Don't worry, it's a "non-cash" wipe-out.
Recovering from a week away nearly incommunicado, I found some interesting tid-bits from the real estate world.
The prize for the "most unnoticed eye-opening news item" goes to Beazer Homes' (BZH) inevitable write-off of the entire goodwill associated with its Crossman acquisition. By way of background, in 2002 BZH spent a tidy $641M to enter the Mid-West market. The venture was a bust from day one, first courtesy of construction claims against the Trinity Homes brand (for which BZH has written off an additional $100M) and then because the residential market mania never materialized in the Mid-West region. (Click here for my homegrown snapshot of BZH's orders pattern)
I appreciate that we are almost three years removed from the bottom of the '00-'02 Boo market (it remains to be seen whether that will be THE bottom, but I digress) and non-GAAP numbers are back being the norm, but even so not all non-GAAP figures are created equal.
I have previously explained why I believe that using Price to Book valuations more accurately reflects the operating performance of homebuilders, and, if one subscribes to that view, the combined Trinity / Crossman-Goodwill write-off results in a rather meaningful $4.12 per share reduction in BZH's book value, or 13% of the reported Book Value as of 12/31/2004. Put another way, despite management's protestations that the impairment charges are "non-cash", they won't affect cash flow, etc, etc., the fact remains that BZH is giving us a preview of what may be in store for the current "price-be-damned" homebuyers: sitting on a piece of real estate worth 35% less than what they paid for it. Unlike BZH however, I kind of doubt that the homeowners will be able to take a one-time "write-off" of their corresponding mortgage liability.
Second "most unnoticed eye-opening news item" comes from the conference call held by BZH to explain the goodwill write-off. In it, BZH all but concedes that the entry level market is in shambles (at least its portion of it) and its strategy for staying on course now hinges on competing for higher priced homes in already overheated markets. I'll admit to being about two years early in calling for interest rates and deteriorating credit worthiness to put the screws on the entry level buyer, so I'll put on my fool's hat again and suggest that it won't take nearly as long this time for similar problems to spread to higher end sectors of the residential market. And I am holding on to my bet that BZH will succeed with its "upselling growth strategy" just as hell freezes over.
Lastly, this L.A. Times article on real estate speculation is a must read (free registration is required). The piece was spotted and brought to my attention by Jeff Matthews via his blog . I have had the pleasure to read Jeff's works over the last few years and suffice to say I wish I had a fraction of his investment smarts.
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