Monday, 12 November 2007 05:00

A Sneak Peek at the Next Lennar Analysis

I know I said I would have the Lennar report by last weekend, but it has been a monumental task to sift through the mish-mash that was passing as disclosure. I will probably post it tomorrow, or the day after. Here is a sneak peak of what I will focus on.

I have been a little critical of the ratings agencies, and I don't think I have been unfair. Look below to see what I think this formerly investment grade company should have been rated since '05, after consolidating JV's and off balance sheet debt. I know many will say non-recourse this, minority ownership that, blah, blah, blah. Listen, if you are going to book the profits from a vehicle, you should book the liability from said vehicle too. It's real simple. If you can take loss from investment in, or debt towards, a vehicle, it should be reported. I guess those smartest guys in the room at Enron taught the rating agency guys and sell side analyst community very little. Hey, what do I know, I am just a lone, unknown Internet blogger.

Fully Consolidated Bankruptcy Scoring, Including Off Balance Sheet Vehicles
  2005 2006 2007E 2008E
Z-score ( Including JV's )           2.50           2.18           1.59           1.48
Reggie's Debt rating CCC  CCC  CC  CC 

Remember, a score of 1.8 or lower indicates a 72% probability of bankruptcy in 8 quarters.


Now, even as an unconsolidated, standalone entity, Lennar does not look like a good credit risk. Fully consolidated, it is time to pull debt our of Lennar before its too late. Remember, nearly a billion dollars of off balance sheet debt is full recourse, a quarter billion of off balance sheet debt is recourse through reimbursement agreements, $676 million in joint and several recourse off balance sheet debt, plus of course $3.7 billion in non-recourse debt, odd balance sheet. Then there is $2.5 billion in on balance sheet long term debt. Keep in mind that this company's revenues are forecast to be about $6.7 billion (with nearly a billion dollars in annual losses) and its equity market is only $2.7 billion. Despite that, momentum traders have turned this into a commoditized trading vehicle that ignores the fundamentals - pushing the stock up significantly over the last two days, if fundamentals ever came into play to begin with. These guys are trading about $2 worth of debt for every $1 of stock they buy and sell.



Much, much more to follow. See also Lennar Comes Clean! $5.5 billion of off balance sheet debt

Friday, 09 November 2007 05:00

Quick note and update on Ryland

Ryland filed it's 10Q yesterday, and as I thought, they are running very thin on cash. They reported $85 million of cash in their press release, but failed to mention in that same release that much of the money came from drawing down $117 million from a credit line. Without the credit line draw down they would have ended the quarter with negative cash generated. They would save about $75 million a quarter if they stopped trying to fool those that may not know better by buying their stock back and issuing dividends. That money is much, much better used in marketing to take sales share from their competitors, or even offering incentives to get people to buy houses. Which which you rather have as a shareholder, a piece of a percent greater accretion from the stock buyback and a few pennies dividend, or a company that successfully reduces it's overpriced, high carrying cost inventory or reduces it's life threatening debt?

As a little tiny aside, they noted that they lost an additional $37.3 million on option contracts, which they classified as a non-cash charge. Sure it's non-cash this quarter from an accounting perspective, because they wasted the cash in past quarters. Remember, the cash flow statements have the impairment charges added back in, even though the impairments are still representative of cash gone, just cash from previous periods - and ultimately value from the company.

Of course, the entire beleaguered sector is trading up as I type this, including Ryland - currently at $25.85, up $0.35. Using book value comparables, it comps out to about $13.66. Obviously, there are those who haven't read my last two posts on Ryland. The disconnect between Ryland's actual value and its current momentum driven market price exists. If you think the Ryland research was interesting, you'll probably love what I come up with on Lennar, and be mildly amused with the analysis on MBIA, the monoline insurer, first mentioned as suspect on this blog in September.

It seems like almost yesterday when Carl Icahn't offered $22 a share for WCI.  At the time he owned 15% of the shares at a price at least 2 to 3 x higher than the current price of 4.80...I'm sure he still owns the same amount of shares.  Icahn like most value investors thought the assets were worth at least book or a small discount to book... now he knows better.....

Today WCI reported 24 net sales for the quarter and a backlog of 1,243... you don't want to know the cancelation rate on the backlog... how many people want to close on a million dollar condo tower today?

WCI owns over 15,000 lots and controls over 3,000 lots.... remember WCI has traditional homebuilding and tower buildings.... so a lot also means a unit in a tower... what is 18,000 divided by 24 a quarter??? about 200 years of supply... but Bill, you say, signups won't be this bad forever, eventually they will shoot back up... yes... true....

However, WCI has 2 billion in inventory and 2 billion in debt with a debt capital ratio of 68%...  mgt says they will generate a couple 100 million in positive cashflow next quarter when some towers close... so what? they can use it to make a minor dent in their debt?  Their debt is going to drown them before they can sell their way out of this situation... also, do you really think they can sell their inventory today at book?  so that means debt > book value of inventory

Mr Icahn is one lucky dude... the reason why he couldn't buy WCI for $22 a share was because management said it wasn't enough money.....  I find this intersting because when I worked for a big builder a large equity player in early 2006 wouldn't sell us their land even though we kept offering more and more. we joked around that we were bidding against ourselves... we could offer more money because we just kept increasing the sales pace of the products we would build there and the sales price of those products... eventually we contracted for around 25 million for a piece they paid 15 million for a year earlier.. however, by the time these morons finally agreed to a price with us the market tanked..  you guessed it, we walked from 1.5 million in option money and they still own that land...... there are no buyers in this submarket because there are about 7,000 lots owned and controlled by builders already... they can't even sell it for the 15 million they paid plus the cost of holding this land for years...

The only thing worse than a dumb buyer is a greedy seller....

WaMu is having a bad day (see news on WaMu). I rang the alarms on WaMu twice -most recently in early October - Washington Mutuals Mortgage Division Posts 5th Straight Quarterly Loss and initially in early September - Yeah, Countrywide is pretty bad, but it ain't the only one at the subprime party... Comparing Countrywide to its peers. You see, you don't even have to be a client to like me:-) This upcoming quarter marks the 6th consecutive quarterly loss for their mortgage division. They saw this coming more than a year and a half ago, and so did I. Unfortunately, I covered that short on WaMu a few weeks ago to raise cash, but luckily reinstated it just in time to catch the big drop. I need to write a piece on handling extreme market volatility and holding on to positions. Many of the stocks that I am bearish on have become volatile momentum plays and have detached significantly from their fundamentals. This makes them more than twice as risky, and quite expensive to hold on to - but also offers significant profit opportunity when traders push a proximal bankruptcy candidate up to $30 per share on the call of someone like Stephen Kim from Citibank. I digress (especially since WaMu hasn't been that volatile), and back to the point - I believe that WaMu, like Countrywide, are not the only banks at the subprime underwriting party (the problem is not subprime loans, but subprime underwriting - which spreads the effects throughout the lending industry that includes consumer, corporate, retail and wholesale - and fails to confine it to any one sector of low FICO mortgages), but we will cross that bridge when we get to it.

As for the severity of the situation, peruse:

  1. Bubbles, Banks and Builders
  2. Bubbles, Banks, and Builders, Pt. Deux
  3. Bubbles, Banks & Builders: Pt.III - "Do or Die, Bed Stuy" and
  4. Bubbles, Bank, & Builders - Pt IV: I can't believe this guy

Ramble off, 'nuff said!

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