Using Veritas to Construct the "Per…

29-04-2017 Hits:84698 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

Read more

The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:79156 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

Read more

What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:78997 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

Read more

Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:83490 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

Read more

This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:80048 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

Read more

What is the Value Proposition For Verita…

01-04-2017 Hits:82355 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

Read more

This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:53328 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

Read more

Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:81367 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

Read more

Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:81358 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

Read more

The Country's First Newly Elected Lame D…

27-03-2017 Hits:81175 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

Read more

Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:87033 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

Read more

The Transformation of Television in Amer…

21-03-2017 Hits:85048 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

Read more

This was submitted by BoomBustBlog member, Christopher Alleva. See supporting documentation for download here:  pdf  Crown Village Deed of Trust KB-Centex-LaSalle (3.41 MB) and pdf  KB Home Crown Farm Sale Deed (4.64 MB).

 
Nagging questions persist about the depth and breadth of the homebuilders' exposure to special purpose affiliate joint venture land development liabilities. Be forewarned, discussions of financial accounting are rather dry. Oliver Wendell Holmes, it's not. Reviewing KB Home’s disclosures for Q3 and the 11-2007 annual reports, it appears that they reduced debt in JVs by $180 million to $1.54 billion and reduced their guarantee exposure by $130 million.  Tellingly, the JV asset value disclosure shown in the Q3 report was left out of the annual report. Presumably, this omission was made because total JV liabilities now exceed the assets (see SEC Reports Excerpts Below).

These disclosures prompt several important questions: KB states that guarantees extended to JVs allow them to gain more favorable terms. While it is unclear from the SEC disclosures, it appears that there is approximately $1.2 billion in non-recourse JV debt as of 11-30-2007.  Is there an implicit guarantee from KB on these loans? Did KB hold themselves out as a backstop to induce the lender to make these loans?  It is beyond my comprehension how a reader of these financial statements can make meaningful qualitative judgments regarding the financial condition of KB Home. 

While KB's SEC disclosures are wholly inadequate, I uncovered details of a JV transaction in suburban Washington D.C. that offers a window into the phantom JVs. Through land records, news accounts and other sources I have pieced together the details of a large JV they undertook with Centex.  In the halcyon days of 2005, KB purchased 180 acres in Gaithersburg Montgomery County with Centex. Amidst the hoopla, now ousted CEO Bruce Karatz wowed the media with the company's recreation of the TV Simpson family's neighborhood in Las Vegas and a celebrity endorsement deal with home decor diva Martha Stewart. All this hype and above all the sensational land transaction intended with one purpose in mind- zoom the stock price.

Eventually the property will be entitled for 2200 units. When the KB JV took title, it was not much more than well-located raw land. It will take at least three years to finish subdividing and another year after that before any unit deliveries. The transaction was recorded at $137 million but they actually bought it for $200 million because they took it on an assignment. There are at least another $25 million in exactions associated with the approval of the subdivision. At 10% interest, they will have another 80 million of interest and $8 million in taxes during the 4 years before any deliveries. Throw in another $12 million in professional fees for engineering, legal and planners, and you can adduce that they will have $325 million in the ground before dollar one of revenue.

Selling at 220 units a year it will take 10 years. Imputed interest over this period at 10% works out to $165 million bringing their basis to $223,000 a lot. Add civil work at $52,000 a unit and your all in lot cost is $275,000 a unit. A barely acceptable lot cost ratio is 33%, which means the actual homes have to sell for at least $775,000. That's almost 10X the median Montgomery County income.

All that said, rumor has it that KB and Centex are dumping out of this mess of their making. LaSalle has a $200 million note. My guess is that it's worth between $75 and $100 million.  Of course, this is one of those off b/s JVs,  a $50 million liability apparently not disclosed anywhere. This is just one market at 50/50 KB and Centex they have at least $50 million of exposure each.  In addition, this is cash exposure. Are the rest of the JVs similarly situated? Enquiring minds want to know. Is this specific JV indicative of the others land deals? Will KB be compelled to recognize and liquidate large off balance sheet liabilities to survive. For investors, the alarming prospect is not knowing how much and when these obligations will return to the nest.  

Footnotes

1.) KB Homes 10K Annual Report

The Company conducts a portion of its land acquisition, development and other residential activities through unconsolidated joint ventures. These unconsolidated joint ventures had outstanding secured construction debt of approximately $1.54 billion at November 30, 2007 and $1.45 billion at November 30, 2006. In certain instances, the Company provides varying levels of guarantees on the debt of unconsolidated joint ventures. When the Company provides a guarantee, the unconsolidated joint venture generally receives more favorable terms from lenders than would otherwise be available to it. At November 30, 2007, the Company had payment guarantees related to the third-party debt of two of its unconsolidated joint ventures. One of these unconsolidated joint ventures had aggregate third-party debt of $320.4 million at November 30, 2007, of which each of the joint venture partners guaranteed it’s pro rata share. The Company’s share of the payment guarantee, which is triggered only in the event of bankruptcy of the joint venture, was 49% or $155.2 million. The other unconsolidated joint venture had total third-party debt of $6.2 million at November 30, 2007, of which each of the joint venture partners guaranteed it’s pro rata share. The Company’s share of this payment guarantee was 50% or $3.1 million. The Company’s pro rata share of limited maintenance guarantees of unconsolidated entity debt totaled $103.8 million at November 30, 2007. The limited maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specific percentage of the loan balance. If the Company is required to make a payment under a limited maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution and/or loan to the affected unconsolidated joint venture.

  

2.) KB Homes Q3 2007 10Q Report

The Company conducts a portion of its land acquisition, development and other residential activities through participation in unconsolidated joint ventures in which it holds less than a controlling interest. These unconsolidated joint ventures had total assets of $2.75 billion and outstanding secured construction debt of approximately $1.72 billion at August 31, 2007. In certain instances, the Company or its subsidiaries provide varying levels of guarantees on the debt of unconsolidated joint ventures. When the Company or its subsidiaries provide a guarantee, an unconsolidated joint venture generally receives more favorable terms from lenders than would otherwise be available to it. At August 31, 2007, the Company had payment guarantees related to the third-party debt of three of its unconsolidated joint ventures. One of the unconsolidated joint ventures had aggregate third-party debt of $450.6 million at August 31, 2007, of which each of the joint venture partners guaranteed its pro rata share. The Company’s share of the payment guarantee, which is triggered only in the event of bankruptcy of the joint venture, was 49% or approximately $218.5 million. The remaining two unconsolidated joint ventures had total third-party debt of $14.6 million at August 31, 2007, of which each of the joint venture partners guaranteed its pro rata share. The Company’s share of these payment guarantees was 50% or $7.3 million. The Company’s pro rata share of limited maintenance guarantees of unconsolidated entity debt totaled $126.3 million at August 31, 2007. The limited maintenance guarantees apply only if the value of the collateral (generally land and improvements) is less than a specific percentage of the loan balance. When the Company is required to make a payment under a limited maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment constitutes a capital contribution and/or loan to the affected unconsolidated joint venture and entitles the Company to receive a greater aggregate amount of the funds any such unconsolidated joint venture may distribute.