too low-cost models for entry-level price points have done is to create a niche opportunity just above that price level for public and privates where they can fight more expensive foreclosures. That might mean that a positive story at the lowest end for publics could soon provide a price point haven for privates to offer more at a great value–but they still have to build fast.

We were talking with some younger professionals recently who more or less affirmed Mezger’s bet that, tax credit or no, entry level buyers are the stepping stones to recovery.

One such young professional said, “Put it this way, the Social Security system will be shot by the time we retire; 401ks have proven they’re not the answer to a secure post-career life, and companies are certainly not going to take care of us through pensions. So we’re on our own, and real estate is the only asset we can depend on to build up enough value to be able to retire some day.”

Now, it may be that further analysis of personal investment strategic alternatives could reveal that a more diversified program might be wise for this young professional. But homeownership seems to have solidified itself as an anchor to the plan.

So, it’s arguable, given who is keeping their jobs and driving households toward lifestage changes and adjustments at the most accelerated pace, that the $8,000 tax credit for first-time home buyers “pulled forward” buyers enough to deplete demand among them.

Birth rates during the Generation Y years ranged from the mid-3 millions to the mid-4 millions per year. There’s a lot of demand in the pipeline for first-time home buyers, especially when they’re the most-well educated generation in history and are bound for the most part to weather even double-digit unemployment rates with a mission to self-ensure their future.

Point is, the only strategy for right now–whether you’re a multi-regional public executive or a private entrepreneurial firm–is a foreclosure-fighter strategy. Competing against other new-home sellers is still, of course, a given. But the real race is to build fast enough and low-cost enough, at every price point, to compete with a foreclosure or a distressed sale that is 30% below your best sticker price.

You can get at it with your monthly cost-of-ownership story. When younger decision-makers hear that story clearly, they’ll get it.

September 28, 2009 | Filed Under Earnings, Financial Crisis, Home Builders | Leave a Comment 

Infill Home Building Goes to the Back Burner

D.R. Horton made sweeping changes in its strategy recently, ones we look at for insight into how other home builders behave at this juncture in housing’s boom and bust cycle.

On both coasts, Horton divisions that focused on multifamily for-sale residences got orders to sell or opt out of their land positions and wind down. The company was “going back to its roots in entry level, single family homes… They’re getting out of the condo business,” an executive who’s familiar with Horton’s recent action plan tells us.

It was just about this time of year in 2006 that Horton’s management leaders affirmed that urban infill , multilevel, podium- and midrise style homes were a big part–a double-digit share–of the company’s future. And Horton had company in its embrace of the “inner rings” of urban areas as a rapidly emerging market for the nation’s biggest builders–the leadership at Pulte, then-Centex, Lennar, KB Home, and Hovnanian each asserted that closer-in urban home building would represent between 10% and 20% of their operations by 2010 or 2012.

This is where the market was headed, they said. Younger buyers prefer to be nearer their downtown jobs, and empty-nest Baby Boomers would downsize in droves out of the exurbs into cultural hubs for their “next phase” of being Boomers.

That was theory circa 2005-06.

That’s history now. Housing’s 2002 to 2006 boom came and went without teaching most greenfield single family home builders skills they needed to know about differences in capital management, the land and city politics game, nor construction operations to succeed with an inner-ring push.

Put it this way, $35 per square foot in direct costs may be fact for some home builders today or it may be malarkey. But it’s the standard of the moment in terms of an operating efficiency that has had to match new homes with foreclosure sales, and is going to have to continue to do that.

That means the cost per square foot metrics for urban building are a dog that won’t hunt in today’s market.

Horton, like the other publics save Beazer and Hovnanian, has amassed a cash war chest. Dry powder to pounce on opportunity or to have on hand for more rainy days.

Here are a couple of factors that could burn through those war chests in no time:

All of this means Horton and the other home builders are now under the gun on several levels.

It’s an awkward time where a balance sheet strategy gets more emphasis than an operating long-term strategy. Horton knows this only too well. They know the inner-ring plan was the right one for the future. They, and almost all the other home builders who tried it with the exception maybe of Toll Brothers, didn’t have the capital runway to learn that business.

It’s going to hurt them down the road.

September 21, 2009 | Filed Under Financial Crisis, Home Builders | 2 Comments 

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