Hovnanian Plans $775 Note Sale to Pay For Tender

First, let me just commend Hovnanian for still being in business. The beleaguered home builder is number one at the top of many investors' lists in the homebuilder death pool. The problem? The company took on too much debt to go on a land-buying spree during the boom and is struggling to pay off that debt while the value of its inventory has declined along with its revenues and profits. To solve the problem, the homebuilder came up with a brilliant plan. Hovnanian will buy back its debt that is trading at a discount, allowing it to book a profit. Of course, it doesn't really have the money, which is kind of the problem to begin with. But, no worries. They'll just issue some debt. Debt investors have proven time and time again that they are total suckers, so the plan should work well. Issue debt, buyback debt, book profit, stay in business a few more years. It's called kicking the can down the road.

Some Thoughts on the Home Builders

The Wall Street Journal has an interesting story this morning that summarizes the main issue facing the homebuilders: a glut of housing inventory, some of it from foreclosed properties in their own developments.  The article has examples of new homes built as little as two years ago in new home developments that are now in foreclosure and offered at steep discounts to nearly identical houses in the same development.  One example is in the Inland Empire of Southern California where the foreclosed house is offered at $229,900 compared to a nearly identical house offered by the developer for $299,000.  Fortunately, the builders have spin on their side, as the article is filled with quotes such as "Our brand-new homes appeal to the buyer who wants up-to-date features and a chance to make their own selections like carpeting and paint colors" from a spokesman at Pulte.  Even better is the one from the Centex CEO that claims "In general, we try not to compete with foreclosures.  It's not all about price, it's about value."  I've always thought that price and value are somehow correlated, but maybe I'm wrong.  I'm fairly certain, however, that those buyers in the market for a house in the $229K price range will likely calculate the cost of a new carpet and some paint, if they happen to hate the current choices in the abandoned house, and it will equal less than $70,000.  That is a value proposition if I've ever heard one.

Meanwhile, in RealityLand, Hovnanian posted a worse-than-expected loss of $178.4 million for its fiscal first quarter, compared to $130.9 million in the same quarter of last year.  Revenue tumbled 66% to $373.8 million.  Who does the CEO Ara Hovnanian blame for its lousy quarter?  Why, the government, of course: "Given the lack of steps taken by the federal government to address housing demand, prospective homebuyers are still faced with making the decision to buy a home against an exceeding difficult economic backdrop."  While its true that if you ignore the $750 billion in TARP funds shoveled into banks to keep them lending, the multi-billions in mortgage modifications enacted, Operation "Hope for Homeowners", the $200 billion conservatorship of Fannie and Freddie, the bailout of credit unions, extension of the Federal Home Loan Banks borrowing ability from the Fed, the TALF, TAF, TSLF (insert 15 more acronyms) from the FED, the government has positively fallen asleep at the switch.  But frankly, Mr. Hovnanian has no one else to blame for his company's current misfortune other than himself and his compatriots, who borrowed too much money to buy too much land at inflated values and built too many houses in what was clearly a bubble (and yes it was very clear to many.)  Now the builders are getting a bunch of tax breaks (Hovnanian received $145 million in a government tax refund in the first quarter) and many of them won't make it DESPITE what has been a ridiculous amount of government intervention to prop up the housing market.  Mr. Hovnanian may complain, but I'm not shedding any tears.       

KB Home Posts Another Loss, Lennar plunges

KB Home posted a $307 million loss on "improved margins and lower write-downs."  While that is a huge improvement over last year, when the homebuilder punted $772.7 million, it's still hard to celebrate those "improving margins" when you're still posting a sizable loss.  Furthermore, the company's revenue declined 56%, new home deliveries slid 52% and the average selling price declined by 6.3%.  CEO Jeff Mezger called the downward pressure on the home-building industry and overall economy "unprecedented."  But why shouldn't an unprecedented boom be followed by an unprecedented bust?  

Meanwhile, as KB Homes stock took a small beating this morning, Lennar's stock was getting hammered by a disproportionate amount.  Could there be some news?  Sort of.  The Fraud Discovery Institute released the Top 10 Red Flags for Fraud at Lennar.  Personally, I've never heard of the Fraud Discovery Institute, but a formidable name like that and a quote claiming that Lennar's joint ventures are a "ponzi" scheme, certainly made my trigger finger itchy.  I'm not sure how many of the red flags were actually new revelations to Lennar's shareholders or those who like to short the stock (yours truly, on occasion), but perhaps the use of the word "ponzi" in a Bloomberg headline woke everyone from their non-farm-payroll induced apathy.  For 2009, "ponzi" is the new "toxic assets."  Prepare yourselves to hear it used prolifically in reference to everything.  Thanks, Bernie Madoff.   

Lennar Loses More Money, Investors Cheer

Lennar posted a fiscal fourth-quarter net loss of $811 million or $5.12 a share.  The average analyst estimate was for a loss of $1.64 a share.  The stock is rallying nicely.  In my next life, I'd like to be reincarnated as an investor in homebuilder stocks because their perennial optimism never ceases to amaze me.  If there is any certainty in this volatile investing climate, it is that the homebuilders will always rally no matter how much money they lose in a quarter.  I find this remarkable as there is so much working against the builders.  New-home sales in the US fell in October to the lowest level in 17 years and builders broke ground in November on the fewest houses since record-keeping began.  Meanwhile, the number of foreclosures and vacant homes is rising.  Certainly the Fed has taken significant actions to lower interest rates and boost demand for homes.  But with consumer confidence at multi-decade lows and the employment picture so cloudy, people are retrenching and saving for a rainy day.  

One of the fallacies that the real estate industry likes to spread like gospel is that there is all this pent up demand from people who need to buy a home because of personal and family changes.  Nobody "needs" to buy a home, particularly not a new home.  Certainly people want to buy homes when their families expand, but they can always keep renting until they feel far more secure about their financial situation.  Just exactly when consumers begin to feel confident enough about the future to take on the stress and responsibility of a new mortgage, in addition to actually getting approved for a mortgage in this lending environment remains an enormous question mark.   

Investors Throw in the Towel on Homebuilders

Investors have tolerated quarter-after-quarter of gut-wrenching losses from the homebuilders.  And yet, despite the magnitude of any ridiculously large loss posted, there was always some bullish goon on CNBC talking about how "cheap" the homebuilders were and how housing prices had bottomed and a turnaround was right around the corner.  The stocks would nearly almost always rally in the face of horrendous earnings reports.  So, I find it interesting that today, of all days, investors actually care that Pulte punted another $280 million on a variety of land-related charges and other impairments.  For some reason, despite watching revenues plummet every single quarter for the past eight quarters or so, today it really matters that Pulte's revenues dropped 37% and that the CEO refuses to even attempt to forecast.  Suddenly, all of the homebuilding stocks are down at least 20% in one day.  Could it finally be homebuilder capitulation?  Not until we get to zero.  

Market Higher on Continued Declines in Commodities Prices

Commodities continue their recent sell-off, giving a boost to financials.  Lower commodities prices mean less inflation which takes the pressure off of the Fed to raise interest rates soon.  Higher interest rates would be yet another kick in the pants of the beleaguered banking industry.  As a consequence, each time commodities take another tumble, financials rally.  Furthermore, it is widely believed that many large hedge funds who have had success this year were long commodities and short financials.  If these players are unwinding their positions, this further reinforces the divergent movements between commodities and financial shares.

In the good news camp, analysts at UBS upgraded AIG this morning.  The stock promptly rallied in response to the upgrade, which I find amusing.  AIG reports earnings tomorrow.  Why on earth would an investor buy a stock the day before the earnings report just because some analyst at UBS, of all places, decided on a whim that this stock is a buy?  Is that because UBS knows subprime better than anyone?  UBS has certainly lost enough money in the past year because of its subprime exposure, so I suppose that could be the reason.  In any event, once again, without irony, this is reported in the financial press as if it were significant news.  Bloomberg even has the misleading headline "AIG Rises as UBS Upgrades to Buy on Narrower Losses" implying that the company has already reported narrower losses, which is certainly not the case.  Personally, I'm going to wait to hear the actual earnings report from the company itself.  Call me crazy but I don't have an particularly itchy trigger finger.

Meanwhile, in actual earnings news, D.R. Horton reported a wider than expected loss of $399.3 million or $1.26 a share.  Analysts were expecting a loss of 70 cents a share.  Wrong again.  The homebuilder took a $330.4 million charge for inventory impairments and other charges, Revenue dropped 44% to $1.43 billion, the number of homes closed fell 36% while net orders declined 56%.  Still searching for that bottom in homebuilders...   

Lennar Posts Disappointing Losses Again

Lennar, the second-largest US homebuilder, posted a second-quarter loss of $121 million.   Around 60 cents a share out of the 76 cents a share in losses was attributed to more write-downs, indicating that the company is still losing money selling houses.  Revenues declined by 61%, deliveries dropped 60% and new orders fell 45%.  The average price of a Lennar home fell 8.1% to $274,000 from a year ago and sales incentives rose 11% to $48,700 per house, up from $43,700.  If you didn't think it could get any worse than this, well, you're wrong.  The company issued a gloomy outlook, claiming that it expected further deterioration in the housing market.

A few glimmers of hope could be gleaned from the data if you are an optimist.  Lennar's cancellation rate was 22%, an improvement from the 29% rate a year earlier.  The backlog of homes under contract and not yet sold did fall 56% to $1.25 billion, indicating that the company was working through its inventory.  I still maintain that the homebuilders are in for a world of hurt with some bankruptcies down the line.  While I'm not issuing any downgrades on the stock because I've believed all the homebuilers have been a sell for some time, maybe I can just add it to my conviction list.   

Hovnanian and Toll Post Steep Losses, Plead For Help From Congress

Hovnanian lost $5.49 a share, or $340.7 million in the second quarter. Hovnanian's losses included $250 million in land-related pretax charges. This means the company only lost around $90 million selling houses. The earnings report was littered with a bevy of minuses including a 30% drop in revenue, a decline in the average price of homes sold of 16.50%, and a 39% decline in net completed contracts. This is the seventh consecutive quarter in which Hovnanian has posted a loss.
Meanwhile, in luxury homebuilder land, Toll reported a loss of $97 million or 59 cents a share. Although the bulk of Toll's losses were related to charges against its inventory of land (they actually made $81 million selling houses), net contracts dropped by 58% from a year ago.  Frankly, I could care less if these numbers met or exceeded analysts estimates.  They are still losing gobs of money, writing down inventory, and seeing steep declines in contracts signed.  When that stabilizes, call me.  Otherwise, I remain a bear on the homebuilders.

In a conference call with analysts, Toll stated that Congress should offer would-be homebuyers a tax incentive to buy a new home, claiming that this should be a much larger priority than bailing out mortgage lenders and homeowners currently facing foreclosure. It you set aside the the fact that it is an obvious self-interested plea for help from Congress, it is an interesting idea, although I would present a different twist. It is true that home prices will never hit bottom until the enormous inventory build-up is reduced, particularly in areas where a significant number of homes on the market are foreclosed properties. What I would suggest to Congress is that they offer a tax incentive for purchases of foreclosed properties. This would give potential homebuyers as well as investors an incentive to clean up the backlog of foreclosed properties. The incentives would be skewed to more credit-worthy homebuyers and liquid investors (presumably because you can no longer get a loan otherwise), thus rewarding prudence, rather than the foolhardy spending of the bubble years. Maybe then, when the cheaper alternatives disappear, people will return to the new home market to buy a home from the homebuilders. That is, of course, assuming they're still around...

Housing Starts Rise 8.2%

Housing starts rose at a higher than expected pace of 8.2%. The rebound in housing starts was mostly due to increases in condo and multi-family construction. Starts on US single-family homes dropped 1.7% from March to the lowest level in 17 years. This news is being greeted with cheers from the market, which is pointing higher before the opening bell. You know what I was just thinking? What we really need today is a few more condo projects to add to the glut of inventories. I sure hope some of those condo starts were in San Diego where the glut of inventories at today's sales pace would take 12 years to work through. Or maybe in Miami, where it is 16 years long. The market rightfully should ignore the fact that lending standards continue to tighten, delinquencies are rising, and sales are still moving at a snail's pace in most parts of the country. It should pay attention to the enthusiasm of homebuilders, who are still breaking ground on new projects, despite their inability to unload the garbage sitting on their books. My guess is that some of the new condo projects started this month will end up in the "uncompleted condo project" statistic in a year. There's an indicator that the Commerce Department should consider adding to the report.

Toll Brothers CEO Urges Buyers to Come Out of Woodwork

Toll Brothers anticipated revenue declines of 30% for the quarter ended April 30th. Robert Toll, the luxury home builder's CEO stated that "The just-completed spring selling season was quite weak in most markets as buyers remain on the sidelines." He further asserted "We believe there is significant pent-up demand which is growing." He characterized the current market as a "buyer's market, but buyers can only take advantage of it if they buy; sooner or later they will, but unfortunately we can't predict when." Mr. Toll then took out his trusty pent-up-demand-o-meter that he carries with him to open houses to show how he measured all of that "growing pent-up demand." But his COO hissed "Put that thing away! We don't want the competition to see that!"
Mr. Toll went on to give some dismal stats on the company's current and future money-making prospects. The number of signed contracts fell by 44% from a year earlier, leading to a 58% decline in terms of dollars. The math on that works out nicely because the average price per unit on contracts signed was $590,000, down from $711,000 a year earlier. These numbers strike me as particularly interesting because I had the pleasure of listening in on Toll's earnings conference call earlier in the year. At the time, Mr. Toll was adamant about the company not needing to cut its prices because it was a luxury home builder that operated in a different segment than the other home building clowns. Mr. Toll claimed that the company did less speculative building and would just wait for the market to turn around so margins shouldn't decline. Essentially he was saying that his company really sells houses on the Moon, where the laws of physics and hopefully economics do not apply. It's an entirely different competitive landscape. You see? There's practically no gravity on the Moon, so prices can't go down. People will continue to pay top dollar for our great houses even though every other new house on Earth is being discounted by at least 30%. Then he turned to his COO and whispered "When is that stupid Moon initiative getting off the ground so I can officially announce it, instead of beating around the bush?"

D.R Horton Posts $1.3 Billion Loss

Trying desperately not to be overshadowed by the gargantuan losses posted at Fannie Mae and UBS, D.R. Horton lost $1.3 billion for the quarter on $834 million in land write-downs. This means DHI only punted around $500 million in its core operations of selling houses. Revenues declined to $1.62 billion from $2.62 year-over-year. Net sales orders fell to 7,528 from 9,983 a year ago and the cancellation rate was 33%. Waiting for a rebound in the homebuilders is beginning to bear a remarkable resemblance to the plot of Waiting for Godot, a play by Samuel Beckett, which I have never seen or read. The only thing I know is that a bunch of people sit around and wait for a guy who never shows up. Maybe in Act I these people purchase a bunch of homebuilder and financial stocks because they think Godot is just around the corner? Act II is where they become disappointed again when someone realizes it was just a Godot lookalike. What happens in Act III? I think that's the part where the weakest homebuilders go bust when Godot fails to show up.

Calpers Takes Hit on Land Deal With Lennar and Cerberus

Calpers' investment in a venture called LandSource Communities Development appears to be souring. The deal was a joint venture with the beleaguered homebuilder Lennar, and LNR Property Corp, a unit of Cerberus Capital Management. These joint ventures were extremely popular during the housing boom, which allowed homebuilders to invest in land without having to keep it as an asset on their balance sheets. The property in this particular JV was north of downtown Los Angeles, once a booming mecca of future development opportunities, now a poster child of the bust. When Calpers originally invested in the vehicle in February 2007, the venture was appraised at $2.6 billion. The venture had assets valued at $1.8 billion as of the end of February 2008 and debt of about $1.24 billion. LandSource is facing problems with its debtholders and may need to file for bankruptcy soon. Lennar and LNR (the unit of Cerberus) reduced their stakes in the venture in February 2007 by coaxing a 68% investment out of the Calpers' vehicle MW Housing, which is managed by MacFarlane Partners. MacFarlane Partners, incidentally, posted a 53% loss for the year ended September 30, 2007, which was over six months ago. Even my ten month old, who spends most of her day soiling her diapers, knows that real estate valuations have declined since September 30, 2007. Although Lennar and LNR did a good job of punting a large portion of their ownership stakes close to the high, each retain a 16% stake, which could prove to be very expensive.

The Wall Street Journal claims that insiders insist that the soured land deal is not related to the resignation of two of Calpers' most senior executives this week. However, you can bet that their departure is related to what will more than likely be lousy performance numbers from Calpers this fiscal year which will close June 2008. As I stated recently in my story about Calpers, too many highly ranked executives are leaving the firm at the same time for it to be a coincidence. As for Lennar, it is the homebuilder who more than likely has the most exposure to off-balance sheet joint ventures. And Cerebrus? Those who read my blog frequently know that Cerberus pops up all the time in stories related to soured private equity deals. These guys seem to be the kings of mega-bucks blowouts. Add this one to the list. In summary, I reckon this won't be the only story about soured land deals we'll be reading about before the end of the year.

Centex Posts $908 Million Loss

Centex lost $7.34 a share for the fiscal fourth quarter ended March 31, a mighty achievement for a $21 stock. The average analyst forecast a loss of $2.22 a share. I suppose we could call this a bit of a miss by those tasked with analyzing the homebuilder's earnings. The loss included some charges, $362 million related to land write-downs and $395 million related to the sale of 8,545 lots. Subtract out the write-downs inventory sales and the company lost money selling housing, which is its core business, even though these numbers would suggest that Centex is actually in the business of puking land that it purchased at ridiculous valuations with borrowed money. A quick look at its homebuilding results shows a bleak picture. Revenues slid 36% on a 33% drop in the number of homes sold. The average selling price fell 15% and gross margins fell 10% from a year earlier. Although the stock was down before the earnings announcement yesterday, it barely responded to the announcement, as if this news was already "priced in" to the valuation. In my opinion, what doesn't appear to be "priced in" to all of the homebuilder stocks is the effect of all the vacancies, foreclosures, negative equity, mortgage defaults, and enormous inventories still sitting out there looking for a bottom. We absolutely have not seen the bottom in the housing market. Too much inventory plus lack of financing does not a bottom make. Facing the possibility of spiraling inflation The Fed signaled yesterday that it may be finished easing. Monetary Policy won't help the homebuilders anymore, or the banks they rely upon to lend their customers money to purchase houses. Some of the homebuilders will be toast by the end of the year.

Senate to Bailout Homebuilders

Our hardworking Senators (just back from a break during the largest global financial crisis we've seen in awhile) have furiously crafted a plan to help homeowners struggling to stave off foreclosure. Of the $15 billion allocated towards saving the housing market, $6 billion has been tagged to save the ailing American Homebuilder. Homebuilders will now be allowed to carry back losses 4 years instead of 2 in order to get tax rebates to the tune of $6 billion. Because really, of all the poor suffering Americans who need help getting out from under the suffocating mound of negative equity, the homebuilders should be our first priority. Let's just review exactly what the homebuilders did during the boom. If you look at their balance sheets and cash flow statements, you will see that the majority of them borrowed heavily to finance purchases of land so they could build spec houses to capitalize on the frenzy in the housing market. They made oodles of money, their executives were paid handsomely, insiders sold their stock and of course, they paid taxes. Management chose to ignore the well-known fact that homebuilding is an extremely cyclical business and they decided to make the most money they could possibly make, leveraged to the hilt without any thought to what would happen in the downturn. My question to my loyal readers is the following: What exactly is wrong with letting some of these jokers go out of business? Honestly, if our government had an extra $6 billion sitting around, maybe I'd be okay with giving them a tax break. But we don't, so our government needs to start prioritizing. I, for one am writing my Senator! Needless to say, this is not the first time she's heard from me.