Riding a Real Estate Roller Coaster
Fla. Developer WCI, and Its Columbia Condo Plans, Endure Several Ups and Downs

By Alejandro Lazo
Washington Post Staff Writer
Monday, December 10, 2007

For nearly two years, a Florida developer has been battling to build a luxury condominium tower in the Howard County town of Columbia, sparking a rancorous debate over the future growth of the community's downtown.

The company, WCI Communities, has fought off lawsuits to stop the edifice from rising. Legislators have tried to limit the building's height. And community groups have formed on both sides.

But all the while, a much bigger soap opera involving the corporation has played out amid the worst housing downturn in decades. In filings with the Securities and Exchange Commission, WCI Communities outlines the pressures bearing down in it.

Billionaire and activist investor Carl C. Icahn has pushed himself onto the company's board after launching an unsuccessful takeover bid last spring. Condominium buyers are backing out of contracts even as prices fall. Most pressing these days, the company is trying to work out a new financing agreement to keep bankers from foreclosing on its loans.

It is a dizzying reversal of fortunes for a company once considered the BMW of home builders -- an industry favorite and a Wall Street darling -- that expanded into the Washington area two years ago, just before the market turned. The story of WCI Communities' rapid decline is a study of the larger woes of a housing industry caught in an economic vise.

WCI Communities' founding chief executive, Alfred Hoffman Jr., and his partner, director Don E. Ackerman, catapulted themselves into the upper echelons of the Florida development world in 1995, when they bought the real estate division of Westinghouse Electric for $556 million.

The pair had already been players in the market for more than a decade, but the Westinghouse purchase gave them control of a sizable inventory of construction projects in and around marquee retirement and leisure communities such as Pelican Bay, Naples and Fort Myers.

The move helped make Hoffman, who become U.S. ambassador to Portugal in 2005, a heavy hitter in state and national Republican politics.

As chief executive, Hoffman expanded the business by cutting deals to build championship golf courses, luxury resort hotels, houses and condominiums. Hoffman focused the company on affluent baby boomers, who economists predicted would be a key driver of development in Florida for decades to come.

"You can't stop it," Hoffman told The Washington Post in 2003, describing the development march from southwest Florida toward the Everglades. "There's no power on Earth that can stop it!"

After becoming a public company in 2002, WCI Communities rode the wave of Florida's real estate boom to its crest, taking on considerable debt to expand its luxury condo business as property values soared.

At first, the strategy delivered handsome paydays. From 2002 to 2005, WCI Communities more than doubled its yearly sales from $1.2 billion to $2.6 billion. Its profit leaped 76 percent to $186.15 million.

But perhaps the first hint of trouble came in 2003, when many of the Florida condos were being sold to speculators, said Mike Larson, an analyst with Weiss Research.

These buyers had descended on the market with the intent of "flipping" the properties -- selling them for a profit once their value had risen with a general appreciation of home values.

"What was at first a healthy recovery -- and healthy growth out of a recession -- turned into this hyper-boom in real estate," Larson said. "You had speculation really that was unprecedented -- and builders drew up plans, snapped up land and started projects all to meet this big onslaught of demand."

In 2004, WCI Communities entered the New York, New Jersey and Connecticut markets with the purchase of Spectrum Communities, a New York home builder. A year later it gained a foothold in the Washington market when it bought Reston-based Renaissance Housing Corp., a luxury home builder and high-rise developer.

Its first condominium project in the metro area would be the company's Plaza Residences in Columbia.

The Howard County Planning Board approved the 22-story building by a vote of 3 to 1 in early 2006, and WCI Communities planned to begin construction that June. Interest in the condos was strong, the company told analysts, yet opposition to the building's height remained, and community divisions over the tower escalated.

Passionate arguments about the character of Columbia's Town Center were made in public hearings, and opponents went to court to try and reverse the decision. Local lawmakers, meanwhile, talked about introducing legislation to limit the heights of downtown buildings, even as the company began clearing the site to begin construction.

Joan Abdallah, a retired teacher and school principal, last year formed a group of potential investors in favor of the Columbia condominiums. She has been following the company's financial troubles with deep interest and said she worries that some of the people who initially expressed interest in buying a unit may be having second thoughts.

Abdallah said she is still committed because she appreciates the quality work of WCI Communities and wishes to live close to Columbia's downtown shops and restaurants. Every now and then, she said, she pulls out the marketing package she received to look at a picture of her proposed residence.

"I still am placing and visualizing myself in that building," Abdallah said. "I often drive around downtown, and I visualize myself there, and really hope that it will happen."

Jim Dietz, chief financial officer for WCI Communities, said the company plans to go forward with the project. But some analysts said its fate may depend on whether the company can secure financing and keep enough projects alive to bring in revenue.

Ever since 2006, the challenge has grown. In the fourth quarter of that year the company posted its first loss, $64.6 million. The loss came after cancellations of traditional home orders spiked, defaults in the company's condominiums surged and a luxury community in Naples did not live up to expectations.

In March, the corporate raider Icahn made an unsolicited $22-a-share bid for the company worth about $920 million, a 16 percent premium at the time. The company rejected the offer and the two parties locked horns, even pushing back the company's June shareholder meeting to late August.

A truce was reached with a new board that made Icahn director, a move that Dietz, in an interview, cited as a possible plus.

"He has a lot of capital coming in behind him," Dietz said. "My guess would be that he would continue to support the company."

Icahn declined to comment on specific plans for the company, citing his role a director, and would only comment broadly on the state of the housing market.

"Sometimes it's darkest before dawn," Icahn said. "And admittedly, in the housing area, there may be some time before dawn. But if you have patience, these things generally work out very profitably."

In November, the company reported a third-quarter loss of $69.7 million ($1.66 a share), compared with a profit of $10.7 million (24 cents) in 2006. The company said it is having to lower prices on its units and spend more on incentives to get people to buy, and its costs are going up as its stretches out construction schedules and insurance gets more expensive.

"Demand continues to be unpredictable from week to week, and we saw an increase in defaults and cancellations during the third quarter," WCI's chief executive Jerry Starkey said in a statement.

The company's credit rating has been downgraded to junk status by rating agencies Moody's and Standard and Poor's. The company's stock closed at $4.05 a share last week, well off its 2005 highs, when prices topped $35.

On Friday, the company said its bankers had granted it an extension until Jan. 7 to work out a new financing agreement. If an arrangement cannot be worked out, the company warned that its lenders would have the right to take action, "including foreclosing on certain collateral and accelerating the maturity of the loans, which could result in the acceleration of substantially all our other outstanding indebtedness."

Alfred Hoffman, WCI's longtime champion, declined to comment for this article. He placed his holdings in a blind trust when he was named ambassador, and the trust has divested most of its holdings in the company over the past year, Dietz said.