The Housing Chronicles Blog: Notes from Wachovia's Home Building Conference, Part I

Friday, February 29, 2008

Notes from Wachovia's Home Building Conference, Part I

Over the last three days in Las Vegas, the nation's top homebuilders and building product manufacturers have been meeting at the Wachovia Home Building and Building Products Conference, with the most notable giving presentations on how their companies are navigating the current climate in the housing industry. Following is a summary of coverage from various sources around the Web:

The Ryland Group (courtesy of BuilderOnline.com):

The Calabasas, Calif.-based builder, which operates in 28 states, told investors at Wachovia's Home Building and Building Products Conference in Las Vegas yesterday afternoon that its strategies for land acquisition and construction haven't changed, and that it would continue to focus on growing capital and earnings per share, and on scaling down its size to proportions best suited for current market conditions...

Gordon Milne, Ryland's CFO and executive vice president, made the point that his company isn't saddled with some of the weight that its competitors have been dragging around. For example, it was never big on joint ventures, and only had $30 million invested and $40 million in shared indebtedness at the end of 2007. While nearly one-fifth of its inventory is in Florida, Ryland's geographic diversity protected it, somewhat, from the severe downturns in California, Arizona, Colorado, and Nevada, where cumulatively only 16 percent of its inventory is located. (Looked at another way, the company's inventory, as of December 31, was down in Northern California by 64 percent, in Southern California by 65 percent, in Las Vegas by 60 percent, in Phoenix by 72 percent, and in Fort Myers by 69 percent.)...

Meanwhile, Milne emphasized that his company's financial condition is sound. It continues to buy back stock, having repurchased 41.6 million shares for $59.3 million last year. It will make a $50 million debt payment in 2008, but doesn't have another due until 2012. And it ended last year with $180 million in cash. (Last year, Ryland also lowered its credit line to $750 million from $1.1 billion.) Ryland owns about three-quarters of its 40,000 lots, and Milne said the company wants to get that down to 50 percent owned. At the same time, it continues to reduce its exposure to land options.

The one area from the recent boom that Ryland misses, said Milne, is the disappearance of Alt-A mortgages, which in 2005 accounted for 17 percent of the loans its mortgage subsidiary wrote. By the end of last year, Alt-A and subprime loans accounted for zero percent of Ryland Mortgage's business. "Alt-A was a big loss," said Milne.

Centex Homes (also courtesy of BuilderOnline.com):

Centex chairman and CEO Tim Eller outlined the six elements of a market trough this morning to kick off the Wachovia Home Building and Building Products Conference in Las Vegas.

Eller said that the six elements of a trough are when foreclosures rise, the economy slows, housing starts fall precipitously, the new home market corrects much faster than the existing market, land prices begin to soften, and home builders with liquidity begin to re-invest.

"What we find is that the first four things have happened, but we have yet to see land prices soften and builders with liquidity have not begun to re-invest," he said...

Moving forward, Eller said Centex is focused on streamlining its processes and operations. He said the company went from 4,500 floor plans at the peak of the boom and is now down to 700, with plans to reduce plans even more.

He said Centex will focus on "A" locations nationally and stay away from the fringe housing markets. "The 'A' locations will always prevail," he said.

Eller said the company had 44 divisions at the peak and is down to 35 today and will be down to about 30 by the company's next fiscal year. For example, in the Southern California, Centex went from five divisions down to one centered in the Inland Empire.

The company also plans to maintain a more flexible land position, going "shorter" on owned properties and "longer" on options as the market matures.

Beazer Homes (from the Atlanta Journal-Constitution):

A trimmed-down, reorganized Beazer Homes may be headed for further alterations as the troubled, Atlanta-based homebuilder tries to reinvent itself in the worst housing market in decades.

Beazer CEO Ian McCarthy, speaking to the Wachovia Homebuilding and Building Products Conference in Las Vegas, said the company is working feverishly to rein in costs, reduce its excess inventory of finished homes and meet a May 15 deadline for restating its quarterly financial reports for much of the last decade...

Over the past year, Beazer has cut its workforce in half, withdrawn from the mortgage business, reduced its land holdings, eliminated some $50 million in materials costs and withdrawn from five metro housing markets across the country.

"We are trimming our land wherever we can. And obviously we are not developing beyond the sales pace that we need today," McCarthy said.

In the weeks ahead, McCarthy said the company may reduce its activity in its 40 remaining markets scattered across 19 states by examining market data to determine which of its four product categories are best suited for each market.

In addition to the slow pace of home sales, Beazer is facing two federal investigations into its mortgage lending practices and a collection of lawsuits from buyers, stockholders and pension plan participants.

The troubles began with reports last year about high foreclosure rates in Beazer neighborhoods in the Charlotte, N.C., area.

McCarthy said the company is working to resolve its legal challenges and putting measures in place to prevent any similar problems from arising in the future, including the appointment of an internal compliance officer and implementation of a new companywide ethics policy.

K. Hovnanian (from BuilderOnline.com):

Forget about profitability and reasonable margins in 2008. This will be the year of generating cash flow. That was the message given Friday to investors by Ara K. Hovnanian, president and CEO of Red Bank, N.J.-based Hovnanian Enterprises...

Having been through several downturns since the company was founded in 1959, it's taking similar steps now to weather the storm, Hovnanian said, including renegotiating and walking away from land options, dramatically reducing land purchases, "right-pricing" its products, quickly turning its standing inventory, and cutting overhead, including a significant number of jobs...

Calling the current housing correction as dramatic and rapid as those of the mid-1970s and the early1980s, Hovnanian said each of those downturns shared an important similarity-a rebound that was as sharp and as fast as the fall-off, with sales and prices rising significantly within 12 to 24 months.

One notable difference between the earlier downturns and the current one, Hovnanian said, is the interest rate. In the early 1980s, they peaked above 18 percent. Today, they're below 6 percent and predicted to go even lower. That will work in the industry's favor as the market begins to turn around.




1 comment:

shashindra said...

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thanks