In an environment in which other home builders have rushed to dump their land at a fraction of what they paid for it to raise cash and please analysts, Pulte CEO Richard Dugas defended his company's reverse strategy during its Tuesday July 24 second-quarter earnings call.
Pulte will work through its land holdings the old fashioned way--by building and selling houses on it, Dugas said. "We see this as the only sustainable and reliable way to generate cash flow...It's better than one-time land sales."
Besides, with minimal debt coming due, more than $1 billion in cash at the end of the second quarter and the pile projected to grow to between $1.7 billion and $1.9 billion by the end of '08, even after paying off $313 million in debt, Pulte can afford the luxury of holding onto its land, he said.
"Our overall view [is] that land sales and getting rid of your land is not what a builder would prefer to do if they have a choice," said Dugas, responding to a question by Analyst Ivy Zelman, of Zelman & Associates. Unless, of course, the company had poor land positions or a significant need for cash, which Pulte doesn't, he added.
Dugas sees Pulte's land as an investment that will leave the company best positioned to capitalize quickly on the upturn in the market when it occurs.
"It's better to use the land you have rather than going out to get it," said Dugas. The process of buying and entitling land is lengthy. Plus, since the company has written down its land so much, there's bound to be profit in it when it eventually does sell.
Of course, analysts question how long that might take and whether even Pulte, with its swelling cash coffer, can endure that long.
Pulte is clearly as equipped as the best to survive. Despite slowing sales, the company has still been able to stanch some of its losses. It lost only $158.4 million, 63 cents a share, in the second quarter, including $220 million in impairments and land-related charges and a $56.8 million tax benefit. It has also been able to reduce its SG&A expenses, down $118 million, or 40%, compared with the prior year quarter.
Dugas said he isn't counting on any considerable market improvement any time soon. But the longer the company maintains its position in various markets, the greater its chances are of capitalizing on what market remains as well as being in place when things do turn around, he emphasized.
Already the company is gaining market share in many regions as its competitors go under or pack up their sales centers and retreat. The failure of other builders helps the company negotiate better prices for labor and some materials as well.
On the other hand, Pulte won't be able to use its size to hold materials price increases, buoyed by rising petroleum prices, at bay forever, warned COO Steven Petruska.
"We are holding our own...but there's a day of reckoning coming," he said. In the meantime, to keep costs down, the company has designed smaller homes and value engineered them better to minimize waste.
While Dugas sees prices falling more in existing home markets, where home owners have been slow to acknowledge the value decreases, he doesn't think Pulte will be able to discount much further than it already has, calling home prices "inelastic."
In addition to keeping the company standing during the current market conditions, Pulte's cash should also put it in the position to take advantage of builder distress to buy more land or even other builders as they falter.
Company executives have been shopping for bargains, but, in most cases, banks have been slow to recognize the full value of land's depreciation in the past couple of years and it might be a while yet before that happens, Dugas said. Similarly, the time doesn't appear right yet for buying another builder.
"We don't have good visibility right now," he said. "We would look at a small builder acquisition the same way we would look at land...On something broader than that or larger than that I would like to tell you that we would hope to be aggressive at just the right time."
But Dugas said he is likely to move late rather than early out of caution.
Pulte has just begun to assess what impact the proposed elimination of the seller-funded down payment assistance programs would mean to the company. Early looks have shown that about 10% of the company's buyers used the programs in the second quarter and executives are trying to assess what percentage of those might be able to use other programs or buy under conventional terms.
"We are going to have to take some time to look at that," said Dugas. "It's not an insignificant portion of our business but it's not the lion's share."