As The Deal's John Blakeley noted recently: The perfect storm of plummeting home prices, continued subprime delinquencies and tight credit markets will likely continue in 2008 and beyond, crippling more and more builders along the way. The ultimate question for the homebuilding sector, therefore, is no longer which builders can avoid restructuring their massive debt loads but what avenue builders will ultimately take to get there: a Chapter 11 filing or out-of-court negotiations with lenders.
There's no one hard-and-fast rule, he pointed out. But here's the latest on those that have gone the way of bankruptcy in 2008 so far:
- Youngsville, N.C.-based homebuilder DenMark Construction Inc. filed for Chapter 11 April 24. It heads to the U.S. Bankruptcy Court for the Eastern District of North Carolina in Wilson April 29 hoping to sell some of its real estate to help as it reorganizes.
- Ontario, Calif.-based Empire Land LLC filed for Chapter 11 on April 25, unable to service debts and finance projects in the works. Palmdale Land Investors LLC is providing $20 million in DIP financing. But the DIP loan is priced at 25%, the highest on record.
- Rolling Meadows, Ill., builder Kimball Hill Inc. found itself in Chapter 11 April 23. Kimball Hill filed for protection in the U.S. Bankruptcy Court in the Northern District of Illinois, citing the housing downturn, declines in consumer confidence, challenges in the credit and mortgage markets, and a bump in foreclosures and cancellation rates. The company has assets of more than $795 million and liabilities of nearly $632 million, according to The Deal's Bankruptcy Insider. It said that its restructuring includes plans to exit the hard-hit market of Florida by the end of 2008.
- Phoenix builder Randall Martin Home Higley Park LLC has taken $50,000 in interim cash collateral out of the total $250,000 advanced by leaseholder Mountain Funding LLC, and a final cash collateral hearing is set for May 1. The Scottsdale, Ariz.-based builder has 173 residential lots with 17 completed homes, collectively worth $9.05 million.
- Another Arizona-based homebuilder PFP Holdings has sought court approval to sell its assets to T2 Homes LLC for $65.15 million. It expects to close on a deal by the end of May.
- Tucson Copper Hill Estates LLC is making strides to negotiate with BankFirst of Sioux Falls, S.D., its largest secured lender, for the use of cash collateral, but it lined up $1 million DIP loan in case the talks fall apart.
- Jonesboro, Ga.-based R&B Construction Inc. filed for Chapter 11 on Feb. 4. The builder planned to try to sell 33 houses for their normal list prices. Its motion was approved Feb. 21 after there were no objections to it.
- Hollywood, Fla.-based Tousa Inc. filed for Chapter 11 on Jan. 29 and won approval two days later to tap into a $134.5 million debtor-in-possession financing. It won final approval Feb. 28 to continue selling off a backlog of 2,500 homes.
- Alabama homebuilder Brantley Homes Inc. filed for liquidation on Jan. 4, which set off a fight between its trustees and lenders.
- On Jan. 8, Whitlatch & Co. got court approval to sell its Richmond Reserve property to stalking-horse bidder Home Savings and Loan Co. The Twinsburg, Ohio-based company filed for Chapter 11 on Sept. 14.
SHADES OF GRAY
"Taken as a whole, 2007 will be remembered for its unprecedented housing industry decline -- a slump involving not just the companies that create housing stock, but also the lenders that provide the mortgages so people can buy it." So began a Dec. 17 article from Blakeley. So when will the U.S. residential real estate market recover? Slightly in 2008, some industry watchers suggest, and not before 2009, say others.
The latest from the National Association of Realtors, April 8, contends:
Existing-home sales are likely to rise from an annual pace of 4.9 million in the first quarter to 5.9 million in the fourth quarter. With relatively weak activity in the first part of the year, existing-home sales for all of 2008 are forecast at 5.39 million, increasing 6.6 percent to 5.74 million in 2009. ... The aggregate existing-home price will probably ease by 1.4 percent to
a median of $215,800 for all of 2008 before rising 3.7 percent to
$223,800 next year.
Housing starts for March were down 11.9% to a seasonally adjusted annual rate of 947,000, according to the Commerce Department, from February and 36.5% off the revised rate for the year-ago period, the lowest level since March 1991, Marketwatch noted. Building permits fell 5.8% to 927,000 from the February adjusted rate of 984,000 and 40.9% from March 2007.
Other research concurs. According to Standard & Poor's S&P/Case-Shiller Home Price Indices report, price declines are continuing into 2008 with Miami and Las Vegas as the weakest markets with annual declines of 22.8% and 21.7%, respectively, over the last 12 months. In February, the study's 10-City Composite posted a record low annual decline with 13.6%.
And Fitch Ratings in December estimated total 2007 starts will be 23.9% lower than 2006. Single-family starts will be down 27.4%, multifamily down 8.8%, new family home sales falling 23.9% and existing home sales falling 12.7%. Further, the agency said:
Given Fitch's adjusted macro forecasts for the balance of 2007 and 2008, it appears likely that builders' financial pressures will continue unabated. For the full year of 2007 homebuilders' revenues could drop 30%, on average, while pretax profits, before real estate charges, could plummet 75-80%.
The agency said Dec. 13 that if its year-end 2007 forecast plays out, there will be considerable inventory overhang kicking off 2008. The agency also outlined two scenarios for what could play out in the next several months. Under one, year-over-year new home sales comparisons would probably bottom out late in 2008, with starts following suit three to six months later. Under the other, new home sales and starts wouldn't bottom out until mid-2009.
BANKRUPTCY CALLING
Heading toward year's end, November and December saw a string of filings.
- St. Petersburg, Fla.-based First Dartmouth Homes filed for protection after a judge ruled in favor of two customers suing to recoup their money from the company Dec. 28.
- Woodstock, Ga.-based residential and commercial builder Oakwood Homes LLC, which has taken part in ABC's "Extreme Makeover: Home Edition," filed for Chapter 7 on Dec. 28.
- Hazel Point LP, which was forced into Chapter 11 protection Nov. 13, countered with a voluntary filing elsewhere Dec. 4. The company wanted the dismissal of the involuntary bankruptcy in Texas and court permission to instead reorganize in South Carolina.
- Bellevue Holdings Inc.'s case got a trustee Dec. 19 after the U.S. trustee found the homebuilder lied about its relationships with a would-be buyer and debtholders.
After an S&P downgrade and a pretax $115 million third-quarter loss, WCI Communities Inc. looked like it could be next, Dealscape's Gerald Magpily noted Nov. 20.
On Nov. 9,
Levitt and Sons LLC, which developed Long Island's Levittown for WWII vets, the homebuilding unit of Levitt Corp., and 37 affiliates succumbed to bankruptcy protection. The 70-year-old homebuilder is the largest to seek protection this year, according to The Deal's Bankruptcy Insider, with assets of more than $400 million and 200,000-plus homes built. Fellow builder Dunmore Homes Inc. of Granite Bay, Calif.,
filed for protection the same day. And kicking off the month, Chicago homebuilder Neumann Homes Inc.
collapsed into bankruptcy Nov. 1, little more than a week after
warning it was coming.
More recently, securities litigation firm Coughlin Stoia Geller Rudman & Robbins LLP on Jan. 25 filed a class action against Levitt, alleging it didn't relay to investors just how severe the problems were within its homebuilding unit. The company had two DIPs cleared Jan. 14 so it could continue building and selling homes to pay down debt. And Dunmore's case went back to California on Jan. 14, where most of its assets and creditors are, after the debtor's official committee of unsecured creditors and several smaller creditors, alleged its move to seek protection in New York was "forum shopping" to limit creditors' some access to proceedings.
As The Deal's David Elman pointed out in 2007, many builders have continued to brave the storm. And even in December some builders were managing to eke out sales. Lake Oswego, Ore.-based Buena Vista Custom Homes Inc. said Dec. 17 it sold 141 homes in a weekend auction, where 240 were up for sale, for a collective $65 million.
Meanwhile, of the many builders to go bankrupt, one of note was New Jersey luxury homebuilder Kara Homes. Elman detailed Kara's fall from grace:
A charismatic owner borrows heavily to finance his business only to be left with more debt than he can pay back when the market turns south. But this bankruptcy has been anything but normal, assuming an almost Jekyll-and-Hyde quality. After a slow start, the case is now frenzied. On one side, there's been a stream of debtor-in-possession financings, sales and the filing of a reorganization plan. On the other side, some lenders have grown impatient, feeling that presiding Judge Michael B. Kaplan could be moving things along even faster. Some lenders have already bolted, selling off their claims.
One problem was Kara's complexity. Thirty-three of its affiliates followed it into bankruptcy. And between the hundreds of homebuyers doubling as creditors and all the different pools of collateral backing the claims of prepetition lenders, Kara's case created a new standard. "It's 33 debtors," says Sam Della Fera Jr., special counsel to Kara at Trenk, DiPasquale, Webster, Della Fera & Sodono PC. "It's multiple secured creditors and numerous construction lien holders and contract purchasers."
Despite a move by its founder and sole equity holder, Zuhdi Karagjozi, to block it, the New Jersey homebuilder won final approval of its disclosure statement on Monday, July 30. Kara will sought confirmation Sept. 12 and emerged Oct. 1.
COHABITATING
- Another New Jersey homebuilder NJ Affordable Homes Corp. heads to court Sept. 7 seeking approval for its settlement. Chapter 7 trustee Charles Forman of Forman Holt & Eliades LLC has accused lenders of ignoring red flags that enabled the homebuilder's president, Wayne Puff, to illegally oversee a complex Ponzi scheme.
- Bankrupt Las Vegas custom home builder Bellevue Holdings Inc. filed for Ch. 11 protection July 6.
- Langhorne, Pa.-based bankrupt homebuilder Elliott Holding Co. sought joint administration for its Chapter 11 case, and that of its affiliates, in June.
- Meyer-Sutton Homes Inc., of Fayetteville, Ga., filed for bankruptcy protection on June 4 and the next day won interim court approval to use cash collateral and continue selling residential units.
- Unable to successfully rejigger operations and admitting it had actually lost money while in bankruptcy protection, the company in June had its Chapter 11 case converted to Chapter 7.
- In January, Kelso, Wash.-based GML Services Inc. needed court approval for the sale of a $139,950 residential property but faced creditor objection. (See more on bankrupt homebuilders' hurdles below.)
In 2006:
NO HELP FROM MY FRIENDS
Bankruptcy for homebuilders can be tricky. While Chapter 11 is designed to provide relief, builders need court approval for every house sale and if they are defined as a single-asset-real-estate, or SARE, company, debtors are given the later of 90 days after a bankruptcy filing -- or 30 days after the court hands down the SARE designation -- to file its reorganization plan or begin making monthly interest payments to secured creditors. If the builder fails to do so, creditors are freed from the automatic Ch. 11 stay and free to move against assets.
THE OTHER SIDE OF THE FENCE
So will things get better? The consensus is yes, but when is the subject of debate, illustrated by several Reuters pieces over the 2007 summer.
"David Seiders, chief economist at the National Association of Home Builders, said that while his forecast is a lot weaker than the previous one he gave in late 2006, due primarily to the deterioration of the subprime mortgage market, 2007 will see the worst of the housing market's slump," Reuters reported July 25.
"Countrywide Financial Corp. Chief Executive Angelo Mozilo said the U.S. housing market is unlikely to recover before 2009, as lenders and homeowners work through oversupply, stagnating home prices, and the excesses of recent lax lending standards in much of the mortgage industry," Reuters reported July 24.
"Home builders at the Reuters Real Estate Summit in New York this week said they didn't expect any improvement until 2008 at the earliest. And even then, their expectations are modest," Reuters reported June 28 following a real estate summit in New York.
BANKING (AND DEFAULTING) ON IT
For the enterprising, it looked as if there was opportunity. But even the homebuilders that were able to draw investment aren't necessarily in the clear.
Bonita Springs, Fla.-based WCI saw the election of Carl Icahn to its board of directors over the summer. Icahn unveiled in January taking a stake in the company, which then turned to Goldman Sachs & Co. the next month to advise on an auction. Icahn unveiled plans for a tender offer a month later and in August, WCI's board announced its slate of candidates -- including Icahn and two of his choosing. The slate won approval Aug. 30. The company may now teeter on the edge of bankruptcy, Dealscape's Gerald Magpily pointed out, as S&P lowered its credit rating to CCC from CCC+ with a negative outlook after WCI 89 customers defaulted on contracts and the company recorded a pre-tax loss of $115 million in the third quarter. Magpily wrote:
Not even corporate raider Carl Icahn has been able to change the direction of WCI. Earlier this month, Icahn reported the first quarterly loss in his three-year-old hedge fund, Icahn Capital Management LP, because of big bets on WCI and Lear Corp. (For more on Icahn, see a related Dealwatch)
Meanwhile, Levitt agreed in January to sell out to Florida homebuilder BFC Financial Corp. for $286 million. BFC backed out of the deal in August. -- Carolyn Murphy
| Dealwatch executive summary |
Date |
Action |
4.25.08
4.24.08 |
Empire Land's DIP priced at 25% is highest on record.
Kimball Hill files for Chapter 11, as does DenMark Construction. |
| 4.08.08 |
PFP Holdings Inc. hopes to sell its assets to T2 Homes LLC by the end of May. |
| 3.2008 |
NAR: March housing starts fall 11.9% from February. S&P: Pricing declines continue. |
| 3.28.08 |
Tucson Copper Hill lines up DIP. |
| 2.29.08 |
Tousa gets final OK to sell backlog of homes. |
| 2.12.08 |
PFP seeks OK to sell assets. |
| 2.04.08 |
R&B does, gets the OK to sell 33 homes at list price. |
| 2.01.08 |
Should homebuilders file for Chapter 11? |
| 1.29.08 |
Tousa files; gets green light to tap cash two days later. |
| 1.25.08 |
Securities litigation firm files suit against Levitt parent. |
| 1.14.08 |
Dunmore case goes back to California. Levitt DIPs cleared. |
| 1.08.08 |
Whitlatch to sell development to stalking-horse bidder. |
| 12.28.07 |
First Dartmouth files for Chapter 11; for Oakwood Homes, it's Chapter 7. |
| 12.18.07 |
Housing starts not as grim as expected. |
| 12.17.07 |
2007: Not a good year for homebuilders. |
| 11.09.07 |
Levitt and Sons, Dunmore Homes go belly up. |
| 11.01.07 |
Neumann Homes Inc. collapses, days after warning a filing was near. |
| 10.01.07 |
Kara emerges from Chapter 11. |
| 9.07.07 |
NJ Affordable goes to court. |
| 9.05.07 |
Kara sells two developments. |
| 8.20.07 |
Icahn on WCI board slate. |
| 8.12.07 |
Kara wins approval to sell off two more affiliates and gets the OK to sell two lots worth $3.13 million. |
| 8.06.07 |
American Home files for Ch. 11. |
| 7.31.07 |
Judge OKs Kara Homes disclosure statement, despite Karagjozi's move to stop it. |
| 7.13.07 |
Alliance meets its demise. |
| 7.09.07 |
Kara seeks fourth DIP loan. |
| 7.6.07 |
Bellevue Holdings files for Ch. 11 protection. |
| 6.2007 |
Bison's case converted to Ch. 7. |
| 6.2007 |
Elliott seeks joint administration. |
| 6.05.07 |
Meyer-Sutton can still sell homes. |
| 5.17.07 |
PAI may stake KB Homes' French affiliate. |
| 5.07.07 |
Kara's long and winding story. |
| 3.13.07 |
Icahn unveils plans for WCI tender offer. |
| 2.08.07 |
Galliford Try grabs Linden Holdings. |
| 2.06.07 |
Barrett pays $4.3 billion for Wilson Bowden. |
| 1.31.07 |
BFC picks up Levitt. |
| 1.16.07 |
Icahn takes stake in WCI. |
| 1.2007 |
Knoblauch can use its cash collateral. GML needs court approval for home sale, creditor objects. |
| 12.2006 |
Kara Homes gets DIP, outlook still cloudy. |
| 12.16.06 |
Bison Building files for Ch. 11, has date with creditor one month later. |
| 11.2006 |
KB Home CEO resigns over options errors. |
| 10.25.06 |
Betty Homes goes belly up. |
| 5.23.06 |
Toll Brothers founder buys Philly dailies. |
| 7.2006 |
See item from Dealbook on what could bring Manhattan's real estate market back. |
| 11.2006 |
Wilson Bowden draws takeover bids. |
| 11.20.06 |
Henderson PE inches toward John Laing buyout, months after Bank of Scotland Corporate wins McCarthy & Stone. |
Source: The Deal |
Comments
Pointing out just how weak this housing market is right now, HOV is taking what can only coined as stunning steps to try to sell their homes now. I wrote about their "Deal of the Century" tonight:
http://www.growyourfunds.com/2007/09/hovnanian_hov_takes_unpreceden.html