Hopes for a quick and easy resolution to the claims of mortgage misconduct dimmed at Beazer Homes USA when the company's chief accounting officer was caught attempting to destroy company documents.
Brought on by a federal investigation into Beazer's loan origination practices, an internal investigation into the allegations turned up evidence that Michael T. Rand, senior vice president and chief accounting officer, violated the company's ethics policy by trying to improperly dispose of company documents. The company's board of directors terminated Rand for cause on June 27, according to filings with the Securities and Exchange Commission.
Regulators have had the company's mortgage arm, which originates but does not underwrite loans, under a magnifying glass since March when The Charlotte Observer published several articles about unusually high-foreclosure rates in local Beazer subdivisions. The series asserted the foreclosures were sparked by Beazer's aggressive sales tactics and alleged bloated income numbers were put on loan applications to arrange larger loans than customers could afford.
By the end of March, the U.S. Attorney's Office for the Western District of North Carolina had issued Beazer a grand jury subpoena for documents related to its mortgage business. HUD also began investigations. And in May, the SEC announced it was informally investigating any related violations of federal securities laws.
In the meantime, beneficiaries of the company's 401K plan also filed a class action lawsuit claiming the company breached its fiduciary duties by not providing timely, accurate, and complete information about its operations.
The company denies any wrongdoing and agrees to cooperate fully with any investigation.
Rand, 44, went to work for Beazer in November 1996 as vice president of operational controls. He was promoted to corporate controller in 1998 and senior vice president and corporate controller in October 2002.
Rand is the second senior executive that Beazer has dismissed this year and the third to leave the company. The company fired general counsel Kenneth Gary in February for "personal conduct" that went against company policies. In March chief financial officer James O'Leary left for the CEO seat at Kaydon Corp.
A further drag on the company's morale is that the housing slowdown has pulled the price of its stock down more than half its value since late last year. Like blood in the water, the price drop has attracted some investor sharks. In early July, New York-based hedge fund Moore Capital Management purchased roughly 5 percent of Beazer's outstanding stock.
Meritage Homes terminates all lot options in the Ft. Myers market.
After just two years in the Ft. Myers/Naples market in southwest Florida, Meritage Homes Corp. announces it is abandoning plans to develop any new communities in the area.
Although the company denies it is officially exiting the market, Meritage investor relations director Brent Anderson confirms that it has "terminated all of our future options to purchase additional lots in southwest Florida." This includes more than 2,500 lots in the area, as well as approximately $25 million in lot option deposits. Meritage entered the southwest Florida housing market in February 2005 when it purchased Ft. Myers-based Colonial Homes for an estimated $66 million.
Meritage chairman and CEO Steve Hilton predicts no immediate turnaround in the depressed market. As a result, the company anticipates recording a non-cash, pre-tax charge of $28 million in goodwill and other intangible assets related to the acquisition. This sum excludes the $25 million lost on local lot deposits.
"Southwest Florida has been experiencing some of the most difficult housing market conditions in the country," Hilton said in a statement to investors. "While our 2006 home closings there represented only approximately 2 percent of our company-wide closings, our year-to-date 2007 home closings in Ft. Myers/Naples are down more than 70 percent from the level a year ago."
Sticky lot prices and inflexible land contracts conspired to make continued expansion in the area near impossible. The company will maintain a skeleton office in the market to complete homes already under contract. "We are not, at this point in time, exiting the Ft. Myers market," Anderson stresses. "We have customers to serve, homes to build, and inventory to sell. Albeit small, we will maintain an office and staff there to achieve those things. Beyond that, we will continue to monitor the market conditions and act accordingly in the future."
Sales and cancellation rates improved in 1Q2007, but positive trending came to an end in April. Preliminary net sales for the first two months of the second quarter were approximately 21 percent lower than the same period last year, and cancellations increased to a rate of 36 percent of gross orders.
The backslide is expected to bring total pre-tax charges to Meritage in the $75 million to $80 million range, mostly in inventory impairments and write-offs of land options.
–Lisa Marquis Jackson
Exit Strategies: Anemic Midwest economies force two builders to pull up the stakes.
Starting in September, Centex Homes will begin a slow pullout of the central Ohio market. Centex is the third largest builder in Columbus by market share, according to Builder magazine. The Dallas-based company has had operations in the Columbus market since the late 1980s.
Citing eroding demand from a shrinking population, KB Home will exit the Indianapolis market. The shutdown should be completed in a number of months, with the builder's Chicago division following up on any post-closing issues associated with the 139 homes under construction in the area.
At a Glance: Caruso Homes
Curious to know who's got the biggest builders on the run in some of the most attractive markets? Check this one out.
- The 21-year-old Caruso Homes has 10 active communities in Maryland, where the company was founded, and seven in Virginia. Expansion plans into Delaware are underway.
- In 2006, the company closed 286 homes and posted $190 million in revenue. Average sales price was $630,000.
- For 15 years, move-up, single-family detached homes were the company's main business, but in recent years, it has diversified into the townhome and active adult markets.
A cross-divisional competition helps Mercedes Homes control standing inventory carrying costs.
With new-home inventory clinging to the 7.1 months supply mark, few builders are anxious to bring more spec homes to market. Yet, without having product in the ground to showcase, builders stand to lose out on potential sales. But striking that delicate balance between having enough ready-made product to satisfy home shoppers' need for choice and not having too much standing inventory weighing on the balance sheet is like trying to hit a moving target.
The equation gets more complicated in markets such as Florida, which have been especially hard hit by the housing slowdown. Builders are desperate to get the market moving, so they're doing everything from incentivizing on what they've already got to coming up with new product offerings.
Mercedes Homes, for one, hopes to bring a little excitement to market with new elevations and improvements to existing floor plans. But the company's got to show them to sell them. And there's considerable expense associated with building new models, which are in effect a strain of spec homes.
But accepting the associated building and holding costs as a necessary evil to get sales flowing again, Mercedes president Keith Buescher moved to rally his troops to find ways to get those costs down. Remembering the company's participation in the television series "Extreme Makeover: Home Edition," during which it built a 3,000-square-foot home and attached garage in seven days, he saw that, if his divisions could build models faster, it would offset some of the expense and create some buzz in the marketplace. And so the contest began.
Each Mercedes division competed to see which one could build new models the fastest. The company's Jacksonville division, headed by Dennis Ginder, took gold with models being built in 23 days.
"You can build them pretty quickly as long as you get the schedule up," says Buescher. And in that respect, the housing slowdown has created some benefit. A lot of subcontractors are hungry for work, so they are more willing and able to comply with a rigorous building schedule.
With model building down to a near science, Buescher expects some spillover into the built-to-order tranche of the business. "We know what we're doing for our models, and it is coming over to our production homes for customers," he notes.
Hot Button: Q&A
In the Dog House
As part of a strategy to boost sales traffic at a new-home community while helping out a local charity, Standard Pacific Homes, John Laing Homes, and William Lyon Homes are building six upscale dog houses to auction off to visitors.
The "dogabodes," which come in a variety of architectural styles, are expected to raise about $5,000 a piece while on display at the Talega community in Orange County, Calif. The proceeds will be donated to the Pet Project Foundation and the San Clemente-Dana Point Animal Shelter.
Kara Homes submits restructuring plan that doesn't include founder Zuhdi Karagjozi.
After building Kara Homes from scratch, it's no surprise that Zuhdi Karagjozi won't go quietly into bankruptcy. In a strongly worded objection to a new reorganization plan that would remove him from the bankrupt firm's top seat, Karagjozi attacked chief restructuring officer Perry Mandarino.
"Mandarino has misrepresented his position to this court and has manipulated these cases to enrich himself and his associates at the expense of the unsecured creditors and me," Karagjozi says in court documents. "He discouraged prospective funder and plan proponents that I brought to the table and is trying to ram through the plan which benefits his associates, Fishman Real Estate Enterprises, owned by Glen Fishman, and Plainfield Specialty Holdings II, despite the fact this plan constitutes a rape of the debtors assets."
Karagjozi accuses Mandarino of steering the company to Plainfield and Fishman, despite having already lined up builders that could pay higher dividends to unsecured creditors. Moreover, he says Mandarino has a history of not only directing assets to Fishman but selling them for a fraction of their value. Mandarino denies the charges.
Owing nearly $300 million to more than 1,000 creditors, Kara filed for bankruptcy in October 2006. The company's June reorganization plan calls for Maplewood Homebuilders, a firm formed by Plainfield Specialty Holdings and Fishman, to provide a $10 million equity investment into Kara, which buys Maplewood 100 percent direct ownership, effectively terminating the Kara brand. Bankruptcy judge Michael B.
Kaplan approved the plan. and it's been sent to Kara's creditors for confirmation.
James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers, is hardly surprised Kara's founder was dismissed. "Unfortunately, he's somewhat tainted from the excess that went on [at Kara]," Hughes says. "Any effort at borrowing to complete some of the projects will require totally new leadership."
Fishman may be new to Kara, but he's built a reputation in the Garden State as managing partner in Asbury Partners, a mixed-use project in Asbury Park. "Fishman has a reputation for taking distressed properties and turning them around," Hughes says.
Plainfield provided Kara with $7 million for operations during bankruptcy, will put up $10 million in equity, has committed a revolving loan of $26 million for construction, and is buying $25 million of debt in three developments, according to the Newark Star-Ledger and court papers. Under the reorganization plan, it will pay unsecured creditors an initial dividend of $2.25 million.
Plainfield's money will help develop the 471 homes (129 are under contract) in the 11 developments in which Kara is building. The company owned 30 developments when it filed bankruptcy. However, it already has sold off some assets and may have to sell others. To complete the remaining jobs, the company will need help with the $115 million in construction costs.
Avatar Holdings announces its CFO is leaving for health reasons and that a former Technical Olympic USA executive will replace him.
Charles L. McNairy resigned the CFO position for the Florida-based firm on July 9. Randy Kotler, who was the chief accounting officer for TOUSA, fills his position. Kotler, 42, will be paid a $100,000 signing bonus and a base salary of $350,000 a year with an annual bonus of no less than $100,000, as well as restricted stock.
Building Blocks: Debt Doubt
Nearly half of all Americans are stressed about their debt levels, with mortgage debt accounting for the bulk of the worry.
No matter how you slice it, a new Lending Tree study says, one out of every two of us suffers from debt anxiety. More concerning is that of the eight groups polled, young families, meaning couples aged 19 to 34 with children, appear most at risk for a financial squeeze. With their credit close to being maxed out, this staple demographic, mostly a mix of entry-level and first-time move-up buyers, is at the core of the credit tightening that's happening in the wake of the sub-prime mortgage fallout. Lenders are less likely to qualify them for new loans at time when refinancing on existing loans is becoming a crapshoot. For a better understanding of young families' plight, check out their financial profile below.
Power Plan: Business Class
Engle Homes is giving the four-year-old Port Potomac community in Woodbridge, Va., a jolt of new energy by bringing a new executive series of single-family homes to the community. The first model to be built is the two-story Ballentrae.
With a base footprint of 2,690 square feet, the home boasts four bedrooms and two and a half baths. But sales executive Brett Crandall says with options such as a media room or a morning room, the plan easily can expand to roughly 4,500 square feet.
Crandall credits the model's open plan for its flexibility. Describing it as "open, airy, breezy–we don't like walls," Crandall says the Ballentrae is a quintessential Engle design. The kitchen gives way to a great room, creating good family space. And he notes that architectural details such as tray ceilings in the owners' suite and "masses of recess lighting" are carefully selected to add drama and class to the spacious home.
However, Crandall says other features have proved to be even bigger crowd pleasers. For example, home shoppers fall in love with the two-story foyer punctuated by a "huge, beautiful, Southern sweeping staircase" and the dual-sided fireplace that straddles a rear private library and the great room. They also enjoy the practicality of having a second-floor laundry room.
But what really makes this model sell, says Crandall, is that "it's a mid-sized house, and it's not overpriced." At a base price of $499,990, it's fairly affordable for the area, which is roughly 30 miles south of Washington, D.C. And with five variations on the elevation, which includes Engle's signature use of gables and hip roofs, Crandall says the home "stands right out on the road."
To view the Ballentrae model in more detail, go to www.englehomesva.com and click on the Port Potomac single family–executive series link.
Front and Center
- The first model to be built in the new executive series is the 2,690-square-foot Ballentrae.
- The four-bedroom, two-and-a-half bath plan has a base price of $499,990.
- The home offers move-up buyers some luxury features such as a grand, two-story foyer, a dual-sided fireplace, tray ceilings, and recess lighting.
KB Snags Lots in CO
A few cracks in land prices' stubborn resolve are beginning to emerge, as more builders report picking off cheap lots from distressed local players. Most recently, KB Home purchased 139 lots in Colorado at one-off prices from a bank, which had taken control of the assets from a foreclosed builder.
CEO Jeffrey Mezger says he expects to pocket more lots at deep discounts if the downturn prolongs.
"The squeeze on the smaller and mid-sized builders continues. These impairments that we are taking are, in a different way, also affecting the privates in that their property gets reappraised and the bank gives them a capital call, and they don't have the cash for the capital cost," he explained during an investor call. "And what we are finding is with the available credit that was out there over the past few years, you have small builders with a much larger lot pipeline than they would need for their business. And as things get tighter for them, we do see them offering up lots for sale to help them as they recapitalize."
In the article "Shea Finds Florida Foothold" in the June 8 issue, Shea Homes was referred to as the exclusive builder in The St. Joe Co.'s Victoria Park community. David Weekley Homes and Beazer Homes USA also build in the community.
With the intent to spend more time with family, Keith McSwain abandons his post as CEO of Atlanta-based McCar Homes. He will remain in an advisory role to the chairman of the board. Steve Roberts will take McSwain's place at the helm. Roberts has been with McCar for six years, most recently serving as the company's CFO.
KB Home chooses a new senior vice president of human resources in hiring John Staines. Staines most recently was the senior vice president of human resources for DaVita, an operator of kidney dialysis centers.
Design and engineering firm Cubellis appoints Mike Kingsley as principal for residential sector business development. Kingsley has roughly 30 years of experience in home building, having worked for a variety of builders such as D.R. Horton and the Bozzuto Group.
Attorney and land acquisition specialist Craig Cherney leaves Pulte Homes' Las Vegas division to become the director of Western operations and acquisitions at the private equity firm American Land Fund.
Former Centex Homes executive Rick Rosenberg joins investment management firm Cole Companies as vice president of real estate investments. Rosenberg most recently served as CFO for Centex's Arizona division.
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