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.   

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.   

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.