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Beazer Homes will likely take a USD 100m-USD 200m impairment charge on land and land option write-offs for 3Q07, said two analysts. Those charges should keep pressure on the company’s gross profit margin which have already shrunk to 5% for the second quarter ended March 2007 from 25% during the same period in 2006, said the two analysts and a buysider.
While the impairment charges will lower the company’s book value, they are not expected to have a major impact on the Georgia-based homebuilder’s ability to make its USD 130m in coupon payments for the 2007 calendar year, said an investor. The company had USD 232.7m of borrowing capacity available on its revolver and USD 225m in cash on its balance sheet at the end of the fiscal second quarter.
Still, heightened housing sector related fears have taken a toll on the company’s bonds. Beazer’s USD 200m 8.625% senior notes due 2011 has fallen to 91 today, from par on 12 June, while its USD 350m 8.375% senior notes due 2012 have also fallen off from par in early June to 91.25 yesterday, according to MarketAxess. The company’s USD 340m 6.875% senior notes due 2015 fell to 85.5 yesterday from 93.75 on 6 June, and its USD 275m 8.125% senior notes traded at 98.75 on 16 July from 101 on 15 June.
The increased potential for near-term volatility in the bonds has also boosted levels of the company’s credit default swaps (CDS), said the third analyst and two investors. The bid/ask on its five-year CDS was 685bps/695bps yesterday, they all said. That level is 40bps wider than Tuesday, said a trader; and over 200bps wider than the previous 28 days, according to Markit. Aside from buying protection in the CDS market, several bondholders are hedging against further downside by buying puts in the company’s equity, said one of the investors. The company’s common shares traded today at USD 20.55.
Impairment charges and land options write-offs have been common with home-builders since the market began to soften in 2006. Beazer Homes leads the national homebuilders in money down on options at roughly 14%, said one of the sources. The next homebuilder with the second largest deposit percentage is Ryland Home at 13% and Meritage Homes at 11%, said the sources. Beazer could be more reluctant to take impairment charges because of the larger deposits it has already made on the land and land options, said the analyst.
“It’s fair to assume that if Beazer builds in the same market [as other homebuilders] and everyone is affected by the same problem, not writing off [land options] leaves more future write offs,” the analyst said.
However, larger deposits on options can increase Beazer’s leverage to renegotiate land prices when it executes the option, countered a buysider.
Homebuilders write down their deposits on options as a last resort, concurred two of the analysts. It is difficult for homebuilders to renegotiate down the pre-arranged execution prices of the options, the two analysts said. Land banks want to stick to the prearranged price because it is usually greater than the land’s present market value, the sources said.
“If you deposit more, it comes with greater flexibility,” said the buysider. The homebuilder can extend the option, perhaps until real estate values rebound, the buysider said.
Despite a slow housing market, compressed margins, and threat of larger write-offs, Beazer’s financials are still strong enough for it to avoid a near-term restructuring, said the sources. However, the company’s bonds could be volatile over the next several quarters as it deals with the sector related issues and potential headline risk from ongoing litigation, according to the sources.
Beazer is under investigation for fraud relating to its mortgage origination business unit by the Department of Justice in North Carolina and is a defendant in several class action lawsuits, said one of the analysts. The company is expected to receive further subpoenas from other assistant attorney generals, said the analyst and investor.
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