This company is a mess but it isn’t as overvalued as some of the other homebuilders. So, I don’t think it’s a great short.
AV Homes develops retirement communities in Florida and Arizona. It has many problems in Florida since foreclosures keep coming onto the market and depressing local real estate prices. The 10-K states:
The significant number of home mortgage foreclosures has increased supply and driven down prices, making the purchase of a foreclosed home an attractive alternative to purchasing a new home, although this trend is moderating in the Arizona market. However, due to the judicial foreclosure process in Florida, we believe that foreclosed homes coming onto the market in Florida will be an issue for the near term. The judicial foreclosure process had delayed the initiation of actions in Florida generally and we have begun to experience an increase in foreclosure notifications on homes within our communities within the last several months. We believe this is a broader market trend. Homebuilders have responded to declining sales and increased cancellation rates with significant concessions, further adding to the price declines. The price declines, in some cases, may cause current homeowners, particularly those in our active adult demographic, to delay the resale of their current home, impacting potential purchases of our new homes. With the decline in the values of homes and the inability of many homeowners to make their mortgage payments, the credit markets have been significantly disrupted, putting strains on many households and businesses. In the face of these conditions, the overall economy has weakened significantly, with high unemployment levels and substantially reduced consumer spending and confidence. As a result, demand for new homes remains at historically low levels.
The company’s presentations talk about an impending housing recovery, yet the 10-K paints a different picture. AV Homes’ existing Florida community has not been selling at a profit. The local market there may be oversupplied as the company has to compete against existing residents in its community selling their home. And in the future they will have to compete against the shadow inventory of homes in their community. It may be a better idea for them to mothball the community until it is profitable to sell homes there again.
One of AV Homes’ key shareholders presumably believes in the company’s prospects in Florida (see press release):
Kelvin Davis, senior partner at TPG, said AV Homes has established a strong platform for future growth. “AV Homes has assembled a strong management team with deep industry experience. The Company is well-positioned to participate in the on-going recovery of the housing market, with real estate assets located in two healthy and growing Sunbelt markets,” Davis said.
I don’t know what they’re thinking.
The CEO
Roger Cregg used to be Pulte Group’s longtime CFO and is currently AV Homes’ CEO. I don’t believe that he has ever been a CEO of a homebuilder before. I suspect that he may do poorly as a CEO and may be leading the company down the wrong path. The company may be wasting money on marketing consultants and unnecessary IT expenses. These are areas where it is easy to waste money. The latest 10-Q states:
General and administrative expenses increased $399 or 12% for the three months ended March 31, 2013 compared to the same period in 2012. The increase was primarily due to increased IT and marketing consulting fees, professional accounting services related to the year-end audit, and increased testing required as a result of our new accounting and operational software system in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. These increases were offset in part by a decrease in legal fees in the first quarter of 2013 as compared to the same period in 2012.
The bottom line
This company has problems tied to its local real estate markets. The CEO is unproven. I question what TPG is doing- why get involved in homebuilders when valuations are high?
However, AV Homes is not extremely overvalued (mainly due to TPG’s investment in the company) so it’s not a great short.
*Disclosure: No position.