Standard Pacific found itself in good company with the other big public builders Friday (July 27) when it logged in second-quarter losses in the triple-digit millions, largely because of land charges in the triple-digit millions.
The Irvine-Calif.-based builder would have been able to book a $0.35 per-share profit if it weren't for $306 million in impairments that dragged the per-share loss down into the negative territory at minus $2.56 a share, reflecting a total loss of $165.9 million.
The $306 million not only included land-related write-offs but joint-venture impairments and goodwill impairments as well in some of its markets. The numbers would have looked even worse if the company hadn't been able to find a way to sell off $111.7-million in land in Phoenix and in Northern California. And there may be more land sales by the end of the year if the company can find buyers.
CEO Stephen J. Scarborough's comment about the results could have come out of the mouth of just about every other home building chief executive: "Challenging market conditions across most of the country continue to put pressure on our operating results," he said. "High levels of new and existing home inventory on the market, increasing mortgage interest rates, a tightening of lending standards and reduced housing affordability in many markets have all contributed to weak new home sales."
Scarborough offered no guidance for the company's future performance and took back any guidance the company offered earlier.
The company's strategy for dealing with the slowdown is a common one as well. It's continuing to pare down its land holdings to three- to four-years worth, attempting to lower its spec count while still keeping enough around for buyers who want to move in right away, and working to generate cash with the goal of paying off its revolving line of credit, which was at $256 million on June 30.
The company reported some extra market weakness in San Antonio, Tex., predominantly a first-time home buyer's market for Standard Pacific, as well as some slippage in Dallas. Florida was a sore spot for the company in Jacksonville, Tampa and Sarasota. In California, things were tough in the Inland Empire, Central Valley, and Bakersfield, while things seemed to be improving in the coastal markets and in Northern California. While the Phoenix market remains weak, the divisions there apparently were able to move a larger share of the backlog into closings.
The company's earnings release follows:
IRVINE, Calif., July 26 /PRNewswire-FirstCall/ -- Standard Pacific Corp.(NYSE: SPF) today reported the Company's unaudited 2007 second quarter operating results. The net loss for the quarter ended June 30, 2007 was$165.9 million, or $2.56 per diluted share, compared to net income of $96.5 million, or $1.44 per diluted share, in the year earlier period. Home building revenues for the 2007 second quarter were $694.8 million versus $1.0 billion last year. The Company's results for the 2007 second quarter include non-cash pretax impairment charges of $306.0 million, or $2.91 per diluted share after tax, of which $223.2 million related to consolidated real estate inventories, $48.1 million related to the Company's share of joint venture inventory impairment charges, $5.3 million related to land deposit write-offs and $29.4 million related to goodwill impairments.Excluding the second quarter impairment charges, the Company's earnings would have been $0.35 per share.
"Challenging market conditions across most of the country continue to put pressure on our operating results," commented Stephen J. Scarborough, Chairman, CEO and President of the Company. "High levels of new and existing home inventory on the market, increasing mortgage interest rates, a tightening of lending standards and reduced housing affordability in many markets have all contributed to weak new home sales. This environment has resulted in significant price competition leading to margin erosion and further impairments of the Company's inventory holdings."
"During the quarter, net new home orders were down 9% year-over-year companywide. Orders were up 23% in California, while down 15% in the Southwest and down 22% in the Southeast. Our cancellation rate for the second quarter was 28% compared to 36% last year."
"In an ongoing effort to strengthen our balance sheet we continued to focus on closing our backlog, reducing our speculative home inventory and lowering our supply of owned and controlled land companywide, with the goal of reducing inventories, generating cash and paying down debt. During the quarter, we were able to reduce our spec homes under construction by 28%year- over-year and lower our total lot position by 24% from the year-ago level resulting in a continued reduction in our revolver borrowings, which are down $340 million over the last three quarters."
Mr. Scarborough concluded, "As mentioned above, our second quarter results reflect additional impairment charges. While difficult to predict going forward, it is possible that the Company will incur additional impairment charges until our markets stabilize, particularly with respect to the pricing of new homes. Because of the uncertainties now impacting the home building industry, we will no longer be providing any earnings or operational guidance and are withdrawing our previous guidance, including guidance with respect to 2007 deliveries, revenues and margins."
Homebuilding pretax income for the 2007 second quarter decreased 275% to a$270.4 million pretax loss compared to pretax income of $154.1 million in the year earlier period. The decrease in pretax income was driven by a 31% decrease in homebuilding revenues to $694.8 million, a negative homebuilding gross margin percentage, a $60.6 million decrease in joint venture income (to a loss of $41.5 million), a 170 basis point increase in the Company's selling, general and administrative ("SG&A") expense rate and an $18.9 million increase in other expense. The Company's homebuilding operations for the 2007 second quarter included the following non-cash pretax charges: a$223.2 million inventory impairment charge; a $48.1 million charge related to the Company's share of joint venture inventory impairments; a $5.3 million charge related to the write-off of land option deposits and capitalized preacquisition costs for abandoned projects; and a $29.4 million goodwill impairment charge. The inventory impairment charge was included in cost of sales while both the land deposit write-offs and the goodwill impairment charge were included in other expense for the quarter.The 31% decrease in homebuilding revenues for the 2007 second quarter was primarily attributable to a 38% decrease in new home deliveries (exclusive of joint ventures) and a 7% decrease in the Company's consolidated average home price to $349,000. These decreases were partially offset by a $108.9 million year-over-year increase in land sale revenues. Land sales totaled$111.7 million for the quarter and represented the sale of approximately 2,400 lots.
In California, consolidated new home deliveries decreased 55% during the2007 second quarter as compared to the prior year period. Deliveries were off 63% in Southern California and 31% in Northern California reflecting the slowdown in order activity experienced throughout 2006 and into the first half of 2007.
In the Southwest, new home deliveries (exclusive of joint venture) were down 20% in the second quarter of 2007 compared to the year earlier period.Deliveries in Arizona during the 2007 second quarter increased 14% over the2006 second quarter. While the Phoenix and Tucson markets have experienced declines in new home demand, including increased sales cancellation rates, these two divisions were able to convert a significant portion of their beginning backlog and standing completed homes into deliveries during the2007 second quarter. New home deliveries were down 36% in Texas, driven primarily by a significant drop in demand in San Antonio. Deliveries from the Company's Dallas and Austin operations were off slightly year-over-year as demand softened moderately during the 2007 second quarter. In Colorado, deliveries were off 31% for the 2007 second quarter in what has continued to be a challenging environment.
New home deliveries in the Company's Southeast region were down 43% during the 2007 second quarter. This decrease was primarily due to a 53% year-over- year decline in Florida deliveries. The lower level of deliveries in Florida was due to weaker housing demand which began last year combined with an increase in the Company's cancellation rate in the state. In the Carolinas, deliveries were off 6% from the year earlier period driven by a 19% decrease in deliveries in Raleigh, which was partially offset by a modest increase in deliveries in Charlotte as compared to the year earlier period.
During the 2007 second quarter, the Company's consolidated average home price decreased 7% to $349,000. The overall decrease was primarily due to changes in the Company's product and geographic mix combined with an increase in the level of incentives and discounts required to sell homes in California, Florida and Arizona, the Company's three largest markets.The Company's average home price in California for the 2007 second quarter decreased 6% from the year earlier period driven by the increased use of incentives and discounts and the following regional changes. The 27% decrease in the average home price in Northern California was due primarily to an increase in the level of incentives and discounts used to sell homes, and to a lesser extent, a greater proportion of deliveries generated from the region's more affordable markets in Sacramento and the Central Valley.In Southern California, the average home price increased 6% primarily due to a greater delivery mix during the 2007 second quarter from the Company's Orange County division, which generally builds more expensive homes.In the Southwest, the Company's average home price increased 15% over the year earlier period. The Company's average price in Arizona was flat year over year primarily reflecting the leveling off of price appreciation in Phoenix as a result of the increased use of incentives in 2007 as compared to the prior year period. The 20% increase in the Company's average price in Texas reflected a greater percentage of deliveries generated from our Dallas and Austin divisions compared to the year earlier period, where our homes are generally more expensive than in our San Antonio operation.
The Company's average home price in the Southeast was up 2% as compared to the year earlier period. In Florida, the average sales price was up 1% from the year ago period and primarily reflected a geographic and product mix shift within the state. The Company's average price was up 24% in the Carolinas from the year earlier period and primarily reflected a change in delivery mix towards larger, more expensive homes in both of our markets in the state.
The Company's 2007 second quarter home building gross margin percentage was down year-over-year to a negative 14.3% from 27.2% in the second quarter of 2006. The 2007 second quarter gross margin reflected a $223.2 million pretax inventory impairment charge, which related primarily to projects in California, Arizona, Nevada and Florida. Excluding the inventory impairment charge and land sales, the Company's 2007 second quarter homebuilding gross margin would have been 20.7% compared to an impairment adjusted year earlier gross margin of 27.7%. The 700 basis point decrease in the year-over-year gross margin percentage as adjusted was driven primarily by lower gross margins in California, Arizona and Florida. The lower gross margins in these markets was driven by increased incentives and discounts and generally falling home prices resulting from weakening demand during last year and this year, creating a much more competitive market for new homes, which, as noted above, put downward pressure on the Company's home prices. If market conditions deteriorate further, or the Company's competitors continue to lower prices to generate sales, the Company may have to reduce its home prices further or increase its discounts and concessions, which would negatively impact the Company's margins and potentially trigger additional inventory impairment charges.
The Company's selling, general and administrative expense rate (including corporate G&A) for the 2007 second quarter increased 170 basis points to 14.0% of homebuilding revenues compared to 12.3% for the same period last year. The higher level of SG&A expenses as a percentage of homebuilding revenues was due primarily to a higher level of sales and marketing costs as a percentage of revenues, particularly advertising expenses and co-broker commissions, as a result of the Company's focus on generating sales in these challenging market conditions. These increases were partially offset by an absolute decrease in the Company's G&A expenses. The decrease in the Company's G&A expenses was principally due to a reduction in staff to better align our overhead with the weaker housing market combined with a decrease in incentive-based compensation.
The Company recognized a $41.5 million loss from unconsolidated joint ventures during the 2007 second quarter compared to income of $19.2 million in the year earlier period. The loss in the 2007 second quarter reflected a$48.1 million pretax charge related to the Company's share of joint venture inventory impairments. Excluding the impairment charges, the Company generated joint venture income of $6.6 million for the 2007 second quarter of which approximately $5.7 million was generated from profits related to land sales to other builders while approximately $0.9 million was generated from new home deliveries. Deliveries from the Company's unconsolidated homebuilding joint ventures totaled 98 new homes in the 2007 second quarter versus 55 last year.
Included in other expense for the three months ended June 30, 2007 and 2006 are pretax charges of approximately $5.3 million and $16.3 million, respectively, related to the write-off of option deposits and capitalized preacquisition costs for abandoned projects, and for the three months ended June 30, 2007, $29.4 million related to the impairment of goodwill. The goodwill impairment charge related to our Jacksonville and San Antonio acquisitions. We continue to carefully evaluate each land purchase in our acquisition pipeline in light of weakened market conditions and any decision to abandon additional land purchase transactions could lead to further deposit and capitalized preacquisition cost write-offs.
Net new orders companywide (excluding joint ventures) for the second quarter of 2007 totaled 1,716 homes, a 9% decrease from the 2006 second quarter. The Company's consolidated cancellation rate for the 2007 second quarter was 28% compared to 36% in the 2006 second quarter and 25% in the 2007 first quarter, while the Company's cancellation rate as a percentage of beginning backlog for the 2007 second quarter was 24% compared to 17% in the year earlier period. The overall decline in net new orders resulted from the decreasing demand for homes in Florida and Texas, and to a lesser extent a decline in orders in the Carolinas. These declines were offset in part by an increase in orders in California and Arizona. The lower level of demand in Florida and Texas and the generally weak level of demand in California and Arizona were primarily attributable to reduced housing affordability, higher mortgage interest rates, a tightening of underwriting standards for certain home loans and increased levels of new and existing homes for sale. These conditions have also contributed to an erosion of homebuyer confidence in these markets.
Net new orders in California (excluding joint ventures) for the 2007 second quarter increased 23% from the 2006 second quarter on a 19% higher community count. Net new home orders were up 13% year-over-year in Southern California on a 6% higher average community count. While order activity in Southern California improved on a year-over-year basis, net orders decreased 18% from the 2007 first quarter reflecting a weakening in demand particularly in the Inland Empire region of Southern California. In addition, the region's 2007 second quarter cancellation rate, while down from 45% a year ago, increased to 28% from 19% in the 2007 first quarter, driven by a jump in the Inland Empire cancellation rate. While conditions remain challenging in the Company's Northern California divisions, improved sales year-over-year are a result of our focus on increasing traffic and orders through a more competitive pricing strategy. The Company's cancellation rate of 25% for the2007 second quarter was down from 33% in the year earlier period but up from the 10% rate in the 2007 first quarter.
Net new orders in the Southwest (excluding joint ventures) for the 2007 second quarter were down 15%. In Arizona, net new home orders were up 14% on an 11% lower average community count. Despite the increase in net new orders in Arizona, the Phoenix and Tucson markets continue to experience weak demand for new and existing homes. In addition, the Company's cancellation rate in Phoenix, while down sharply from the 2006 second quarter rate of 60%, still remains high relative to historical levels at 39% for the 2007 second quarter. In Texas, net new orders were down 34% on a 22% higher average community count. This decline was primarily due to the continued deterioration in the San Antonio market. This market, with its high concentration of first time buyers, has been adversely impacted by the tightening in mortgage credit underwriting standards, particularly with respect to subprime borrowers. To a lesser extent, the Company has experienced weakness in the Dallas market over the past few quarters, and more recently has seen a slight weakening in the Austin market over the past quarter. In Colorado, net new orders were up 3% on a 15% lower community count. In Nevada, we generated 26 new home orders from 4 communities in the Company's Las Vegas division, a market which has also experienced weakening demand for new homes.
In the Southeast, net new orders (excluding joint ventures) decreased 22% during the 2007 second quarter. The decrease in net new orders in the region was primarily due to a 31% decline in orders in Florida. The year-over-year decline in Florida order activity reflects continued erosion in buyer demand and an increase in the Company's cancellation rate to 37% for the 2007 second quarter from 32% last year. The most notable year-over-year change in Florida has been in the Company's Tampa division where housing market conditions began to change dramatically at the end of the 2006 second quarter. Since Tampa is the Company's largest division in Florida, the slowdown in that market has meaningfully impacted our statewide order totals. Net new orders in the Carolinas were down 11% on a 30% higher community count. While the Carolina markets have slowed somewhat recently, they still remain relatively healthy.
The dollar value of the Company's backlog (excluding joint ventures) decreased 47% from the year earlier period to $1.1 billion at June 30, 2007, reflecting the meaningful slowdown in order activity the Company experienced during 2006 and into the first half of 2007.
Total building sites owned and controlled as of June 30, 2007 decreased 24% from the year earlier period, which reflects the Company's effort to generate cash and reduce its real estate inventories and to better align its land supply with the current level of new housing demand.
The Company's number of completed and unsold homes (excluding jointventures) as of June 30, 2007 increased 47% compared to the year earlier period while decreasing 19% from the 2007 first quarter. The higher year-over-year total was the result of weaker housing market conditions which contributed to an increase in the Company's cancellation rates during the latter half of 2006 and the first half of 2007 resulting in unintended completed spec homes. At the same time, the number of homes under construction as of June 30, 2007 decreased 47% (exclusive of joint ventures) from the year earlier period to 3,655 units in response to the Company's increased focus on managing the level of its speculative inventory and its desire to better match new construction starts with the lower sales volume.
In the 2007 second quarter, the Company's financial services subsidiary generated a nominal pretax profit of $187,000 compared to $744,000 in the year earlier period. The decrease in profitability was driven primarily by a 19% lower level of loan sales and a decrease in margins (in basis points) on loans sold. The decrease in loan sales was primarily the result of a 38% decrease in consolidated new home deliveries which was partially offset by increased capture rates.
Financial services joint venture income, which is derived from mortgage financing joint ventures with third party financial institutions operating in conjunction with the Company's homebuilding divisions in the Carolinas, and Tampa, Orlando and Southwestern Florida, was down 27% to $273,000. The lower level of joint venture income was due to the lower level of new home deliveries in 2007 combined with the transition of the Company's Colorado operations during 2006 from a joint venture arrangement to its wholly owned financial services subsidiary.