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alstry (< 20)

Rumors...Oh My



May 19, 2008 – Comments (2)

Equity offering, sale, debt offering, the rumors about SPF keep flying.  They have even convinced FloridaBuilder to Green Thumb when I am betting on BK.  What a knob I must be!!!!!!!

Again from my perspective, SPF is like a house with a mortage on it.  Any value over the mortgage is the equity value.  For example, if a house has a $600K first mortgage and a $400K second mortgage, but is only worth $700K...If you paid me $100K, I wouldn't take that house for free if I had to assume the debt.

SPF is not much different.  It has about $2.5 million of debt and I value the net fair market value of its assets at about $1 to 1.5 Billion.  Management is doing its best to make the public believe that what they represent as book value is close to the truth(imagine what would happen if the public knew???).

If you paid me $500 million, I wouldn't take SPF for free if I had to take subject to the ridiculous debt Scarborugh burdened shareholders with before running off with his severence package!!!!!  It's not much more than a bunch of leveraged lots and land in some of the most challenged markets in the country. 


Not only that, even if you paid down most of the debt, after SGA, prospects still don't no not look too rosey.

And just think, there are still people out there spreading the rumors......

From BigBuilderOnline Tonight:

* Item: Standard Pacific was said to be soliciting offers for a buyer in the past month or more, but as of last week, serious bids from strategic or financial players failed to emerge.
* Item: A question in light of an imminently-expected filing for bankruptcy protection by the Landource joint venture partnership is whether Lennar will ante up to buy the MW Partners portion back and put the future-perfect Newhall Land expanse back on its balance sheet.
* Item: As we haven't even begun to see banks' real estate losses tallied up and brought to market for re-pricing, home builders' consequential distress can only be described as in its early innings.

Unrelated as these items may seem to be, the way they tie together has to do with the fact that credit and debt markets are closed and equity markets are open. If new-home building's darkest hour will come just before the dawn, then we've got some darker hours to go yet.

Equity markets are open. Creative ownership structures will be all the rage, possibly keeping some good operators in business even if they've scraped the last of their cash reserves from the bottom of the petty cash till. Even if they're pre-mature, equity investors continue to pump capital into the big builder sector.

So, if a company has debt and can conserve and generate enough cash to cover it--probably for the better part of 24 more months minimally--it's likely it will survive to tell the tale of one of the severest downturn plotlines in 40 years or more. Most of those companies know who they are by now. Some may not.

If there's any question, a word of advice from the head of a company who's been around this block a few times now is simply this: "Stop spending money." Literally. An assumption almost everybody has to go by now is that their land value--unimproved--is at about zero, and improvements themselves are worth maybe 80% of out-of-pocket costs. The question is how to sell, or liquidate, or walk away from this in a way that financially makes any sense. "Too many times, home builders keep doing things they were doing, like putting in new streets in neighborhoods that are not selling. You think you need the street, but do you really need it? You have to stop spending any money."

When all the money center bank and commerical lenders take  haircuts on their real estate loan portfolios, then it will be the moment of truth.

"When you run out of gas a mile or two before you reach the filling station, you don't ever get to the destination where you won't need that car anymore," this industry vet said. "Does it help anybody to know now that there may well be a new-home shortage by 2011? Only if you've got the wherewithal to get to 2011. Unfortunately, a lot of builders won't get there."

Standard Pacific and Landsource in some ways share a problem. Recovery will one-day restore huge value to their land assets, but that day is years hence. If one thing is clear about the toll of this downturn it is that it will decimate managements first and foremost, even as it rewrites the pricetags on land and lots.

When home buyer psychology and home mortgage lending converge and the million-units-a-year of real need for new single-family homes regains a pulse, it will be plausible to calculate 12 months of forward earnings based on cash in hand, cost containment, and new orders. Until greed once again succeeds in trumping fear, the world's most famous caveat--"never a borrower nor a lender be"--will apply for better or worse.

2 Comments – Post Your Own

#1) On May 19, 2008 at 6:13 PM, alstry (< 20) wrote:


and it is not a scarecrow

Buffett Says U.S. Is Less Than Halfway Through Credit Crisis

By Josh P. Hamilton

May 19 (Bloomberg) -- Billionaire Warren Buffett said the U.S. economy is less than halfway through a credit crisis that already sent home foreclosures to a record and sparked the collapse of Wall Street's fifth-largest securities firm.

``I don't necessarily think we're halfway through or necessarily a quarter of the way through the effects throughout the general economy,'' Buffett, 77, told reporters today in Frankfurt, Germany. ``The initial effects are felt by the people who really did the silliest things, but you can have a whole bunch of domino-type effects that eventually can get to people who are doing fairly sound things.''

The worst housing slump in a quarter century sank the mortgage securities market. Banks and securities firms worldwide amassed $344 billion of writedowns and credit losses, and at least $35 billion of additional writedowns included in their balance sheets weren't deducted from reported earnings, regulatory filings show.

The danger of multiple investment bank failures probably ended when the Federal Reserve orchestrated the takeover of Bear Stearns Cos. by JPMorgan Chase & Co., said Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. Yet the damage to the economy and individuals will keep mounting, he said.

``In my judgment, there's a good chance that most of that is not over,'' said Buffett, who's on the first leg of a four- day European tour to meet owners of family-run businesses that may someday be inclined to sell to Berkshire.

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#2) On May 19, 2008 at 6:29 PM, dwot (29.02) wrote:

Buffett makes sense.  Although the big bank was saved, I suspect small ones will have a lot of failures.  And what he says about the fallout hitting people doing sound things...  I think that is going to be bigger than people expect.

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