Monday, December 10, 2007

The Ultimate Decider

The Plaza tower saga rated a front page story in today’s Washington Post business section. It appears that the ultimate decision as to whether the tower will be built rests with the ability of WCI Communities to secure financing. A year ago that would not have been a problem for the Florida developer but back then its stock was trading at around $35.00 per share. Today it trades for $4.84. It may be mid January before the fate of this project is decided.


Anonymous said...

From 35 to $4? What happened?

David W. Keelan said...

What happened is the subprime mess. Builders are finding it more difficult than anyone to find capital to borrow. Given how expensive their projects are they are highly leveraged. Who wants to lend them money? Not many people unless they can get a premium on their investment. WCI's book value is great - meaning that they are worth more than they are trading for. These are not internal factors they are external factors hammering at the development community.

So, those beating up on developers you will get your wish now. However it will come at a very dear cost - jobs and lots of them.

David W. Keelan said...

I should have added, since a lot of people have left the market for real estate their revenues have taken a huge hit. The balance sheet is stable, but income is dropping and they are burning their cash reserves.

They will either sell of a lot of their projects or perhaps stall them until a turn around.

It is a solid company that will survive one way or another.

Anonymous said...

Don't forget the litigants hijacking the DPZ process to the point where contracted buyers backed out.

Thanks, Lloyd, for the vacant lot! That's vibrancy!

Anonymous said...

It's not just the "external factor" of the subprime market. The third quarter report provides plenty more insight.

David W. Keelan said...

Anon, I did. Here is the link.

An excerpt:

The continuing deterioration of conditions in the markets in which we operate has had, and will likely continue to have for an extended period of time, a negative impact on our liquidity and our ability to comply with financial and other covenants under our bank loans and indentures. Some of the factors which have adversely affected us include, but are not limited to, declines in new home orders; significant increase in cancellations, defaults and rescission claims and lawsuits; increased use of incentives and discounts; reduced margins; significant tower project delays and increased interest and insurance costs; general contractor financial instability; and credit rating downgrades. All of these factors, and others which may arise in the future, have adversely impacted, and will likely continue to adversely impact our financial condition. Refer to our discussion under Liquidity and Capital Resources for further information concerning our covenant compliance.

With little or no visibility as to when market conditions are likely to improve, we have been taking steps to reduce costs to partially offset variances caused by the current unfavorable business environment. We are continuing to reduce overhead, improving operating efficiency, and implementing practices to reduce construction costs. The Company announced a restructuring of its operations to combine the traditional homebuilding and tower operations to enhance efficiencies. In addition, we have reduced land purchases and development activities. All of these measures are focused on maximizing cash flow and paying down debt. Although no assurance can be given, we expect to realize approximately $200-$450 million of cash flow from operating activities and approximately $10 million of cash flow from investing activities in 2007, generated primarily from the collection of tower receivables and proceeds from traditional home closings, land and recreational amenity sales

FreeMarket said...

“WCI's book value is great - meaning that they are worth more than they are trading for.”

Be careful drawing conclusions from a high book value, college boy. WCI is worth exactly what they are trading for, otherwise we would have an arbitrage opportunity by buying all the shares and immediately liquidating the company (less transaction costs, of course). The market obviously thinks that low profitability in the near term will eat away much of that book value. I am not disagreeing that the stock is a good buy, but I am an optimist. ;-)