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Joint Ventures, revisited

Written by Reggie Middleton

Thursday, 07 February 2008

My first post on this blog shared my "Thoughts on the Homebuilders" about 5 months ago. I stated that the off balance sheet JVs that were hidden will come back to bite the builders. I delved into this with significant detail in regards to Lennar. I also posted tutorials on tricks, funny accounting , zero value in land , as well as the coming (now here) land recession , in two parts. Well, most of those posts could have been put to good use over the last 6 months. Here, we see them all come together with Centex's JV issues in thier latest 10Q. The company has nearly a quarter billion dollars of recourse and accountable contingent liability debt through 43 off balance sheet joint ventures. According to the latest 10Q:

During the three months ended December 31, 2007, the lender to certain of the Company’s joint ventures has notified the Company that it believes the joint ventures are in default of certain joint venture loan agreements as a result of the Company’s joint venture partner not complying with all aspects of the joint ventures’ loan agreements. The lender has not taken any action against the joint ventures or the Company at this time. Additionally, a lender to two of the Company’s other joint ventures has notified the Company that it believes the joint ventures are in default of their joint venture loan agreements for not meeting their contractual obligations. The Company is currently in discussions with the lender. Based upon the terms and debt amounts outstanding for these joint ventures and the terms of the joint venture agreements, the Company does not believe its exposure related to these joint venture defaults will be material to its financial position or results of operations.

A summary of the estimated maturities of our share of joint ventures’ debt is provided below. The Company has estimated the debt maturities with the assumption that all payments are first applied to pay down the outstanding debt balances as of December 31, 2007, and the Company has not projected the early repayment of joint venture debt.

	For the Fiscal Years Ended
	March 31,

2008	$	52,511
2009		124,103
2010		34,782
2011		25,601
2012		24,761
Thereafter		—

	$	261,758

The last three posts are the result of a cursory glance at just the first half of the latest reporting, and exhibit more than enough to confidently maintain a short position in this company. I am contemplating truly taking the company apart from an analytical perpsective. I have been bearish on it since September, but now I see the fissures in its business model opening to become gaping holes. I will post a summary of any in indepth analysis I perform in two weeks, if I decide to go that roue.

It is interesting that as the homebuilding industry is at its worst, the sell side starts to recommend long positions. Truly detrimental to one's net worth.

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