Saturday, March 31, 2007

Value of Standard Pacific's Land Owned

Some insightful commenters are debating the SPF book value post:

"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."

Of course I wish that SPF would give us a list of their land holdings. But until they do, we can only make educated guesses.

First of all, builders do not use LIFO or FIFO accounting for land inventory because land is not fungible. Each parcel is unique.

I think we can say that SPF's landholdings are skewed to the more recent. In a sense, the first-in land is the first-out, because they 1)buy it 2)entitle it 3)build it 4)sell it. They buy land to replace what they get rid of through home sales.

That is why land developers exist. They take the highest risks in order to get in front of the homebuilders and sell land into the builders' pipelines.

Indeed, SPF is not in the business of investing in land for the long term. From the 2006 10-K: "We generally purchase land only when either substantially all material entitlements have been obtained or our management team has determined that no material impediments exist to obtaining such entitlements, and we anticipate commencing development or construction within a relatively short period of time."

We know that they bought $1B land in 2006, at least that much in 2005, and they've never had more than $4B in inventory. I get the sense that they turn over their land in under four years, so I question how much of the land on the balance sheet is from pre-2003. (They do have JV lots that are as old as 1997.)

Second, land bought pre-2003 might have been worth 2.5x during the height of the mania, but now it is probably worth par. Possibly even less. This real estate bubble has been going on longer than four years. And when land values fall, they fall hard. They are a bet on home prices and builder profit margins.

I grant that the old JV land, and the old land owned (if any), are undervalued on the books. But my suspicion is that the amount of that land is dwarfed by the way overpriced land.

1 comment:

Steve Selengut said...

More on Investment Grade Value Stocks:

Investment Grade Value Stocks At Ten Year Lows

There has never been a correction that has not proven to be an investment opportunity. While everything is down in price, there is actually less to worry about than when prices are historically high. More money has been lost by people who bought into last year's markets than by those who will buy into this one, at this stage of the correction. When the going gets tough, the tough go shopping.

Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets. This correction is worse than most that I've experienced, but the doom and gloom scenarios many have been pushing are unlikely to come to fruition. Once the media elects a new president, they'll just have to start reporting better news: 96% of all mortgages are current sounds a whole lot better than 20% of all sub-prime mortgages are in trouble.

Some fundamentals in many excellent companies have eroded significantly (due in part to accounting rules that are being changed), but for the most part, interest payments are being made and few dividends have been cut. Bargain prices abound in both the equity and fixed income markets and interest rates are historically low.

A cocktail of credit market laxatives is working its way into a constipated world economy. Relief is on the way. Today's prices may well be looked at as the lowest of the next ten years! Here's a list of things to think about or to do while Investment Grade value Stock prices are at ten-year lows:

Don't beat yourself up by looking at your account market value. You should expect it to be down significantly because all security prices have fallen. Look for ways to add to your portfolios---that's what the smart guys are doing.

Keep in mind that someone is buying the individual shares that the others are selling. The buyers will hold on until they can turn a profit, and the cash on the sidelines will eventually find its way back into the markets as prices rise.

There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.

Take a look at the future. Nope, you can't tell when the rally will come or how long it will last. If you are buying quality securities now, as you certainly should be, you will be able to love the rally even more than you did the last time--- as you take yet another round of profits.

As, or if, the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely so that you can add to them safely later. There's more to "Shop at The Gap" than meets the eye, and you may run out of cash well before the new rally begins.

Cash flow is king, so take smaller profits sooner than usual as long as there are abundant buying opportunities. Today, nearly eighty percent of all Investment Grade Value Stocks are down more than 15% from their 52-week highs.

In looking at your income securities, cash flow is the primary concern; as long as it continues unabated, the change in market value is merely a perceptual/emotional issue. A loosening of the credit markets should move CEF prices back into normal ranges.

Note that Working Capital keeps growing in spite of falling prices. Examine your holdings for opportunities to average down on cost per share or to increase your yield on fixed income securities.

Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it's easier, generally less risky, and better for your peace of mind.

Stop examining your portfolio's performance in market value terms--- it leads to fearful, often frantic, decision-making. Keep your asset allocation and investment objectives clearly in focus and try to think in terms of market and economic cycles as opposed to calendar quarters and years. The Working Capital Model provides a calmer way of dealing with portfolio dislocations during severe corrections.

So long as everything is down, there is really less to worry about. This is the result of panic selling by ETF and open-end mutual fund owners and the beginnings of year-end window dressing by fund managers.

Corrections, regardless of cause, will vary in depth and duration, but both characteristics are only clearly visible in rear view mirrors. The short and deep ones are most lovable; the long and slow ones are more difficult to deal with. If you over-think the environment or over-cook the research, you'll miss the after-party.

Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction.

Get out there and buy low for a change.

Steve Selengut
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"