WCI Communities aims for $1 billion full-year cash flow

By Jennifer Lanning Drey and Lisa Kerner

Portland, Ore., May 8 - WCI Communities Inc. plans to reduce leverage by achieving $1 billion in cash flow for the full year, James P. Dietz, WCI's chief financial officer, said Tuesday during the company's first-quarter earnings call.

The company also expects to end the year with a roughly 50% debt-to-capitalization ratio, Dietz said.

The ratio was 65.5% at March 31.

"We'll have a substantially reduced balance sheet by the end of the year," Dietz said during Tuesday's call.

At the end of the quarter, WCI's net debt was about $1.9 billion, according to a company news release.

The company had total liquidity of $462.8 million at the end of the quarter.

WCI's net cash from operating activities totaled $102.4 million in the first quarter, which Dietz said helped reduce net debt by about $90 million.

The company used cash of $144.1 million in the same period a year ago, according to the news release.

First-quarter cash flow benefited from tower unit closings and lower land purchase and development costs, which totaled $38.8 million this quarter versus $85.9 million in the same period in 2006.

Looking ahead, WCI expects the year's highest inflow of cash to come in the third and fourth quarters.

Dietz said at the end of the first quarter, WCI was in compliance with all of its loan covenants, and the company expects to maintain compliance for the remainder of the year.

During the quarter, WCI made amendments to its senior unsecured revolving credit facility and its senior unsecured term loan facility that provide temporary reductions of the fixed charge coverage ratios and an increase to the allowed unsold home inventory level in exchange for a reduction in overall credit capacity and a reduced maximum leverage limitation.

The company also agreed to provide certain lien rights to its lenders if it violates the amended covenants and, at the same time, is unable to meet a minimum liquidity test.

When asked about the company's backup plan if business were to deteriorate further, Dietz said, "Our bank group is concerned but still quite supportive, and we'd need to work through that situation if it arose."

$15.8 million loss

Still, the results were weak, and WCI blamed lower margins in its traditional and tower divisions, fewer home closings in the period and a disappointing peak selling season in Florida for its slumping first-quarter 2007 results.

The company announced a net loss of $15.8 million for the quarter, compared with net income of $40.2 million in the first quarter of 2006. Diluted earnings per share fell to a loss of $0.38, from income of $0.89 in the year-ago period.

First-quarter revenues tumbled 40.3% to $340.6 million, from $570.7 million for the same period last year.

Total net unit orders for the quarter also slipped significantly, by 41.0% to 237, while the total net value of traditional and tower homebuilding orders for the quarter fell 53.4% from the same period last year to $156.1 million.

"While cancellations of traditional home orders receded during the quarter to historical levels of around 20%, tower defaults in some buildings have been higher than our prior estimates," WCI president and chief executive officer Jerry Starkey stated in a company news release.

As a result, WCI increased its tower default reserve to cover an approximately 15% default rate for towers closing in 2007.

"Due to the number of units in buildings now closing and market conditions, it is taking a longer period of time to close many of the tower units than it has historically, but based upon the contract holders' actions, statements and other factors, the revised default reserve represents our best estimate of the ultimate outcome at this time," Starkey added.

"We continue to emphasize maximizing cash flow and reducing overhead and product costs. In the first quarter, we achieved a reduction in average home cost of about $6,300, thereby reaching a cumulative reduction of approximately $22,000 per home since the beginning of 2006. This is good progress towards our goal of saving $42,000 per home by the end of 2007," Starkey said.

WCI expects to realize approximately $1 billion of cash flow from operations, primarily from the collection of tower receivables, plus proceeds from land and recreational amenity sales.

"While we did not have any land or recreational amenity sales in the first quarter, we closed the cash sale of a $47.5 million recreational facility in April of this year," Starkey noted.

Tower defaults rise

The delivery of 254 tower units during 2007 provided net cash inflows of approximately $210.7 million, according to a form 10-Q filing with the Securities and Exchange Commission. Looking ahead, WCI said it expects to "collect a significant portion of the remaining contracts receivable in the remainder of 2007" as six tower closings (620 units with cash inflow of $644.2 million) are planned. At the end of April, the number of unclosed units was reduced to 128, totaling $125.3 million in contracts receivable.

WCI "reserved for an estimated 64 defaults related to the 128 unclosed units," the filing stated.

The company blamed the longer closing times over the past few months to a larger number of units in some buildings, a general weakness of the real estate market, challenges in the mortgage market and other individual circumstances.

"If we do not collect these contract receivables due to various contingencies, including buyer defaults and rescission claims, we may receive less cash than we expect," according to WCI's filing.

WCI said the concentration of contracts to purchase multiple tower units by partnerships, limited liability corporations and other entities or individuals may increase the risk associated with the collection of the related contracts receivable balance.

The tower default rate is expected to rise to 15% from about 1% to 2% prior to 2006.

In addition to reporting disappointing first-quarter results, the Bonita Springs, Fla., lifestyle community builder has been fighting off a bid from investor Carl Icahn to purchase the company for $22 per share.

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