Builder Alert - HOV earnings report - AAA rating (Ara's Awful Assets)........... Also, Why Banks Are Still Lending to Builders
March 11, 2008
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RELATED TICKERS: HOV
On March 9th (2 days ago) I put out my 3rd edition of the quarterly builder rankings.... I mentioned for the 1,000 time that shorting builders wasn't the best play... the real play is buying an ultrashort and I stated the following in Sunday's blog
I must warn you that ultra-shorts are timing mechanisms. So I wouldn’t enter into them tomorrow after the market has just dropped around 800 points on the Dow. Buy an ultrashort after you feel a rally has topped.
I hope you followed my advice from Sunday and didn't enter into a short position or bought an ultrashort yesterday (Monday).... I rolled out of all my ultrashorts last week and started rolling into long positions.... this market is pretty easy to guess, do the opposite of the herd.
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In any event, one day after my quarterly rankings, HOV announced a brutal earnings, or should I say non-earnings report. Now some people have questioned why I ranked HOV so high as a tier 1 sell........ its because I am trying to help you as an investor and I am breaking down builders into tranches of short term (3 month risk periods)...... HOV was in the second best tranche which was a tier 1 sell, so I wouldn't consider that an endorsement....
Go back to my previous 2 editions of quarterly builder rankings and I think you will find that each tranche of builders I ranked performed as expected. The better tranches performed better overall.
So why am I saying Ara's awful assets (AAA)? It is because Ara was the biggest buyer of other homebuilders during the peak........ most of the builders that were acquired were second tier builders........ Which built in... you guessed it, 2nd tier markets........ you don't want to own assets bought at the peak in second tier markets.... why.... here is why
FUTURE CASH OPPORTUNITIES
Monthly sales absorbtions dropped from 2.2 to 1.2..... that absolutely blows....... cram 10 hotdogs in your mouth....... that is how bad it blows....... you see when the new housing market tanks, people don't buy in fringe developments
YOY orders down 38% and YOY new sales pricing down 8.7%........ everyone wants to know when we reach the bottom............ Today Floridabuilder is going to tell you when.......... When two back to back builders report YOY orders up, YOY sales pricing up and absorptions over 2 a month........ that is it............ two builders in a row need to do this......... as you can see HOV isn't even close
Backlog dropped around 2,000 and went from 4.9 to 3.2 months........ well the one redeeming quality I gave HOV in my quarterly rankings was backlog.......... one day later that redeeming quality just disappeared.
Selling efforts dropped from 431 to 404........ this is something that I brought up several blogs ago........ that the builders are going to run into a quandry.........they are building on finished lots and monetizing them to cash.... positive cashflow........ however, these communities slowly get closed out one by one......... less selling efforts means less sales........ so at what point do you start developing land and opening sites....... negative cashflow........... see my point........ HOV lost 6.2% of its selling efforts in one quarter..........
So from a future cashflow perspective............ I would say............... things look worse for HOV......... However, are they still a tier 1 sell?
Lets see how the other lower tier builders report............. make no mistake, this was a very bad earnings report..........
OTHER INDICATORS REGARDING HEALTH
Well if we are going to check your health the first thing we need to do, especially if you are an older male like Ara, is to give you a colonoscopy...... two fingers not one............
gross margins dropped to 6.7% as a result of the fort myers give away....... i've railed in a lot of previous posts that treasure coast and fort myers area were the worst in the nation........... the gross margins in fort myers were in the 2% range............ and by the way, this is after HOV has impaired the land to almost nothing..........
HOV lost 100 million in equity and their debt to equity ticked up from 62% to 66%..... tick tick tick tick........ by the way there are still 5 builders with a higher debt to equity that haven't reported........... told you HOV wasn't in the lowest tranche
The best part that was great to hear was HOV generated $1 a share in cash...... I mean that is what is going to help you turn things around........ I have been stating for a long time that cash is king and that.... oh wait what is this............. hmmmmmmmmmmmm............... HOV tapped its revolving credit line by $100 million so actually they generated no cash, they just borrowed money from their creditor and put it into their bank account.............. where is fellow fool, Alstry!!!!!!! I'm sure he has a rant about this.........
The creditors reduced HOV's borrowing capacity several 100 million to 900 million....... The inability to pay down your revolver is not good......... all the better capitalized builders are paying their revolver to zero........ not tapping it and putting it into their bank account
So Alstry why did the banks allow HOV to do this?
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WHY THE BANKS ARE BENDING OVER
Alstry's posts on SPF and RYL are relentless... Even a Michael Vick pitbull gives up at some point......... What Alstry and many of the bears are not getting is that the unwind process for developers and builders is somewhat orderly......... no taking cuts
Sometimes I wonder if you bears actually read my blog posts or if you are so gung ho about watching our economy tank into oblivion that you lose all rational sight...........
My blog posts are for the most part timely and they take a short term view of less than 3 months................ I could care less about the macro picture............. I would hope that if you read my blog you are looking for some sort of investing advice and understanding of the industry...... I don't see how I would add any value if I stated....... "all builders suck and are going bankrupt".......... is that good advice? I guess so if you are wondering if you should invest in builders and know nothing...
However, does that allow you to differentiate between the truly bad builders that are going bankrupt sooner than later and the ones that should do well long term? NO........ the fact of the matter is most people don't have time to research every industry to the nth degree and maybe they want to put some risk capital into a homebuilder......... so they want a builder that won't go bankrupt and they want to know when is a good time to buy in..........
I am really getting tired of repeating myself on this EFFING point....... 75% of homebuilders are private and the majority of them are in worse shape than the publics........... period....... Are you people not listening to me on this point?
The banks are so overwhelmed by the amount of non performing real estate assets and questionable loans that they can't see straight..... they are not properly staffed and don't know what to do...... there are builders who are closing homes with 0% curtailment, yet their revolvers are maxed out..... if that isn't a red flag for a bank being behind the 8 ball, I don't know what is.
Alstry in particular has mentioned that SPF is insolvent and points to land sales in Sacremento at 16 cents on the dollar as justification for the banks to pull credit......... He also has a lot of other good points gleaned from the financial statements that are bearish....... however, he also cherry picks............... I always try to provide a balanced argument....... you know something that is in the meat of the bell curve and not 3 deviations from the norm..........
So lets walk down Alstry's path.........
First if a consortium of banks is going to pull credit on SPF, then you probably need to pull credit on the other 75% of builders with a worse financial position.... seriously, why would you pull credit on a builder knowing that 75% of the loans on your books are in worse shape....... what would happen if all the banks did this
basically 75% of the builders would go bankrupt immediately, flooding the market with newly unemployed in builders and related vendors....... is that what you want? does that make you happy? is this the type of capitulation you want?
then because all of these builders are heading into bankruptcy because they have no funding including DIP Financing, you are looking at chapter 7s instead of 11s...... so now all these builder and developer assets that made up 75% of new home production and development of land are going to go through a chapter 7 liquidation all at the same time in an environment where there is no liquidity for these type of assets....... you are looking at creditors getting 10 cents on the dollar........ Does that make sense for the banks to do? If you were a bank CEO would you call up all the other bank CEOs and say "all these builders are insolvent on their balance sheet, we need to all stop waivers and pull credit immediately".......... you would be a bank CEO for one day
after every bank that just pulled credit on 75% of the builders and developers the next step is all the massive amounts of writedowns these banks would have to take, causing a number of them to become insolvent themselves and go bankrupt.... Wow that is smart, call in all your loans so you can force yourself into bankruptcy.......
Or is there a better solution.............. the banks, in contradiction to what the MF board bears want could do this
When the worst performing builder/developer can't pay off interest let alone principal and the builder shuts his operation down himself......... then you move in and sell the assets in an orderly fashion at 40 cents on the dollar and you take the write-off......... slowly one builder/developer at a time in sequence starting with the worst builders and developers...... hopefully the economy can find a bottom to stop the bleeding while this is going on over the period of a couple years
The builders that want to survive and have shown any sign of life (e.g. positive cashflow, large cash position, reducing headcount, right sizing, etc...) are going to continue getting soft glove treatment from the banks.... it is in the banks interest and the builders interest and our countries interest....
the banks chance of getting all their money back or getting a higher percent of their outstanding loan back are better if the process is orderly and they work with the builders and developers.......
This is why I say no taking cuts....... because the process of going bankrupt will be orderly and I've heard enough through my partner about what the trigger points are with banks and which banks are playing hardball and which aren't and why........... all of this information gets put into my blog post indirectly as a part of my overall analysis.........
how many people would read my blog if there wasn't some semblance of accuracy in my builder performance calls or my analysis of what is going on in the industry?
Again, if you are an investor and you want to know what is going on today, the outlook for the next 3 months and want builders ranked in tranches with some techincal buy and sell points you came to the right place.......
If you watch sports what do the best coaches always say.................. one play at a time......... that is how I blog and will continue to blog........... if the economy or homebuilding gets worse or better, then I will make slow adjustments to my analysis of the industry........... One play at a time
Sorry I used you as an example Alstry, but given that you have 82 blog posts mainly on RYL and SPF, it was difficult for me to come up with another determined bear off the top of my head..........
that is not to say Alstry or the bears are wrong........ I just choose a different path on how I analyze builders and the industry
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