Wednesday, November 14, 2007

Will The Tower Ever Be Built?

The developer, WCI Communities, tells the Sun yes, but the company recently reported a quarterly loss of nearly $70 million (compared to an $11 million profit a year earlier) and the chief executive says ominously in this SEC filing that during the quarter "we experienced higher tower defaults and increased our reserves for future tower defaults."

The company has already laid off more than 575 employees as part of a company-wide belt-tightening, and it considered whether to sell itself. In this filing, the company says it is in discussions with its lenders and could lose financing under certain credit agreements because of deteriorating conditions in the housing market.

Here's some excerpts:

"The most significant impact to our third quarter operations occurred in our tower homebuilding division which experienced a $209.1 million and $87.7 million decline in revenues and gross margin, respectively. Tower defaults in certain of our buildings that began delivering units in 2007 have been higher than our average default rate experienced prior to 2007. The tower unit default rate was approximately 1%-2% prior to 2006, 7% during 2006 and 26% for the nine months ended September 30, 2007."

"The continuing deterioration of conditions in the markets in which we operate has had, and will likely continue to have for an extended period of time, a negative impact on our liquidity and our ability to comply with financial and other covenants under our bank loans and indentures. Some of the factors which have adversely affected us include, but are not limited to, declines in new home orders; significant increase in cancellations, defaults and rescission claims and lawsuits; increased use of incentives and discounts; reduced margins; significant tower project delays and increased interest and insurance costs; general contractor financial instability; and credit rating downgrades. All of these factors, and others which may arise in the future, have adversely impacted, and will likely continue to adversely impact our financial condition."

"With little or no visibility as to when market conditions are likely to improve, we have been taking steps to reduce costs to partially offset variances caused by the current unfavorable business environment. We are continuing to reduce overhead, improving operating efficiency, and implementing practices to reduce construction costs. The Company announced a restructuring of its operations to combine the traditional homebuilding and tower operations to enhance efficiencies. In addition, we have reduced land purchases and development activities. All of these measures are focused on maximizing cash flow and paying down debt. Although no assurance can be given, we expect to realize approximately $200-$450 million of cash flow from operating activities and approximately $10 million of cash flow from investing activities in 2007, generated primarily from the collection of tower receivables and proceeds from traditional home closings, land and recreational amenity sales."

"If conditions in the homebuilding industry worsen in the future, we may be required to evaluate additional homes and communities which may result in additional impairment charges and such charges could be significant."


It's no secret that developers of all stripes are rethinking their plans because of the current turmoil in the mortgage and broader credit markets.If WCI completes it Plaza Residences in downtown Columbia, it will be threading a needle.

Here's the full text of CEO Jerry Starkey's statement:

“Demand continues to be unpredictable from week to week and we saw an increase in defaults and cancellations during the third quarter. We are focused on reducing our costs of operation and recently announced a restructuring that we expect will enable us to lower our annual salary and benefit expenses by about $46 million. As a part of this restructuring, we have combined geographic regions and retained the top talent capable of taking on expanded roles and responsibility during this downturn. During the quarter, we experienced higher tower defaults and increased our reserves for future tower defaults. This resulted in revenue and earnings reversals and had a negative impact on our financial performance during the period. We also wrote down our traditional and tower inventory to reflect impairments caused by expected lower prices and slower absorption in some product lines. While lower demand and increased defaults have severely hampered our earnings, we continue to expect significant cash flow in the fourth quarter to result in about $210 million to $460 million of cash flow for the full year ($200 million to $450 million from operating activities and $10 million from investing activities). The Company’s expected cash flow from operations includes 275 to 300 traditional homes closings in the fourth quarter. The backlog of 591 traditional homes as of September 30, 2007 includes 273 homes scheduled to close by year end.”

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