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WCI Communities - Luxury home and condo builder

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2008-08-04

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stories: yahoo.com, reuters.com

Public home builder WCI Communities, Inc. has filed for Chapter 11 bankruptcy protection. WCI was ranked the 40th largest home builder in 2007, closing approximately 1,650 houses that year per builderonline.com.

From WCI's press release on the filing:

WCI Communities, Inc., a leading developer, builder and seller of luxury homes and tower units, announced today that it and approximately 130 of its wholly-owned subsidiaries had filed voluntary petitions to restructure their debt and capital. Excluded from the filing is the company's Watermark real estate brokerage, which does business as Prudential Florida WCI Realty, as well as its WCI Mortgage business and certain other joint ventures in which WCI is a partner.

WCI describes itself as a company with "more than 50 years experience". They have operations across the east coast (Florida, New York, New Jersey, Connecticut, Massachusetts, Virginia and Maryland) and employ some 1,800 indiividuals.

The filing coincides with the replacement of CEO Jerry Starkey with David Fry.

An article published at Reuters goes into further detail on the causes of WCI's bankruptcy. Specifically, it seems that WCI defaulted on debt covenants pertaining to their revolving credit facility, of which WCI had drawn approximately $760 million (Reuters).

Interestingly, WCI imploded virtually to the day we expected (see below), based on their convertibles due tomorrow.

Ailing Writeup, 2008-05-10:

Someone (Raymond James) has finally come out and said it: WCI is twirling in a death spiral. The company has no hope of profits till well beyond 2009, may have to mark down deferred tax assets, has debt of $1.7B (83.3% of net capitalization), and continues to suffer higher than normal levels of cancellations. WCI has $110M in cash, as of March.

Further:

...lenders are completing appraisals of assets secured under the borrowing base, and management (WCI) acknowledged many of those new property values are likely to come back below current book value," Puryear said.

The difference in values would reduce borrowing base availability further and could trigger mandatory prepayments, he added in a note to clients.

A poster on our forums threw in an interesting little tidbit:

What is not mentioned here is $125 million in convertible debt that has a put date of 8/5/08. They acknowledge that they do not have the money to address this. While they are making an attempt to renegotiate this debt, all of this together is kind of the proverbial snowball rolling down the hill.

That does indeed seem like the last sort of problem they need.

WCI was ranked #40 on BuilderOnline's Top 100 for 2006. A provocative excerpt from that article follows:

There's just no getting around the fact that 2006 was a horrendous year for WCI Communities. With the bulk of its business concentrated in the extremely soft Florida market, the Bonita Springs, Fla.–based builder reported a 95 percent drop in profits over the previous year. Cancellations and defaults resulted in negative net sales in the fourth quarter.

“When America wakes up from this slump and this fear of buying homes, I think we'll see Florida return to one of the top home building markets in the country, as it has been historically,” CEO Jerry Starkey told industry analysts in its fourth-quarter earnings call.

Starkey never stopped waiting for "America to wake up" from its irrational fear (also known as realizing that home prices are insanely inflated and disconnected from fundamentals).

Carl Icahn was kind enough to make a near-$1B, $22/share bid for WCI in early 2007. WCI rejected it—perhaps miffed by the fact that the offer called for the ouster of geniuses like Starkey and a good chunk of the board. In fact, to show their contempt, WCI adopted a poison pill limiting the voting power of large shareholders (Icahn was accumulating a stake of the company at market prices).

This defense successfully caused the stock to fall to the $7 range within a few months.

By August, WCI relented, and red-faced, let Icahn (who had assembled a near 15% stake) put three directors on its board, and disabled the poison pill.

None of this ended up solving the company's problems, which were apparently of a more fundamental nature having to do with... the market (and WCI's exposure to it).

Incidentally, both Bill Gates and Martin Schwartz also had sizeable stakes in WCI.

In a near-Shakespearan tragedy, with the stock now around $2, all of the above (billionaires and WCI itself) are looking (and probably feeling) rather foolish.

Also slaughtered: countless investors who thought throwing money into homebuilders monkey-see-monkey-do after Gates and Icahn was a great idea.

Call this one an "imminent implode".

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Important: This company is on our list of builder operations that have "imploded" (see also ailing lenders). This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid declines in enterprise value; or abnormal "bail-out" by corporate parents or peers in order to continue to operate. The builders may be residential or commercial.