The once-deep pockets of United Arab Emirates-based Emaar Properties have run shallow; the company's U.S. home building subsidiary, WL Homes, which does business as John Laing Homes, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, District of Delaware Thursday morning.
The company confirmed the filing in a statement. "John LaingHomes anticipates that the Chapter 11 process will allow it to significantly reducedebt from its balance sheet while facilitating a strategic reorganization of thecompany, which will place it in the strongest possible position to sustain itsmomentum despite extremely challenging market conditions," said the statement.
The company also said it had organized a debtor-in-possession line of credit to allow it to operate during reorganization. At press time, court documents were unavailable electronically, but Bloomberg.com reported the company listed assets of more than $1 billion and debt of between $500 million and $1 billion. There was no information regarding the company's plan for reorganization in the report other than a short reference to Laing wanting to focus on luxury developments in Southern California.
"There has been a sharp fall in both the number of new homes sold in the United States, as well as the prices of new homes sold," stated Bradley D. Sharp, the company's new chief restructuring officer, in the documents, according to the Bloomberg report. Sharp is a senior vice president with crisis management and restructuring advisory firm Development Specialists, Inc.
But although new-home sales nationally are down nearly 67% from 2006 levels, according to the most recent data from Hanley Wood Market Intelligence, some in the industry believe that the company's fall has not just been market driven.
The company's troubles have their roots in housing's high flying days of 2005. In December of that year, hedge fund Cerberus Capital Management snapped up General Motors Acceptance Corp. (GMAC), whose subsidiary, Residential Funding Corp., owned 56% of John Laing. Rather than contend with hedge funds' bully-ish reputation, Laing management began searching intensely for a new owner. For an in-depth history of the industry's largest acquisition, click here.
At first, Emaar and John Laing seemed a good match. Laing management lauded a synergy in both companies' respect for customer service and skill in luxury development. Skeptics wondered if Laing's price tag was a bit too hefty given both the company's limited geographical footprint--it had operations in California and Colorado at the time--and the softness that was beginning to develop in the residential housing market. However, both companies pointed to Emaar's big bank account and the skill of Laing management as the two things that would buoy the company through tough times.
Then-CEO Larry Webb told Big Builder, "[Emaar] think[s] we can grow to five times our current size in five years and would like [for] us to be the largest privately held home builder in the U.S."
As the market began to falter in earnest, the builder did look to grow as others were shrinking. It launched a start-up in Arizona and acquired a small builder, Lindenwood Homes, in Houston during 2007.
The honeymoon was over quickly. In April 2008, Webb stepped down from his post; Robert Booth, managing director for Emaar Canada, which, like Laing is owned by Emaar Properties, succeeded Webb as chief executive.
As the year dragged on into 2009, the company had several rounds of significant staff cuts, shut down operations in various markets including Colorado and Northern California, and hired a restructuring specialist from DSI. But the other shoe dropped a couple of months ago when it began closing up shop--selling inventory and ceasing new development--in its Southern California sweet spot.
Peter Dennehy, a Southern California-based real estate consultant with The Sullivan Group, said that the news of the filing was hardly a surprise. The rumor mill had been churning as word of a growing number of abandoned projects surfaced.
Although John Laing did some retooling of product and restructuring to improve efficiencies, Dennehy said the company was behind the curve in adapting to the new market. As an example, he pointed to its Sentinels at Del Sur community. When the community began selling in 2007, its move-down product was priced between $1.3 million and $1.5 million. Today, those prices have come down to roughly $800,000 to $900,000, but Dennehy said even that was too aggressive for today's market.
"To bring product to market that's not a value-oriented product seems like an interesting strategy in this market," Dennehy said.
But why was the company, which enjoyed a reputation as being very marketing savvy and in tune with consumer demands, so slow to change? Industry speculation points to a couple of reasons. First, the company tried to power forward in 2006 and 2007 and, given that mission, likely overpaid for parcels, making it difficult to build less expensive homes. Second, the strategy is reflective of Emaar's singular focus on luxury development.
However, as the corporate strategy has proved to be out of synch with market reality, there is a silver lining, according to Dennehy. The company, for whatever it paid whenever, has in its portfolio assets that would be considered desirable even by today's standards.
"They do have a lot of what I would call 'reboundable' projects," Dennehy said. "If they can be acquired at distressed prices."