Fiscal year-end deals make gains out of losses [Download PDF]

For builders, this is the home stretch for 2008. Most have rounded the corner on the first half of their fiscal year and are pressing on through the back half. But as they close in on the finish line, so do their chances at free cash to pad the balance sheet as the window is closing on potential benefits from a two-year tax carry back; 2006 was the last year most builders were profitable, making 2008 the last year builders can apply today's losses against yesterday's profits. So, the pressure is on to sell off previously impaired inventory before year-end to pocket a cash refund in early 2009–especially for those who might not survive without it.

So, here's Big Builder's take on how the tax carry back season is shaping up for the publics. There's more than $4.1 billion in tax money up for grabs. Some really need it, some just want it, and some could curiously seem to care less about it. But what will determine how much of a refund each builder pockets is a combination of how significantly they've written down their inventories and how motivated they are to unload them. The refund ultimately depends on a builder's skill at closing deals, be it with an individual home shopper or a bulk land buyer. Read on to find out who's likely to come up short and who might leave money on the table.

Beazer received $56.6 million in tax refunds during FY2008 and is poised to do better for 2009. At stake is $214.4 million in 2006 taxes, but a Sept. 30 fiscal year-end was fast approaching at press time, highlighting the need for a last minute deal to unload assets in bulk. However, it will benefit from previously announced exits from Denver, Colo.; Columbus and Cincinnati, Ohio; Lexington, Ky.; Charlotte, N.C.; and Fresno, Calif. As of June 30, it had generated $54.5 million in land and lot sales during the previous three quarters.

Centex has made no bones about its pursuit of an asset-light strategy. The company aggressively exited markets–Denver, Detroit, Central Ohio, and North Carolina's Piedmont Triad–and looked to unload assets in bulk, netting some big tax refunds. Case in point is the company's 11th-hour, 30-cents-on-the-dollar, 8,500-lot deal that will generate roughly $294 million in refunds. Look for Centex to do more deals to recover as much as $287.3 million paid in FY2007. It's already well on its way. Centex sold its whole kit and caboodle in Michigan to Lombardo Homes this summer. And it's a good thing, too. Centex has $150 million in debt due in 2008.

Although D.R. Horton has a cash cushion of $819.4 million and a total debt-to-cap ratio of 50.1 percent, America's Builder would do well to not leave $753.8 million in 2006 taxes on the table. Roughly 30.3 percent of its assets have been impaired, which sets the stage for expectations of future tax benefit. In the past nine months, Horton closed 19,435 homes and sold $145.1 million in land, but its 11,700 homes in inventory suggest more work could be done. However, it's iffy–at best–that there's enough time before Horton's fiscal year-end on Sept. 30 to lock in significant tax refunds.

The amount up for grabs for Hovnanian Enterprises pales in comparison to some of its peers at $83.6 million. The highly leveraged company no doubt could use the extra bucks to reduce its total debt-to-cap of 77.3 percent by paying down its $2.6 billion in debt; 40.8 percent of its inventory has been impaired since 2006, and deliveries, particularly spec, have been relatively solid. But it's time to put the pedal to the metal to nab some quick closings on the 1,365 homes in standing inventory.

KB Home's strong balance sheet does little to motivate its execs to sweat over a big portfolio deal à la Lennar or Centex. With $1.3 billion in its coffers, it doesn't need the cash. Moreover, it has a tight rein on its land supply, so there's little need to dump big chunks. However, the company should expect some tax carry back benefit as it continues to exit markets and reduce community counts. KB exited Albuquerque, N.M; Chicago; and the Mid-Atlantic region earlier this year. However, surprisingly slow sales during its 1Q2008 and bare-bones spec levels will play into KB's year-end closings, diminishing refund potential.

Lennar is home building's deal master. Just one peek at Lennar's artful sale of some of its interest in the now-defunct LandSource or its 11,000-lot joint venture with Morgan Stanley Real Estate, and it's clear that Lennar execs know how to do good deals in bad times. So, it's likely that Lennar could pull another rabbit out of its hat before its fiscal year-end that would result in significant tax benefit. The company's taken impairments to the tune of $4.2 billion on 45.8 percent of its inventory since 2006, a fact that tees up a sizeable tax refund if Lennar can close homes and lot deals before Nov. 30. A bigger war chest could come in handy amid an era of failing JVs; Lennar's got $612.7 million in JV recourse exposure.

M.D.C. Holdings has squirreled away roughly $1.3 billion in cash–and counting. Look for M.D.C. to take advantage of as much tax carry back benefit as possible. It has taken significant impairments–70 percent of its 11,600 owned lots have been written down–and continues to work to monetize them. The company recently sold 1,100 lots for $40 million in proceeds and $90 million in taxable losses.

Meritage has a good debt position, but the same can't really be said for its cash position. It's searching for ways to grow cash on hand, as evidenced by its recent stock offering. The offering raised $83 million, bringing its cash count up to $115.2 million. With the need for more coin pressing amid a shift to an asset-light mentality, Meritage could be looking for a land deal, perhaps along the line of Centex's portfolio deal. Even if it doesn't happen, the company should get back a decent slice of the $138.7 million in 2006 taxes through lot supply reduction and community closeouts; 40 percent of its communities outside Texas have fewer than 25 remaining lots.

M/I's $2.1 million in cash no doubt is a spur for it to look for a sequel to its 2007 deal to unload 3,700 lots for $82 million. While there's less tax money able to be recouped this year, the $16 million up for grabs would help fortify the balance sheet. M/I has closed 952 homes thus far in 2008 and unveiled a mortgage buy down program, but its launch was tempered by the GSE takeover, which sent interest rates tumbling. Still, M/I lowered its owned lot count by 1,000 in its 2Q2008.

NVR shelled out $375.6 million in 2006 taxes, but it's unlikely Uncle Sam will send a refund check anywhere near that amount–even if the company has impaired 41.1 percent of its inventory since 2006. The reasoning? NVR's much-lauded strategy of controlling land through an overwhelming use of options. If almost everything it controls is optioned, there's not much to sell for a tax benefit. However, NVR is doing better than many peers in terms of closings, with 5,215 in its first two quarters.

For more than a year, Orleans has chased a "portfolio optimization strategy," which got a boost when nine deals unburdened its portfolio by roughly 1,400 lots while generating as much as $25 million in expected tax returns. And it needs the cash; it has just $39.1 million in cash, it's over-levered, higher interest payments on $30 million in debt are right around the corner, and its revolver is shrinking by $121 million in December. But a deal redux isn't going to happen, as its fiscal year-end results are due out at the end of September.

Pulte is sitting pretty atop a $998.3 million pile of cash, so any transactions that reap a ta

x benefit against the $393.1 million paid in 2006 are gravy. Pulte has so much cash on hand that, in June, it repurchased $313.4 million in notes, leaving just $25.0 million due in 2009. But even as the company isn't necessarily motivated by the promise of cash back, it's likely to have a decent chunk of change coming its way. The company is kicking booty when it comes to closing deals, be it for a home or land. Pulte recorded nearly $3.0 billion in revenue from settlements on 10,171 homes and $27.0 million in land sales in the first half of 2008.

After impairing 34.4 percent of its inventory since 2006 to the tune of $883.8 million, Ryland is ripe to recoup a decent portion of the $207.2 million it paid in 2006 taxes. The company has done $11.5 million in land sales so far in 2008, and its use of incentives is still getting buyers to the closing table. An exit from Cincinnati will precipitate additional transactions that will drive a refund. Any future tax benefit will likely go to enhance the company's $199.4 million cash position, or to buy back stock.

Had MatlinPatterson not come into the picture to steady Stan Pac's shaky financials, the company's outlook would be cloudier than it is today. The company is greatly de-levered, and has $572.4 million in cash. While there's less impetus to do deals for the sake of a tax refund, Stan Pac is likely to get a decent bounce from its exit from San Antonio, Texas, and Tucson, Ariz., as well as simply from closings.

Perched on $1.5 billion in cash, Toll Brothers plans to just ride out the current downturn. Although Toll entered 20 markets from 1996 to 2007, no plans for an exit appear to be in the works. Moreover, its strong land position has kept impairments since 2006 at the $1.6 billion mark, or 27.9 percent of inventory. So while land sales alone are unlikely to generate significant cash, the builder could expect an additional jingle in its pockets from closings. Toll logged $62.9 million in deliveries in the first nine months of its fiscal year and expects to deliver between 850 and 1,050 additional units before Oct. 31.