Giant 400: Land, Impairments Dog Public Home Builders

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Impairments are no good for any builder, public or private.

May 01, 2008
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Builder Concerns Reflect A Market In Full Flight

View the 2008 Giant 400 List

Public home builders are not the only ones drowning in a sea of red ink flowing from vast tracts of impaired land. In the mid-2000s feeding frenzy, the largest public builders got their snouts in the trough of overpriced land deeper than any private builder. Just check out these descriptions from Wall Street stock analyst David Goldberg of UBS Securities of some of the most significant impairments since the early days of the housing crash in mid-2006:

Centex: $2.1 billion from land impairment charges (including $213 million in joint ventures), $454 million from forfeiture of option deposit and pre-acquisition costs, goodwill of $61 million

D.R. Horton: $1.6 billion of impairments on owned lots, $234 million from forfeiture of option deposits and pre-acquisition costs. Also includes $474 million of goodwill impairments.

KB Home: $1.6 billion of inventory impairments (including $215 million from joint ventures), $288 million of option impairments, goodwill write-offs of $108 million.

Lennar: $2.1 billion of inventory adjustments (including $623 million from joint ventures), $682 million of write-offs of option deposits, goodwill write-offs of $190 million. Excludes $740 million loss related to land sale to Morgan Stanley.

Pulte: Approximately $2.1 billion in on-balance-sheet impairments, $390 million in write-offs of land deposits and pre-acquisition costs, $286 million in impairment charges related to land held in joint ventures. Also includes goodwill write-off of $370 million.

The Inside Skinny

Stock analyst Carl Reichardt of Wachovia Securities says the public builders usually report their margin numbers before impairments for very good reason: "If they reported them after impairments, those numbers would be mostly large and negative."

However, Reichardt notes that reporting margin numbers before impairments does give a better picture of what's going on in the present tense. "Impairments really relate to future communities and homes rather than what the builder delivered in the most recent reporting period," he says. "Most of these companies have very small margins before impairments. If they include them, it flips over to huge negative margins. Let's face it, margins suck for these companies."

One industry insider, privy to senior management, estimated that if the current housing downturn persists into 2010, as many as half the Top 10 builders would not survive.

Check out the rest of the analysis for this year's Giant 400 report:

  • Sound Retreat for This Year's Giant 400
  • Rental Apartments Poised for Liftoff
  • Sun Cuts Clouds Over Manufactured Housing
  • Where Are We Heading?
  • View the 2008 Giant 400 List
 

The Giant 400 survey includes a question asking builders to rank their greatest challenges. No surprise that sales, the economy and profitability lead the list. But it does seem surprising that land is such a distant fourth. Overpriced, leveraged land is a killer when houses stop selling.

Builder Concerns Reflect A Market In Full Flight

If you're looking for evidence of the importance of the housing industry to the economic health of America, look no further. Housing's giants list sales as their biggest challenge (64.9 percent of respondents), narrowly edging out fears related to the economy and interest rates (64.5 percent). Land issues are a distant fourth (26.4 percent), but land is actually the key component of this downturn — the Old Maid card no production builder wants to hold when people stop buying houses.

The high and mighty titans of the housing industry — publicly held builders like No. 1 ranked D.R. Horton and No. 2 Lennar — are humbled by holding too much land bought at the peak of the market, at prices now out of whack with falling home prices.

New York-based housing market analyst Ivy Zelman says this slump is far from over, predicting that by the end of 2008 the largest builder may have 20 percent fewer closings and revenue than in 2007. "It's ugly out there," Zelman says. "The public builders are challenged as never before, and most of the private builders are dependent on the banks for financing, and those banks are behaving irrationally right now."

If there's light in this tunnel, look for it to show first in Texas, which has the advantage of a vibrant, oil-driven economy and existing home prices that are still rising. "By the end of this year, I think you'll see the Texas markets go from moderately supply-rich to moderately supply-constricted," says Mike Inselmann, president of the Houston-based research firm Metrostudy. "Texas has never had the inventory problems you see in states like California, Florida and Arizona."

When the market does recover, it will be interesting to see if the largest builders can recover their momentum and resume growing. The public builders have laid off hundreds of good managers, who just might start their own companies when they have the chance.

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