The Wall Street Journal
Pelican Preserve, an adult community in Fort Myers, Fla., hasn't had its grand opening yet, but several buyers have already signed contracts for homes in the development, where prices start at $140,000.
The early sales—and the relatively modest selling prices that helped attract them—reflect the advantages WCI Communities Inc. now enjoys over many of its home-building rivals, thanks to a trip through bankruptcy court.
Pelican Preserve, with its planned new 1,150 homes, is the company's first new construction and sales project since it emerged from Chapter 11 proceedings last year.
Under court protection, WCI slashed its costs by nearly 75%. It has also been able to write down the value of its land holdings, which was battered by the housing downturn, to reflect the current market.
That "gives us a competitive edge in pricing our homes," says Chief Executive David Fry. "Other companies didn't have that luxury."
While most builders done in by the housing market's collapse are gone for good, a few are emerging from bankruptcy revitalized—with less debt, choice land and sharper business plans. Like WCI, whose public shareholders were wiped out under its reorganization plan, they are more likely to be owned by their creditors.
Relieved of day-to-day shareholder pressure to keep up their stock price and pay all their bills, these companies can take steep write-downs on the value of their land, which was often purchased during the industry's boom years. That allows them to price homes low enough to capture consumers' attention and still post a profit.
The new competition hasn't helped large publicly traded home builders. Many of those builders managed to avoid bankruptcy court but are struggling to sell homes in what continues to be a weak market, particularly in states like Florida, Nevada and Arizona. Having counted on winning business away from their failed peers, they may instead find themselves up against tough, newly private rivals that have learned from past mistakes.
"It's just a lot easier to steal market share if all the private guys are on the sidelines," says Michael Widner, a home-building analyst with Stifel Nicolaus.
Some industry executives, however, believe that tight credit and lack of access to public markets will keep Chapter 11 veterans like WCI in check.
Ken Campbell, the CEO of publicly traded Standard Pacific Corp., of Irvine, Calif., says his overriding concern is the lack of a housing-market recovery.
"Without good prospects of a recovery, I don't think much capital is going to make its way to the recently bankrupt companies," says Mr. Campbell, whose company was near bankruptcy when it was rescued by a distressed-debt buyout firm in 2008.
Even for the healthiest builders, home construction is a risky business these days. Despite record-low mortgage rates that have made homes more affordable, new-home sales have been hurt by high unemployment and weak consumer confidence. A bloated supply of bargain-priced resale and foreclosed homes makes it tough for home builders to compete on price.
But housing is cyclical. "We're not going to be in this slump forever," says David Warren, a bankruptcy attorney at Poyner Spruill LLP.
That's what Orleans Homebuilders Inc. is counting on. The Bensalem, Pa., company initially planned to sell the bulk of its land to rival NVR Inc., but instead it opted for reorganization.
"Why would you sell at the bottom?" asks Mitchell B. Arden, senior managing director of Phoenix Management Services Inc., Orleans Homebuilders' chief restructuring officer. "Home builders have historically made money."
Orleans's goal is to emerge from bankruptcy court later this year with its debt chopped in half. It aims to increase efficiency and cut cost by scaling back the number of home models and variations it offers. Under its reorganization plan, Orleans will be owned by senior lenders, including a trio of hedge funds.
Mr. Arden says the revamped Orleans could sell off less-prime land parcels. Finding buyers shouldn't be a problem, he says, because plenty of builders are in the market for bargain-priced land as they prepare for an eventual upturn.
Indeed, some private investors are already betting they can make money building houses on cheap land. City Ventures, a Santa Ana, Calif., builder launched last year, raised $100 million this year in private-equity investment to fund land acquisition. It says cheap land has allowed it to price homes as much as 50% below prices at the height of the boom.
New Home Co., another California-based start-up, says it has been buying land for 20% to 50% below boom prices. Its first community in Irvine, Calif., sold out this year, and it plans 38 more homes.
"As a private builder with no legacy assets that are tying us down and being pretty well capitalized, I think it gives us every advantage," says Larry Webb, New Home's chief executive, who previously worked for a private builder that went bankrupt.
Overpaying was a mistake that came back to haunt WCI, as it did many builders. It bought two smaller builders at the top of the market, says Mr. Fry. And it started several luxury-condominium projects in Florida, one of the states hardest hit by the housing slump.
As the company stumbled, activist investor Carl Icahn bought up stock and fought his way onto the board, but WCI couldn't escape the crumbling housing market. In August 2008, with $1.9 billion of debt, it filed for Chapter 11 bankruptcy protection.
WCI, based in Bonita Springs, Fla., emerged from Chapter 11 last fall as a closely held timber frame home builder with debt of $450 million. It is owned primarily by more than 15 private-equity firms that bought up its debt at a discount. Its largest holder is Monarch Alternative Capital LP.
The reorganized company sold the land that didn't work with its revamped business plan, including sites for high-rise condominiums in Florida and Virginia, and kept about 9,000 acres.
Land cost now accounts for an average 10% of the price for one of its homes, down from 20% at the market's peak.
WCI slashed its work force and the number of floor plans it offered on its homes. Corporate costs—ranging from marketing to real-estate taxes—fell to around $40 million a year from more than $150 million.
"There has been a radical culture shift in the organization," Mr. Fry says. "We will be much leaner going forward."
The early sales—and the relatively modest selling prices that helped attract them—reflect the advantages WCI Communities Inc. now enjoys over many of its home-building rivals, thanks to a trip through bankruptcy court.
Pelican Preserve, with its planned new 1,150 homes, is the company's first new construction and sales project since it emerged from Chapter 11 proceedings last year.
Under court protection, WCI slashed its costs by nearly 75%. It has also been able to write down the value of its land holdings, which was battered by the housing downturn, to reflect the current market.
That "gives us a competitive edge in pricing our homes," says Chief Executive David Fry. "Other companies didn't have that luxury."
While most builders done in by the housing market's collapse are gone for good, a few are emerging from bankruptcy revitalized—with less debt, choice land and sharper business plans. Like WCI, whose public shareholders were wiped out under its reorganization plan, they are more likely to be owned by their creditors.
Relieved of day-to-day shareholder pressure to keep up their stock price and pay all their bills, these companies can take steep write-downs on the value of their land, which was often purchased during the industry's boom years. That allows them to price homes low enough to capture consumers' attention and still post a profit.
The new competition hasn't helped large publicly traded home builders. Many of those builders managed to avoid bankruptcy court but are struggling to sell homes in what continues to be a weak market, particularly in states like Florida, Nevada and Arizona. Having counted on winning business away from their failed peers, they may instead find themselves up against tough, newly private rivals that have learned from past mistakes.
"It's just a lot easier to steal market share if all the private guys are on the sidelines," says Michael Widner, a home-building analyst with Stifel Nicolaus.
Some industry executives, however, believe that tight credit and lack of access to public markets will keep Chapter 11 veterans like WCI in check.
Ken Campbell, the CEO of publicly traded Standard Pacific Corp., of Irvine, Calif., says his overriding concern is the lack of a housing-market recovery.
"Without good prospects of a recovery, I don't think much capital is going to make its way to the recently bankrupt companies," says Mr. Campbell, whose company was near bankruptcy when it was rescued by a distressed-debt buyout firm in 2008.
Even for the healthiest builders, home construction is a risky business these days. Despite record-low mortgage rates that have made homes more affordable, new-home sales have been hurt by high unemployment and weak consumer confidence. A bloated supply of bargain-priced resale and foreclosed homes makes it tough for home builders to compete on price.
But housing is cyclical. "We're not going to be in this slump forever," says David Warren, a bankruptcy attorney at Poyner Spruill LLP.
That's what Orleans Homebuilders Inc. is counting on. The Bensalem, Pa., company initially planned to sell the bulk of its land to rival NVR Inc., but instead it opted for reorganization.
"Why would you sell at the bottom?" asks Mitchell B. Arden, senior managing director of Phoenix Management Services Inc., Orleans Homebuilders' chief restructuring officer. "Home builders have historically made money."
Orleans's goal is to emerge from bankruptcy court later this year with its debt chopped in half. It aims to increase efficiency and cut cost by scaling back the number of home models and variations it offers. Under its reorganization plan, Orleans will be owned by senior lenders, including a trio of hedge funds.
Mr. Arden says the revamped Orleans could sell off less-prime land parcels. Finding buyers shouldn't be a problem, he says, because plenty of builders are in the market for bargain-priced land as they prepare for an eventual upturn.
Indeed, some private investors are already betting they can make money building houses on cheap land. City Ventures, a Santa Ana, Calif., builder launched last year, raised $100 million this year in private-equity investment to fund land acquisition. It says cheap land has allowed it to price homes as much as 50% below prices at the height of the boom.
New Home Co., another California-based start-up, says it has been buying land for 20% to 50% below boom prices. Its first community in Irvine, Calif., sold out this year, and it plans 38 more homes.
"As a private builder with no legacy assets that are tying us down and being pretty well capitalized, I think it gives us every advantage," says Larry Webb, New Home's chief executive, who previously worked for a private builder that went bankrupt.
Overpaying was a mistake that came back to haunt WCI, as it did many builders. It bought two smaller builders at the top of the market, says Mr. Fry. And it started several luxury-condominium projects in Florida, one of the states hardest hit by the housing slump.
As the company stumbled, activist investor Carl Icahn bought up stock and fought his way onto the board, but WCI couldn't escape the crumbling housing market. In August 2008, with $1.9 billion of debt, it filed for Chapter 11 bankruptcy protection.
WCI, based in Bonita Springs, Fla., emerged from Chapter 11 last fall as a closely held timber frame home builder with debt of $450 million. It is owned primarily by more than 15 private-equity firms that bought up its debt at a discount. Its largest holder is Monarch Alternative Capital LP.
The reorganized company sold the land that didn't work with its revamped business plan, including sites for high-rise condominiums in Florida and Virginia, and kept about 9,000 acres.
Land cost now accounts for an average 10% of the price for one of its homes, down from 20% at the market's peak.
WCI slashed its work force and the number of floor plans it offered on its homes. Corporate costs—ranging from marketing to real-estate taxes—fell to around $40 million a year from more than $150 million.
"There has been a radical culture shift in the organization," Mr. Fry says. "We will be much leaner going forward."
No comments:
Post a Comment