The telephone calls Max Spann Jr., is receiving these days from home builders are evoking flashbacks from the last real estate slowdown.

"I have major builders who are going to be announcing [auctions] in the next few weeks that did sales with us in the '80s and '90s and now they are calling us again," says Spann, president of the Clinton, N.J.–based Max Spann Real Estate and Auction Co. "One of them is a national. One is a large regional townhome and condominium seller. One builder is looking to sell lots."

Photo: Riku + Anna The story is the same for auction companies across the country as builders seek to quickly liquidate inventory overhang, say operators in California, the Midwest, and Florida, as well as the Northeast.

As the National Association of Realtors reports the decline in traditional sales of residential properties last year, the National Auctioneers Association notes a 12.5 percent increase in sales of auctioned homes and lots, says Robert A. Shively, the auctioneers' association CEO. "Theirs are down; ours are up." That 12.5 percent doesn't break down sales of existing homes versus sales of new homes or lots, Shively says, but there's plenty of anecdotal evidence that new homes and vacant residential lots contribute to that percentage increase.

Standard Pacific Corp. recently auctioned off four model homes and two nearly finished houses to help clear out a subdivision called Estancia near Sacramento, Calif. "This is a fast, efficient way for us to close out and complete the project," said Jackie Shipley, the company's local vice president of sales and marketing, in The Sacramento Bee. Chicago-based Neumann Homes also hired an auction house last November to sell 23 single-family homes, 22 condominiums, and 40 sites in the ailing Detroit market.

"[Builder auctions are] on the upswing across the board," says Chuck McAtee, CEO of Pacific Auction Exchange. "For builders, especially when they have a larger inventory or just a few left in a development, auctions can offer them a particular date and time of sale that they just can't get from a traditional real estate listing. It helps eliminate high carrying costs. Their money is worth more today than it is in the future."

McAtee doesn't just want to sell builders' houses via auction; he also wants to sell wannabe new-home buyers' existing homes, reducing contingency sales and potential cancellations. He says he is actively trying to recruit that business from builders. "From the builders, it's been very positive feedback because they see this is a way to get buyers in their homes who would have cancelled."

The biggest challenge auction houses face in generating more builder business is fighting the stereotype that auctions are fire sales, says Tim Costello, CEO of Builder Homesite, a builder consortium that develops technology solutions.

"We actually did auctions with builders three years ago for a completely different reason," Costello says. "Builders were having a very difficult time pricing, so we were using the auction method to gauge what the real market was going to pay for homes."

But builders are leery of the stigma, he adds. "They were willing to test it in a booming market. ...So, it was safe. But I believe most builders do not want their brand or their community tainted with the public perception of distress."

–Teresa Burney

Trigger Happy

Negative cash flows have many builders dangerously close to tripping the interest charge covenants on their debt.

More than a year of swollen inventories and mushrooming cancellations are conspiring to put some builders in a cash crunch that could trigger interest charge covenants and increase their cost of capital.

Starts2.jpg And if the downturn is further protracted, this could mean bigger trouble for big builders. Already some builders are feeling the wiggle room they had on their interest coverage covenants contract, pushing them closer to noncompliance. This trend is alarming considering the coverage covenant hurdles are low, says Joseph Snider, a vice president and senior credit officer with Moody's Investor Service.

"Investment-grade home builders can usually meet these covenants with their hands tied behind their backs and their eyes blindfolded," he says.

When securing financing with a bank, builders–Toll Brothers being an exception–usually agree to cover the amount of the debt's interest by a certain factor, a calculation of profitability that doesn't include taxes and other costs, EBITDA. However, in a down market, EBITDA declines, bringing builders closer to the covenant's threshold.

To prevent breaching that point, signaling a covenant violation, which more than likely results in credit rating downgrade, builders must reduce the amount of interest they pay on the debt. "The only way to do that is to retire debt," explains Snider. "And the only way to retire debt is to generate positive cash flow."

However, that's proving to be the real sticking point for builders these days. Only six of the 19 home builders in Snider's coverage universe are cash flow positive for the trailing 12 months. Although many builders have been shedding lots left and right, the total dollar value of housing inventories remains elevated, keeping cash in check. Super-size cancellation rates compound the problem, as finished home and homes under construction stay in inventory for longer.

Moreover, instead of using free cash to pay down debt, some builders, such as KB Home and NVR, are using it to make substantial share repurchases.

While liquidity issues don't represent "a life or death situation" for the bulk of builders, for those builders uncomfortably close to the danger zone, they need to find ways to maximize cash flow to lower their interest burden, Snider says. And the simple solutions are use incentives to burn through existing inventory faster and sell off other assets. However, critics argue that these mechanisms could prove to be short-sighted, leaving builders vulnerable when the market picks back up.

–Sarah Yaussi

Cycling Through the Charges

Builders have one more stage of land-related charges to pedal through.

Starts3.jpg By the close of fiscal year 2006, the top 13 public builders collectively took $3.3 billion in land-related charges to their balance sheets. And there's likely to be more on the way. But whether those future charges will amount to minor scrapes or major lesions to builders' valuations, time will only tell. Illustration: Stanford Kay By the close of fiscal year 2006, the top 13 public builders collectively took $3.3 billion in land-related charges to their balance sheets. And there?s likely to be more on the way. But whether those future charges will amount to minor scrapes or major lesions to builders? valuations, time will only tell.

Some industry experts predict that land-related charges will taper off going forward, as the housing market stabilizes and begins improving. Others, however, argue that builders are only halfway through the cycle of land value reductions. And, historically, the next stage has been the most painful. Take a ride to find out why.

Kitty Catapults to the Top

Green takes over as The Bonita Bay Group's new CEO.

When Kitty Green joined Westinghouse Communities in 1989, she "had no clue what community development was all about." Now, almost two decades later, she is president and CEO of The Bonita Bay Group, a major southwest Florida developer based in Bonita Springs.

"I got into this business by accident," says Green. "I was in marketing, and Westinghouse needed a marketing director. But over the years, I have learned to love this business. I love the process of looking at land and seeing what it could be. It is incredibly satisfying."

Green assumed her new post on Feb. 1, succeeding Dennis Gilkey, who resigned in January to pursue entrepreneurial business opportunities. Green joined The Bonita Bay Group in 1999 as a director of special projects and worked her way up to vice president of the company's northern region.

"My focus will be on where we're going as a company," she says. "We are going into new market areas, new kinds of communities, and new target markets. We plan to be much more innovative."

Currently, the company, which employs 1,500 people, is developing seven master planned communities in its southwest Florida home base. Most are aimed at affluent retirees.

However, new properties on the drawing board target a wider customer mix. For example, one community is being designed to attract a blend of weekend warriors and full-time residents.

"We all talk about baby boomers as a group, but they come in a lot of different slices," Green explains. "They don't all want to live in a country club-type of community."

Besides shooting for a broader clientele, the company is looking to expand geographically. The Bonita Bay Group is "evaluating a number of sites," but Green says she is "not prepared yet to say where we are going to land."

However, Brian Lucas, who has been put in charge of finding new markets, says that he has visited a "very pretty property in North Georgia that is very easy to fall in love with." The company also is looking at northeast Florida and the coastal and mountain regions of the Carolinas.

Lucas says his office has been inundated of late with proposed land deals. "With the market the way it is, we have a stack of flyers an inch thick," he says. "Some are pretty bizarre and don't fit into our model. But we've actually put boots on our feet to personally look at 15 to 20 properties."

However, with 25,000 future units in its pocket, the company is in no hurry to buy more ground, at least for the moment. "We're not in much of a buying mood right now," Lucas says. "We're ready to buy if we see the right piece, but we're not going to jump at the first property we see."

For now, The Bonita Bay Group is using the down market to do the financial, marketing, and permitting due diligence necessary to be ready to move when the time is right, which Lucas says could be as early as mid-2007. It also is using the time to build up its planning and development, legal, and political teams.

"Everybody else has been letting people go; that seems like the thing to do," says Lucas. "But we're not letting anybody go; we're hiring. And there's a lot of talent available out there. As a private company, we're able to take a longer view" than public firms.

One notable new hire is David Tillis, who was in charge of all entitlement activities at the The St. Joe Co. "He's got a pretty impressive resume, and we're excited to have him," Lucas says of Tillis, who will serve the company's regional general manager of new markets.

–Lew Sichelman

Hot Button

What's the best use of your free cash right now?

"We are expecting to spend a lot of that cash flow on buying shares back this year because we got our inventory right sized already. We've got our debt to capital where we want it to be so we don't need to take it down any further." –Gordon Milne, The Ryland Group

"During a softening environment in the industry, we believe the preservation and the accumulation of additional liquidity is the right thing to do." –Don Tomnitz, D.R. Horton

"I think we're going to continue to pay down our debt and keep our balance sheet strong and be available to opportunities as they arise, whether it will be lower land prices or acquisitions that maybe make some sense down the road. Or buy back stock. We are going to continue to be active on all those fronts." –Larry Seay, Meritage Homes Corp.

"As related to the share repurchase, we didn't do any this quarter. ...In light of the current business environment, we didn't think it was prudent to be buying back shares this quarter." –Jim O'Leary, Beazer Homes USA

"We'll look seriously at debt repurchase as necessary, given the realities of where earnings will go and to help strengthen our balance sheet positioning for the future."

–Cathy Smith, Centex Corp.

Carolina Calls

An Indianapolis-based builder increases its presence in the Tar Heel State.

CP Morgan is planning to expand its reach in North Carolina, starting up operations in the Piedmont Triad area. The Indianapolis–based builder has had a competitive position in Charlotte, N.C., for the past two years and plans to use a similar sales strategy in the Piedmont Triad, which includes the cities of Winston-Salem, High Point, and Greensboro.

Tom Eggleston The company plans to sell detached, single-family homes in the Triad at prices between $100,000 to $175,000. CEO Tom Eggleston says a low-cost business model will make the company all the more competitive in the market. "The real story is the efficiency of how we operate. It's a lean production model that has a very low tolerance for waste," he says.

CP Morgan started the first housing foundations in February and expects pre-sales to begin in May. Eggleston says most of the sales are projected to take place in the second half of the year, but he is reticent to make any concrete sales projections just yet. The good news is that the land is already spoken for, Eggleston says. Between owned land and negotiated options, the company controls roughly 1,000 lots.

The builder has been eyeing the Piedmont Triad region since it first set up shop in Charlotte, its only market outside Indiana. The region was ripe for business expansion, given job growth and an "unmet need" for housing, says Eggleston.

"The market has still been strong in North Carolina," agrees Ed Dunnavant, Metrostudy's director for the North Carolina region. "It is a great place to live and work."

However, The Business Journal of the Greater Triad Area reports that CP Morgan may have a tougher time than it expects launching homes in the region. Local new-home inventory has risen 20 percent in the past year, and some local builders are slowing the pace of construction. The number of building permits dropped 22 percent in the last three months of 2006.

"The pie is already smaller," Joe Jenkins, the local division president for Centex Corp., told the newspaper. "If we have more builders, everyone gets a smaller piece."

–Judi Hasson

LoWder New Homes At a Glance

LoWder New Homes
2000 Interstate Park Dr.
Montgomery, AL 36109
Phone: 334-270-6789

Curious to know who's got the biggest builders on the run in some of the most attractive markets? Check this one out.

  • Ed Lowder founded his namesake company, Lowder Homes, in 1956. Today, the company builds about 316 homes a year, primarily in the tri-county region surrounding Montgomery, Ala.
  • The company focuses on building master planned communities that include lifestyle elements such as clubhouses, swimming pools, and walking trails. Home prices range in the $150,000s to $600,000s.
  • As one of the largest home builders in the area, Lowder Homes is poised to benefit from the substantial growth associated with the state capital, two local Air Force bases, and a new Hyundai manufacturing plant.

Bottom Line

Vice president Jimmy Rutland says Lowder does a little bit of everything when it comes to housing. Like the auto industry that's fueling local growth, they've got a model to suit any buyer, any budget. "Volkswagens, Chevys, Cadillacs, and Mercedes. We pride ourselves not only on the quality homes but on the quality neighborhoods we develop."

–Judi Hasson

Power Plan: Fly Aways

While some homeowners are happy with a golf course, others need a hangar and a runway right in the back yard.

While airplane hangars and a private airstrip may not be the most desired amenities for the average home buyer, they are hitting a sweet spot with a growing breed of new-home buyers. Private pilots who see value in having a personal airplane hangar and a runway strip within walking distance are spurring the growth of such communities, known as airparks. More than 3,000 of these communities exist across the country.

Greg Peitzmeier, the Nevada division president for California-based Lakemont Homes, says his division is tapping into this trend. It's added a fly-in feature to its list of amenities at a Lakemont community near Reno, Nev. Buyers of select homes in the 2,500-home community will have access to a private airstrip and hangars, in addition to the usual amenities such as a clubhouse, a fitness center, and a five-star chef. "It is a fairly mature buyer between the ages of 45 and 65. They are relatively affluent. [Flying] is typically their passion," says Peitzmeier.

NOW BOARDING IN THE BACK YARD: In addition to private airplane hangars, houses at Lakemont Homes' Airpark Estates at Legado in Nevada feature up to six bedrooms, libraries, and three-car garages. Prices start in the high $400,000s. Photos: Courtesy Lakemont Homes The community, Lakemont Airpark Estates at Legado, is roughly 15 minutes from Carson City and 30 minutes from Reno. Home prices begin in the upper $400,000s.

To date, six homes in the community have hangars. However, Peitzmeier isn't put off by the low number. "This is a unique home and a unique buyer," he says says. "You won't see a subdivision [like this] with 50 to 60 homes. Our goal would be to sell one or two homes a month."

In fact, he sees offering a niche product as a strategy to attracting more affluent buyers who are less susceptible to tough market conditions. "We actually have done relatively well. Obviously, the market has softened," Peitzmeier says. "While some of the other projects slowed down, this consumer is typically pretty affluent. This is a limited type of opportunity."

–Judi Hasson

Home, Sweet Hanger

  • For select homes in the Lakemont Airpark
  • states at Legado community, an airplane hangar comes as a standard feature.
  • The hangars have stucco exteriors and 16-foot ceilings. Options include adding a bathroom or a kitchen or having a heated interior.
  • Home prices in the community begin in the upper $400,000 range.

Staff Cutbacks Continue in Florida

As recovery in the new-home building market remains slow, many Florida builders have to take another slice out of their workforces. DiVosta Building Corp., a subsidiary of Pulte Homes, says it will lay off 218 more workers in February, roughly 40 percent of its headquarters' workforce, to keep its payroll in line with the market's demand for new homes. And staff reductions aren't just for the market's biggest players like Centex Corp., Lennar Corp., and Toll Brothers, which industry sources say also have had cutbacks. Jupiter, Fla–based Sunland Homes recently cut 20 of its 45 employees.

Toll's First Atlanta Community

Toll Brothers did a lot of nosing around for good land in the metro Atlanta area before committing to a particular parcel. But now that it's found the right piece of dirt, the Pennsylvania-based company announces its first community in the area, Woodstock Knoll. The luxury-home community will open for sales this spring, with first deliveries expected by early 2008.

New SEC Inquiry at KB Home

The Securities and Exchange Commission launches a formal investigation into Los Angeles–based KB Home's stock option grant policies. In August 2006, the SEC began an informal inquiry into the practice. By November, former CEO Bruce Karatz resigned after an internal investigation revealed he had manipulated stock option grant dates to benefit materially from lower stock prices.

Executive Moves

Walter Industries is experiencing some personnel shifts. Ron McCaslin replaces Charles E. Cauthen as president of the company's home building subsidiary, Jim Walter Homes. Cauthen, who also served as interim president of the company's mortgage entity Mid-State Homes, becomes CFO of Jim Walter Homes Holding Co., a new subsidiary that includes both the home building and financing groups.

Patrick Higgins receives a promotion from vice president of sales at John Laing Homes to senior vice president of sales and marketing. The former Centex Corp. employee joined the Newport Beach, Calif.–based builder in mid-2006.

Bonita Bay Group appoints Amanda Wilson Watkins to vice president of sales and marketing. A former strategic marketer for Centex Corp., she will oversee market research, sales and marketing programs, and corporate branding initiatives for the Bonita Springs, Fla.– based builder.

Robert Kim joins Frontier Homes as vice president of Frontier Commercial. Kim will oversee the commercial subsidiary's growth through asset acquisitions and development.

Changing Faces?

Please send information regarding all staffing changes to Sarah Yaussi at

Learn more about markets featured in this article: Greensboro, NC.