Despite heavy exposure to a home building market that is, without a doubt, among the worst-hit by the downturn, Coral Springs, Fla.-based Avatar Holdings managed to turn a profit in the third quarter of this year.
Avatar reported net income for the quarter that ended Sept. 30 of more than $3 million, or $0.35 per share, on $57.5 million in revenue on Friday Nov. 9. Admittedly, it was well below the $22.9 million ($2.21 per share) the company pulled in during the same quarter of 2006, but the fact that the company was able to turn a profit at all in a market that is primarily based in the heart of Florida and secondarily in Arizona, and where its home closings fell 68% in the third quarter down to 151 houses, may be a slight miracle.
The company was forced to impair a Florida community rife with speculative inventory from Avatar as well as other builders by $2 million. However, after reviewing its long-held land assets in other communities, it decided no impairments were necessary.
One secret to Avatar's success is that it has had its land for a long time; the other is that it has managed to build a cash reserve of $197 million. Its total debt sits at a little more than $136 million.
To match the new, lower-demand market, Avatar reduced its staff by 36.8% as of Sept. 30, down to 370 from the 585 people it employed at the end of 2005. It is also looking to generate cash from selling commercial and industrial land in its holdings as well as some residential land that would not be developed until well into the future.
To respond to what it expects will be a need for more affordable homes, Avatar began designing houses with less square footage on smaller lots in 2006 "to enable us to sell lower priced houses at meaningful profit margins," according to the builder. Those smaller houses are being rolled out in several communities now. It also has introduced a new multifamily product at Solivita, near Orlando.
What the company is not doing is aggressively discounting its homes. "We do not believe it is in the best interest of our shareholders to sacrifice the long-term value of our assets, including our communities, for short-term earnings," Avatar stated in its SEC filing. "As a result, we currently do not believe that it is an appropriate strategy for us to artificially create demand for our products by aggressively discounting our homes and adding additional supply to our markets to compete with other builders for volume. In our opinion, our balance sheet strategy will allow us to react to opportunities that may arise in the future."
The filing said the company expects the housing market to remain depressed through 2008. "Nevertheless," it explained, "we continue to anticipate that we will be profitable for 2007."