Macro Tsimmis

intelligently hedged investment

Beazer Homes (BZH) update

Posted by intelledgement on Thu, 11 Oct 07

Beazer Homes (BZH) management issued a press release today and there was a lot of interesting stuff therein. First, they released preliminary data on their 4Q07 numbers (which ended 30 Sep) and while the news was generally bad—home closings down 39% Y-O-Y, new home starts down 52% “driven largely by an unusually high cancellation rate (68%), which the Company attributes in large part to the pronounced tightening in the mortgage markets in August and September”—there was one bit of good news. Beazer’s cash on hand improved from $123MM to over $400MM.

The company also converted a $500MM unsecured line of credit—which was unusable as by failing to file their quarterly reports with the SEC, they were in default—into a secured line of credit by pledging properties as collateral and now can access that cash as well. This is good in the tactical sense that it gives management more leeway to maneuver in tough times but (potentially) bad strategically in that it means less assets available for shareholders should things come unglued.

Management also announced preliminary result of the internal investigation into the accounting issues that are preventing them from filing. Essentially, the company improperly booked revenue that should not have been. The exact numbers are not known yet, but it looks as if they will have to restate their financials going back as far as 1999. The biggest adjustment looks as if it will be to 2006, where income will be decreased $20MM (and increased by that amount in future time periods). BZH expect to handle restatements from 1999 to 2003 with a single number adjustment; it is not clear how big the adjustments will need to be for the 2004 and 2005 financials. All-in-all, this is noisome, but does not appear to be all that big a deal.

Their internal investigation uncovered another set of potentially more serious problems, however. “The internal investigation found evidence that employees of the Company’s Beazer Mortgage Corporation subsidiary violated certain U.S. Department of Housing and Urban Development (“HUD”) regulations, particularly in relation to Down Payment Assistance programs, in certain Federal Housing Administration (“FHA”) insured loans originated by Beazer Mortgage Corporation dating back to at least 2000.… The Company’s potential future liability relates, in part, to the impact of providing reimbursement of losses arising from mortgage defaults in circumstances in which the Company’s FHA-insured mortgage origination activities would have violated standard representations made to mortgage purchasers. In the event of fraud or certain misrepresentations at the time of the sale of such FHA-insured loans, the Company may be liable for losses suffered either by the mortgage purchaser, or HUD if any payment was made pursuant to an FHA loan guarantee. The factors influencing the extent of such potential future liability include, among other things, the number of FHA-insured loans originated by Beazer Mortgage Corporation, the percentage of such loans in which misrepresentations or fraud may have occurred, and the default rate, principal amount and losses associated with such loans.”

Of course the problem here is not the internal findings per se, but the potential impact of the ongoing external investigations, currently being conducted by the US Department of Justice and the SEC. BZH management intend to attempt to settle any resultant liabilities and they stated: “Based on an analysis of the factors described above and available precedents, the Company currently believes that an aggregate settlement with regulatory authorities in a range of $8 – $15 million may be attainable. ”

It was this rosy assessment that drove the stock price northwards today, up as high as $10.75 (+8%) before closing at $10.13 (+2%, up twenty cents from yesterday’s close). Seems pretty optimistic to us; there is an awful lot of blood in the water. If we had not already shorted north of $11, we might be tempted to do so here. As things stand, we are content to wait and see.

One Response to “Beazer Homes (BZH) update”

  1. LOL according to David Berg, author of The Trial Lawyer: What It Takes to Win and a partner at Berg & Androphy, a Houston-based law firm, Beazer management’s estimate that they will get out of their regulatory and criminal violation issues for $8-to-$15MM are “at best wishful thinking” (as quoted Friday in this Forbes article).

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