Tuesday, July 24, 2007

Standard Pacific Joint Ventures

How about that preposterous rumor (from CNBC, of course) that Buffet would buy part of Hovnanian? The giveaway was that they chose the builder with the highest short interest.

My trade was to fade that rally (17%!) by sellling stock into it and also picking up the August 17.5 puts. Worked great and I'm looking for HOV to slump further. Ditto SPF.

The housing bottom is not going to come until inventory adjusts to normal (the market starts clearing again). That will happen when sellers give up on their wishing prices and hit the bids.

This article by Mish is helpful in understanding what kind of land the builders were buying and putting in joint-venture deals.

Meanwhile, I'm looking further into SPF's JVs:

We enter into land development and homebuilding joint ventures... [We] typically obtain secured acquisition, development and construction financing, which reduce the use of funds from our revolving credit facility...

At March 31, 2007, our unconsolidated joint ventures had borrowings outstanding that totaled approximately $1,245.3 million that, in accordance with U.S. generally accepted accounting principles, are not recorded in the accompanying condensed consolidated balance sheets, and equity that totaled $816.4 million.
We and our joint venture partners generally provide credit enhancements in connection with these borrowings in the form of loan-to-value maintenance agreements, which require us under certain circumstances to repay the venture’s borrowings to the extent such borrowings plus, in certain circumstances, construction completion costs exceed a specified percentage of the value of the property securing the loan.

At March 31, 2007, approximately $658.6 million of our unconsolidated joint venture borrowings were subject to these credit enhancements by us (of which $155.0 million we would be solely responsible for and $503.6 million which we would be jointly and severally responsible with our partners). During the three months ended March 31, 2007, we were not required to make remargin payments under any loan-to-value maintenance agreement. However, subsequent to the end of the 2007 first quarter, we made an additional investment to one of our Southern California joint ventures totaling $9.7 million, which represented our 50% share of the venture’s project loan remargin requirement. [We] expect that, over the next several quarters, we and our joint venture partners will be required to make additional remargin payments with respect to certain joint venture loans and will be required to restructure or extend others.

If our joint venture partners fail to make their required capital contributions, in addition to making our own required capital contribution, we may find it necessary to make an additional capital contribution equal to the amount the partner was required to contribute. Making capital contributions on behalf of our partners could result in our being required to consolidate the operations of the applicable joint venture into our consolidated financial statements which may negatively impact our leverage covenants. Also, if we have a dispute with one of our joint venture partners and are unable to resolve it, the buy-sell provision in the applicable joint venture agreement may be triggered. In such an instance, we may be required to either sell our interest to our partner or purchase our partner’s interest.

Another issue for SPF is the performance guarantees that they and the JV's have given:

We and our joint venture partners have also agreed to indemnify third party surety providers with respect to performance bonds issued on behalf of certain of our joint ventures. If a joint venture does not perform its obligations, the surety bond could be called. If these surety bonds are called and the joint venture fails to reimburse the surety, we and our joint venture partners would be obligated to indemnify the surety. At March 31, 2007, our joint ventures had approximately $130.0 million of surety bonds outstanding...

I realized that I have been neglecting a category of capital mis-allocator besides the crazed flipper: people who only needed a 2000 square foot house but bought a 3500 sf one, because, of course, the more money you spend on real estate, the more money you make in appreciation.

This was perhaps the more pernicious type, because it was an enormous misallocation of capital.

As with any bubble, it will take a while for the effects of that misallocation to ripple through the system. See this chart for more about that.

1 comment:

Anonymous said...

I agree. So far I haven't heard of any HB's going bankrupt. Until that happens the short is on.

There's an inventory glut and their impairment charge-offs are a matter of when, not if.

I haven't seen such obvious money in the bank since the Y2K remidiation shorts.