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Cover Story: Course Corrected

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WCI Communities' management team at headquarters in Bonita Springs, Fla. Pictured are (from left) senior vice president and general counsel Vivien Hastings, senior vice president and CFO Russell Devendorf, CEO David Fry, senior vice president of home building Douglas Schwartz, and vice president of development and operations Paul Erhardt.Photo: Josh Ritchie

You may know David Fry. He's chief executive of that small to midsized, moderately fast-growing, privately held, regional Florida home building company called WCI Communities.

Huh?

Yes, he's that David Fry, and yes, it's that WCI.

This is the story of who, and what, and how Fry and WCI may become one of home building's handful of "you-can't-make-this-stuff-up," back-from-the-brink stories, and why the fellow and the company he leads matter to the home building community right now.

They matter partly because a home building organization that breaks out of the confines of an era characterized by rampant business failures, value destruction, and virtually no imaginable chance at redemption is a noteworthy exception to a rule of ruination, duress, and desperation.

Long, sad, true home builder bankruptcy story short: A Top 25 public home building company crashes into bankruptcy in 2008, owing creditors almost $2 billion, with almost 900 completed homes?347 single-family and 517 condo tower units, according to bankruptcy court documents?on its books to sell and a 12,000-acre undeveloped lot bank in a high-end, high-maintenance operational footprint that stretches thinly from the southern tip of Florida to the Yankee village, sleepy, green environs of colonial Connecticut.

With debtor-in-possession financing it put into place the very week that Lehman went kaput, WCI's SWAT team of transitional executive "liquidators" do such a good job at getting value as they sell off most of the completed homes and non-core assets that, a year into it, they wake up having stumbled on a dazzling realization.

They realize they're not just good at paying down debt.

During the sell-off, it occurs to them that the WCI name and locations were selling better in Florida than a lot of other stuff out there in the deep freeze that is the U.S. housing market. So, it dawns on them, "Hey, instead of trying to get a few more pennies on the dollar in the lot sale game with home builders, let's get dollars on the dollar by?you guessed it?building WCI homes!" The wreckage of its past did not, remarkably enough, preclude a shot at a future as a home builder.

"We realized when we did the analysis that selling the lots to builders didn't nearly meet the internal rate of return characteristics that we could hit when we built and sold homes ourselves, so we took the proposal to the board of directors last spring, and they backed our going back into home construction in July 2010," says Fry. "Home building had not been a scenario in the restructuring plan, so it wasn't a given that the board would approve it."

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A year later, it's a five-year plan for home building operations, with 1,200-orso units a year and $450 million-plus in home building revenue by 2015 as the goal. That's setting the bar pretty high.

"David has been with WCI since 1995, coming up through the amenities area of the company, into the home building side of the business, and he's got the land understanding and knowledge that translates into knowing how every part of the company works," says an executive from one of the leading stakeholders in WCI right now, a financial services company.

Destruction and regeneration are part of residential real estate's same old story.

Rare, though, are ones that do it like WCI. It was long and wrong on land, heavy on carrying-cost lift, and up to its ears in exposure to the implosion in high-end condominium towers. A $2.6 billion builder in 2005, it careened to hell in a bucket, although it hardly enjoyed the ride down to about $364 million last year.

Except among those who actually made it happen, WCI's resurrection?from almost $2 billion in debt when it went into bankruptcy in August 2008, to a reset at $450 million in new debt coming out of Chapter 11 in September 2009, to its current state of debt of under $100 million?is practically a miracle. It's even more so in an age where commercial and residential real estate finance operates like it prefers its debt-laden home building companies dead. In Florida, of all places.

But WCI is not dead; it's rebuilding. If it does what its leadership plans, its 10 operating communities this year will yield an ego-rightsizing 165 closings at an average selling price of $303,000 for home building revenues of $50 million. The five-year program calls for closings of a more macho 1,200 homes, generating northward of $450 million. One of the best things going for the five-year plan is that 70 percent of the lots it would sell with new homes on them are already in communities WCI owns.

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Is WCI making money building and selling homes right now?

Close, says Fry: "We are not generating profits on a run-rate basis today due to the fact we just reopened our communities for sale and have not begun to generate the closings. We are in a sense 'a start-up builder' with a great land position. We have had good sales pace and gross margins (well above average for the industry), which will show up in our closing numbers in the back half of 2011 and into 2012 and beyond. Assuming the market doesn't take a turn for the worse, we anticipate returning to profitability in 2012."

Right now, the fact that 30 percent of the plan through 2015 calls for lots that are not in its pipeline means that the company's working its stable of about 15 owners?where bondholders and equity shareholders are on a par with one another? to raise about $25 million in debt and an equal amount of equity, for a total of $50 million to have as dry powder for operations, acquisition, etc.

As Talking Heads' David Byrne likes to say, "How did I get here?"

WCI did by recognizing what it wasn't, and what it is. In the nick of time, just as the economy, the world of high finance, real estate, and luxury Sun Belt living exploded supernova style and summer 2008 turned sin and debt into the protracted payback time we're in right now, WCI managed to see itself for what it is?a balance sheet-disciplined, midsized, regional builder in a warm climate, aiming more at move-up and active-adult home buyers than the partmagical, part-mythical second home market?and distilled itself as quickly as possible into that form so that it could live to build another day.

To do that, it had to recognize in a flash of brutal honesty what it wasn't? it wasn't an Eastern Seaboard, superregional, semi-custom, single-family, attached, and high-rise builder of every luxury home product under the sun. That meant 70 percent of its communities in any states other than Florida?21 communities in all?had to go into the "non-core" bucket for sale. Goodbye New England. Good riddance Mid- Atlantic. Home sweet home is Florida.

And why not? Except for the odd 100- year storm that we're weathering on the demographics of migration front, Florida's prospects are for growth of 200,000 to 300,000 people each year for the remaining years of the decade, according to the State of Florida Office of Economic and Demographic Research.

Importantly, Fry and his team discovered what the folks at Orleans Homebuilders and Woodside Homes have also found: The brand held up.

Almost as quickly as WCI made headway against its mountain of debt repayment, it had to strike upon an epiphany?of the kind only home builders have?around what it could be. A privately held, moderately priced move-up and second-time move-up home builder with an emphasis on active-adult lifestyle living in golf course-oriented communities.

Photo: Josh Ritchie

In this way, coming out of Chapter 11 in September 2009, Fry and company marked a bright line in the sand, on one side of which was "the old WCI" and on the other side is "the new WCI."

One of the reasons this is the case is that Fry did so well at what he was asked to do that he earned a chance to do what he was not told to do.

What he was told to do?and the restructuring plan a Delaware-based U.S. bankruptcy court judge signed off on in 2008?was to sell off the assets of an empire its management then valued at $20 billion in completed single-family, tower units, amenitized master-planned developments, and raw undeveloped land.

What he did do was the math. Home builder math, that is. He put down in one column the amount of money he would make under the restructuring plan by selling all the company's 5,000 remaining lots at the going rates. Next to that, he tallied up the value that he would generate by building a WCI home on a number of those lots in the communities where homes are still selling.

"We knew what builders would pay for lots on a rolling, takedown basis," says John Peshkin, managing principal at Vanguard Land and a member of the WCI board of directors. Fry leaned on Peshkin's land market knowledge for perspective on the math before he took the go-vertical proposal to the rest of the board. Peshkin affirmed the thinking that the "net present value of the lots was considerably greater if WCI built versus selling them off even among competing builder bidders. Part of that owes to the intrinsic value of the WCI brand."

Any home builder worth his salt will nod at the answer to the math problem. It makes more sense, and more dollars for whoever the investors are, to go vertical. Stripped down to its bare nature?a brand and its core land assets?what WCI pencils to, in terms of value to its debt and equity holders is a business that's worth more if it builds than if it simply liquidates its inventory.

So, while home building and development's cyclical troughs historically seed success stories directly out of the wreckage of the busts, seldom does the very same builder that dropped from the dizzying heights into oblivion spring back to life, viable and capable of future prosperity, playing itself.

You'd have to think of NVR or M.D.C. Holdings to come up with examples of companies that in past down cycles defied near death, dipped into Chapter 11, and lived not only to tell the tale but get stronger. They're a couple among the sparse ranks of those who've gotten home building's oh-so-rare allotment of second chances, deservedly. Right now, a handful of companies have managed a re-emergence from bankruptcy, notably Orleans Homebuilders and Woodside Homes, and regional privates like St. Lawrence in the Carolinas and Caruso Homes in the D.C. metro.

Listen to the CEOs of NVR and M.D.C., and you'll hear them recoil from the errors of their old?pre-bankruptcy? ways as freshly as though they occurred yesterday. "Never again!" the refrain goes, as it regards getting caught by a down cycle with a glut of lots, a bloated cost structure, and exposure to risky high-rise businesses.

WCI's debt- and death-defying feats of wonder oddly enough owe to two factors? one is land, which could have killed it but now it could be its redemption. The other is a brand, which couldn't save it, but now may just be its path of stepping stones to an eventual recovery.

"The old WCI" is how Fry refers to a company that nearly flashed out in a blaze of glory under the weight of almost $2 billion in debt in late summer 2008. "We were good at marketing and selling, branding, driving people to our sales centers, overpromising, under-delivering, selling off 300 floor plans that project managers could change without restriction to highly customized one-offs."

One thing to know is that Fry might not be too keen for good-news, badnews jokes, having lived through perhaps more than his share of them. Like the one three years ago now, a fateful Friday, Aug. 1, 2008. It's billionaire Carl Icahn getting him out of a meeting to say, the good news was that Icahn wanted Fry to step up and run the company as WCI's new CEO.

It was hardly a surprise Icahn turned to Fry?a fellow who started as an 11-year-old working golf courses for his father, and who's forgotten more about land and its value than most of us will ever know.

The bad news? Well, he was going to have to spend that very weekend working on a bankruptcy filing to sell everything off for a fraction of what it was worth.

Talk about a tough lie in the hazard.