ROLLING MEADOWS, Ill. - By the end of September, Kimball Hill Homes, the industry's 22nd-largest builder based on 2006 closings, expects to complete its exit from the Portland, Ore., market, where it is disposing of $15 million in land assets. Kimball Hill sold $71.6 million in land assets overall through the first half of this year, and its chairman, David Hill, said during a teleconference last week that his company has signed binding letters of intent on the sale of three properties in the past three weeks alone.

From the second quarter of 2006 through the third quarter of 2007, Kimball Hill has reduced the lots it controlled or owned to 21,000, from 32,000. The company, Hill says, is moving towards an "asset-lite" strategy in response to the current housing downturn, with the intended goal of improving its debt-to-capitalization ratio to 50-50 by next year. "We are a long way from that right now," says Hill. While he expects to find buyers among other builders, Hill says that most of the interest in his company's land assets is coming from "other forms of equity structures," with which Kimball Hill has had "many active talks."

During the three months that ended on June 30, Kimball Hill took $81.3 million in additional impairment charges, including $38.1 million related to options for lots to build a 1,200-home project in Chicago, which the builder had walked away from. Over nine months, impairment charges totaled $133.7 million. Because of the latest quarter's impairments, the builder reported negative gross margins of 25.4 percent, with the steepest declines in the Pacific Northwest and Nevada, says Gene Rowehl, the builder's CFO. In the quarter, Kimball Hill lost $40.9 million, compared to an $11.96 million net gain for the same three months a year ago. Its deliveries were off by 30.5 percent to 771 homes, and its revenue fell 33 percent to $207.5 million. Through nine months, Kimball Hill lost $75 million (versus a positive $38.5 million in the first nine months of 2006) on revenue of $637.5 million that was down 16.7 percent.

Two bright notes: Excluding the impairment charge, the company could report a $1.3 million pretax profit. It was also able to negotiate more favorable leverage covenants from its lenders to maintain access to its $500 million credit line. "Our banks have voted 'yes' with us" in their willingness to adjust the terms of their loans, Hill states. On the mortgage front, Kimball Hill has had minimal exposure to subprime or alt-A mortgages, but its mortgage division did report a $136,000 quarterly loss, as its capture rate fell to 57.2 percent from 60.4 percent.

Hill says his company is taking steps to weather the current storm, "whether it lasts for two, three, or four more quarters." It reduced its staff by 29 percent through the first half of the year, and in its fiscal third quarter cut the average price for its homes by 8 percent, or by $22,000, to $251,000. Its unsold inventory in the quarter shrank by 27.6 percent to 715 units. Hill says he's seeing evidence that the mortgage markets are beginning to stabilize. But he concedes that there are still "a thousand ifs" before builders can "discern and time the recovery. The fog has gotten even deeper over the last two quarters."

During the teleconference, Hill announced that the company had promoted C. Kenneth Love to the positions of president and CEO, effective Oct. 1. Hill will assume the position of Executive Chairman.

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