06 September 2011


Story first appeared in the Wall Street Journal.
Five years into a housing meltdown, questions are arising about how long some publicly held home builders can survive without significant improvement in the market.
Sales of newly built homes, which peaked at 1.3 million units in 2005, were running at an annual rate of just 298,000 units in July and are on pace to post the lowest count this year since record keeping began in 1963.
So far, home builders have been able to stave off disaster by sharply cutting employees and shrinking their product mix to compete with existing homes. Several Obama administration stimulus measures also helped the builders, including a tax break that allowed the builders to pocket $2.6 billion in tax refunds and a home-buyer tax credit that temporarily lifted sales last year.
But the lifelines are running out, and home sales aren't expected to pick up anytime soon.
Alex Barron, a founder and analyst with the Housing Research Center, said the market is not deep enough or big enough to support all the builders, and there needs to be some consolidation. He doesn’t think that means [mergers or acquisitions]. He just thinks that means there has to be a shakeout.
Mr. Barron declined to speculate about any specific companies. But two operators that other analysts are watching closely are Hovnanian Enterprises Inc. and Beazer Homes USA Inc. Some analysts believe both companies are running low on cash. Both companies have seen their stock prices decline nearly 60% so far this year—making them the sector's biggest decliners—and both have traded below $2 a share.
To be sure, the shares of most of the major builders have fallen so far this year. Toll Brothers Inc. shares are down about 10%, while Lennar Corp. has dropped 22%.
On Tuesday, Hovnanian shares closed at $1.75 apiece and Beazer ended at $2.19.
J. Larry Sorsby, Hovnanian's chief financial officer, said in an email that the company has taken many steps to right-size their company, strengthen their balance sheet and position themselves for a return to profitability."
During the second quarter, Hovnanian, based in Red Bank, N.J., burned through $88.5 million, leaving it with $433.5 million in cash, though $85.3 million of that is restricted and not easily accessible.

At that rate, Ms. Bryan said Hovnanian could run out of money in less than two years. The stronger builders have cash hoards topping $1 billion.
Mr. Sorsby believes the company's cash situation won't be a problem. They are confident that they have sufficient capital to meet all their obligations.
Hovnanian will report third-quarter results next week.
A key component in a home builder's health is its strategy for buying and developing land. Some companies have pulled back on land purchases to conserve money, while some builders have looked to new ventures to weather the downturn.
Both Lennar Corp. and Toll Brothers, for example, are working out distressed real-estate loans, a move that is being cheered by many industry analysts. Toll, long known as the builder of suburban McMansions, has expanded into urban areas building condominiums, which continue to be some of its strongest performers.
Hovnanian's strategy is to keep acquiring land lots and keep building a broad variety of homes. In the second quarter, it spent some $125 million of cash to purchase about 1,440 lots and to develop land.
One thing in Hovnanian's favor, he adds, is that the company doesn't have significant debt coming due in the next few years, although that changes in 2016.
Hovnanian's Mr. Sorsby said the company will refinance the debt before it matures, providing breathing room.
Still, bondholders are jittery. Some of Hovnanian's unsecured debt is trading below 50 cents on the dollar.
Some analysts are also worried about Atlanta-based Beazer. The company recently replaced longtime Chief Executive Ian McCarthy with its chief financial officer, Allan Merrill.
Mr. McCarthy oversaw the builder through numerous legal and regulatory problems, including a Securities and Exchange Commission investigation. He left several months after agreeing to repay $6.5 million and return company stock as part of a settlement with the SEC; Mr. McCarthy wasn't accused of a crime.
In 2009, the company agreed to pay as much as $55 million to the federal government and homeowners after a joint federal probe in which the company acknowledged violations of certain mortgage-lending regulations and accounting rules.
A year earlier, Beazer settled SEC civil allegations over the company's accounting practices without admitting any wrongdoing. Beazer said it understated earnings by a net total of about $28 million between fiscal years 1998 and 2006.
As of June 30, Beazer had $559 million in cash, though roughly half of it is restricted. But Beazer is also buying and developing land: It spent more than $50 million in its fiscal third quarter, and the annual total could come in around $250 million, executives said in an earnings call earlier this month.
Ms. Bryan of Gimme Credit thinks Beazer also could see cash depleted within two years.
On the earnings call, however, Beazer executives said home sales currently in backlog could help boost unrestricted cash as high as $400 million by Sept. 30. To be sure, given the recent stock-market turmoil, all of these sales may not close, they said.

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