David Fry, president and CEO of WCI Communities, takes back his business card, pulls out a red ink fine-point pen, and crosses out the word "interim" in front of his title. The gesture says a lot.
For a while, Fry's title was as tenuous as that of WCI, which after a harrowing downward spiral, punctuated by an aborted takeover by billionaire Carl Icahn, ended up in 13 months of Chapter 11 bankruptcy reorganization.
During those 13 months, Fry, 50, spent a lot of time with red ink pens and teams of advisors trying to determine if the company had a future and, if so, what it would look like.
The company emerged from bankruptcy at the end of August shed of roughly $2 billion in debt and other financial obligations. Its secured creditors hold 95% ownership as well as a $450 million loan to the company. The unsecured creditors possess the rest.
Fry now finds himself at the helm of a company he joined one full real estate cycle ago--in 1995 when WCI was new. WCI founder Al Hoffman hired him to run the company's amenities division at the beginning of the last climb out of the abyss for the market.
On Aug. 1, 2008, Icahn called up Fry to offer him the CEO position at WCI and to tell him that, by the way, the company would be filing bankruptcy three days later.
Fry recently met with Big Builder senior editor Teresa Burney at the company's Bonita Springs, Fla., headquarters to talk about what comes next for the now private company.
BB: What's the near-term future? Are you going to be just a land developer, or are you going to go build anything?
DF: Primarily, this is our focus through 2010. Our priorities are to finish selling the finished inventory that we have, just under 400 homes, so that is priority one. The majority are in Florida.
Aside from selling the remaining inventory, we have 10 to 12 assets that we have deigned to be not core [to sell]. They are [primarily] commercial sites or sites that have been planned always for retail or for office. A couple of them are raw land, entitled. We are already in discussions on many of those.
The third priority for us is to build relationships with other builders. WCI historically has been a fully integrated community developer and a builder. But we will be meeting with some other builders, introducing them to some of our communities, and possibly doing some parcel acquisitions or lot sales, takedowns or joint ventures with them, which we have never done.
BB: The point is to harvest cash?
DF: Those three things are what are going to really keep us going for the next 15 months. Other than that, it's really just a wait and see. Wait and see what happens to the market to determine kind of how and when WCI comes back as a builder.
BB: Will you be building anything now?
DF: Our focus is to pay down debt. We came out of bankruptcy with $450 million in debt. Our objective by the end of 2010 is to have a large percentage of that paid down.
That's by selling the remaining spec inventory. That's by doing some lot deals with other builders and then some of these non-core assets [sales]. The goal is January 2011 the company is sitting on very little debt. We will still have over 9,000 lots in inventories. We will maintain the amenities; we will maintain the communities we have. We think we will be in a good position to react to wherever the market determines we should go.
BB: So you will be nimble and ready to begin building again?
DF: We are not going to ramp back up our activity to the levels of before. It's going to be very moderate, very disciplined. I suspect, whatever we do, we will come back much more targeted, not as widespread as a company.
BB: When you say targeted, you mean?
DF: We will be more Florida-centric. We will be more targeted in price points. Historically, WCI sold product from $150,000 to $5 million, and it's just hard to be effective and efficient doing that. So we will be much more disciplined.
BB: Do you see your future as being single-family, or do you see it as high-rise or as a mixture?
DF: I think it's a mixture. However, I think we all realize the high-rise is going to come back a lot slower. It's just hard in the high-rise business to do the real low-end. Construction costs are such that it really inhibits you from that. So we plan to stay in the high-rise business. The question is when we are going to be able to get back in the business of selling high-rise.
BB: Now, your boss is this group of investors who have most of the company. Do they want to get their money out and leave, or do they want to stay and participate in the upturn?
DF: I think it's probably a combination of both. I'm speculating. I do know that some are probably here for the longer haul, and some may not be. It doesn't change our priorities. Our priorities are to eliminate debt so the company can be in a good overhead position when the market does turn. But, yeah, we have a consortium of banks and a variety of funds that now own the company. They are the debtholders, and they own the majority of the company.
BB: You are basically working for a committee in a way.
DF: Well, we have five individuals who constitute our board. Four of those individuals were selected by the people we just talked about, and then the other one was selected by the unsecured creditors. So we do have a board of directors.
BB: So your directive from them is to pay it back and get yourself ready to participate in the next upswing?
DF: That's right, keep an eye on the market. Keep an eye on our customers. Figure out if their wants or needs have changed or will change. I think many home builders are wrestling with this. We used to think one way about how people bought, and if we sit around and think they are going to buy the same way, we are going to lose.
Especially our buyers, the folks who are buying second homes. By virtue of our land holdings, we will probably continue to be a high percentage of that market. So if we think that person who is turning 50 and is buying a home in Florida isn't thinking differently about what they are going to buy, then we will miss it because wants and needs have changed significantly.
BB: Are you doing any kind of buyer surveys?
DF: We are going to do some with our own communities, our own residents to get a feel for what those changes might be, but it will be very low-profile, lunches and that sort of thing for the next six to nine months.
BB: You haven't hired anybody to figure out what the new buyer is like?
DF: It's too early for that. As we go through mid-year 2010, maybe we start formalizing some of those things. But I mean, quite frankly, in the markets we are in, we are not seeing the prices coming up yet. We are selling 50 homes a month. For a company our size and in this market, that is not bad. But I am not real proud of the prices. That's the challenge.
BB: How far down are they?
DF: It varies widely from product to product, but let me just give you a benchmark--just since Jan. 1, we are down 15%. We have not seen it stop.
BB: That's a little scary.
DF: We are going to be out of inventory, by and large, in the next six months.
BB: So in 2010, you are still purging and cleaning and paying off debt and positioning yourself to be leaner. Do you see yourself having more layoffs? Or do you see yourself right-sized at this point?
DF: There are not a lot more to go. We have about 180 what we call core home building employees. (There were 1,685 at the peak in 2005.)
BB: Are you staying in this building?
DF: We used to have three of them. We used to have this one, that one over there, and another one across the street. Now we are actually going to be on one floor of one.
That is the advantage of the bankruptcy process; you are able to purge those leases, $10 million in leases. This building was $32 a square foot, and they basically wiped it out. We were actually looking to go get some cheap space, and the guy came back to us and offered $8 a foot here.
BB: Up until the Chapter 11 filing, there was quite a lot of high drama going on at WCI with Carl Icahn buying up 14% of the stock and taking an active role in the company.
DF: One person asked me last week what was in your head when you were given this job? We filed for bankruptcy on Aug. 4, so I got a call on Aug. 1 from Carl Icahn. It was shocking for two reasons. No. 1, I didn't know that we were filing bankruptcy and he had offered me this job. I had never met him until he called me.
BB: So you got your job and the company filed for bankruptcy a few days later. So you had the weekend to absorb it?
DF: I didn't have time to absorb it. We spent the weekend trying to figure out what we were going to say about it.
BB: Did Carl Icahn make the decision to file for bankruptcy?
DF: The board did.
BB: Was the process very contentious with the creditors at the beginning?
DF: I don't think it ever got hostile. It was always tense. And, obviously, these guys had lost a lot of money. But I think collectively, between the management team, the unsecured creditors and the banks, and the secured lenders, there was a very constructive effort from start to finish. Like any negotiation there are times when things get more tense than others, but I am very pleased with the way the whole process unrolled.
BB: You didn't go in with a plan for reorganization. You did it in 13 months with no plan when you filed?
DF: It was decided on Friday before the Monday filing. There was no plan.
BB: In hindsight, you were probably better off filing for bankruptcy.
DF: Yes, in hindsight we were better off in filing. We got in before Lehman crashed. We got DIP (debtor in possession) financing in place. We didn't actually need it, but we had it.
BB: You didn't need to use your DIP financing?'
DF: We sold on average of 50 homes a month, and that has helped us carry it.
BB: So between downsizing the company and selling off assets, you are able to maintain the company for now. But at some point you have to do something to make some money other than by selling assets.
DF: At some point we have to get back in the business, but it doesn't have to be in the next 15 months. To your point that we have got to make money somehow, if the market was not to improve significantly, we feel that we could generate enough cash flow through lot sales to maintain the business. But I can't imagine that, because there is some business.
BB: You have got a chance to figure out what you want to be when you grow up again.
DF: We have the luxury to spend probably the next six to 12 months to figure that out.
BB: But fancy high-rises are gone for now?
DF: For today. I think the whole high-rise business itself is sort of suspect for the short term. But it will come back. It's a unique lifestyle.
BB: What are some lessons you learned in the bankruptcy process?
DF: From a company standpoint, [during the process] it became obvious, and all the other builders could have had the same thing, all of us could have had better discipline in the business. For me, looking at WCI, we tried to grow too quickly and largely through acquisitions of other businesses. We probably weren't as well fixed on the product type or the types of homes we built. Show me any other builder in the company that is building homes for a buyer that is buying a $150,000 second home and the same builder is also building the $5 million custom home on the East Coast. We had over 300 house plans at one point. There is no way a company our size can manage that properly.
BB: Well, WCI grew quickly through acquisitions.
DF: It was hyper-growth.
BB: And it was heavily financed growth. Even before the market turned the company had close to 70% debt-to-equity. That was in the high times.
BB: What did you have going for you when you went into bankruptcy reorganization?
DF: I think we were different from others in the space that were facing similar issues. We were sitting on roughly 1,000 homes finished, so obviously the creditors of the company were looking at that and saying, 'OK, so this represents $500 million of cash.' I'm picking that number, but it was a lot of cash.
When you take that into consideration and then you get a chance to look at the land holdings that we have--we have some very unique land positions in Florida, very desirable land positions in Florida--those two things together I think allowed us to get through this process without a lot of unreasonable contentions.
BB: You had assets that were available in the near term and the far term that can be sold?
DF: It is conceivable that the company could be debt free in two years if things go well. I'm not going to call that right now, but that is possible.
BB: It seems that Florida is coming back later than other areas. You are betting that the state will continue to be attractive when the market returns?
DF: We are betting for the long term that the migration patterns will continue, and we will get back into some level of normalcy. That is our bet for the long term. I think close to anybody I have talked to agree with that. It will just be a year or two before it will return.
BB: So are you able to take a vacation now?
DF: Actually I am planning a vacation Christmas week. As home builders you could never take Christmas off because we were always closing homes for year end. Obviously this year is a little different, we aren't building any homes.