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Prior Weeks - Click Here
Real Estate and Housing Industry Outlook
August 25, 2007
Morgan@MorganFlorida.org
” Well, we’re expecting a CO in the next couple of weeks. At the end of this month, or maybe early first week of September, plus or minus Labor Day. And we expect to begin closing the condominium units in second half of September with the hotel units following about 30 days behind the condo units.”
Jim Dietz – WCI Communities, Inc. – EVP, CFO
Quote of the Week – Jim Dietz is talking about Bal Harbour. This one deserves quote of the week status, since there is no way possible Bal Harbour gets a CO (Certificate of Occupancy)this month or the first week of September. Well, let’s say there is no way they get a full CO that will allow them to close and transfer title on units. And that’s all the counts folks. So the second half of his statement is also a falsity that demonstrates just how bad things are at WCI. A company is totally out of control when the key executives either have no clue what is going on, or are knowingly making false statements. There is no middle ground here. From what I have seen during my visits to this project, they will not get a final CO for another 60-90 days. And closing these units is not going to be a walk in the park.
WCI – I am going to stick with WCI for this week’s update for two reasons. One, the problems here are indicative of the entire home building group. And maybe some of you will start to agree . . . the light at the end of the tunnel is a freight train. Two, I have spent 90% of my time this week on conference calls about WCI, researching WCI and in the field visiting communities. So here we go. If you’re long, it will be a scary trip.
Ghost Ship – I spent a great deal of time this week researching WCI issues and talking to dozens of people. There were two issues that stood out – (1) No one is running the ship. (2) There is no hidden value. I’ve spoken about the lack of hidden value for a year now. I’ve only touched on the management team, and I tried to tread gently. But after this week, it is clear the overwhelming consensus is no one is left to run the ship. Look back at the last two years. WCI lost or pushed out a lot of talent. In fact, I hear that Barry Schwartz resigned on Friday. I couldn’t find a single person that had faith in Starkey and Company. I found a few people that had some very crazy things to say, and if true, there are some heavy duty surprises coming. But for now, we have a company being run by the top dogs that created many of the problems, and they are being directed by a group that believed this company was a jewel worth $22 a share. Oh, did I forget to mention the guys running the company are the same guys that turned down the $22.
Conference Call – Maybe we should just start calling these “love fests” or “group hugs.” The conference call this week was nothing more than a repeat of what we already knew, and maybe a little twisting of the facts for what we don’t know. There was certainly nothing worth the time it took to listen to the call. And could Starkey have been any less enthusiastic. Listening to him reminds me of a prisoner of war reading an enemy prepared statement. Here are a few interesting moments from the call.
Bal Harbour Default Rate - Jerry Starkey responded to a question about the default rate at Bal Harbour, stating: “Last year we were around 6%, maybe a little bit more than that, maybe in the 8% range, maybe 9, 10%. In that building. Below our 11% average for the remaining buildings.”
What did he say? Talk about dodging a question. Read it again. Is he saying the default rate will be 6, 7, 8, 9 or 10? The answer is all of the above. He does say it will be below the 11% average, but that’s about it. I can assure you, the default rate will be well north of 11%. You have three major problems facing Bal Harbour:
1 – Flippers - More than 80% of the buyers appear to be flippers, and I would stick my neck out and say it is probably more than 90%. Prices on the MLS are now at or below original contract prices on several units. There have been NO pending sales on any units. NONE. Prices are still falling on the MLS. More on this below, and complete details available for clients.
2 – Multiple Properties – At Bal Harbour, and other towers coming up for closing, you have flippers that purchased multiple properties at several tower properties. Those buyers that are stuck with units will not want to be stuck with yet another unit they can’t sell, nor will most of them be able to get another mortgage. One look at the Miami-Dade MLS reports tells anyone that can read, condo units are not selling AND prices are falling as flippers become more desperate by the day.
3 – Mortgages – There were two big companies that stand out for me when it comes to dancing with the devil during the housing bubble – Countrywide and Wells Fargo. These two companies offered mortgages to anyone that could fog a mirror. Here’s an example. Adams Homes was known for selling homes with $1,000 down, providing you used their lenders. Who were there preferred lenders? You guessed it, Countrywide and Wells Fargo. I know of one young man that purchased six homes from Adams and received mortgage approvals on all six homes from Wells Fargo and Countrywide. This man earned less than $40,000 and had assets of less and $50,000. He should never have received an approval for one mortgage, not to mention six. The wackiest thing about this, were the approvals usually took less than 15 minutes on the phone.
Starkey “seemed” to imply on the conference call that Wells Fargo was going to provide mortgages for Bal Harbour buyers. If that’s not what he intended to portray with all of the long wind we heard about Wells Fargo on the call, he probably should have disclosed this issue clearly. I find it hard to believe Wells Fargo is going to step up to the plate at Bal Harbour. If they do, there are still a few problems for buyers and even bigger problems for Wells Fargo down the road:
A. Appraised Value – There is almost zero chance any of these units will appraise out for the original contract price. Strike that. There is absolutely no chance any of these units appraise out. I think we are more likely to see these units appraise out at 80% of original contract price, unless the monkey business we saw in the appraisal market continues. Not. Not even a remote chance. Banks are demanding very tight appraisals now. So what happens if you have a $2M unit that appraises out at $1.6M. Well, you’re only going to receive a mortgage of $1.44M, IF you are lucky enough to get a 90% mortgage. WCI has your $400,000 deposit . . . but you still need to come up with another $160,000 to get that mortgage. Now you have $560,000 sunk into the money pit, and your taxes, condo fees and interest payments start running at the tune of $15,000++ a month. So the choice is either walk away and lose $300,000 or close and lose $600,000++++.
B. Qualifying – Let’s say Wells Fargo does do something stupid, and provides mortgages for all the flippers at Bal Harbour. We already know Wells Fargo has raised rates and toughened qualifying standards. So even if they are telling Starkey and Company that they will “be there for them,” I don’t buy it . . . and neither should Starkey, Icahn, Cohen or anyone else looking at this. It will be very difficult for most of the buyers to land a mortgage. Let’s forget about tougher standards, higher rates and lower appraisals for a split second. How about many of these buyers are flippers, and lenders have all but eliminated this market.
C. Multiple Properties – Let’s beat the dead horse. In fact, WCI put out a statement a few months back on this very subject. It was a convoluted release, and I received a lot of calls for an explanation. It’s very simple. WCI knew the light at the end of the tunnel was a freight train when they issued the press release. Buyers that bought Mosaic, Singer Island, Hammock Bay, etc., and also bought Bal Harbour . . . the star of the group, will NOT be able to get a mortgage, even if they want one.
Current Bal Harbour Prices - Starkey responded to a question about the Bal Harbour units offered for sale on the MLS system. Here’s what he said, “I think if you look at those MLS listings and they are about a third. They average about 40% above the price that the buyer has under contract.”
I really hate to burst his bubble, but the average price on the MLS and non-MLS listings is not 40%. In fact, it doesn’t matter what the unrealistic prices are, unless you are intentionally trying to mislead someone. Let’s face it, are you going to pay $2M for a unit on the 4th floor, when you can buy the identical unit on the 12th floor for $1.5M? Despite what Starkey thinks, you don’t look at the highest priced units, as these will never sell at these prices. You look at the lowest priced units, and if you are a buyer of one of these units, you gag . . . and you’re stomach starts to turn. For my clients, I have a spreadsheet of all of the listed properties, with original contract price and current listed price. Folks, there are properties listed on the MLS below the original contract price. These buyers/sellers are trying to salvage something from their 15% deposits. So here’s the kicker for Starkey. If flippers can’t flip at less than original contract price, how much wood could a woodchuck cut if a woodchuck could chuck wood?
Dumbest Conference Call Question – There were not many good questions on the call, and when there was a good question, Starkey and Company did a great job of avoiding the facts or twisting them to the point you weren’t really sure what they said or how it applied to the question. There was no lack of dumb questions from folks that just wanted to get their name on the call. The Pink Tail Feather of the Dodo Bird Award goes to Jim Wilson of JMP Securities for his string of dumb questions. Here’s one:
Jim Wilson: Thanks, good morning, guys. A couple questions. Wondering as you've moved along in the construction process on the towers, has there been any material change in your experience of what you're seeing in costs particularly as I think labor markets and everything have loosened up as far as labor and materials? Anything to help you here recently?
Mike Morgan’s Take: Let’s face it, who cares about costs at this point. We’re way beyond a few bucks more or less in labor, concrete, copper etc. It’s almost as if Jim Wilson just landed or was just thawed out. I point these kind of questions out to demonstrate that most analysts will not ask tough questions. And I don’t know of any analysts that will give it to you straight. They can’t afford to. If they do, they don’t get on the calls and investor relations doesn’t return their calls. But let me demonstrate a bit further with Wilson’s second question:
Jim Wilson: Okay. All right. And then I guess I'm particularly thinking you're related to Bal Harbour such an important building for you. Any sense -- I've seen a little bit myself but not a lot, on where for those that are even relisting condos kind of what listing prices or what their price expectations are in the market price just kind of give a bit of a current flavor?
Earth to Jim – This topic was already covered. Starkey said the number was 40% earlier in the call. But, now Starkey says 30-40% of contracted price in response to Jim. Which is it Starkey, 30 or 40? But as I pointed out above, this is not the number you want to look at. You want to look at ground zero, and what “real” listing prices are. Jim Wilson is a high priced analyst that should know that. Not. In fact, in response to Starkey’s downwardly revised number (in the same conference call), Wilson responds: “Okay. That's kind of what I've seen.”
Hey Jim, when was the last time you looked at the Miami-Dade MLS numbers? If Wilson had looked at the numbers, he would not have asked the question he asked, and he would not have won the pink feather.
I can’t resist. One more to show you what a waste of time some of these conference calls are, and why it is so important to get out in the field. This is Jim Wilson’s final question. Or is it a statement? Or is it just a bunch of words spewed out without any common sense or thought?
Jim Wilson: “And then the final thing I was looking in your last slides or your appendix of your inventory and your planned units in the future and obviously pretty good concentration in the traditional market between Tampa and Naples. I was just wondering if you could give a little color on how you're seeing the traditional market, sales demand, or margins in particularly contrasting those two. Is it any better in the kind of what I would think as more regular job basis as opposed to retirement basis? Tampa market compared to Naples? Is it better for you, more profitable? Or just a little color?”
I had to read it four times. Here’s the problem when analysts don’t get out in the field. They don’t know what to ask, so they either ask questions that have been addressed in the monologue or they make stuff up. And they make it so convoluted, that you think you’re the dummy because you don’t understand the question . . . or the dribble the exec gives back in response.
Best Conference Call Questions – Impairments and Debt. That just about sums it up for WCI. WCI has not addressed impairments properly, only impairing standing inventory. They are not impairing communities. So they are basically saying, only the inventory is bad, but the rest of the community is good. Duhhhhh. On the debt side, “do the math.” You can’t use Starkey Math or Dietz Math, you need to use real numbers and real debt. Bottom line . . . they can’t meet debt covenants moving forward. The cash is not there and they can’t spin concrete into gold. Period. Full Stop. End of Story.
Well, maybe not the absolute end. You see, not only can’t they meet debt moving forward, but WCI has to address the forward accounting issues of the past. This ghost ship has no one at the help, except maybe the Ghosts of Past, Present and Future. We might need some new math to figure out what’s what, where it is, where it’s going, who gets what, and who joins Icahn and Cohen on the losing bench.
Bal Harbour Flippers – Jim Dietz told us that he believes 100% of the hotel/condo buyers are investors. I agree. He also told us 50% of the condo buyers are investors. Well, I don’t buy this for a minute. For one thing, it looks like as many of 30% (or more) of these units were sold to real estate agents and brokers. And from scanning the MLS and speaking with brokers about pocket listings, I gotta put this number at closer to 80% on the condo side.
Deal Speculation – Reuters turned to Jim Wilson for the scoop on WCI. And Jim said, “The implications of all this is that you break it all into pieces," Wilson said. "They have condos. They have conventional houses. They've got marinas. They have a whole bunch of parts. They have golf courses, They have (recreational) facilities. They've got some other commercial lands."
I can only say one thing to Jim and folks that buy the “scoop.” Use it in good health on your doggie poop. If Jim and others like Jim took the time to get out into the field, they would realize the “whole bunch of parts” are not worth anything close to what Starkey and Company are dreaming of. Jim’s statement is reminiscent of David Lereah and Howard Dean’s famous campaign cheer, scream, dying moment. Let’s take apart Jim’s pieces:
1 – They have condos. Hey, Jim – condos are not selling. And condos cost money to carry.
2 – They have conventional houses. Same problem Jim, but worse.
3 – They’ve got marinas. Unfortunately, it is not going to be easy to simply sell these marinas. Jim should know that. Then again, maybe not. The marinas might be the most attractive piece of the puzzle, but let’s see if they can sell them for what they have in them. That’s easier said then done. And the debt holders will be first in line.
4 – They have a whole bunch of parts. The problem with the parts, is they don’t add up to what they paid for them. Moreover, when you look at properties like Tuscany Reserve, you’ve got to wonder who in their right mind signed of on the dollars spent here. From what I hear in the field, this was Starkey’s personal boondoggle. But if Jim Wilson had spent any time in the field, he’d know this, and he’d know that Tuscany Reserve is a cash drain . . . and he would know selling the golf course is just about a no-no. Who wants a golf course that is going to lose millions? You have to sell memberships, which means you have to sell homes in Tuscany Ridge . . . and that ain’t happening Jim.
5 – They have recreational facilities. I guess Jim’s referring to the golf courses, but speaking before putting the brain in gear to determine what they have the right to sell and what they can sell and what they can realistically sell for.
Pink Feather Runner Up – Jack McCabe, a real estate consultant in Florida, is the same guy that said there was a deal on WCI a few months back. He never ceases to amaze me, and it never ceases to amaze me the media soak it up. This week he was quoted saying, “This is a very positive change for WCI in both the short and the long term. I think we will see some changes in the current operating philosophy." McCabe said some changes may include WCI moving away from building luxury communities based around golf courses to other types of amenities and possibly selling off some land holdings and properties.
McCabe, just like Jim Wilson, obviously has no clue what is going on in the field. But guys like this get the press, and when Reuters, Bloomberg, etc. run this ka ka, readers accept it as the Gospel. It’s very easy for me to take apart their statements, since I “do” spend time in the field and I “do” my research. So let’s talk about the new Board that Jack thinks is so wonderful.
1 – Icahn is the same guy that was willing to pay $22. And even after realizing he was wrong, he’s sticking around for more pain. If there were some possibility of hidden value at WCI, I’d side with Icahn. Unfortunately, this will go down in history as one of his biggest mistakes.
2 – McCabe thinks this is a positive change for the short term. I’ve got news for Jack. Nothing is going to happen short term at WCI, except Bal Harbour being delayed . . . again. The condo market is not going to correct overnight, and if Jack hasn’t noticed . . . no one wants land.
3 – McCabe also thinks WCI should move away from luxury communities around golf courses. He gets two pink feathers for this “foot-in-mouth” statement. The only thing WCI has going for it is luxury and golf amenities. If they do away with that, they’ll be running with a very crowded field of builders that are cutting each other’s throats.
WCI Land – Let’s face it. This is the big mystery. We know where there communities are. We don’t know where all of their land is, so there is no way to put your finger on a value. Many of my clients want me to put a number on the land. Now that Icahn has control of the board, no one but Icahn and his buddies will be able to put a value on the land. But if there was any hidden value in the land, Goldman Sachs would have been pumping this to potential buyers. There was no pump, because there is no hidden value.
From what we are seeing in the markets now, land prices are back to 2002 prices . . . and still falling. I expect to see land prices at or below year 2000 prices before buyers step up to the plate. Right now, the last thing you want to own is land. I’ve been approached by dozens of sellers of land. They have two problems. One, they are asking too much. Two, there are no buyers of land. Just like the mortgage market can’t mark portfolios to market, the same thing holds true for land. We don’t know what it is worth now, because we don’t know how long this cycle will last or how much pain it will cause. The only things we do know is – owners of land don’t want it. And buyers of land . . . well, there are no buyers.
Pain is critical here. When land does become attractive, it will be at the expense of holders that are going bust. Only then will land sell at below-market prices as dying builders liquidate at distress prices. Back to WCI – there is no hidden value in their land. In fact, it is an expense to them and prices are still dropping.
Disclosure: Of the stocks referenced today, I have no positions.
Mish's Blog: If you haven't been following Mike Shedlock on Global Economic Analysis, here is a link to his blog - http://globaleconomicanalysis.blogspot.com/ It is a great read on a macro level where Mish (Mike Shedlock) zooms in on micro issues as well.
Mike Morgan, J.D., CRS, GRI
Morgan Florida Real Estate
Morgan@MorganFlorida.org
772-260-5448
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