Sunday, April 1, 2007

Standard Pacific's Model Homes and Options

Standard Pacific is already dumping Model Homes at auctions:

"Desperate to avoid still more losses, home builder Standard Pacific sent upgraded model homes to auction last Saturday with a bargain price tage."

"'These homes are priced well below anything in Elk Grove,' said Keith McLane of West Coast Home Auctions. 'The seller is looking to sell 6-homes very quickly.'"

"They sold alright: a 4 bedroom home went for $440,000, a good $150,000 less than it sold for 18 months ago."

They have $155M model homes as of 31-Dec. Unfortunately, we don't know exactly what the 25% discounts to retail mean for BV impact. (Although we could estimate based on historical profit margins.)

Next, I was pretty close on my land/lot option leverage factors, with 10 and 15, respectively:

"At December 31, 2005, we had cash deposits and letters of credit outstanding of approximately $134.3 million on land purchase contracts having a total remaining purchase price of approximately $1,433.6 million.," and, "cash deposits and letters of credit outstanding of approximately $49.6 million on option contracts having a total remaining purchase price of approximately $718.2 million."

It occured to me that SPF is in a double bind on the lot options since they will either (i) walk away from the deposits or (ii) exercise them and cause even more economic damage, since the options are out of the money.

I have known land acquisitions people (both for landbanks and builders), and I have never known them to walk away from options readily. Even if exercising them meant throwing good money after bad, sunk costs.


Anonymous said...

based on the 10-K looks like currently the most restrictive of their financial covenants for credit lines and senior debt is that they need to maintain tangible net worth of 1.372 Bn (which does not decline due to losses). Looks like that's only about 300 mil of writedowns - about the same as the Dec 2006 quarter. Once they hit that trigger, I bet liquidity gets really ugly.
All in all, aggressive pricing may do more harm to the extent it causes excess impairments.

CP said...

Gross margin percentages from the 10-K:

2006: 18.3%
2005: 27.2%
2004: 24.4%

CP said...

Good call on the covenant issue.
Specifically, this refers to the $1.5B revolving credit facility.

There's a leverage covenant that might come into play at about the same level of tangible net worth:

"our ratio of the carrying value of unsold land (land that has not yet undergone vertical construction and has not been sold to a homebuyer or other third party) to adjusted consolidated tangible net worth [is prohibited] from being in excess of 1.60 to 1.0"

So if they are limited to $300M in writedowns, how much more will they writedown this quarter?