Standard Pacific (SPF) Book Value Impairment Scenerio
Standard Pacific is a largish homebuilder whose top four markets have been CA, FL, AZ, and TX, which together account for 86% of their home deliveries (excluding deliveries by unconsolidated joint ventures).
At yesterday's closing price of 20.90, SPF ostensibly trades at 0.75 times book value, compared to the 1.46 multiple for the Residential Construction sector. I think it's worth examining whether $20 for SPF stock is a price where you could pick up cheap land, or whether there is still risk of significant impairment to the book value.
We know (from CEO Scarborough's Wachovia presentation this month) that SPF bought $1B worth of land in '06 and, incredibly, plans to buy $500M more in '07.
For the entire year 2006 (which is the first year that the builders have really marked down land and walked away from options), SPF took charges of $370.6 million: $255.8 million for consolidated real estate inventories, $52.6 million related to the write-off of option deposits and preacquisition costs for abandoned projects, $42.5 million JV's, and $19.6 million of goodwill.
Let's look at this balance sheet and decide what a good bid would be as real estate bottomfishers.
- Writeoff the goodwill: -$1.59/sh.
- The JV investments. JV's are between SPF and land developers and other builders. The homebuilders leverage their equity investment by obtaining bank financing at the joint venture level. The JV's are probably levered 5 or 10 to 1. Let's take a look at an SPF JV: "In November 2005, our Las Vegas division entered into a JV... to acquire and develop a 2,675-acre community located in North Las Vegas. This JV plans to develop 15,750 homes... Construction is expected to begin in late 2007 and to continue over a six to eight year period." (10-k) SPF has already taken down 750 of these lots. The JV has 9300 left to sell. SPF carries its interest in the JV at $43.7 million. All told, SPF's JVs have 13,850 lots they need to get rid of. What if the value of the JVs' assets only depreciates 10% further, and they are only levered 5:1? That is a 50% haircut to the $310M balance sheet entry. -$2.41/sh
- Mortgage loans. Although I wouldn't touch them with a 10 foot pole, let's assume they have already been marked to a reasonable market value.
- Land owned. Interestingly, SPF's outright land purchases are most likely to be in the markets that were most overheated. Land sellers in those markets generally were not wiling to offer options or terms. That means that this position is unlevered. Still, land values are a residual of home values and builder profit margins. The residential RE market has worsened substantially since 31-Dec-06. Imagine if they only have to mark this land down 20% (and keep in mind that urban fringe land was going for 10x the late 90's prices). That's -$6.6/sh.
- Homes completed and model homes: perhaps a 10% off sale to get these out the door? -$1.77/sh
- The lot options. These are probably leveraged 10 or 20 to 1. I'm assuming these are essentially worthless (i.e. SPF is just going to walk away from the deposits because they (i) are out-of-the-money and (ii) don't have hundreds of millions in cash needed to exercise them). -$3.16/sh
That totals impairments of $16.35/sh, putting our bid at $11.04 - a 45% discount to yesterday's market value.
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9 comments:
A lot of attention on price to book but what people really need to focus on is cashflow and liquidity. some of these homebuilders are in a death spiral of negative cashflow, with potential inventory writedowns that will trigger a liquidity crunch. the cycle hits bottom when someone's bankrupt.
Need to know how much of the land they owned was purchased before 2004. This land probably appreciated 50% and has no chance of going underwater and might be understated on balance sheet.
Perhaps $400 million of the land on the balance sheet is from pre 2003 and is actually worth closer to $1 billion. You need to check this out.
But I suspect you are right that book value is somewhere under $20 but may not be as bad as you think. Without being able to do a detailed analysis of their land holdings you have no clue what the land might be worth.
The only way they can have inventory from 2004 is if they are using last-in-first-out (LIFO) for inventory (i.e. what they bought most recently they expense as COGS); The SEC requires disclosure of the LIFO valuation allowance or the "LIFO reserve" -the difference between LIFO and first-in-first-out (FIFO) (or the excess of replacement cost over stated value).
I can't find anywhere in the 10-K where they mention either but sually lack of disclosure means they use FIFO. That means inventory they bought in 2004 they expensed as COGS in 2004, and so on. So more than likely what they are carrying is their most recent purchases.
a home builder uses neither LIFO or FIFO for land inventory. They use the actual price of the land that is being sold.
A home builder may buy land in 2000, 2001, and 2002 and not keep it on the books as purchase cost until it is actually built on or sold.
This is why Carl Icahn is trying to buy WCI. WCI has tons of Florida land from 2001 which has since appreciated 100%.
I have no idea as to what SPF land is worth. But the point is nobody else knows either without having alot more info then any of the HB's provide.
Some of the HB's are in good shape with their land holdings on the balance sheet. Others that bought a ton at the top are in BAD shape.
If it is true that SPF bought 1 billion in land in 2006, i would think they are in somewaht bad shape. But maybe they got some kind of great deal. How are we to know.
"WCI has tons of Florida land from 2001 which has since appreciated 100%."
What is the guarantee that that land prices are not gonna fall back to the 2001 levels, or may be even before that.
Standard Pacific Homes, a product of the Southern California boom appears to be in denial about land values. Their history reveals a short sighted pattern to chase the market, buying building companies and land at the peak of the cycle, when savy investors were selling.
Perhaps the $400 million of land on the balance sheet is only worth $200 million. Potential for disaster looms in markets such as Florida and Arizona. Areas known for being dependant on subprime loans and real estate investors to deplete housing inventory.
Dear cp,
I was wondering if you knew of any books or research reports on prior housing busts. For example the housing problems in the early nineties.
Thank you,
David
I was also wondering if you recommended any good books on short selling. I think the short sellers often have to do better, more thorough research than the buyside.
Stephen Pizzo has a book about the S&L crisis. that is a great start- parallels are incredible
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