Multiple Disasters at WCI

There are disasters in the making at WCI. Let's takes a look.
On February 27th WCI reported wider-than-expected quarterly loss.

WCI Communities Inc. a Florida upscale home and condominium builder that may put itself up for sale, on Tuesday reported a wider-than-expected quarterly net loss, amid the weak U.S. housing market.

The company posted a quarterly net loss of $64.6 million, or $1.52 per share, versus a profit of $54.6 million, or $1.20 per share, in the year-earlier quarter.

Analysts had expected a net loss of $1.37 per share, according to Reuters Estimates.

Excluding the impact of $118.3 million for the write-off for deteriorating values of its land holdings and residential towers, WCI's income was $6.6 million or 18 cents per share.

Fourth-quarter revenue fell 37.6 percent to $526.3 million, the result of lower sales, higher cancellations of both homes and condominiums, the Bonita Springs, Florida company said.

Gross margins as a percentage of revenue were negative during the quarter, WCI said, a result of write-offs and greater sales cuts.

Earlier this month, WCI said it hired Goldman Sachs & Co. to explore strategic options, which included a possible sale, selling some assets or repurchasing stock. The move was viewed as a response to pressure from investors such as Carl Icahn, Hotchkiss & Wiley Capital Management and SAC Capital Advisors.

WCI last month adopted a shareholder rights plan, commonly known as a "poison pill" after investor Carl Icahn said he had boosted his stake in the company to 14.6 percent.

Meanwhile, billionaire investor Icahn said he and nine others will seek seats on the WCI board. WCI said Icahn's hand-picked slate would further his personal objectives and would be highly disruptive to the company.

A Realistic Look

1. No one in their right mind would want to but this company. Of course that does not exclude it from happening as insane leveraged buyouts of all sorts have been happening recently. However, I suspect the widening of credit spreads and recent global stock market action will put an end to such absurdities sooner rather than later.
2. Poison pills are an act of desperation.
3. The threat of repurchasing stock is a bluff. WCI has a serious cash flow problem and wasting money repurchasing stock would compound it.

Forecast Withdrawn

Later in the day WCI withdrew its 2007 earnings forecast.

Feb 27 WCI Communities Inc. a builder of upscale homes and high-rise apartment buildings, chiefly in Florida, withdrew its 2007 earnings forecast on Tuesday, citing difficulty in forecasting regional housing demand.

In November the company forecast 2007 earnings of $1 to $2 per share.

"Because of the lack of visibility on demand, cancellations that we've experienced ... we're withdrawing the guidance that we provided previously and believe that the most important metrics for WCI to focus on during 2007 is cash flow and debt reduction," Jerry Starkey, president and chief executive, said during a conference call with analysts.

Reasons for withdrawing forecast

• No visibility
• Cancellations exceeding closings
• Difficulty in forecasting regional demand
• Wants to focus on cash flow and debt reduction

Liquidity Crunch

Is there a liquidity crunch at WCI? Rodger Rafter on The Market Traders offered these thoughts:

WCI wants to generate $1 billion in cash flow from operations this year. Last year they burned $490 million, and they burned smaller amounts in 2004 and 2005, so that would be quite a turn around. Indeed, for many years builders were content to pile up inventory of land and homes for sale, along with mountatins of debt. They didn't care about cash from operations when there was plenty of cash from financing to be had.

Why the sudden need to generate cash?

My take is that the financing is drying up. If builders can't raise cash from operations while the losses are mounting, then they'll have an especially hard time getting lenders to extend their credit agreements. With today's write-offs, WCI is already in violation of their credit covenants. DHOM violated theirs last year and had to renegotiate at significantly higher interest rates. OHB is also on a mission to generate cash from operations.

WCI Releases Fourth Quarter and Full Year 2006 Earnings

Financial Highlights

• Full year 2006 net income: $9.0 million
• Full year 2006 diluted EPS: $0.21
• Full year 2006 figures include $139.5 million of pre-tax asset impairments & write-offs
• Full-year 2006 diluted EPS before impairments and write-downs: $2.16
• Fourth quarter net income: loss of $64.6 million
• Fourth quarter diluted EPS: loss of $1.52
• Fourth quarter figures include $118.3 million of pre-tax asset impairments & write-offs
• Fourth quarter diluted EPS before impairments and write-offs: $0.18
• 2006 year-end backlog: $911.2 million vs. $2.05 billion in 2005
• Projected 2007 cash flow from operations of approximately $1 billion
• Projected year-end 2007 net debt to capital ratio of approximately 50%

click on chart for a better view


"Our principle business focus in 2007 is on maximizing cash flow, reducing debt, and improving our financial flexibility. We expect to generate approximately $1 billion of cash flow from operations during 2007. While all aspects of our business will contribute to this cash flow objective, completing and closing nine towers during the year is the primary driver. We expect around $1 billion in collections from the closing of those nine towers and from the closing of the remaining sold units from three towers that were completed in December 2006."

WCI has not made its numbers for a year, the economy is headed into a recession, they have negative new orders for their latest quarter, and demand for condos is in the gutter. In addition they have "lack of visibility on demand" and are "withdrawing the guidance provided previously" yet somehow we are supposed to believe they are going to "complete and close nine towers" and that will be the "primary driver" enabling them to "generate approximately $1 billion of cash flow from operations during 2007." As ridiculous as it sounds, someone must believe that story or their stock would be trading closer to $2 than $20.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/