Kimball Hill Homes is weeks away from unveiling its plan to restructure its operations and emerge from Chapter 11 bankruptcy protection. But for that plan to work, the Rolling Meadows, Ill.-based builder must have access to cheap land, says Kimball Hill CEO Kenneth Love.
"The centerpiece of our restructuring is the belief that we will be able to acquire well-positioned, quality lots without any significant new investment in capital,” Love told BUILDER last Friday. He added that if this premise turns out to be unfounded “and we’ve misjudged the market, then that would be a real problem for our reorganization efforts.”
During the 30-minute interview, Love confirmed to BUILDER that Kimball Hill’s management has been approached by five companies interested in acquiring some or all of the builder’s assets. He wouldn’t identify the suitors except to say they include private equity firms and other builders. “We are going to explore everything, and we’re not gong to reject any option,” he said.
Love emphasized, however, that it is still Kimball Hill’s goal to emerge from Chapter 11 as a going concern operating under its own name. (News about prospective buyers was first reported by suburban Chicago's Daily Herald newspaper.)
Kimball Hill filed for protection from creditors under Chapter 11 last April with $631.9 million in debt and $795.5 million in assets at the close of 2007. While the company paid down some of that debt in the ensuring months, the amount “doesn’t materially change the playing field,” Love said.
Still, the company did sell 1,800 houses from between October 2007 and September 30, 2008, which was about half the sales from the same period a year earlier but still encouraging. Love said the company has been building smaller homes lately “to address the affordability issue, because a disproportionately high number of buyers in the market are first-time buyers.”
By continuing to build and sell homes while in bankruptcy, Love saw evidence that Kimball Hill had neutralized buyers’ objections to purchasing a home from a shaky company. “When we filed, buyers weren’t sure if we’d be able to operate as a home builder. But that skepticism has lessened over time.” He attributed that, in part, to the company’s decision, on its first day under Chapter 11, to establish a third-party warranty program “that has helped us considerably” to win over customers.
Love was not ready, when interviewed, to discuss the specifics of Kimball Hill’s restructuring plan. But in broad strokes, he said that the builder ultimately “needs to decide what kind of company we want to be to compete in good times and challenging times.’ He identified the metrics he believed lenders and creditors would use to assess Kimball Hill’s plan: What is the builder’s likelihood for future success, and how might the credit crisis affect that?
On the first count, Love said he “feels very good.” He noted that company officials had worked up a list of measurements they think lenders are considering, “and on every one—warranty expense, cycle time, revenue per employee, you name it—we’ve either met or outperformed cash flow projections. I’ll tell you one thing: we have more cash now than we did when we filed.”
How lenders weigh Kimball Hill’s viability against the credit crunch is dicier. The builder is dealing with 17 banks, each with its own financial problems and risk-tolerance levels. Marshalling those lenders towards a single reorganization plan would have been difficult under ideal circumstances. “The past three or four weeks have introduced uncertainties and variables, and I don’t know what the banks will say, because of the pressure they are under,” said Love.
Despite having asked the U.S. Bankruptcy Court in Northern Illinois for two extensions, Kimball Hill is roughly on schedule to deliver its reorganization plan. “When we filed, we expected it would take five months, so we’re relatively on target,” said Love. He is also “very optimistic” about the builder from an operational standpoint, even in its markets in Nevada and California, where Kimball Hill has seen some “stabilization” in its construction activities and profitability. “Our sales and margins have become more predictable, so that’s one ray of light.”
John Caulfield is senior editor at BUILDER magazine.
Learn more about markets featured in this article: Chicago, IL.