A Dare In The Desert: 5,500 Retirement Homes

Philip J. Dion sees gold where most just see sand. Staring at a photo of the California desert mounted on the wall of his Phoenix headquarters, Del Webb Corp.'s chief executive envisages thousands of houses filled with America's burgeoning ranks of retirees.

Fanciful? Perhaps. But in recent years, successful retirement communities in Arizona and Nevada have helped pull the $228 million real estate company out of a near-fatal tailspin. Now, the 46-year-old chief faces his biggest test yet. Despite the worst housing market California has known in years, Dion is planning a massive retirement-home project just outside Palm Springs.

GAMBLING LOSSES. Dion is used to long odds. For most of the 1980s, disastrous investments in casinos and hotels in Las Vegas and in Atlantic City dragged down the builder of the Flamingo Hotel--the first casino on the Vegas Strip, once owned by gangster Bugsy Siegel. In 1988 and 1989, Del Webb lost $100 million on sales of $259 million. So Dion, then a six-year veteran, decided to unload the casinos and focus on retirement homes.

That pulled Del Webb out of its slide. In 1990, it earned $15 million on revenues of $242 million, up 72%. But that growth has now stalled. In fiscal 1991, ended in June, operating profits fell 18%, to $12 million, while sales sank 6%. And in the first quarter, the real estate slump sent operating profits tumbling 32%.

Still, Dion believes his new project, Sun City Palm Springs, isn't just castles in Spain. The company has spent $40 million on land and raised $32 million of new equity to help develop the project near the celebrity-studded resort town. And despite the real estate funk, investors aren't flinching: Del Webb's stock has jumped 150%, to 14, since January.

That's an awful lot of support for a development that has yet to be built. On Oct. 23, Del Webb broke ground on the project, which will include up to 5,500 units on 1,574 acres of desert. In January, it will start selling houses--at an average of $160,000 a pop--to be completed next fall. Sun City will be pitched as a serene world of golf, bowling, and crafts. "We are not a homebuilder," says Dion. "We sell a lifestyle."

But it may be tough to find enough people to live that lifestyle. In Palm Springs, where Del Webb hopes to sell 800 houses a year, total new-home sales this year are expected to be 1,775--less than half the 1989 peak--according to Meyers Group, a Los Angeles real estate consultant. And many retirees may be reluctant to sell their homes--and buy Del Webb's new units--in a soft market.

Also, retired folk may bypass Palm Springs for Del Webb's Phoenix and Las Vegas communities, where similar houses sell for about one-third less. "Del Webb is going to be competing against itself," says Eric Brown, an analyst with Kennedy-Wilson, a real estate marketing firm based in Los Angeles.

RISK-TAKER. Again, Dion isn't worried. Retirees are plentiful and don't act the way other home buyers do, he argues. They may be more willing to sell their homes because the recent slump has wiped out only a fraction of their gains after a decades-long real estate boom. Launching a huge development in the depths of a recession takes nerve--but such risks have paid off for Dion before. When Phoenix housing sales plummeted 24% in 1988, Del Webb's sales in the area were offby only 11%. And by moving into the hot Las Vegas market, the company has grown at a time when many homebuilders around the country are going belly-up. But as the Del Webb chief pushes into the California desert, he can only hope that the gold he sees there is not a mirage.

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