ED Magedson – Founder
K Hovnanian HomesRed Bank, New Jersey United States of America
d**n these builders, I can't continue with the series if they keep giving me these golden nuggets every day... This deal of the century is going to be a train wreck. KHOV is in my top 3 of bankruptcy alert now. Before I begin with tearing open KHOV's financials and explaining why they are doing it and the ramifications, let me first say that prior to March 2007 I didn't think there would be any bankruptcies in the public arena... maybe one (DHOM or TOA)... however, the mortgage crisis significantly cut demand and increased supply. I am a top down investor and the macroeconomic impact of the liquidity crisis is devestating to homebuilders... I am now projecting 4 bankruptcies of the 20 I follow... again... prior to March 2007 I probably would have said 0-1... Hovnanian is having a deal of the century because they are living paycheck to paycheck and are closer than most builders to bankruptcy. Bold statement? Yes. Foolish CEO? Yes. Even if KHOV makes it through the downturn they will be a shell of their former self....
How do builders get cash... issue equity, issue debt, tap credit lines, sell homes or sell land... On my first blog I tried to make it a no brainer for you fools that the obvious choice was to sell that massive land inventory position... but I tricked you by showing how it was overstated in my following blog posts...
KHOV would kill investors (such as LEV's attempt to issue stock) if they issued equity, plus who would buy it
Issue debt at junk ratings probably can't get done either again who would buy it... who is going to buy junk deb that sits behind (in position) to the 2 billion of notes already out there?
Tap credit lines.. ceo hovnanian will tell you he has 1.5b in revolving credit... ohh but you've already tapped 455 million on your revolver and have letters of credit on another 111m.... read the fine print in the 10Q... of the remaining 950m of the revolver KHOV can only borrow 132 million based on current inventory levels... hmmm i love reading the 10Q
They can't sell land because it is overstated, and I really don't feel like discussing this again.
Leaving only selling homes...what a concept!!!! The deal of the century revolves around 1,000 homes for sale which obviously are finished or near finished spec homes. If they can blow these out they will create a nice mountain of cash for 3 days.... that will be the peak of their cash. So why aren't other builders doing this? Because it is stupid!!!! Again this is why I single out Hovnanian's CEO for being one of the 2 dumbest CEOs in this downturn. Dugas being the other
By reducing prices 20%, you may blow out a majority of those homes... but what % of those homes will actually sell? maybe 70%...
You have 7,863 homes in backlog that haven't closed... how many of those people are going to want to retrade their contract and ask for the discount? You sold 700 homes by slashing and burning your price and getting cash.. now you have 7,863 homes that want that same discount... Foolish, you just slashed your prices so you can use that new found cash to give to the 10x as many homes in backlog??? You are giving away more cash when you take this deal of the century play and weigh it against the backlog future deals of the century
lenders are now doing appraisals using selling prices in your communities or surrounding new communities... So for those 7,683 homes in backlog, how many of those mortgages are going to fall through because the appraisal is substantially lower than contract price thanks to your deal of the century? The lender doesn't care about a deal of the century because he knows KHOV can come back a month later with another deal of the century... KHOV is doing significant damage to their community valuations.
Don't give me the KHOV can keep the deposits BS... Look at the 10Q, KHOV has 93 million in deposits on 2.83 billion in backlog (this is why you read 10Qs people)... that amounts to 3.2% of contract price... If you have 3.2% down on a 500,000 home or 15,000 and KHOV says go to hell we aren't giving you the 100,000 off and we are keeping your deposit... you respond "no you go to hell KHOV because I am not paying 500,000 for a home you just sold for 400,000". Thus creating more specs than your selling on the deal of the century
KHOVs cancellations as a percent of backlog was 19% last quarter (and this doesn't include the effects of the summer subprime liquidity crisis).... What percent of KHOVs backlog will become spec homes (inventory and not cash) if your at 19% plus the fallout from the liquidity crisis plus the deal of the century discounts making it significantly harder for backlog to get mortgages or easier for backlog to walk away from 3.2% deposits unless you reduce their price too?
KHOV did this sale, because they are in serious trouble... we are talking LEV, DHOM trouble... people, do not be fooled by the increase in cash in next quarters financials... and it won't be as much as you think... what you need to focus on is how far the backlog numbers drop and how inventory numbers are up.... don't believe me? Just wait until you see KHOVs next 10Q it will happen...
KHOV was getting a 15.9% gross margin with 11.9% SG&A prior to the liquidity crisis... throw in slash in burn and throw in huge debt burden.... these guys need a white knight and all they see around them are the black knights and vultures waiting for them to go under so they can pillage their assets at bankruptcy prices...
This is by far the dumbest move any builder has done/ Remember TMFKOPP you said builders probably will recover as long as they don't slash and burn....
Can we trust this builder to be here to repair our homes?? This company is very slow to pay its vendors and other bills. There appears to be a major cash flow problem. They have been laying off experienced employees by the hundreds. These are not not the actions of a company which expects to survive. The stockholders should be very concerened when the company is paying a new C.O.O. $500,000.00 a year with a $25,000.00 a year travel/vehicle allowance. But can't afford to pay their vendors, and just give lip service to customer complaints. Thats not how to get new buyers. You need to have senior managers who will accept phone calls from home owners and are not affraid to leave their office to meet with them and resolve the homeowners concerns. Hiding behind their secretarys is not good management nor customer service. A.Hovnanian has always stressed excellent company ethics, it seems that some of his managers are no longer listening. This company is in serious trouble as its falling stock price shows.
This report was posted on Ripoff Report on 02/26/2010 07:55 PM and is a permanent record located here: http://www.ripoffreport.com/reports/k-hovnanian-homes/red-bank-new-jersey-/k-hovnanian-homes-financial-problems-red-bank-new-jersey-575094. The posting time indicated is Arizona local time. Arizona does not observe daylight savings so the post time may be Mountain or Pacific depending on the time of year.
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