Beazer Buys Time for Rebound in U.S. Housing: Corporate Finance
Beazer Homes USA Inc. (BZH), the builder that’s piled up $1.8 billion of losses since the collapse of the U.S. housing market, is buying time until the U.S. economy recovers by replenishing its capital with stock and bond sales.
Beazer sold $300 million of secured debt, raised about $160 million selling stock and hybrid securities and said it would buy back $250 million of bonds last week. The Atlanta-based company’s $300 million of 9.125 percent notes due June 2018 have returned 19 percent in the past six weeks and now trade at more than 97 cents on the dollar, according to data compiled by Bloomberg.
The fundraising bolsters Beazer’s prospects by giving it cash to buy land amid signs that housing is bottoming even though it hasn’t generated enough money to cover its interest expenses for five years. The deals last week will save about $10 million in interest, while adding to Beazer’s cash supply, said Stefan Lingmerth, an analyst at Phoenix Investment Adviser LLC in New York.
“They’re doing the right things, cutting the interest and the margins are going up every quarter,” said Lingmerth, whose firm has about $500 million of high-yield assets under management and has invested in Beazer’s bonds and stock. “If you get more price increases, these guys could be profitable sooner rather than later.”
Beazer, which builds in developments such as Surprise Farms in Surprise, Arizona, sold 3,249 houses in the 2011 fiscal year that ended Sept. 30 for an average price of about $220,000, it said in a Nov. 15 regulatory filing. It’s been losing money since 2006, as the decline in U.S. housing prices made it difficult to sell new homes and forced it to write down the value of its holdings.
Jeffrey Hoza, Beazer’s treasurer, declined to comment on the company’s financial situation.
Beazer may make money before interest, taxes, depreciation and amortization this year, Allan Merrill, its chief executive officer, said on a conference call in May. It would be the first time since 2007, Bloomberg data show.
“Like all the public homebuilders, they survived this by being able to sell homes at a lower price,” Lingmerth said. “They’ve cut a lot of costs.”
U.S. homebuilders may have enjoyed a fifth consecutive quarter of growth based on results from Lennar Corp. and KB Home in the March-June period, according to Bloomberg Industries. Purchases of U.S. new homes have begun to rebound as low mortgage rates help attract buyers amid a limited supply of existing properties.
Confidence among U.S. homebuilders increased in July by the most in almost a decade. The National Association of Home Builders/Wells Fargo confidence index climbed 6 points to 35 this month, the highest level since March 2007, a report from the Washington-based group showed today. The gauge exceeded the most-optimistic projection in a Bloomberg News survey of 46 economists.
Beazer’s 9.125 percent notes, which traded for 82 cents on the dollar on June 1 and as low as 56 cents in October, climbed to 97.3 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Credit default swaps on the company fell to 8 percent upfront yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That means it would cost $800,000 initially plus $500,000 a year to insure against losses on $10 billion of bonds for five years. The contracts cost as much as 72 percent upfront in March 2009, implying 98 percent odds the company would go bankrupt.
Beazer expanded through a series of acquisitions after its spinoff from Hanson Plc in 1994. To finance its push across the U.S., Beazer borrowed, increasing its long-term debt to $1.84 billion in 2006 from $395 million in 2001, according to data compiled by Bloomberg. Debt was $1.43 billion as of March 31.
As the housing market froze, sales dropped to 12,020 in 2007, then 6,697 the next year, down from about 18,000 in the 2006 fiscal year, Bloomberg data show. Beazer posted a net loss of $411.1 million in 2007 and hasn’t profited over a full fiscal year since, the data show.
Beazer promoted Merrill, a former UBS AG investment banker who advised on its initial public offering, to CEO last year. He replaced Ian McCarthy, who last year agreed to return $6.5 million to the company after the U.S. Securities and Exchange Commission said the company committed accounting fraud during his tenure. Beazer settled with the SEC in 2008 without admitting or denying wrongdoing.
Merrill said on the May conference call that returning to profitability was his “overriding objective” and that he’s trying to earn more by selling more houses, increasing margins, holding down fixed costs and cutting interest expenses.
“He’s done a very, very good job,” Susan Berliner, a bond analyst at JPMorgan Chase & Co., said in a telephone interview. “They’re very focused on getting profitable which we think will happen down the road.”
While Beazer’s bonds are approaching par, the company’s stock has dropped to $2.82 at 10:50 a.m. in New York from a peak of $82.03 in 2006, cutting its market value to $347.2 million, according to data compiled by Bloomberg.
Beazer’s depressed shares have attracted investment from hedge funds. Brigade Capital Management LLC and John Paulson’s Paulson & Co. each own about 2 percent of the company, Caspian Capital LP has a 1.5 percent stake, and Boaz Weinstein’s Saba Capital Management LP owns about 1 percent, Bloomberg data show.
GSO Capital Partners LP, the credit arm of Blackstone Group LP, also owns about 1 percent. The stock is an “option on a recovery in housing,” according to Darren Richman, a partner at the firm in New York.
“There’s a bifurcation between how the debt and equity markets are viewing the homebuilders,” Richman said in a telephone interview. “It’s a very easy bet to make that Beazer will be solvent for an extended period of time.”
After raising about $60 million in the stock market and selling $100 million of hybrid securities, Beazer issued $300 million of 6.625 percent second-lien notes on July 11. The offering size was increased from $275 million.
Beazer said the money will be used to redeem the $250 million of 12 percent notes that it sold in 2009. Blackstone’s GSO stands to benefit from the refinancing. It helped backstop the 2009 offering, which was issued at 89 cents on the dollar, Richman said.
“The company had very few friends on Wall Street,” Richman said. “It caught the market by surprise that somebody would be willing to give them money.”
Home prices are 25 percent below the May 2007 peak, and values in more than half of major U.S. markets will probably reach a bottom by December, Zillow Inc. said in April.
“Homebuilders need to have sufficient inventory as demand increases otherwise they won’t be able to maximize their sales,” Brian Bogart, an analyst at KDP Investment Advisors Inc. of Montpelier, Vermont, said in a telephone interview. “The equity issuance gives them more flexibility to meet rising demand without having to increase their debt.”
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