Now that peace appears to have been made with shareholder activist Carl Icahn, WCI Communities has turned its attention to the accumulation of cash. That was the overwhelming topic during the company's conference call Wednesday (August 22) -- collecting cash, generating cash, preserving cash, and gaining access to cash.
That conversation followed the company's report of a net loss of $33.2 million, with revenues down 54.2% and new orders down more than 50% compared to the same quarter last year. Revenues from tower building were down 99% because of tower defaults and because the company had only seven towers under construction this year compared to 21 last year.
For more than a year, the highly leveraged Bonita Springs-Fla.-based company has said it expects to have $1 billion in cash by year's end that it would use to pay back debt. The market's deepening slump, extremely high cancellation rates on its towers and home contracts, and Carl Icahn's challenge to the company's management all helped derail that goal. Management estimated fighting off Icahn's challenge to take control of the company and hiring various attorneys and consultants to decide whether it should be sold cost about $10-million alone.
By the end of the first half of '07, WCI had accumulated only $119.8 million in cash, causing it to downsize its year-end cash estimates to between $530 and $730 million.
Achieving a cash balance within that range is achievable, said WCI CEO Jerry Starkey during the conference call. He called that a conservative goal and mapped out some of the ways he expects to reach it.
First, he said, the company wasn't counting heavily on its sale of towers to achieve that goal, even though in earlier conference calls the towers were said to be the primary drivers of income. Instead, he said, it was the company's traditional home sales that accounted for about 60% of the decline in cash flow.
In recent weeks, there has been speculation among analysts that the two large towers the company is expecting to close out this year in South Florida, One Bal Harbour and Singer Island, would experience extremely high cancellation rates. The speculation has been spurred by the fact that about one-third of the units that are under contract to be sold at One Bal Harbor are already listed as for sale on the Multiple Listing Service by their contracted buyers.
Starkey deflected questions about whether those buyers were likely to walk from their deposits if they cannot resell them by saying that the buyers have the units up for sale priced substantially higher than what they are paying WCI for them.
Company executives also went out of their way to try to quell worries that some of its mostly upscale buyers would cancel their contracts because they would not be able to obtain jumbo mortgages because of the current credit crunch. WCI, they said, has a partnership with Wells Fargo, a known heavy-hitter in the jumbo mortgage market that hasn't pulled out of the market. "We believe that we have sufficient availability of mortgage credit," said Starkey.
Starkey said the company will be focusing on moving the company's considerable speculative inventory and closing deals. For every sale it loses to a cancellation, it is committed to have another to replace it.
WCI also expects to generate some cash from selling some of its land assets, including commercially zoned parcels and some of the recreational amenities it owns, to generate more cash. The company is also working to reduce the cost of building its traditional single-family homes by $42,000 each. It had already reduced average costs by $26,000 a house by the end of June.
Severely cutting spending on new land this year should also help the balance sheet as will reduce overhead. The company has cut its employee count by a third in the last 16 months and it expects to cut between 200 and 250 jobs more by year's end. That will reduce payroll by nearly $165 million by the end of 2007.
It was revealed during the conference call that Steve Zenker, vice president of investor and corporate communication, is leaving he company. He did not return telephone calls seeking comment.
Moreover, Starkey, who is currently a director as well as CEO and isn't on the new slate of directors that was negotiated with Carl Icahn, was asked what his future role in the reorganized company will be.
"I continue to be the CEO," he said. "When we meet with the new board we will see what the board's game plan is and how I fit into that."