Housing Giants - May 23, 2008 - (Page 26)

PUBLIC OR PRIVATE: SURVIVAL ADVANTAGE? Both public and private firms are starting to fail as a result of the current housing debacle, so we asked the experts who watch the industry closely which side of that coin has the survival advantage. Already, two big Chicago-based private builders have filed for Chapter 11 protection: first Neumann Homes (No. 135 this year, No. 77 a year ago, No. 58 in 2006) then Kimball Hill Homes (No. 29 this year and last), which filed late last month. Kimball Hill had 3,246 closings for $833.3 million in 2007. But publicly traded Technical Olympic USA of Hollywood, Fla., is the largest bankruptcy forced by this downturn so far. TOUSA is still No. 17 this year, with an estimated $1.84 billion in revenue from 5,850 closings. “The public builders are in more trouble because they have the most land, especially those five companies at the top of the list,” says Littleton, Col.-based management consultant and Professional Builder columnist Chuck Shinn. “How many private builders have taken more than $2 billion in impairments? That’s the norm for the big publics,” he says. “They’ve been burned so bad on land, they’re now moving toward NVR’s model that emphasizes buying finished lots on option contracts.” The public builders, Shinn says, have also decimated their organizations by laying off hundreds of good managers, perhaps fueling a whole new wave of competitors. Shinn also questions the public builders’ reliance on mass-producing single-family homes in large subdivisions in the distant suburbs. “That product is dead,” he says. “Mixed-use developments, at higher densities and lower prices, will dominate when the market comes back. Private regional builders have the flexibility to build such projects, and they already have the financial strength to match the public builders. There’s plenty of private equity capital around.” Not so fast, say the public builders and Wall Street stock analysts who cover them. “It’s not mass production of a single product that makes the public builders successful,” says Toll Brothers Chairman Bob Toll. “It’s the large scale of development they have the financing to undertake. Smaller builders can’t do it.” D.R. Horton Chairman Don Horton says private builders will have trouble when they try to renew their credit lines. “We have the largest builder line out there at $2.5 billion. I don’t know where private builders are going to get money,” he says. “The banks don’t want real-estate today — not houses, not land.” Wall Street insider and industry analyst Ivy Zelman says most private builders are more bankdependent than the public companies, and bank financing for acquisition and development may dry up with the credit crunch. “But the publics are challenged right now as well. There will be more public builders going into Chapter 11. WCI Communities is a clear candidate. And the largest private builders, like Shea Homes (No. 15), have strong balance sheets and will be able to get the financing they need. The largest regional private builders may be stronger than some of the publics.” Analyst Carl Reichardt believes the market will turn in 2009, with most of the largest builders still in business. “I don’t believe there will be a lot of failures unless things get a lot worse, and we’ve already seen a 63 percent decline in sales. That’s the most since 1963, in any cycle. They will all be around, wounded but not dead, and land margins will be thin for a long time. It’s going to be a lot harder to grow and earn returns.” 26 HOUSING GIANTS.5.23.08 WWW.HOUSINGGIANTS.COM http://www.tollbrothers.com/homesearch/servlet/HomeSearch http://www.housingzone.com/giants/article/CA6382221.html http://www.neumannhomes.com/ http://www.kimballhillhomes.com/ http://www.drhorton.com/ http://www.housingzone.com/giants/article/CA6544301.html http://www.tousa.com/ http://www.tousa.com/ http://www.wcicommunities.com/default.asp?pageID=home&siteID=1000&vid=1000&url=www.wcicommunities.com&col=0 http://www.wcicommunities.com/default.asp?pageID=home&siteID=1000&vid=1000&url=www.wcicommunities.com&col=0 http://www.sheahomes.com/ http://www.nvrinc.com/ http://www.HousingGiants.com

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