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Tower builder hit hard by slump

The Baltimore Sun

There is evidence of mounting financial pressure on the Florida developer trying to build a 23-story condominium tower near the lakefront in downtown Columbia.

Last week, Standard & Poor's, a leading provider of credit ratings, downgraded the corporate credit rating of WCI Communities Inc. to a highly speculative grade that indicates a higher chance of default.

But James P. Dietz, WCI's executive vice president and chief financial officer, said he remained confident about the future of the Plaza Residences.

"The downgrade has nothing to do with anything," he said. "The question is whether we have the financial capability to build the project, and the answer is yes. Clearly we have had a tough quarter, but that doesn't mean that the fourth quarter and the first quarter won't look better."

Dietz said WCI has a significant amount invested in the project but declined to specify an amount.

"We're planning to move forward," he said. "I know there are a few who oppose this, and that certainly has slowed us down and cost us money. We'd like to build the residence that has been approved. We think it's going to be an asset for the people of Columbia."

Delays stemmed in part from a court action filed by four plaintiffs to stop the project in a case still pending. Also, two bills that would have potentially blocked the tower died in the Howard County Council this month when there were not enough votes for passage.

Utility preparations have begun on the site, although it has been quiet for several weeks. Dietz said this month that selling efforts "will ramp up soon."

James Fielding, senior director of Standard & Poor's Ratings Service, said: "The downgrades follow a sharp spike in canceled contracts to purchase the company's luxury high-rise condominium units and the company's announcement that it will need to once again renegotiate the terms of its revolving credit facility." Although bankers will evaluate each WCI project on its merits, the company's overall financial status could make any new projects challenging, he said.

"It depends on the willingness of the banks to work with them and the courts," he said. "They're particularly challenged because they're more highly leveraged than most publicly rated homebuilders, and they're concentrated more in Florida. During the housing boom, they borrowed more freely than their peers."

The Florida market has been hit particularly hard by the recent housing slump.

"For them to turn this around, they're going to have to close on existing tower units, generate significant cash flow and use that to pay down debt," Fielding said.

And, in order to remain a viable company, WCI will need to continue to have new projects in the pipeline, he said.

Recently, WCI announced 575 job cuts - about a quarter of its work force. It reported third-quarter losses that prompted stock analysts to say lenders will be increasingly less flexible with it.

In addition to the job cuts, WCI reported that six board members, including billionaire investor Carl C. Icahn, will work without pay for the rest of 2007 and all of 2008.

WCI reported that it took only eight gross orders in its tower segment during the third quarter and that 89 customers defaulted on previously signed contracts.

As a result of those defaults, WCI recorded an $89 million reversal in tower revenue previously recognized. The company posted a net loss of $69.7 million, or $1.66 a share, on revenue of $166 million for the third quarter.

Susan Berliner, a senior managing director and analyst at Bear Stearns Co., who until recently followed WCI, has said that she does not see how the Columbia tower will get built.

In a recent company statement, Jerry Starkey, president and chief executive officer of WCI Communities, said: "Demand continues to be unpredictable from week to week, and we saw an increase in defaults and cancellations during the third quarter.

"We are focused on reducing our costs of operation and recently announced a restructuring that we expect will enable us to lower our annual salary and benefit expenses by about $46 million."

Daniel Oppenheim, an analyst at Banc of America Securities in New York, recently wrote that WCI will have only about $210 million in liquidity, "which is expected to erode quickly."

Founded in 1946, WCI was named America's Best Builder in 2004 by the National Association of Home Builders and Builder magazine. The builder serves primary retirement and second-home buyers in Florida, New York, New Jersey, Connecticut, Maryland and Virginia.


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