Comstock Homebuilding Cos. continues to be listed on the NASDAQ stock exchange. An article, "Vital Signs," in Big Builder¹s April 8, 2010, issue and on reported otherwise. Comstock was out of compliance with the exchange¹s $1 minimum bid requirement, but it recently regained compliance after its shares achieved a closing bid price exceeding $1 for 10 consecutive days on April 19. Big Builder regrets this error.

Any number of adjectives and adverbs could be employed to describe business conditions for the publicly traded home builders in 2009, most of them shading toward the negative but still expressing hope. Think increasingly stable. Improved. Even mixed. But it is a noun that trumps them all: Validation.

Before the housing downturn and resulting recession, it was common for investors and stock analysts to question whether the public builder model held up under close scrutiny. What were the advantages? Scale? Efficiencies? Marketplace clout?

The major advantage turned out to be none of the above in 2009. That advantage was the ability to survive.

As a group, the public builders ended 2009 in demonstrably better shape financially than they were at the end of 2008. To be sure, they were all worth less and have written down assets and goodwill to a point at which the pre-recession valuations of their stocks may not be seen again for a decade or more.

Of the 14 public home building companies tracked in this report, most ended fiscal 2009 with lower near-term debt, lower net debt-to-capital ratios, plenty of home building cash, and lower fixed costs.

The chief achievement of the publics during the downturn was their ability to raise capital, a feat beyond the grasp of private builders both large and small. Whether through stock and bond offerings, debt swaps, or private equity capital infusions, it was the relative transparency of the publics' business operations that allowed them to raise money when others could not.

Of course, it didn't hurt that the government threw in an extension of net operating loss carrybacks from two to five years, which allowed the publics to pull in nearly $2 billion in tax benefits during the 2009 fourth quarter alone.

Not all made it through, however. On the heels of the failure of TOUSA and the bankruptcy of WCI, Centex, which some analysts believed could not make it through the downturn intact on its own, merged with Pulte in 2009. Orleans Homebuilders made it through 2009 only to file for bankruptcy protection in early 2010.

Additionally, 2009 was not a year of profits, although an increase in sales during the second half of the year, coupled with the NOL tax benefits, did put several of the publics into the black for their fiscal fourth quarters. Still, only NVR and M.D.C. Holdings were profitable for the full fiscal year, with the latter only on the basis of a $142.6 million NOL tax benefit in the fourth quarter.

The builder stocks, on the other hand, were good, in some cases spectacular, investments. As of market close March 12, compared with the same date a year earlier (shortly after the stock markets hit their recession lows), Beazer Homes USA had gained 850 percent; Brookfield Homes, 268.2 percent; D.R. Horton, 54.2 percent; Hovnanian Enterprises, 442.5 percent; KB Home, 60.5 percent; Lennar Corp., 90.6 percent; M.D.C., 24.4 percent; Meritage Homes, 76.8 percent; M/I Homes, 119.6 percent; NVR, 90.1 percent; Pulte Homes, 11.8 percent; The Ryland Group, 58.4 percent; Standard Pacific, 520.5 percent; and Toll Brothers, 16.7 percent.

The biggest gainers were considered the most likely to succumb to the downturn, most notably Beazer, Hovnanian, and Standard Pacific, and all three remained below the $5 trading level considered the entry point for an investment grade stock as of March 12. The other big gainer, Brookfield, was trading at $9.74. Investors who had ridden the stocks down from their peaks in 2006, however, were still carrying losses.

Still, UBS home building analyst David Goldberg, among others, saw the group as overvalued as of mid-March, with a 1.1x multiple against tangible book value. Goldberg, again not alone among the home building analysts, was expecting conditions in the housing market to “take another leg down” before a sustainable recovery could begin.

LOSSES NARROW The year 2009 was better than 2008 for the public home builders, but it was not a good year by any measure.

Based on an analysis of preliminary data for the 14 public builders tracked for this report (Beazer, Brookfield, D.R. Horton, Hovnanian, KB Home, Lennar, M.D.C., Meritage Homes, M/I Homes, NVR, Pulte, Ryland, Standard Pacific, and Toll), the combined net loss for fiscal 2009 was $2.7 billion, a marked improvement from a combined net loss of $11.5 billion in fiscal 2008.

That combined loss was minimized by tax benefits. On an operating basis (pre-tax income), the combined loss for the group was more than cut in half. NVR was the only company to post positive numbers for pre-tax income ($264.6 million).

Home building revenues for the group were off substantially, falling to $24 billion from $36 billion the prior fiscal year, a 33 percent drop. The falloff was due mostly to a decline in combined closings, which were down more than a quarter. The average price across the group also fell, by 7 percent, to $292,350 from $314,570.

New orders, though up significantly in the later months of the year, were down for all of 2009 from 2008, just shy of 95,000 from roughly 101,000. The drop came partly as a result of a reduction in community counts and despite an increase in average sales per community (per month). A major improvement was recorded for the average cancellation rate across the 14 public home builders, which fell to 20.7 percent from 33.8 percent.

As 2010 began, the 14 publics had 26,674 homes in backlog, up from 22,524 at the beginning of 2009.

A big contributor to the improvement from 2008 to 2009 was cost control. Home building cost (excluding land) was down substantially year over year, falling 36 percent. However, part of that savings was attributable to the widely reported trend to smaller homes with fewer high-end amenities, though they were not tracked for this report. Correspondingly, land cost for 10 of the 14 publics for which figures were available (minus M/I, NVR, Ryland, and Toll) was down 44 percent. The number of employees fell from 30,077 to 23,437.

There were big savings in SG&A (sales, general, and administrative) expense, with the total for all 14 publics falling 29 percent from $5.3 billion in 2008 to $3.8 billion in 2009.

The publics' “land-light” strategies remained evident in 2009 despite a second-half splurge by several to pick up lots at distressed prices to reload for what was hoped to be a continuation of increased sales activity into the 2010 spring selling season. Lots controlled by the 14 publics fell 3.8 percent to 641,512 as owned lots remained almost flat with 2008. Due to the lower sales volume, however, the years' supply rose from 6.7 to 8.0 across the 14 companies.

Impairments, on the other hand, were down substantially. They fell 61 percent to $3.4 billion from $8.8 billion in fiscal 2008.

In his full-year 2009 analysis of the publics in his universe, UBS' Goldberg estimated the severe impact that impairments had on book value of the companies. According to that analysis, Beazer had written down 60.4 percent of its book value; Horton, 52.7 percent; Hovnanian, 77.9 percent; KB, 66.4 percent; Lennar, 47.4 percent; Meritage, 71.9 percent; Pulte, 46.4 percent; Ryland, 53.8 percent; Standard Pacific, 95.2 percent; and Toll, 47 percent. This helps explain his view that the stocks were overpriced as of mid-March.

For purposes of this analysis, margins were excluded due to a host of variables that makes year-to-year or historical comparisons relatively meaningless.

As Josh Levin, home building analyst at Citi, said in a research note on fourth-quarter earnings in February, “Although almost every home builder in our coverage universe reported sequentially better gross margins, we note that the actual gross margins varied widely. We think that a combination of aggressive impairments and a stealth subsidy by the home buyer tax credit may have augmented gross margins among some of the home builders. We anticipate that some companies at the high end of the range may experience some gross margin degradation in the near term.”

DIGGING OUT OF THE DOWNTURN As 2009 began, a morbid death watch was on among pundits who follow the public home builders. Three, four, maybe five of the big builders were thought to be in danger of collapsing. Of those, excepting the now merged-out-of-existence Centex, only Orleans has filed for bankruptcy. How'd they do it?

It was a combination of smart financial management and more than a little luck, actually. Given the severity of the global financial meltdown in late 2008 and the swoon it caused well into 2009, there was literally no access to capital markets. That changed as 2009 wore on as the Federal Reserve kept interest rates low and investors sought higher returns.

Several of the big publics were able to issue new stock and bonds, which bulked up their cash positions and allowed them to reduce and reschedule debt. The result was a much healthier industry, on paper at least, at year-end 2009, albeit with unusually rich interest rates on much of the new debt.

The 14 publics ended the fiscal year with a combined $12.4 billion in cash, up slightly from $12.3 billion at fiscal year-end 2008. Total debt for the 14, according to the BIG BUILDER analysis, was $21.6 billion, up from $20.8 billion.

Debt per share, however, in aggregate, fell from $292.72 to $246.41. The average debt per share for the individual companies was $17.60.

Perhaps the chief accomplishment of several of the publics in 2009 was to push debt further out. If, as some economists predict, profligate spending and taxation by the current Congress and White House lead to double-digit inflation, the higher interest rates on the new debt may look like bargains. If it does not and instead leads to a double-dip recession, one or more of the companies will have just postponed the inevitable. If neither happens, the economy improves and the market for new homes returns to something like normalcy, most if not all will service the debt capably.

Hovnanian was among the companies that successfully pushed debt further into the future. Though its debt-to-total capital exceeds 100 percent, it managed to push $1.1 billion off to 2016 and has roughly $400 million in notes to contend with between now and then. Meritage has no significant debt due before 2014. KB is on the hook for only $350 million before 2015. Beazer managed to push out $127 million that was to be due in 2011 with a stock and convertible bond issuance. Standard Pacific floated $280 million in new bonds to retire debt due in 2010, 2011, and 2012, which, by year-end, was down to less than $200 million.

As the spring selling season was under way in mid-March, there were few if any solid indicators that the new-home market was improving. Several of the public CEOs sounded upbeat during fourth-quarter conference calls with analysts, but none went so far as to predict a return to a normal market. Most were pleased with a definite increase in traffic as 2009 drew to a close—and with their NOL carryback tax refunds, which were expected mostly during the first quarter of 2010.

It turned out that 2009 was indeed a year of living dangerously, but for most, living nonetheless.

REPORT CARD METHODOLOGY: An annual data presentation that combines original and researched information with proprietary analysis, the BIG BUILDER Public Builder Report Card uses key financial and operational data available from investor presentations, analyst reports, and filings with the SEC. In addition, we incorporate feedback from investor relations and senior financial officers.

This year, our home builder universe includes 14 companies traded on the U.S. stock exchange whose primary business is that of building homes. We excluded Orleans Homebuilders from our 2009 analysis due to delayed financial filings and Avatar Holdings due to its filing of SEC documentation after our press deadlines.

The evaluation breaks quantitative data into four categories: financial, land, sales and marketing, and operations. Because a public's overall performance is so closely tied to financials, we weight this category more heavily. Hanley Wood controller Ted Southern developed BIG BUILDER's analysis model for 2009 based largely on a structure created by former housing analyst Barbara Allen in 2006. Also of note:

  • Pulte Homes numbers include Centex's contribution after the August merger.
  • Beazer Homes USA had a late-year accounting change that required discontinued operations to be removed from the top lines of its balance sheet. As a result, 2009 numbers do not compare perfectly with 2008.
  • Cash totals do not include restricted cash or cash invested.
  • Source: BIG BUILDER research and previously published reports. Averages and totals computed from BIG BUILDER universe of public companies as published in each report.