Yes, 16% may be high. DiStefano uses a risk free rate of 3.1% and the current level is 2.2%, so there is 90bp right there. It’s hard for me to accept anything below 12% as that is the pre-Lehman bogey of the model home purchaser who enjoyed the security of a lease (page 87). The $219mm increases by 2.75% for every 100bp reduction from 16%, so even if you use 13%, the DiStefano appraisal increases to $237mm or $18mm. Much of this improvement is offset by recognizing that there were 74 sold/escrowed at the time of the appraisal, and now there are 84 sold/escrowed so the number of unsold units is lower today by 10.
Regarding current price and volume of sales, I agree they must be negatively affected by the CH11 filing and we should expect an improvement upon emergence. No doubt this point is being made by management to the creditors. On the other hand, if I were a creditor I certainly would be emphasizing the low prices and volumes to justify a lower EV.
The leverage of the real estate value vs. debt is high enough. But add in the potentially digital outcome of any agreement’s effect on the equity and you have a possible goose egg here. For me to get interested, I need lower prices, or improving fundamentals. Until then I will be watching the ticker, as well as Orange County job growth, home sales and home price trends. Also key will be any future impairment in the next 10-Q.
Out next week will return, December 4th.
P.S. I enjoy reading your blog Plan.
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