Why Icahn Is Betting On WCI's Florida Condos
From: Wall Street Journal
By MICHAEL CORKERY in Miami Beach
April 5, 2007; Page C1
Amid softening home prices, rising foreclosures and turmoil in the mortgage industry, billionaire financier Carl Icahn is making a contrarian bet on a troubled pocket of the U.S. housing market: high-end Florida condominiums.
How Mr. Icahn fares with his wager could help answer whether this state's housing downturn is a cloud that will soon blow over or a storm that will linger for years. The board of WCI Communities Inc., a home builder that has erected hundreds of high-rise condos along the Florida coast, could decide today whether to accept Mr. Icahn's tender offer of $22 a share for the builder that many consider a good barometer for the state's priciest real estate. That offer, which totals about $920 million, is slightly higher than WCI's $21.45 price yesterday in 4 p.m. New York Stock Exchange composite trading.
Mr. Icahn's pursuit of WCI has puzzled many on Wall Street who believe the Bonita Springs, Fla., company is highly exposed to the swelling glut of condos dotting Florida beaches and golf courses. In the fourth quarter, WCI, which has a market value of about $909 million, had more defaults on condos and cancellations of typical single-family homes, which it also builds, than it received orders for new homes.
Mr. Icahn appears to be counting on Florida real estate to make a comeback. "My investment philosophy, generally, with exceptions, is to buy something when no one wants it," he said yesterday. "We made a fairly large investment and took control of several energy companies seven or eight years ago when they were way down. Housing is somewhat analogous."
Mr. Icahn, who has put up a slate of nominees for the WCI board, declines to comment on what, if any, plans he has for the company. In a Jan. 16 Securities and Exchange Commission filing, Mr. Icahn said he beneficially held 14.5%, or 6.1 million shares, in WCI and that he intended to contact the company to discuss how to "unlock the inherent value" of its shares. His tender offer is conditioned on the WCI board pulling its recently enacted poison-pill provision intended to ward off hostile takeovers. WCI declined to comment, citing a "quiet period" after the tender offer.
In an interview before he made his March 23 tender offer, he said, "On a medium- to long-term basis, there are a lot of factors that will help Florida." Among them: Baby boomers reaching retirement age are moving south.
With prices as high as $11 million for some prime units, WCI condos seem suited to wealthy buyers. WCI also boasts a large amount of undeveloped land across Florida, with many parcels located near its current developments. Some investors believe that land will prove valuable when the Florida market recovers.
Mr. Icahn's offer comes at a crucial time for WCI and for the Florida condo market, generally. The company is expected to open about 10 condo developments across Florida this year. Many of the units within these developments were sold to investors several years ago, as the speculative market roared along. Now those buyers are choosing whether to close on their units and move in, or walk away from hefty deposits, or try to resell their condos in a softening market. WCI buyers put down average deposits of 18% on units with an average sales price of $1.2 million.
While the speculative overhang of newly constructed single-family homes may have peaked in some markets across the country, the full force of Florida's condo glut is still unfolding because, in many cases, it has taken two to three years to complete the high-rise buildings.
In Miami-Dade County alone, 8,000 condo units are expected to open this year, while an additional 12,000 units will open in 2008, followed by 5,500 units in 2009, says Jack McCabe, a housing consultant based in Deerfield Beach, Fla. Fewer than 11,000 condos were built in Miami-Dade between 1995 and 2004.
"It's not a pretty picture," Mr. McCabe says. "This stuff was built five years too soon. The first real wave of baby boomers will retire in 2010 and Florida is going to be one of the most vibrant markets. But before that, we are going to see a lot of people lose money."
Many investors agree. As of March 15, WCI was among the most heavily shorted stocks, with short interest comprising 55% of its float.
Short sellers bet that a stock price will fall. Many short investors are betting WCI will be hit by a wave of defaults, as buyers walk away from their deposits or buyers try to rescind their contracts through lawsuits.
"You have a dire situation," says Credit Suisse analyst Ivy Zelman, who has a "sell" rating on WCI. "There is too much inventory, not enough sales and price deflation. It's the perfect storm."
Charles May put down a $315,000 deposit on a WCI condo in Bal Harbour, near Miami, in December 2003. Before he decided to buy the approximately $1.55 million condo he says WCI sent a limousine to his house, delivering champagne and fancy bathrobes.
Three years later, the condo tower isn't finished and Mr. May expects he will have to resell for a loss. Mr. May is suing the company to get his deposit back, claiming the project is behind schedule.
WCI says its default rate, or rate of condo buyers who don't close on their unit and walk away from a deposit, this year may rise above its historical average of about 2%, but it doesn't expect that rate to exceed 10%. While on the rise, that measurement is much lower than what many other builders are experiencing.
Other builders have higher cancellations, in part because they require smaller deposits for single-family homes. Buyers of WCI units have been more reluctant to walk away from their bigger deposits.
A surge in defaults could be especially painful for WCI because the company needs cash to pay down its debt. WCI's debt-to-capital is roughly 66%, compared with an average of 44% among other builders, says Credit Suisse's Ms. Zelman.
To be sure, some analysts say WCI could limp along collecting as much cash as it can.
One source is the deposits that the company gets to keep when buyers walk. Some analysts also believe Mr. Icahn could refinance the company's debt and possibly sell off some of its land
By MICHAEL CORKERY in Miami Beach
April 5, 2007; Page C1
Amid softening home prices, rising foreclosures and turmoil in the mortgage industry, billionaire financier Carl Icahn is making a contrarian bet on a troubled pocket of the U.S. housing market: high-end Florida condominiums.
How Mr. Icahn fares with his wager could help answer whether this state's housing downturn is a cloud that will soon blow over or a storm that will linger for years. The board of WCI Communities Inc., a home builder that has erected hundreds of high-rise condos along the Florida coast, could decide today whether to accept Mr. Icahn's tender offer of $22 a share for the builder that many consider a good barometer for the state's priciest real estate. That offer, which totals about $920 million, is slightly higher than WCI's $21.45 price yesterday in 4 p.m. New York Stock Exchange composite trading.
Mr. Icahn's pursuit of WCI has puzzled many on Wall Street who believe the Bonita Springs, Fla., company is highly exposed to the swelling glut of condos dotting Florida beaches and golf courses. In the fourth quarter, WCI, which has a market value of about $909 million, had more defaults on condos and cancellations of typical single-family homes, which it also builds, than it received orders for new homes.
Mr. Icahn appears to be counting on Florida real estate to make a comeback. "My investment philosophy, generally, with exceptions, is to buy something when no one wants it," he said yesterday. "We made a fairly large investment and took control of several energy companies seven or eight years ago when they were way down. Housing is somewhat analogous."
Mr. Icahn, who has put up a slate of nominees for the WCI board, declines to comment on what, if any, plans he has for the company. In a Jan. 16 Securities and Exchange Commission filing, Mr. Icahn said he beneficially held 14.5%, or 6.1 million shares, in WCI and that he intended to contact the company to discuss how to "unlock the inherent value" of its shares. His tender offer is conditioned on the WCI board pulling its recently enacted poison-pill provision intended to ward off hostile takeovers. WCI declined to comment, citing a "quiet period" after the tender offer.
In an interview before he made his March 23 tender offer, he said, "On a medium- to long-term basis, there are a lot of factors that will help Florida." Among them: Baby boomers reaching retirement age are moving south.
With prices as high as $11 million for some prime units, WCI condos seem suited to wealthy buyers. WCI also boasts a large amount of undeveloped land across Florida, with many parcels located near its current developments. Some investors believe that land will prove valuable when the Florida market recovers.
Mr. Icahn's offer comes at a crucial time for WCI and for the Florida condo market, generally. The company is expected to open about 10 condo developments across Florida this year. Many of the units within these developments were sold to investors several years ago, as the speculative market roared along. Now those buyers are choosing whether to close on their units and move in, or walk away from hefty deposits, or try to resell their condos in a softening market. WCI buyers put down average deposits of 18% on units with an average sales price of $1.2 million.
While the speculative overhang of newly constructed single-family homes may have peaked in some markets across the country, the full force of Florida's condo glut is still unfolding because, in many cases, it has taken two to three years to complete the high-rise buildings.
In Miami-Dade County alone, 8,000 condo units are expected to open this year, while an additional 12,000 units will open in 2008, followed by 5,500 units in 2009, says Jack McCabe, a housing consultant based in Deerfield Beach, Fla. Fewer than 11,000 condos were built in Miami-Dade between 1995 and 2004.
"It's not a pretty picture," Mr. McCabe says. "This stuff was built five years too soon. The first real wave of baby boomers will retire in 2010 and Florida is going to be one of the most vibrant markets. But before that, we are going to see a lot of people lose money."
Many investors agree. As of March 15, WCI was among the most heavily shorted stocks, with short interest comprising 55% of its float.
Short sellers bet that a stock price will fall. Many short investors are betting WCI will be hit by a wave of defaults, as buyers walk away from their deposits or buyers try to rescind their contracts through lawsuits.
"You have a dire situation," says Credit Suisse analyst Ivy Zelman, who has a "sell" rating on WCI. "There is too much inventory, not enough sales and price deflation. It's the perfect storm."
Charles May put down a $315,000 deposit on a WCI condo in Bal Harbour, near Miami, in December 2003. Before he decided to buy the approximately $1.55 million condo he says WCI sent a limousine to his house, delivering champagne and fancy bathrobes.
Three years later, the condo tower isn't finished and Mr. May expects he will have to resell for a loss. Mr. May is suing the company to get his deposit back, claiming the project is behind schedule.
WCI says its default rate, or rate of condo buyers who don't close on their unit and walk away from a deposit, this year may rise above its historical average of about 2%, but it doesn't expect that rate to exceed 10%. While on the rise, that measurement is much lower than what many other builders are experiencing.
Other builders have higher cancellations, in part because they require smaller deposits for single-family homes. Buyers of WCI units have been more reluctant to walk away from their bigger deposits.
A surge in defaults could be especially painful for WCI because the company needs cash to pay down its debt. WCI's debt-to-capital is roughly 66%, compared with an average of 44% among other builders, says Credit Suisse's Ms. Zelman.
To be sure, some analysts say WCI could limp along collecting as much cash as it can.
One source is the deposits that the company gets to keep when buyers walk. Some analysts also believe Mr. Icahn could refinance the company's debt and possibly sell off some of its land
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