Surmounting Housing Woes : Warmington Homes Pares Costs, Buys Bargain Land and Prospers
The economy hasn’t changed much in the past few months. Home sales are still way down, drywall workers still are striking, and consumers remain unimpressed with presidential candidates’ recipes for fixing the economy.
So why are the men and women who work at the elegantly appointed Warmington Homes headquarters building here smiling?
Lead cheerleader Timothy P. Hogan, 43-year-old president of the company, says it’s because, “despite all the doom and gloom,” Warmington is having a decent year and looking for real growth in 1993.
Hogan readily admits that there are reasons for home builders to despair. But by hewing to a fairly conservative line over the years, he says, Warmington has avoided some of the traps that have caught other residential developers.
The 66-year-old company “has been through a few recessions, and we have learned the lessons,” Hogan said. “We know we have to address our problems early and move forward.”
The company has pared costs, partly by slashing its payroll from a building-boom high of 414 employees in 1989 to just 190 today. It also was among the first builders to cut prices on slow-moving new homes in late 1990, when the depth of the recession first became evident in Southern California.
That strategy has helped Warmington get rid of costly old inventory and move on to new homes designed expressly to sell profitably at lower prices--the average Warmington house today sells for 15% less than it would have in 1989.
“So we are moving,” Hogan said, “and that’s more than 75% of the builders out there can say.”
Most recently, Warmington last weekend opened sales at its newest development, in San Juan Capistrano. The company has already sold five of the 120 houses it plans to build, and it has appointments to close deals this week with six other purchasers. The sales action comes despite prices that begin at $299,900 in a market where, conventional wisdom holds, the expensive spread is dead.
The luxury homes, which range from 2,590 to 3,350 square feet, are not only selling well, they are doing so without benefit of models. The model complex still is in the framing stage, so buyers have only blueprints and architects’ renderings to go on.
What is special about the project--aside from whatever marketing clout the Warmington name carries--is the price.
Similarly sized and equipped homes in the surrounding hill country start at $350,000 and quickly top $400,000.
Warmington was able to pare its prices by picking up the 120 lots at a relative song--$9 million for 40 acres bought in an April distress sale. That translates to about $75,000 for each lot--nearly $40,000 less than the same land sold for when the market was booming in the late 1980s, said Larry D. Riggs, Warmington’s executive vice president.
When the Resolution Trust Corp., the federal cleanup agency for failed S&Ls;, put the land up for sale, it didn’t take a room full of geniuses to realize that the asking price was a bargain.
What gave Warmington an edge over its competitors was that it was able to come up with the cash to close the deal.
“We are one of the few big players in Southern California who are still out there buying properties and moving forward . . . and we can do it because we don’t have a lot of the baggage other companies are carrying around,” Hogan said.
His company is now developing 19 projects in California, ranging from starter homes priced at less than $100,000 to luxury models at nearly $400,000. But Warmington typically sells homes before it builds them, and so it has very little inventory. Also, the company is using land purchased either before prices soared in the late ‘80s or after they started crashing last year.
“We are in a position to buy right now,” Hogan said, “because we aren’t carrying the big debt load”--principal and interest payments--”on expensive land that we bought at the top of the market.”
That and Warmington’s practice of borrowing only 65% to 75% of the cost of a project, compared to the usual borrowing level of 85% to 90%, has enabled the company to keep lines of credit open and to find investors willing to put up large chunks of money for a share in its projects.
Hogan will not name names when he talks of builders who are suffering under crushing debt loads. Some, however, are easy to identify.
One of them is Presley Cos., a major Southland home builder that recently announced that it was writing down by $26 million the value of real estate it purchased in the late ‘80s. And William Lyon Co., one of the nation’s biggest home builders, reportedly is in a similar fix, stuck with large chunks of land that are worth far less today than when purchased a few years ago.
“Any builder who was out aggressively buying land in the late 1980s paid too much for it,” said Larry Webb, president of A-M Homes of Southern California, a Newport Beach-based builder that, like Warmington, appears to have avoided many of the land-buying excesses of the late ‘80s.
But builders with money, or access to it, can pick up some tremendous bargains in today’s depressed market.
Land prices are off 35% or more from 1989 levels, and Hogan said he expects some to tumble by 50% or so before the market regains any semblance of stability.
Other Southland builders actively buying these days include Los Angeles-based Kaufman & Broad Home Corp. and its Newport Beach luxury home subsidiary, Vintage Communities; Lewis Homes of Upland; Fieldstone Co. of Newport Beach; Shawntana Development Corp. of Newport Beach; and the relatively new Capital Pacific Homes, a Newport Beach company that recently acquired control of J.M. Peters Co. and about 2,000 lots that it owned.
Warmington gets its equity funds from a variety of sources, including large private investors like Heller Financial Inc. of Chicago, which is Warmington’s joint venture partner in the San Juan Capistrano projects; and a variety of overseas investors, including several from Argentina. Hogan said he also is speaking with Asian investors, domestic pension funds and insurance companies to convince them that the Southern California real estate scene is not dead.
“The people who have gone for home runs in the past are the ones having trouble,” Hogan said. “But we don’t try for that. We like to hit singles.”
The company also has long eschewed borrowing from large commercial banks, preferring to maintain close relationships with smaller regional lenders, Hogan said, among them First L.A. Bank in Los Angeles; Valley National Bank in Phoenix, Ariz.; and Canadian-owned Commercial Center Bank in Santa Ana.
Using its bank credit and equity from joint investors, Warmington has purchased $33.5 million worth of property since January, Hogan said. That land, in addition to the San Juan Capistrano property, includes 58 lots in Anaheim Hills, 97 lots in Valencia and 69 in Saugus.
In addition, Warmington is in escrow on properties in Pacifica, Tracy and Hayward in Northern California; and in Calabasas, Valencia and San Diego in Southern California.
The company is buying land, Riggs said, “because we think there is a lot of pent-up demand out there for houses, and these are land deals at prices that can make things beneficial to consumers.”
Hogan said Warmington’s executives don’t see much relief for Southern California’s housing industry through the rest of the year. “There is just no engine leading the economy out of the recession in a big way, like housing used to do.”
But if consumers’ economic uncertainty starts fading after the presidential election in November, Riggs said, then that pent-up demand “has got to make itself felt, perhaps as soon as early next year. And we want to be ready.”
