Meritage Homes Corp., Scottsdale (NYSE:MTH) late Thursday filed an 8-K with the Securities and Exchange Commission disclosing its intention to contest an effort by lenders and its joint venture partners to pay liabilities of $13.2 million related to the stalled Inspirada community in Henderson, Nevada.
The filing was triggered by the June 6 receipt of a demand from the lenders, led by J.P Morgan Chase, for payment of $13.2 million considered by the lenders as Meritage's share of the amount owned by the joint venture, which was forced into involuntary bankruptcy by the lenders in December. The joint venture is led by an entity called South Edge LLC and includes a Las Vegas developer named John Ritter as well as KB Home, Meritage, Woodside Group, Toll Brothers, Beazer Homes, Kimball Hill Homes and Pardee Homes.
In the 8K filing, Meritage said, "While our interest in this joint venture is comparatively small, totaling approximately 3.5%, we are vigorously defending and otherwise seeking resolution of these actions. Also as previously disclosed, Meritage is the only builder joint venture partner to have fully performed its obligations with respect to takedowns of lots from the joint venture, having completed its first takedown in April 2007 and having tendered full performance of its second and final takedown in April 2008."
The filing continued, "However, the joint venture and the lender group rejected Meritage's tender of performance of its second and final takedown, and Meritage contends, among other things, that the rejection by the joint venture and the lender group of Meritage's tender of full performance was wrongful and should release Meritage of liability with respect to the takedown and all guarantees. We have fully impaired our investment in this joint venture in a prior period."
Meritage did not disclose the name of the venture involved in the 8K, choosing to refer to it as "a large Nevada-based land acquisition and development joint venture in which the lenders are seeking damages on the basis of enforcement of completion guarantees and other related claims." A call to the company's investor relations department, however, confirmed it was South Edge and Inspirada.
The impact of the June 6 letter from the lender group on other members of the joint venture is unclear. One analyst, Adam Rudiger of Wells Fargo Securities, said in a note to investors that he did not expect the lenders demand to have a signficant impact on Meritage. He also surmised the KB Home, the biggest partner in the joint venture, and other builders received the same letter.
"We were unable to confirm if KBH received a similar demand from the lending group. However, considering the company is a 48.5% partner in the JV (vs. MTH's 3.5%) we assume that KBH also received the same letter. KBH has fully reserved for its estimated potential liabilities and has publically suggested it expects that such a demand would be made. KBH's maximum expected liability as detailed in SEC filings is $212MM plus potentially an additional $25-$35MM in unpaid interest."
Rudiger also said he had not as yet learned the extent of Toll Brothers' exposure. Beazer, in a 10-Q filing, estimated its exposure at $14.5 million plus interest and unspecified fees.