Kimball Hill - Residential, Chicago-area

Implosion, 2008-04-23:

Kimball Hill has filed Chapter 11 bankruptcy. In statement posted on its web site Kimball Hill said:

While its asset base remains strong, the Company has been impacted by many of the factors which have adversely impacted the homebuilding industry over the last 18 months. These factors have included the downturn in the housing market, severe challenges in the credit and mortgage markets, diminished consumer confidence, increased foreclosures and higher cancellation rates.

"Today's decision was difficult to make, but we believe it is in the best interests of all of our stakeholders," said Ken Love, president and CEO. "Filing for Chapter 11 will allow us to restructure our debt and other obligations, bringing our capital structure in line with current market realities."

Mr. Love noted that in response to the challenging housing market, Kimball Hill has already successfully implemented a number of initiatives aimed at improving operating performance, including reducing overhead costs and the recent decision to exit the Florida market by the end of 2008.

"Our issues are financial, not operational. The next step in our restructuring is to strengthen our capital structure and position our company to weather the current storm that has hit the housing and capital markets. We have had significant discussions with potential plan sponsors and our senior lenders already, and we hope to agree on a reorganization plan in the next 90 days," said Mr. Love. "We will continue to sell, build and deliver homes without interruption."

"Financial, not operational"—that about says it all. Very telling regarding the nature of the current crisis.

We wish the best to all employees and customers of Kimball Hill and hope this will be resolved for them with a minimum of pain and dislocation.

Ailing Post, 2008-02-17:

Kimball Hill, while a Chicago-centric builder, appears to have grown too aggressively with developments and joint ventures around the country in an attempt to opportunistically "ride the bubble". That business decision has now burned them badly. Quoting from the first article above:

A key developer of several Northwest and West Chicago suburbs, including Rolling Meadows, Kimball Hill has been laboring under the weight of a $500 million line of credit and a simultaneous housing depression. After expanding nationally in recent years to hot housing markets in California, Florida, Nevada and Texas, those same markets are now suffering the most in the worst housing downturn in years.

Kimball Hill also revealed in this week's filings it is in a joint venture in Nevada for two tracts of land on which it now maintains significant debt. The joint agreement calls for additional financial transactions in the coming weeks, involving additional debt, which could result in the default of that agreement, too.

At least one observer with experience in corporate turnarounds is quite bearish on the company:

"They are all going to fall very shortly," said Brandt, chief executive officer of DSI, an international turnaround consulting firm.

Brandt predicted Friday Kimball Hill will file for Chapter 11 bankruptcy protection within weeks.

"Their reorganization potential is not good," said Brandt, who has handled complicated home developer bankruptcies in the past.

Kimball Hill is another unfortunate case of company which is so longstanding as to nearly be an institution, today being done in (or "doing itself in") through historic credit bubble excess.

The company was not incorporated until 1969, but actually began in 1953 when a lawyer named Kimball Hill bought up land ear marked to be a golf course. On the would-be greens and fairways he built what they don't build today: community. Conducting business in stark contrast to the Countrywide shark sellers of today, Hill built homes that

'..., were affordable and if the family couldn't pay the 10 percent down, $10 or $25 would do'

Returning WWII vets and generations thereafter came to thrive in the booming suburb built by Kimball Hill—"Rolling Meadows." It would be fair to say Hill poured his self into the town he built, and that it is reflected in ways not measured on the balance sheet or metrics seen by analysts and rating agencies.

Hill's influence went beyond subdivision planning. He extended streets and then paved and named them -- mostly after birds.

He was the driving force behind the incorporation of Rolling Meadows, and the only reason the town wasn't named for him was because he didn't want it.'

Hill's son David took over the helm in 1969 and has since guided the ship steady. In 2005 the company reported record margins and seemed well prepared to weather another impending housing downturn. As recently as January 2006 the company was seemingly in control of its fate:

'With quick wits and fast feet, Kimball Hill Homes Chairman David K. Hill survived the crash of housing markets in California, Nevada, Florida and Illinois during 2006. Now he's gathering his energy to deliver a knockout blow in 2007.'

But the first sign something was going wrong in the above is that the company apparently thought that what happened in 2006 was "the crash". Now we know that was not the case. Later the company admitted that in the first quarter of 2006, the first counter-punch was in fact delivered:

' "Our wake-up call came in January 2006," he says now. "We were lulled to sleep during our first quarter of fiscal 2006 (October through December 2005) because we had the best margin closings in the history of the company. When we looked at declining sales, it was easy to attribute them to seasonal factors. "But in January, we saw the handwriting on the wall. '

And into year-end 2007 the reeling builder, pinned against the ropes with no way out, hemmoraged $221 million. But there was one more blow delt:

'...,its net worth fell below levels for one of the covenants in its senior credit facility. Being in violation of that covenant limits the company's access to an estimated $100 million within that $500 million credit facility, which is why Standard & Poor's and Moody's last week downgraded their respective credit ratings of Kimball Hill, and S&P placed the builder on Credit Watch. " '

These sort of events sealed the downward-spiral dynamic for Kimball Hill, from which it has found no reprieve, as every indication is that the market is nowhere near bottom.