Your Land Plan 08

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• Your Land Plan 08

The Presidential Seminar Aspen, Colorado April 3,
2008
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What Well Cover Today

• The Panelists.
• What are we Learning?
• An Overview of the Market Today What can
  builders do now . . . and Why?
• What Happened to Capital? Does it Come Back? Who
  Provides it and When?
• Questions and Answers.

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Land ownership by home builders

• Land ownership and development in the future -
  Who will fill the void?
• Has the paradigm shifted - will the large
  national builders jump back in?
• Who is willing to take development and market
  risk?
•   Will this create opportunities?
• Who will buy develop housing lots going forward
• How will Builders transfer Market/Development
  Risk?
• Who will be willing to take these risks

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When will the market improve?

•    Will land be worth almost nothing forever?
•    What level of absorption and prices will be
  normal in the future?
•   What areas of the country will be the "new hot
  spots"?

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Where is the market today? 

• Are deals getting done?
• Are the early large deals we hear about good for
  the builders or the investors?
• Isolated deals Lennar, StanPac, M/I, Centex
• Bid/Ask still too far apart
• When is it time to jump in?
• Deals not yet getting done other than a few
  exceptions
• When will lots start moving-timing Q2, Q3, Q4
  08??
• Who let the Dogs out? Are Builders selling just
  the scraps now
• Banks/institutional Lenders
• Not yet recognizing the pain/standing firm no
  need to discount
• Does Bear Stearns or other financial market
  factors change that soon?
• Will Congress provide relief by changing
  definition of defaulting land/construction loans

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What Led Us Astray Better Understanding Markets

• Biases that Impact Decision Making
• Regression to the Mean
• Individuals tend to ignore the fact extreme
  events tend to regress to the mean.
• Insufficient Anchor Adjustment
• Individuals make estimates for values based on an
  initial value (Dumb and Dumber)
• Overconfidence
• Individuals tend to be overconfident of the
  infallibility of their judgment when addressing
  moderate to complex situations.

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What Led Us Astray Better Understanding Markets

• Biases that Impact Decision Making
• Confirmation Trap
• Individuals tend to seek confirmatory information
  for what they think is true and neglect search
  for information in conflict with their beliefs.
• Escalation of Commitment
• Tendency of individuals to escalate commitment to
  a previously selected course of action to a point
  beyond which a rational decision making model
  would prescribe.(Return on incremental
  investment)

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What Led Us Astray Better Understanding Markets

• The Impact of Groupthink
• A mode of thinking that persons engage in when
  concurrence seeking becomes so dominant in a
  cohesive group that it tends to override
  realistic appraisal of alternative course of
  action.
• Invulnerability (Paranoia is not all bad)
• Rationalize (Analyze negative feedback)
• Unanimity (Silence is not golden)

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What Led Us Astray Better Understanding Markets

• Two Business Models
• Homebuilding
• A manufacturing model
• Low risk, low return key is low investment
• Managed by efficiency measures such as ROE, ROC,
  asset and inventory turns
• Land acquisition and entitlement
• A speculative model
• High risk, high return key is high return
• Managed by return measures such as operating
  margins, ROE and ROC
• Critical to price equity appropriately

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What Led Us Astray Better Understanding Markets

• Income to Rents
• Historically 15 to 1
• At peak 24 to 1
• Fueled by creation of exotic mortgages
• Faulty assumption Home values would not decline
• Income to rents should regress to the mean
• Dont expect land values to appreciate in the
  near term

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Happiness is Positive Cash Flow

• Get Real on Land and Lots Be Strategic.
• Thoughtfully Market and Sell Excess Positions.
• Why? Make the Government Your Banker.
• Current rules.
• Legislative proposals.
• 3 Current Flavors in the Market.
• The blue collar approach.
• The negotiated institutional joint venture.
• The broadcast blast.

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Happiness is Positive Cash

• What Are the More Significant Pitfalls?
• Related party rules.
• Option arrangements.
• Accounting versus tax treatment.
• Mechanics Public versus private builders.
• Lessons Learned . . . So Far.
• Time is NOT on your side.
• Once you sell it, you dont own it.
• Current or short-term cash flow is a focus.
• There are a LOT of institutional looky lous.

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Proactivity Isnt Just a 5 Word . . .

• What Should Private Builders Be Doing Now?
• Scrub the Balance Sheet.
• Analyze, and reanalyze impairments your
  accountants and lender will.
• How much equity layer, if any?
• Challenge Cash Flows.
• In this market, year-over-year and quarter-over
  quarter results dont count weeks do!
• Realistic 13-week cash flow statements.
• Prepare Realistic Pro Formas.
• Todays absorption and todays pricing.
• SGA needs to match!

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OK, So Wheres the Good News?

• Increased Mortgage Loan Limits for Buyers.
• Likelihood of Extended NOL Carry back Relief.
• Potential New Home Purchase Tax Credit.

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Where We WereClear the Land and We Will Build

• Location, Location, Location was a factor in
  pricing, but was downplayed as far determining to
  ultimately buy, develop and build.
• A locations were bid way up and out of reach of
  many local/regional builders
• B C compromise locations followed suit
• Basic fundamentals were often ignored
• Desirabilty, commutability, schools, surrounding
  neighborhoods
• Developers Became the Candy Store for
  Municipalities
• Developers were leaned upon to fund the wish
  lists of municipal improvements
• Roads, Sewer, Water
• Developers agreed and passed along the costs and
  just raised prices to the consumer
• Easy/creative financing fed fuel onto this
  builder fire

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Its the Economy Stupid.. Its the Excess Supply
Stupid

• Re-deploying/reuse of all excess residential lots
  to other uses (student/workforce housing, senior
  or assisted living, retail.)
• What is the natural absorption of lots?
• Is it 2001, 2005 or some other level?
• Bouncing along at 1 million starts a year now for
  last 4 months (verse 1.5M in March 2007)
• How much inventory (years supply) do builders
  still have to burn through at this new stabilized
  rate?
• Are builders buyers anytime soon
• National verse local markets
• When/Where will the buying begin? Allocation of
  acquisition capital by national/regional home
  builders.
• ROE vs. geographic diversity--what returns and
  margins are targeted?

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Follow the Money -- 25B and countingAre the
funds that are stacking up with billions of
dollars of capital really capable of being the
developers of the future?

• Blackrock Real Estate Group
• Cantor Real Estate
• Carlyle Group
• Edgartown Partners
• JMP
• John Landon
• Matlin Patterson
• Magnolia Florida
• Morgan Stanley Real Estate
• Oaktree Capital
• Resmark Equity Partners
• RSF Partners
• Starwood Land Ventures

• Apollo Real Estate Advisors
• Canyon Capital
• Cap Mark
• Colony
• Fortress
• MSD Capital
• G.I. Fund
• Global States
• Najafi Companies
• Goldman Sachs
• Tennenbaum Capital Partners
• Ridgeback
• Walton Street

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What will future ownership by builders look like??

• When will builders start buying lots again and
  on what basis?
• What will the future relationships between
  builders and developers look like?
• JVs, are they gone or will they be reinvented
• Land-Banking gone, what does the new structure
  look like
• What is the role of Private Equity/Hedge Funds
• Builders selling land/lots
• Morgan Stanley/Lennar, Levitt, TOUSA
• What happened in these deals, lessons learned and
  the future.
• Different groups are looking for different
  returns/slices of deals, i.e. 90/10 funding
  split and waterfall returns
• Different valuations
• Different risk appetites
• Different timing
• Just Land or land and vertical profits
• Capital stack deficiencies can lead to
  opportunities for all.

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What Will Change

• Excess land inventory/overhang must be absorbed
• Re-uses/new land uses must be utilized based on
  the current stabilized (Hopefully) demand
• Student Housing
• Workforce Housing, medical, municipal
• Rental
• Consider rezoning office, retail entertainment
• Builders Must Reduce Costs
• Raw materials, components, labor is a definite
  pressure point
• More efficient plans
• Value engineer
• Control waste
• Better cycle time
• But run away Land Basis must come down
• Sure we need raw land prices to come into line
• Entitlement Exactions need to be looked at
  extremely closely
• Public Private Partnerships for improvements
• Tax benefits (NYC 421a, Puerto Rico Tax Credits,
  etc)
• CDDs

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WILL I MAKE MONEY AGAIN.

• WHEN ?????