Inspecting the Foundation : Real estate: When it completed a $155-million bond sale a year ago, Baldwin Co. appeared to be flush with cash. Since then, it has been hit with liens and lawsuits, but officials say the company is healthy.

By DEBORA VRANA and JOHN O’DELL

July 31, 1994 12 AM PT

TIMES STAFF WRITERS

NEWPORT BEACH —

The tuxedoed Baldwin brothers were all smiles as they strolled through the ballroom of the Four Seasons hotel in Newport Beach, listening to the fizz of champagne, the rustle of sequined socialites and the glowing accolades of their peers in the real estate industry.

During the $2,700-a-table charity dinner honoring longtime Orange County home builders Alfred E. and James P. Baldwin, Auxiliary Bishop Michael Driscoll of the Diocese of Orange blessed the brothers and their ventures--a blessing that seemed already bestowed, given the $155-million junk-bond deal that Baldwin Co. had completed 10 months earlier and the $60-million credit line it had arranged with General Electric Capital Corp.

Befitting the glitzy occasion, the bishop was followed by a king as home-building giant William Lyon mounted the podium at the May 18 dinner to praise the Baldwins for their fiscal acumen.

In a humorous aside, Lyon called the Baldwins’ bond deal “the great train robbery of 1993.”

Ironically, that remark now reflects critics’ skeptical view of the company.

Former executives allege that bondholders were misled, and some investors are nervous about the firm’s financial condition. Since collecting the bond money a year ago, Baldwin Co. has seen its management team collapse, much to the dismay of investors who bought the company’s IOUs partly because of their faith in that team.

The company also has left a trail of unpaid and unhappy subcontractors and has angered hundreds of Anaheim Hills homeowners by failing to build a long-promised community park.

On Monday, Baldwin Co. is scheduled to make the second of its semiannual bond interest payments, and company President Al Baldwin says the $8.5-million check will be in the mail.

The company must pay about $17 million each year in bond interest--a big chunk of its annual cash flow. In public documents, the company reports it had earnings of $28.5 million before interest in 1993, down from $38.2 million the previous year.

For the first quarter of 1994, the company reported a $4-million profit, down 13% from $4.6 million a year earlier, and said that the costs of stepping up construction activities on its various projects caused it to end the quarter with $14.8 million “negative operating cash flow.”

Analysts look for earnings to exceed high-yield debt payments by a 2 to 1 ratio each year before they feel comfortable with a company’s ability to pay off junk bonds. Baldwin reported a 1.9 to 1 ratio for 1993, down from 2.39 to 1 the previous year.

With more than 75% of the proceeds from last year’s bond sale gone to pay off old debts, however, the company has little left for ongoing operations. At the end of the first quarter it also had used up $41.5 million of its $60 million credit line.

Al Baldwin said the company’s financial situation is solid and maintains that suggestions to the contrary are coming from embittered former employees and people who don’t understand corporate cash management techniques.

“Our earnings are up and our sales are up,” he said, pointing out that the company’s revenue from home sales jumped 35% to $63 million for the first six months of this year. He would not disclose second-quarter profit until it is reported to the Securities and Exchange Commission, probably within two months.

One indication of how tight money is at Baldwin Co., however, is the number of subcontractors who are filing liens against Baldwin projects and lawsuits against the company, alleging that they are not being paid. In the past month, almost $1 million worth of claims have been filed in Orange County Superior Court against Baldwin Co. and its various subsidiaries. Other claims for non-payment have been filed in San Diego County.

“That’s a lot,” said Irvine real estate attorney R. Michael Joyce. “A big home builder would not want that and would normally have the economic wherewithal to get them dismissed.”

Al Baldwin shrugs off suggestions that the spate of non-payment suits is an indication of financial trouble.

“People look at the Baldwins as having deep pockets, (with) all this money from our bond offering, and some of them think we should pay them for work they haven’t done,” he said. “But the bond money was used to develop lots and pay off debt, and now that we’re going through a major gearing up and starting a lot of homes, we’ve had to manage our cash.”

In an example of just how tightly managed that cash has been, Baldwin representatives pleaded with Anaheim officials this month for a two-year extension of their deadline to build a community park in the company’s flagship development, The Summit at Anaheim Hills. The company argued that it cannot afford to build the $1.5-million project yet.

On another front, the company is facing legal action filed by two former top managers--division presidents who say they were forced out because the Baldwins didn’t want to pay them what they’d been promised. In their suits, former Baldwin Ventura division President Robert Burns and Orange County division President Geoffrey Fearns also allege that the Baldwin brothers misled bond investors by omitting critical information.

Burns states in his civil suit that he was told by the Baldwins that he would have a 10% partnership interest in all company projects within his division, but he alleges that the brothers repeatedly put off executing a formal, written partnership agreement. The suit alleges, too, that Burns’ partnership agreement was not disclosed to bond investors.

Burns was hired to create a Los Angeles-Ventura division for Baldwin and do advance planning for projects. None of the homes planned for the seven projects he identifies in his suit had been built when he left the company in January, but he states in the suit that he is entitled to 10% of future profits--an amount he estimates to be “not less than $35 million.”

If Burns prevails and does have a claim to a share of future profits, that could make the company vulnerable to suits by bondholders. Siphoning off a share of project profits for Burns would reduce the amount available to pay interest on the bonds.

Al Baldwin said that Burns is lying and that he is not concerned about the outcome of the suit. “He’s a lawyer,” he said, “and if there were a partnership agreement it would be in writing. There isn’t any.”

Burns also alleges in his suit that former Baldwin employees Fearns and San Diego division President Gregory Smith were approached by the Baldwin brothers who tried to “coerce them into engaging in a sham tax transaction.”

The brothers, the suit states, wanted Fearns and Smith to agree to have the company “transfer to them certain properties encumbered by substantial indebtedness, in exchange for their partnership interest,” in the properties. The exchange would enable Baldwin Co. to avoid reporting taxable income from the properties, the suit said.

Though there is no indication that the Internal Revenue Service has begun investigating Burns’ allegations, Baldwin Co. revealed in its recently filed 1993 annual report that the IRS is examining it for the years 1979 to 1987 and that the result could be a demand for payment of about $8.6 million in back taxes.

Al Baldwin’s response to the Burns and Fearns suits is that they were filed to create negative publicity about the company in order “to leverage us to pay a lot of money they don’t have coming to them. And we’re not going to pay them for work they didn’t do.”

The fact that Burns, Fearns and Smith all have left the company since the bonds were sold may ultimately have more effect on Baldwin Co. than anything alleged in the lawsuits.

Steve Goldman, head of bond trading at the Los Angeles brokerage Jefferies & Co., said a large mutual fund that invested in the Baldwin bonds is very concerned about the exodus.

“You start asking questions,” he said, when the management team presented during the sale of a bond issue is gone six months later.

The bonds, which are now yielding about 12.5% interest, have been trading recently at a 10% to 15% discount from their sale price--not unusual given the overall drop in the bond market recently.

Beyond nervous investors and angry former employees, the Baldwin brothers are dealing with other woes.

Anna Martinez bought a home in the Summit development partly because the company promised to build a 16-acre park there. But at a July 19 public hearing before the Anaheim City Council, Martinez was one of more than 100 homeowners who attended to express anger over what they characterized as foot-dragging by the company.

Even though the start of construction on the park is months overdue, the council negotiated a compromise that requires construction of a playground by early next year but postpones completion of the rest of the park until 1997.

Councilman Frank Feldhaus and other council members told homeowners at the hearing that they were concerned that Baldwin Co. could be pushed into bankruptcy if the park issue were forced--and the company’s representative at the meeting did not step up to the podium to counter the impression that a single park was all that stood between the company and bankruptcy court.

“They had cash flow troubles, and then they sold some junk bonds. That’s the way I know they are having trouble,” Feldhaus said in an interview. He said company officials didn’t tell him, however, that they were going bankrupt.

“I didn’t audit their books, so I don’t know what their position is,” he said. “But that’s the alternative--they could file bankruptcy and walk away from the park completely.”

Al Baldwin denies vehemently that such a thing could happen, and such a scenario certainly would have been unthinkable in the 1980s, when Baldwin Co. consistently ranked among the top 10 builders in Southern California.

In the 30 years since it was incorporated, Baldwin Co. has built 15,000 homes in Southern California, most of them in master-planned communities in Orange, San Diego and Ventura counties. Before the California real estate boom went bust in 1990, the Baldwins outgrew the role of merchant builder--buying lots from other, bigger developers--and began purchasing huge tracts of land themselves.

Those developments include the 800-acre Portola Hills in Trabuco Canyon, the 591-acre Summit in Anaheim Hills, the 850-acre Carmel del Mar in San Diego and the 24,000-acre Otay Ranch planned-community project near Chula Vista.

“They have some exceptionally well-located properties, but it remains to be seen whether they can bring those projects to the market on a timely basis,” said Kenneth Agid, an Irvine real estate marketing consultant. “It’s a major challenge for a company with a seasoned management team to bring these projects on line, and right now there’s a lot of change inside the Baldwin Co.”

Other challenges are coming from bitter subcontractors.

“They’ve always been slow to pay, and if you work with them, you know that,” said Mark Job, an estimator with Banner Concrete in Riverside. His company worked for Baldwin on a Summit condominium project.

“They’ve had a lot of problems with subcontractors who they haven’t paid, so they can’t get them to work,” he said. “They always pay us, but the pay has been slower in the last two years.”

Another subcontractor, Orange cabinetmaker Canac Kitchens Ltd., is suing Baldwin for nearly $300,000 it says it is owed for four projects in Orange County.

“They wouldn’t pay until we filed the suit. They just ignored all of our demands,” said Irvine attorney Robert L. Bachman, who is representing Canac Kitchens.

“But once the suit was filed, they started making weekly payments, which is very unusual. The norm is cash in 30 days.”

He said Canac, a major supplier of kitchen cabinetry to home builders across the West, has had payment problems with many builders during the recession. The Baldwin situation, however, “has gone on longer than most,” he said. “I think Canac let the debt build because of Baldwin’s size and reputation. They couldn’t believe the company wouldn’t pay.”

The Canac suit was filed June 2. On Friday, the day after Al Baldwin was interviewed and asked about the case, Canac General Manager Brian Magee called The Times and said his company plans to drop the suit.

Canac has five contracts with Baldwin Co., he said, and the companies’ relationship “is a good one.” Baldwin Co., he said, “has paid substantially all of the money” that Canac was seeking in its lawsuit.

In addition to Canac, subcontractors who have sued Baldwin Co. in Orange County Superior Court in the past month include the company’s longtime grading subcontractor, Ebensteiner & Co. The Agoura Hills firm has filed two suits alleging that Baldwin has refused to pay about $500,000 in bills for work at several projects in late 1993 and early 1994. The company has been Baldwin’s principal grading contractor for almost a decade. Company owner Paul Ebensteiner did not respond to repeated requests for an interview.

Al Baldwin said Ebensteiner has surrendered control of the company and that Baldwin officials “don’t like what they are doing now.” He said Ebensteiner & Co. has billed for work that Baldwin Co. doesn’t think was properly done.

A fourth suit was filed this month by Prime Plastering Co. of Norco seeking $63,000 that is says Baldwin Co. has refused to pay for work done at one of the company’s condominium projects in Portola Hills earlier this year.

While it is not unusual for a large building company to have a long list of liens filed against it by subcontractors, lawsuits are less common. They indicate that the builder is refusing to pay rather than delaying payment.

Ronald P. Therrien, Baldwin’s chief financial officer, said such suits are a fact of life for builders and often stem from disputes over the quality of a subcontractor’s work. Subcontractors who blame Baldwin Co. for their own woes, he said, just aren’t facing reality.

Baldwin Co. was strapped for cash last year when it turned to Wall Street. The company was in default on more than $100 million of its $183 million in debt and had to use most of the bond proceeds to pay off overdue loans. It was left with only about $30 million for new construction.

That a company mired so deeply in financial difficulty could sell bonds based on its promises of a rosy future caused other Southern California developers to cheer. After three years of deep recession, they said, the Baldwin deal showed that investors were finally regaining their confidence in Southern California real estate.

Al Baldwin agrees with that: The company’s valuable land holdings, he said, were more attractive to the investment community than its 30-year history of profitability.

The bond issue in July, 1993, was well received on Wall Street. The deal was oversubscribed by hungry investors--meaning that more bonds were sold than were initially offered.

But some traders now say their initial enthusiasm waned quickly. Though the bonds’ value picked up Friday with news that the company had completed a $14.9-million land sale Thursday in San Diego, they had dropped shortly after they were issued last year when the company posted lackluster quarterly returns.

Wayne Mueller, managing director of the high-yield department for Bear, Stearns & Co., the New York brokerage that sold the bonds for the Baldwins, defends the company.

“What investors anticipated were the quarterly numbers predicted in the road show,” such as home sales and the number of homes built but unsold, he said. “But the Baldwins look at the big picture.”

Because the company is privately owned, he said, it was not as concerned with the differences between quarterly and long-range numbers as a publicly traded company might have been, “so people got a little jittery,” Mueller said.

Al Baldwin says that no such numbers were ever tossed out.

“We made no projections on the road show or in the prospectus,” he said. “We talked about our historic performance, about our land holdings and about future product lines, but we made no projections.”

That was not the perception in the investment community.

David Siegel, chief financial officer for Presley Cos., a Newport Beach home builder, said that the Baldwin bond deal made his company’s private sale of $200 million worth of junk bonds last month more challenging.

“The fact that the Baldwins didn’t make their numbers, as many people have stated, really created some caution on the part of bond buyers,” he said.

If a company prices a deal “and then comes out with really bad results, people are upset,” said one trader who asked not to be identified because of concern that the comments could affect the price of the company’s bonds and the trader’s relationship with clients.

Other analysts see Baldwin Co. in a much more positive light.

Barbara Allen, a home building expert with the brokerage Donaldson, Lufkin & Jenrette in New York and a satisfied owner of a Baldwin condo in Del Mar, said she sees a bright future for some Southern California builders, especially those like Baldwin that have access to Wall Street.

Analyst Agid agreed. “They are pioneers,” he said of the Baldwin brothers, “and they have survived what have been some very tough and lean years. Those two are survivors.”

* BUILDING BLOCKS: The Baldwin brothers’ rise to fame began with converted chicken farm. D7

The Baldwin Empire

Newport Beach-based Baldwin Co. has new-home developments in the works from Ventura to San Diego counties. The company is preparing a massive housing construction effort, partly with proceeds from a successful junk-bond sale last July that netted $155 million. An overview of current projects, some of which are not yet under construction:

Ventura County

1) Ormond Beach

Location: Oxnard

Size: 424 acres

Concept: 2,761 townhomes and detached houses, 1,000 to 1,600 square feet

2) Lang Ranch

Location: Thousand Oaks

Size: 106 acres

Concept: 438 townhomes and detached houses, 1,600 to 2,600 square feet

Los Angeles County

3) Calabasas

Location: Calabasas

Size: 27 lots in a gate-guarded community

Concept: 27 detached homes

Orange County

4) The Summit in Anaheim Hills

Location: Anaheim

Size: 591 acres

Concept: Approximately 1,855 townhomes and detached houses, 1,100 to more than 2,000 square feet; proposed equestrian trails, jogging and biking paths, 12-acre park, elementary school and five-acre retail center.

Began construction: 1989

Homes sold by Dec. 31, 1993: 449

1993 price range: $130,000 to more than $375,000

5) Portola Hills

Location: Southeast Orange County

Size: 800 acres

Began construction: 1989

Homes sold by Dec. 31, 1993: 449

1993 price range: $130,000 to more than $375,000

San Diego County

6) Carmel Del Mar

Location: San Diego