WCI Communities, Inc. Tuesday reported a net loss of $15.8 million, down from $40.2 million in the first quarter of 2006, or a loss of $0.38 per share compared to a gain of $0.89 in the same period a year ago. The company did, however, draw down inventories, cut its cancellation rate in its Traditional Homes division and restructure its debt to less stringent terms.
Revenues were down 40.3% from last year's first quarter to $340.6 million.Net unit orders for the quarter declined 41.0% to 237 while the aggregate net value of Traditional and Tower Homebuilding orders for the quarter fell 53.4% over the same period a year ago to $156.1 million.
"Our peak selling season in Florida this year was a disappointment, even though we did experience a sequential increase in new orders in the first quarter of 2007 compared to the fourth quarter of 2006, and saw significant improvement in our Traditional Homebuilding cancellation rates," said Jerry Starkey, WCI's president and CEO. "Our Mid-Atlantic Division fared better than our other operations, experiencing substantially better net order comparisons and a cancellation percentage rate of around 10%."
Starkey blamed the loss on lower margins in both the Traditional and Tower divisions and on fewer home closings. He said cancellation rates in the Traditional division fell to "around 20%, but he also said defaults in its Tower division caused the company to increase its tower default reserve to cover an approximate 15% default rate for towers closing in 2007. In 2006, the default rate for the 14 towers completed and closed was 6.1%.
"We continue to emphasize maximizing cash flow and reducing overhead and product costs," Sharkey said. "In the first quarter, we achieved a reduction in average home cost of about $6,300, thereby reaching a cumulative reduction of approximately $22,000 per home since the beginning of 2006. This is good progress towards our goal of saving $42,000 per home by the end of 2007. These average savings per house benefit our cost structure on homes to be built during 2007 and thereafter but do not benefit completed homes that are unsold or in backlog. We also continue to expect to realize approximately $1 billion of cash flow from operations, generated primarily from the collection of tower receivables. Proceeds from land and recreational amenity sales are expected to contribute to cash flow and make up any variance from our previous estimates of tower receivable collections and cash flow. While we did not have any land or recreational amenity sales in the first quarter, we closed the cash sale of a $47.5 million recreational facility in April of this year."
In the Traditional home building segment, revenues for the first quarter fell 25.4% to $214.2 million from $287.2 during the same period last year on closings of 306 homes, down from 492 last year. Florida revenues, excluding lots sales, totaled $137.2 million, 64.1% of the total, versus$232.2 million, or 82.8% of the total, last year. The revenue share for the Northeast division shot up to 27.7% from 9.9% last year; the Mid-Atlantic division was relatively stable at 8.2%, up from 7.3% last year. Gross margin as a percentage of revenue for the Traditional division decreased 620 basis points to 16.6% for the first quarter of 2007 from 22.8% a year ago, due to substantially lower margins achieved on the sale of finished spec inventory. The spec home closings accounted for 48% of the closings during the quarter and produced an average gross margin percentage of revenue of 9.3%, less than half the 19.9% gross margin percentage that was achieved on homes that were delivered out of the first-quarter beginning backlog.
For the first quarter of 2007, the number of gross and net orders declined 28.0% and 29.7%, respectively. The value of Traditional Homebuilding gross orders declined 32.7% to $212.4 million while the value of net orders dropped 40.1% to $158.9 million. Cancellations during the quarter totaled 60, down from 75 during the same period a year ago and 249 in the fourth quarter of 2006. The average price for Traditional Homebuilding net orders for the first quarter of 2007 fell 14.8% to $651,000 compared with $764,000 for the first quarter of 2006, due to mix changes and a higher percentage of discounts during the quarter -- approximately 15% compared to approximately 2% on orders in the same period a year ago. In total, 139 spec homes were sold during the quarter, with an average projected gross margin as a percent of revenues that was over 1,000 basis points below the average gross margin percentage of 17% to 18% projected for the 105 to-be-built orders for the quarter. The company's total spec inventory at the end of the quarter, completed and in-process and including models, was 576 versus 691 at the end of the fourth quarter of 2006.
Backlog in the Traditional segment was $631.3 million, down 46.5% from $1.18 billion last yhear. The average projected gross margin in backlog at the end of the quarter was approximately 20%.
Revenues for the Tower sement fell 66.3% to $74.0 million from $219.4 million last year, due to fewer sales in buildings under construction, higher defaults, and less progression of percentage of completion than expected from the 11 towers under construction during the first quarter of 2007 contributed to the decline in revenues. In comparison, there were 24 towers under construction and recognizing revenue during the first quarter of 2006. Tower division gross margin as a percentage of revenue declined 2,370 basis points to 1.1% for the quarter from 24.8% for the three months ended March 31, 2006. For the first quarter of 2007, $19.6 million of unfavorable adjustments to estimates were made related to towers under construction, which were recorded as additional costs of Tower revenues for the quarter, including a $7.4 million increase in the tower default reserve to account for an estimated 15% default rate for future tower closings, a $4.9 million gross margin impact and a reduction of revenue of $21.6 million on 19 defaulted contracts for which revenue and gross margin was reversed this quarter, a $6.1 million adjustment for additional estimated interest and insurance costs anticipated associated with longer tower construction cycles, and $1.2 million of other adjustments. Absent these adjustments, Tower gross margin as a percent of revenue would have totaled 21.3%.
Net orders in the Tower division totaled negative seven (12 new contracts less 19 defaults) versus 55 in the first quarter of 2006. No new towers began converting to contract during either period. Tower backlog totaled $159.4 million, a 77.5% decrease from $708.2 million last year. For the rest of the year, six towers, consisting of 977 units and with a projected sell-out value of approximately $1.04 billion, are expected to be completed. Those towers are 88% sold, the company said.
During the quarter, the company completed and delivered three towers, which contained 481 residences, of which 411 were sold. Of the sold units, 272 have closed through April 30 and 19 have defaulted. The company has reserved for an estimated 62 additional defaults in these buildings. In addition, the company experienced another 5 defaults in other towers recently closed or under construction.
Revenues for the Real Estate Services division were $25.6 million, a 15.8% decrease from the $30.4 million recorded for the same period a year ago. The decline was primarily due to the continued slow market for new and resale homes during the quarter. Transactions for Prudential Florida WCI Realty declined 22.8% over the same period a year ago. Gross margin as a percentage of revenue for the period was 8.2% compared with 9.1% in the first quarter of 2006.
Revenues for the Amenities division were $25.1 million, a 5.3% decrease from the $26.5 million for the same period a year ago. Gross margin as a percent of revenue increased to 9.9% for the first quarter of 2007 versus 6.5% in the first quarter of 2006 despite a $414,000 asset impairment charge for the abandonment of plans to develop a marina in a joint venture.
Selling, general, and administrative expenses including real estate taxes(SG&A) declined $4.9 million to $46.9 million for the first quarter, versus$51.8 million a year ago. The company reported $3.3 million in professional fees paid related to the company's ongoing proxy contest and preparations for a possible sale. As a percentage of revenue, SG&A increased to 13.8%, up from 9.1% in the first quarter of the previous year largely due to lower revenues in 2007.
For the three months ended March 31, 2007, net cash generated from operating activities totaled $102.4 million compared with cash used of $144.1 million in the same period a year ago. Cash flow benefited from the 254 tower unit closings and significantly lower land purchases and land development expenditures, which together totaled $38.8 million versus $85.9 million in the year ago period. The company continues to expect a significant net inflow of cash in 2007 from the expected closing of an additional six towers during the year, which is expected to be the primary driver behind the company's expected reduction of its net debt from approximately $1.9 billion at March 31, 2007 to approximately $1.0 billion by the end of the year.
WCI amended its senior unsecured revolving credit facility (the "SURCA") and its senior unsecured term loan facility (the "Term Loan") on April 5, 2007, with an effective date of March 31, 2007. The amendments provide temporary reductions of the fixed charges coverage ratios and an increase to the allowed unsold home inventory level in exchange for a reduction in overall credit capacity and a reduced maximum leverage limitation, which are consistent with the Company's de-leveraging strategy, and increased pricing during the modification period. The Company also agreed to provide certain lien rights to its lenders if it violates the amended covenants and, at that same time, is unable to meet a minimum liquidity test. Total liquidity, measured as the sum of cash plus available capacity under the unsecured revolving facility, totaled approximately $462.8 million at March 31, 2007. In addition, letters of credit of $40.3 million were outstanding as of March 31, 2007. The maximum amount now available to borrow under the company's senior unsecured revolving credit facility is $850 million with a further reduction to $800 million on October 1, 2007. The SURCA matures in June 2010 and the Term Loan matures in December 2010.
The ratio of net debt to net capitalization increased to 65.5% compared with 58.0% at March 31, 2006 but decreased from 66.3% at December 31, 2006. WCI said it expects its net debt to net capitalization rate to approximate 50% by the end of 2007 due to the expected cash inflows from the realization of tower receivables as well as land sales and recreational amenity sales.