Only the stock market seemed to look unfavorably on Beazer Homes USA’s announced trip to the debt and equity markets this week.
The Atlanta-based company’s stock price fell Wednesday on news that the company plans to issue 18 million shares of new stock and $50 million worth of notes that will convert to stock in 2013, reflecting the fact that the sales will dilute the roughly 40 million existing shares. By market close, the company’s stock price had fallen by 11.99%, down $0.65 from $5.42 to $4.77 a share.
But analysts and industry watchers said Beazer’s move was smartly timed and necessary to lower its debt levels as well as push back debt due dates. Beazer said some of the proceeds from the sale will be used to replenish funds it used to pay off $127 million of 8.625% senior notes due in 2011 as well as other “general corporate purposes.”
Beazer executives were traveling Wednesday and were unavailable for comment.
The move should lower the company’s hefty debt-to-capital ratio to roughly 71% versus 83%, according to a report by J.P. Morgan analyst Michael Rehaut.
But perhaps as important was the erasure of the debt due in 2011, said Steve Friedman, national director of home building services for Ernst & Young. That effectively lengthens the company’s debt runway, giving Beazer time for the market and its own sales to begin recovering before the debt comes due.
Friedman said the move will only dilute the book value of the stock slightly. “It’s the right thing to do in my mind, and [the debt is] at a reasonable price," he said. "The fact that they’ve been able to access the debt market is a good thing.”
By the time the bonds transform into stock in 2013, Beazer will have had some time to generate greater earnings, so that might not be so dilutive to shareholder value either, said Friedman, “if you believe in the company.”
Several other builders sold stock in 2009 to bolster their balance sheets, including Lennar and Avatar. But Raymond James Financial analyst Buck Horne doesn’t expect it to be common this year among the large public builders; most have already been able to restructure their balance sheets by pushing their debt to points in the future where they hope to have the cash to pay it off.
Plus, most of the larger public builders are sitting on hundreds of millions of dollars in cash and are expecting more from the recent tax law change.
“Many of them will be getting hundreds of millions of dollars back from the Treasury Department,” said Horne. “[Beazer’s trip to the stock market] is more or less a one-off.”
“There are certainly cheaper sources of capital,” Horne continued. “But one thing [Beazer's stock issuance] does indicate is that the [equity] window is open for builders who need it.”
“I think Beazer’s timing was excellent,” said Standard Pacific Homes’ CEO Ken Campbell, whose own company has been busy restructuring its own debt to extend due dates. “There has been a runup of the home builders’ stock [prices] in anticipation that the worst is over,” he said. Bond prices, too, are up, Campbell added.
Indeed, Beazer’s stock price has risen substantially from a low of $0.25 in March 2009.
“They have created a longer runway for themselves so [that] now they can concentrate on earning their way out of their debt problems,” Campbell said.
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.
Learn more about markets featured in this article: Atlanta, GA.
