At a quarterly company meeting held at Universal Studios in Orlando in late 2005, Levitt Corp. CEO Alan Levan was focused on growth. Dressed as movie icon Indiana Jones, he unveiled to employees his "10 by 10 Plan," a plan to grow the company's mainstay subsidiary Levitt and Sons to more than 10,000 delivered homes per year.
Fast forward two years, and a Grim Reaper costume might be more appropriate for Levan's next big proclamation: The release of Levitt's third quarter earnings on Nov. 9 may prove to be the nail in the coffin for production home building's longest-lived legacy. Levitt's stockholders, bankers, trade partners, and buyers anxiously await the results, as Internet blogs and message boards are alight with gossip about an impending insolvency announcement for the beleaguered subsidiary.
A bankruptcy of Levitt and Sons could rid parent company Levitt of what some would deem an albatross on the balance sheet. Without the home building subsidiary and its more-than-$400-million in debt and depreciating land assets, the parent company could emerge from the mess a more financially stable entity, albeit a much smaller one solely focused on land development.
"The best thing that could happen [for shareholders] would be for Levitt to get rid of that giant anchor wrapped around its neck [in Levitt and Sons]," said Eric Landry, a home building analyst with Morningstar.
However, for others, a bankruptcy could mean the beginning of a whole new set of problems. Secured creditors may recoup the bulk of their investments, but unsecured creditors including suppliers, trades, and buyers are likely to walk away with only pennies on the dollars they are owed. Consequently, mom-and-pop trade partners could be forced into financial ruin, and home buyers could be stripped of their earnest money and their dreams of a new home.
Perched on a Precipice
Work halted on Levitt communities in Florida, Georgia, South Carolina, and Tennessee in October after management broke the news to investors that the company would have to take as much as $170 million in charges on the balance sheet. The bulk of the charges were related to inventory owned by Levitt and Sons, whose value has eroded as the new-home sales pace slackened in the Southeast.
The magnitude of the impairments has thrown Levitt and Sons into a liquidity crisis. The company ceased making interest payments on $2.6 million in debt owed to its five lenders as of Oct. 10. The home builder went into default on several loans, including three loans from Wachovia Bank totaling $181.5 million and a $125 million revolving credit facility with Key Bank. Management also noted that, although it hasn't received a formal notice of default, Levitt and Sons is out of compliance with its loan obligations with Bank of America and Regions Bank.
Corporate management has refused to throw the home building subsidiary a life ring. It has already loaned Levitt and Sons $84.0 million, which it intends to write off, and has no plans to distribute any portion of the $145.0 million it raised in a controversial rights offering to help the home building subsidiary meet its cash obligations. In fact, in a recent company announcement, management stated: "Levitt Corp. is currently unwilling to loan additional funds to Levitt and Sons unless Levitt and Sons' debt is restructured in a way which increases the likelihood that Levitt and Sons can generate sufficient cash to meet its ongoing obligations and be positioned to address the long-term issues it faces."
Levitt and Sons management team, led by Seth Wise as president and COO, has scrambled to negotiate better terms, but no formal agreement of new terms has been announced.
The Road to Insolvency
Like more than a few home builders these days, Levitt's woes have roots in the glory days of home building. An exuberant housing market and management's ambitious growth plans led to more than a few poor decisions. The company expanded into Tennessee with the acquisition of Bowden Building Corp. in May 2004. In 2005, the company launched new projects in Atlanta, Ga.; Myrtle Beach, S.C.; and Nashville, Tenn. Several competitors in Florida and Georgia who would not speak for attribution said that, in their opinion, management overpaid for land, even paying premiums on top of market prices to get land sellers to take the contracts.
Even as the market peaked, Levitt was slow to pull back on the throttle. According to the company's 2006 10-K, the company ended the year with an increase in assets that stemmed from a $210.8 million net increase in real estate inventory, including $64.8 million in land acquisitions.
With a significant number of communities underwater, management has clambered to keep the company going. On top of trying to negotiate better pricing from suppliers and trades, improve operational efficiencies, and shorten cycle time, the company has reduced its headcount. It laid off 89 employees in February and cut another approximately 200 employees from the payroll in September.
Management also authorized the use of hefty sales incentives, dramatic price reductions, and aggressive marketing tactics to drive sales and reduce inventory. The strategy has met with limited success, as margins have compressed and cancellations increased.
Sorting Out the Rest
Levan blames unforeseen and continued market deterioration for the company's uncertain future; however, some company stakeholders blame Levan. His time arguably is stretched thin; not only is Levan CEO of Levitt, but he also is CEO of BankAtlantic Bankcorp and holding company BFC, the latter having a controlling interest in both Levitt and BankAtlantic.
There also has been criticism both within and outside the industry of Levitt and Sons' business model, with detractors alleging that risk was baked into its master-plan-community developer model. While Levitt and Sons has been squarely focused on the active adult buyer, one of the most solid demographics in terms of new home demand, active adult communities require significant investment up front because they are so highly amenitized with clubhouses and golf courses and the like. And for a builder-developer without a strong balance sheet, illiquidity can become an issue in record time.
Liquidity is lacking at Levitt and Sons. Sold homes can't get to closing because the company lacks the funds to get them delivered, creating much discord among vendors. One local source, who also would not speak for attribution, claimed there are guards patrolling Levitt and Sons communities to prevent disgruntled suppliers from stripping their products out of the homes.
Any decision to rid Levitt of the Levitt and Sons brand will mark a painful passing of production home building's founding company. Founded in 1927, Levitt and Sons became the industry's biggest brand with its post-WWII construction of the mass-produced Levittown communities in the Northeast.
Like the company they are named for, those communities now bear little resemblance to what they were when they were built.