Standard Pacific Homes - Residential

The Irvine-CA based Standard Pacific Homes, the subject of bankrupcy rumors throughout 2007, is still scraping along. However, their full-year 2007 results (announced Feb. 4) leave little room for comfort, as the company lost $767M for the year, as compared with a gain of $123M in 2006. More on the nature of the losses from the linked article:

The value of the builder's 1,279 units in backlog plummeted 50 percent to $442.7 million. For the year, StanPac's average selling price softened by 6 percent to $377,000, and the availability of mortgages resulted in some "softening" in the sales of higher-priced homes, particularly in California.

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In the fourth quarter alone, StanPac lost $440.9 million, compared to a $98.4 million loss in fourth quarter 2006. That loss is attributable to $276 million in impairment charges on 62 projects, a $36 million increase in joint-venture related losses, and the set-aside of a $180.5 million deferred tax-asset reserve. Including discontinued operations in San Antonio and Tucson, Ariz., where StanPac exited last year, the company's total pretax impairment charges for 2007 were $1.09 billion.

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Zelman & Associates, an investment and research firm, estimates that the $281 million StanPac generated from land sales last year may have represented a 70 percent discount from what the company had originally paid for that land.

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Throughout 2007, and especially in the second half of last year, investors and analysts voiced concern about Standard Pacific's joint-venture exposure. In the fourth quarter, the company got out of six joint ventures and reduced JV-related debt by 39 percent to a still-high $771 million. Scarborough says he's confident that the company would continue to reduce JV debt through 2008.

Pretty grim. But there's more:

In the fourth quarter, the company's gross margins from its home building operations were negative 17 percent. During that quarter, the company was not in compliance with tangible net worth covenants for its $900 million revolving credit, and two term loans totaling $325 million. It has received a waiver of those covenants from its banks that extends through March 31.

To us—and apparently S&P—all this suggests a worsening rather than improving situation, but sure enough, some analysts disagree (perhaps they are comforted by the $235M tax refund all these losses will generate in 2008). We wonder what exactly the cash cow is going to be with the core business (building and selling homes) having switched to a money-loser. Given that, cash flow is currently coming from sales of JVs and other assets—at steep discounts, to boot. While the company may be able to stay afloat for a while on that plan, by definition it means continual hits to shareholder equity.

An improvement of SPF's trajectory seems like it would require the market to bounce back soon. Otherwise, in an environment of rising costs and falling home prices, we are at a loss to figure where SPF is going to generate profits from. In light of that harsh reality, creditors may not be willing to waive SPF's debt covenants next time around.