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REVIEW SUMMARY
Company. WCI Communities
Industry. Homebuilding
Key. A corporate reputation can be rehabilitated if the company can deliver a quality product.
Can WCI Communities salvage its reputation?
In a surprise turn, the creditors who control the Bonita Springs-based homebuilding company are betting that it can reemerge from the wreckage of bankruptcy reorganization as a Florida-focused builder of mid-priced homes.
Most observers believed creditors were engineering a liquidation of the company to pay off its debts and few ever expected WCI to survive and build homes again. Until a few months ago, WCI did nothing to dispel that impression as it quietly sold off assets to raise cash while shunning publicity.
Since the economic downturn plunged it into financial disaster, WCI alienated every constituency it had on the Gulf Coast. It wiped out shareholders, stuck several hundred homeowners with Chinese drywall problems, laid off longtime employees and damaged relationships with suppliers.
But as tarnished as WCI's reputation is today, current owners say that will fade once the homebuilding recovery is firmly underway. It has launched a public relations and marketing effort to try to regain the luster it once held.
“In my experience monitoring reputation, once you start delivering a high-quality product again, the market has a short memory,” says John Peshkin, the former CEO of the North American operations of homebuilder Taylor Woodrow who is now managing principal of Vanguard LLC, a private real-estate investment group in Sarasota. Peshkin also is a member of the board of directors of WCI.
Certainly, Florida has had its share of companies that have recovered from real estate busts and mismanagement. Peshkin points to development company Arvida as one example of a firm that bounced back several times from corporate calamity. “They had a lot of problems at one time and they came back,” Peshkin says. “I think the same thing can be true of WCI.”
In fact, executives are so confident that they can restore WCI's reputation that they don't plan to change the company's name. They say focus groups conducted with community residents indicate they're happy with their home purchase. “Remember WCI for what it was,” Peshkin says. “I see the brand as a very significant value add.”
WCI has its roots in Naples, when it was known as Westinghouse Communities. Tampa developer Al Hoffman, whose Florida Design Communities successfully developed projects such as Sun City Center, acquired the real estate arm of Westinghouse Electric in 1995 and took the company public in 2002.
The company's troubles started after its shares started trading on the New York Stock Exchange and Hoffman left the company to become U.S. Ambassador to Portugal, presciently selling his stake in the company in 2005. WCI's headlong plunge into condo construction ultimately was its undoing in the economic downturn, wiping out shareholders after the board spurned an offer by New York investor Carl Icahn for $22 a share in the spring of 2007.
While Wall Street provided the low-cost capital to grow when it went public, WCI's current president and CEO, David Fry, 50, says quarterly earnings demands by short-term investors and analyst pressure to expand into the Northeast presented an “inherent conflict” with serving customers well over the long term. “I can access capital through the private markets as well,” says Fry.
In fact, that's just what the company plans to do. Fry says he'll present a recapitalization plan to the board within the next few weeks to help restart homebuilding operations and pay off a substantial portion of the new debt that was issued after WCI emerged from bankruptcy reorganization in September. Fry declined to provide details of the plan until the board reviews and approves it.
Fry says WCI will refocus on Florida, though it won't build high-end luxury homes or low-end housing, selling lots to builders who specialize in those markets instead. It also plans to pull out of the Northeast, where it mistakenly ventured during the boom to diversify its operations. It will continue to build homes in the $200,000 to $1 million price range and target customers it knows well: retirees, second-home and move-up buyers.
Another shot
As it turns out, WCI's creditors decided the company was worth more alive than carved up.
That realization came about in the last few months, says Patrick Bartels Jr., vice president of Monarch Alternative Capital, a New York City hedge fund that bought WCI distressed debt and is now the company's largest shareholder. “There's no question whether or not Florida will come back,” Bartels says. “The question is how long it will take.”
While it may take as long as two years or more for Florida's real estate to recover, Bartels says there are pockets of opportunity for moderately priced homes. “Demand will return quicker at the right price point,” he says.
Bartels brushes off the hits WCI took to its reputation in bankruptcy court because it's now under new ownership and management. “We still believe in the WCI brand.”
In the bankruptcy reorganization, the secured creditors — a group of banks and private funds — agreed to eliminate more than $2 billion in debt. In exchange, they received nearly all the company's newly issued equity and $450 million in new debt.
Shareholders of the company before it filed bankruptcy, which included former WCI Chairman Don Ackerman, lost their investment and unsecured creditors got a sliver of equity that nonetheless has potential to grow if the company can be successful.
Among the unsecured creditors are victims of Chinese drywall in more than 200 homes. A special trust was established for the drywall problems with $900,000 in cash and 3% of the company's new equity, giving it the sole rights to recover legal damages from drywall manufacturers.
But despite the brutal terms, the reorganization plan gave WCI new life, though Fry says it wasn't until a few months ago that creditors began contemplating the viability of the company as a homebuilder again. Now a private company, Fry declined to name the eight principal shareholders who control 50% except for Monarch, which owns 20%.
The capital raise that Fry is exploring will be used in part to retire the first tranche of the new debt totaling $300 million. That is the most onerous liability on WCI's balance sheet because its covenants drain much of the free cash the company generates today.
Terms of any new debt would likely give the company more freedom to decide how it spends its cash, including building new homes. The company generated $500 million in revenues in 2009 and Fry expects that number to be lower in 2010 but rebound in 2011 when the company has homes to sell.
Already, the company has sold seven large parcels, generating just more than $95 million. Tampa-based Minto Communities' acquisition of WCI's remaining land in Sun City was among those. In a surprising twist, Hoffman, who has since retired to Palm Beach and raised investor money with business partner Charlie Brasington to acquire distressed real estate, also was a bidder for the Sun City assets, Fry says.
WCI has also sold off most of its bloated inventory of 900 homes, many of them condos. Out of the 758 homes it sold in 2009, 478 were sold to individual users and the rest to investors buying condos in bulk transactions.
Those large-parcel and home sales have helped WCI trim its debt to $230 million today. The real estate inventory on the company's balance sheet now totals $325 million, a result of write-downs and sales, Fry says. That compares to just over $1 billion in real estate listed in its last publicly available annual report on Dec. 31, 2008 and $1.8 billion on Dec. 31, 2007. “Some condo values dropped 50%,” Fry says.
Building homes again
Even after selling land and homes to pay down its debt, WCI will still have 12,000 lots on about 9,000 acres, Fry says. It plans to start building homes in five of its 19 communities, including four on the Gulf Coast: Venetian Golf & River Club in Venice, Pelican Preserve in Fort Myers, and Tiburon and Manchester Square in Naples.
While the Florida markets remain flooded with existing homes for sale, Fry says there are pockets of opportunity. For example, he says Pelican Preserve neighborhood in Fort Myers has largely avoided the foreclosure crisis. “The market is in balance and distressed inventory is limited,” he says. “We know there's pent-up demand.”
But except for a few pockets, Florida generally continues to be swamped with foreclosures and existing homes that cost much less than new construction. “The foreclosures have got to stop and that's a year or two away,” Fry acknowledges. “The higher-priced stuff has to readjust.”
Homes valued above $500,000 are likely to come down further, which is one reason why WCI plans to stay out of the luxury market and sell lots to custom builders instead. Before the crash, WCI sold homes in Sun City for $150,000 to mansions in Palm Beach for $5 million. “That is not an efficient way to build,” Fry says.
Customers stung by the financial crisis are much more sensitive to price. “We've got a different market,” Fry says. “Luxury has been redefined.”
And despite the fact that many suppliers were unsecured creditors in bankruptcy, Fry says many are eager to work again with WCI. “New guys have come to the table as well,” he says. Of course, few are likely to grumble about the past when they're desperate for business.
The company's future residential developments will probably look different, too. Instead of a golf club, which is costly to maintain, WCI is exploring other kinds of amenities such as nature trails and preserves. “Used to be you could sell $100,000 memberships,” Fry says. “They're not going to be sustained.”
Fry's background isn't in homebuilding, but it will be his job to restart the home-construction side of the business. Fry rose to WCI's top executive ranks through the company's amenities division. Prior to joining WCI in 1995, Fry was golf operations director for South Seas Resort Co. on Captiva.
Fry, whose reputation as a good communicator is a departure from his predecessor CEO Jerry Starkey, says he's relieved to move beyond the company's survival.
“We're in the middle of a strategic planning process,” he says, smiling. The five-year plan has “some pretty interesting growth scenarios,” he hints.
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