Land Charges Bury Builders

Updated from 11:04 a.m. EDT

D.R. Horton(DHI:NYSE) recorded an $824 million loss for the second quarter after massive land impairment charges -- much larger than analysts expected -- ate away profits at the country's largest homebuilder.

The company was just one of several homebuilders to post results awash with red ink as the slumping housing market and declining prices result in big impairments and writedowns. Each warned of weakening market conditions and offered little hope about a turnaround anytime soon, given the record high levels of inventory for new and existing homes.

On Thursday, the Census Bureau reported that new-home sales across the country fell nearly 7% from May to June, while inventories remained high.

In a conference call, Horton signaled that results across the country continue to deteriorate, noting that June home sales were worse than May's.

"We don't see any positives in a lot of our markets," Horton CEO Donald Tomnitz told investors on the call. He said the company is not projecting a recovery because "we don't see a recovery on the horizon."

Horton's loss amounted to $2.62 a share, compared with profit of 93 cents a share a year earlier. Analysts had expected a loss of 35 cents a share, according to Thomson Financial.

The builder recorded $852 million of land charges and write-offs. Additionally, the builder reported a $426 million goodwill impairment charge.

The land charges mark the biggest such charges recorded by a builder so far in the housing downturn. Homebuilders are being forced to record these charges as prices for houses decline; this makes previous investments unprofitable.

Bank of America analyst Daniel Oppenheim, for one, expected Horton to record just $450 million to $500 million in land impairments.

Horton's revenue fell 29% in the second quarter to $2.5 billion. Orders dropped 40% to 8,559 units.

Horton shares were down 82 cents, or 4.7%, to $16.66 in recent trading.

Problems in the California market greatly weighed on Horton's results, management said on the call. To date, more than 50% of the company's land impairment charges have been in the state, as high cancellation rates and falling home prices require the builder to write down the value of previous land investments there.

Tomnitz said the company is fighting an affordability issue in the state.

During the recent boom, California had gotten to the point where only 10% of the residents could afford the median price of a home. Tomnitz said he recently saw a report that said only 4% or 5% of residents would now be able to afford the median price without the fancy mortgages of recent years.

Horton said the company continues to reduce its overhead in California. It recently merged two Ventura County sales divisions and merged some of its back office personnel from Northern California and Southern California.

Shares of Beazer Homes(BZH:NYSE) also were sliding after the builder reported its own charge-laden loss for the quarter. The company said Thursday that it recorded a fiscal third-quarter loss of $123 million, or $3.20 a share, compared with a profit of $102.6 million, or $2.60 a share, a year earlier.

The Atlanta-based builder recorded land-related impairments and write-offs totaling $188.5 million.

"Most housing markets across the country continue to be characterized by an oversupply of both new and resale home inventory, reduced levels of consumer demand for new homes and aggressive price competition among home builders," said Beazer President and Chief Executive Ian McCarthy.

"These factors, together with a pronounced credit tightening in the mortgage markets, particularly for credit challenged home buyers, are likely to lead to continued difficult market conditions for Beazer Homes and other home builders," he said.

Late Wednesday, Ryland(RYL:NYSE) and Pulte(PHM:NYSE) each reported steep second-quarter losses Wednesday due to the land charges.

Shares of Beazer recently were down $1.48, or 8.7%, to $15.56, while Pulte dropped 68 cents, or 3.3%, to $19.99. Ryland was down 16 cents, or 0.5%, to $32.76.

Elsewhere, Florida homebuilder WCI Communities(WCI:NYSE) tumbled 21% after the company said it has not received a definitive acquisition proposal. The builder has been exploring options after having rejected a $22-a-share buyout bid from financier Carl Icahn.

"While initially several companies expressed an interest in acquiring WCI, deteriorating conditions and uncertainty in the homebuilding and debt markets have made the sale process more challenging," the company said.

WCI said it will continue to explore the sale process and also evaluate other alternatives. Shares recently were down $2.43 to $8.89.


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