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Coffee Talk
Business Observer Friday, Jan. 12, 2007 13 years ago

Coffee Talk

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When John Deanthony agreed Jan. 8 to sell his Sarasota-based multimillion-dollar air-conditioning business, he says it wasn't the slumping Gulf Coast residential construction market that got him. Instead, it was something even more out of his control: age.The nation's economy will slow this year, but there won't be a recession, says David Jones, the chairman of Fort Myers-based Investors' Security Trust. Epicurean Life, a Sarasota-based conglomerate of upscale restaurants, grocery stores and gift shops put up for sale three months ago, is attracting a unique lot of potential buyers, from local to international players - many, apparently with the resources to consider the $31 million price tag. It's rare when investment bank analysts recommend investors sell a stock, especially one that's rewarded shareholders so well in recent years.The shares of Bonita Springs-based homebuilder WCI Communities rose nearly 3% on Jan. 9 after Hotchkis and Wiley Capital Management announced they had amassed nearly 16% of the company's stock.Despite the significant slowing of new-home sales, investors are paying a slight premium to buy bonds of the Ave Maria residential development project in eastern Collier County, recent data shows.The rush is on to file for building-permit applications in Lee County before impact fees rise substantially in February.Not such a bad year for Tampa home sales

Coffee Talk

+ To avoid market slowdown: retire

When John Deanthony agreed Jan. 8 to sell his Sarasota-based multimillion-dollar air-conditioning business, he says it wasn't the slumping Gulf Coast residential construction market that got him. Instead, it was something even more out of his control: age.

Deanthony turned 63 years old a few months ago, and has been looking to retire and, in the process, sell off Consolidated Heated & Cooling, which he's owned since 1990. The company, originally named Williams Bros., has been operating in Sarasota County since the 1950s and is one of the first companies in the area to focus primarily on air-conditioning repair and maintenance.

Deanthony sold the firm to Bradenton-based Southern Comfort Heating & Cooling, one of the largest and fastest growing air-conditioning companies in the Sarasota-Manatee market. (See Review, 04/07/2006). Southern Comfort revenues have grown at an annual average rate of 30% since 2001, and it generated $9 million in 2006 revenues. It has grown from 17 employees in 2001 to 55.

Southern Comfort general manager Danny Marshall says as the real estate market slowdown continues, his company has been looking to grow through acquisitions - but only ones that meet certain thresholds, such as the company being at least 20 years old and focusing on repair service.

After a quick courtship late last year, both Marshall and Deanthony tell Coffee Talk that the deal, scheduled to close Feb. 1, fits the criteria. What's more, it will help Southern Comfort grow its presence in both the Sarasota market and in new construction, areas Consolidated thrived in during its heyday.

Consolidated's 17 employees will be able to retain their jobs with Southern Comfort. Neither party would disclose the purchase price.

Despite Deanthony's insistence otherwise, the deal is somewhat connected to the real estate market slump. Consolidated's 2006 revenues of about $4 million were off 25% from the $5 million the previous year. And 2007 revenues are not expected to be more than $2.5 million, off 100% from 2005.

+ Jones forecasts slower economy

The nation's economy will slow this year, but there won't be a recession, says David Jones, the chairman of Fort Myers-based Investors' Security Trust.

"We're going to grow at 2.5% GDP, down from 3.2%," says Jones, the former chairman and chief economist of New York bond firm Aubrey G. Lanston & Co. and an author of four books about the Federal Reserve.

Typically, Florida's economy lags behind the rest of the nation and Jones expects the slowdown to hit the state by the end of the year. "It'll take another six to 12 months before this area bottoms," he says.

Jones doesn't forecast a cut in interest rates any time soon. That's because the Federal Reserve will want to see that inflation is well within 1% to 2%. "The Fed is quite hawkish," Jones says.

However, once inflation is under control, the Federal Reserve will likely lower short-term rates to 4.75% from the current 5.25% by the end of 2007, Jones says. Long-term rates will remain slightly below 4.5%, he notes.

One possible wrinkle in that scenario is if foreign investors reduce their U.S. bond portfolios. "Watch long-term interest rates," Jones says. "You'll start to see interest rates go up if foreigners start dumping bonds."

The economy has started to slow as the impact from the housing downturn starts to spread. Jones says commercial construction is flat, consumer confidence is softening and car sales are down.

Home prices have weakened considerably, providing hope that a housing recovery is in sight. "That means the large inventories will be cleaned up sooner," he says. The key to the recovery of the housing market is that long-term mortgage rates and unemployment are still relatively low.

Although Jones is an expert in bonds, his forecast for stocks is for single-digit percentage gains in the broad market this year because of a slowing economy.

+ Restaurant, grocery conglomerate seeks buyer

Epicurean Life, a Sarasota-based conglomerate of upscale restaurants, grocery stores and gift shops put up for sale three months ago, is attracting a unique lot of potential buyers, from local to international players - many, apparently with the resources to consider the $31 million price tag.

Despite the positive preliminary interest though, there haven't been any formal legitimate offers, either for the whole package or individual stores.

Lee DeLieto Jr., part of the Michael Saunders & Co. real estate brokerage team listing the sale, hopes to begin reeling in more serious buyers, starting with a new marketing push that includes glossy ads in the Wall Street Journal and the Robb Report.

"Hopefully, we'll get a solid offer in the next few months," DeLieto tells Coffee Talk. "This isn't an inexpensive purchase."

Epicurean Life has several businesses spread over two locations: There's the older version in Sarasota's Southside Village, which includes a Morton's Gourmet Market, Annabelle's Home & Kitchen and the Tasting Room bar and restaurant.

The second spot anchors the front end of Lakewood Ranch's new Main Street shopping plaza, where there's also a Fred's Restaurant, in addition to a Morton's and an Annabelle's.

The sellers - Sarasota entrepreneur Bill Griffin and his family - are willing to break up the pieces for the right buyer, DeLieto says. The key, though, is finding a buyer that will keep the name and high-end reputations intact, as well as look to grow the business to other locations with similar demographics, such as Naples.

DeLieto declined to drop names of any potential buyers. He says there's been a balanced mix between straight-up investors with a hands-off approach to restaurateurs who would look to be more involved. There have been a few international prospects too, a fact DeLieto attributes to the worldly product mix at Morton's that has fostered a loyal foreign clientele.

+ Analyst says it's time to sell Chico's

It's rare when investment bank analysts recommend investors sell a stock, especially one that's rewarded shareholders so well in recent years.

But Pacific Growth Equities analyst Christine Chen did just that by downgrading Fort Myers-based women's apparel company Chico's FAS from "neutral" to "sell."

In a note to clients, Chen says the stock could fall another 15% to $17 a share as she expects the company to continue to report disappointing sales results this year. The stock recently traded at $20 a share.

In particular, Chen says Chico's faces increasing competition from specialty retailers such as Coldwater Creek and Anne Taylor as well as department stores that have spruced up their merchandise.

Chen estimates any recovery in sales won't take place until the second half of 2007.

Chico's reported December sales results for the five-week period ended Dec. 30 increased 11.9% to $193.2 million, from $172.6 million for the prior year's five-week period ended Dec. 31, 2005. However, comparable store sales for the company-owned stores decreased 2% for the same five-week period ended Dec. 30.

+ WCI stock jumps, investor warns of changes

The shares of Bonita Springs-based homebuilder WCI Communities rose nearly 3% on Jan. 9 after Hotchkis and Wiley Capital Management announced they had amassed nearly 16% of the company's stock.

The firm is the latest in a series of big-name investors buying WCI's stock. Recent investors who have acquired large stakes in the company include corporate raider Carl Icahn and hedge-fund tycoon Steve Cohen.

The Los Angeles-based money management firm says in a securities filing that it has decided to "engage in constructive discussions with [WCI] about its business and affairs which may include discussing the structure of management and the board of directors. Although these discussions are not expected or intended to result in acquiring control of [WCI], they could be regarded as influencing it."

Hotchkis and Wiley, which manages mutual funds and money for wealthy individuals, takes a value-oriented approach to investing. That means the firm seeks companies that are undervalued with the expectation that other investors will eventually come to the same conclusion.

+ Ave Maria bonds trade at slight premium

Despite the significant slowing of new-home sales, investors are paying a slight premium to buy bonds of the Ave Maria residential development project in eastern Collier County, recent data shows.

For example, one customer recently purchased more than $1 million worth of Ave Maria's bonds due in November 2012 for a yield of 4.72%, according to data from the Bond Market Association. The recently issued bonds have a coupon of 4.8%.

Still, investors are being compensated for the extra risk they're taking because the tax-free bonds are not rated or insured. Currently, AAA-rated tax-free bonds of similar maturity are yielding 3.61%, according to Standard & Poor's.

The development is a partnership between Domino's Pizza founder Thomas Monaghan and Barron Collier Cos. Pulte Homes plans build the majority of the 8,464 homes in the development, which will include the new campus of Ave Maria University.

+ Lee raises tax on builders

The rush is on to file for building-permit applications in Lee County before impact fees rise substantially in February.

The Lee County commission voted recently to raise impact fees, a tax on new construction that is designed to pay for new roads and schools. In some cases, those fees will more than triple.

Commercial builders are going to be among the hardest hit, according to Lee County Development Services. For example, the impact fee for new medical-office space will rise from about $8,000 today to as much as $24,714 per 1,000 square feet of space starting in February. The office-space impact fees will rise from $2,705 per 1,000 square feet to as high as $7,724.

There's not much time left. Builders who file for permits on or after Feb. 1 will have to pay the higher impact fees.

+ Not such a bad year for Tampa home sales

TAMPA BAY US HOMES SALES

2003 2004 2005 2006

Sales 1,755 1,832 1,868 1,723

Source: US Home Corp., a division of Lennar Corp.

US Home Corp. President Mark Metheny says the Tampa division fared well in 2006, considering the softness of the residential real estate market, and he's optimistic about the New Year.

The Tampa Bay division, which includes Hillsborough, Pinellas, Pasco, Polk and Hernando counties, sold 1,723 homes in 23 communities at an average price of $250,000. That's only a 7.7% decline in sales from 2005, which was one of the best years ever for the company.

The three most popular US Home communities were Suncoast Meadows located in Land O' Lakes in Pasco County, where the home-builder sold 120 homes in 2006, Bridgewater in Wesley Chapel, where US Home sold 107 new homes, and south Hillsborough County's Carriage Pointe in Ruskin, where 105 new homes sold.

Metheny's group had a great August and good September, thanks to a promotion that included an generator with each home purchase, he says.

In addition, the builder lowered prices on the average 10% to 15% in '06, he says, adding: "We had a lot of homes started so we priced at market."

Those lower prices don't bode well for US Home's parent company, Miami-based Lennar Corp., one of the nation's largest builders. The company announced earlier this month it expected a fourth-quarter loss as the company reduces the value of its inventory.

Lennar projects a loss within a range of 88 cents per share to $1.28 for its quarter ended Nov. 30 after a pretax charge of up to $500-million for the inventory devaluation.

"At the end of the day, it's not going to look as pretty on paper," Metheny says.

Even though home prices have decreased, the price of building has continued to rise, especially as counties raise impact fees by thousands of dollars, he says.

Metheny predicts Tampa Bay home prices will not continue the downward trek this year. And he says '06 was still a good year historically. It only paled in comparison to 2003 through 2005, three of the best years in history for residential real estate.

Tampa's US Home now has about four months of inventory, which is the amount the division likes to carry, he says.

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