Macro Economic Trends and Risks
Dominion Homes Wrecked

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By RodgerRafter
June 26, 2008

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Dominion Homes was my first big homebuilder short because they were struggling in the boom years. Their biggest problem was that their building was in the rust belt regions of Ohio and Northern Kentucky. The economies in those regions never really supported much of a housing boom after interest rates started rising.

I posted about them several times, stating that I thought they'd be the publicly traded builder to go bankrupt. They were acquired by its main creditors for 65 cents per share on 6/12/08, completing a deal that was negotiated back in January, which is not too different from going bankrupt from a shareholder's perspective. At least they get something, management made sure that they get to keep their jobs, and the bankers will be able to figure out ways of avoiding write-offs awhile longer. The BS release is a bummer for me, as I've been short DHOM since January 2005 at about $24 and will have to pay substantial capital gains taxes next year. It would have been better for me if they had just gone slowly into bankruptcy.

Q1 sales totals tell the story of declining sales for Dominion.

Sales Contracts
Q1 03: 904
Q1 04: 950
Q1 05: 626
Q1 06: 475
Q1 07: 218
Q1 08: 157

With sales high in 2003 and 2004, they bought up land and took on more debt.

Total Real Estate Inventories
Q1 03: $267,409,000, 15,195 lots controlled
Q1 04: $382,859,000, 22,470 lots controlled
Q1 05: $416,740,000, 20,097 lots controlled
Q1 06: $421,823,000, 17,311 lots controlled
Q1 07: $352,096,000, 13,850 lots controlled
Q1 08: $291,247,000, 12,924 lots controlled

At the peak, they had about 10,000 lots controlled through options, and those were the first to be written off. Now just about all their lots controlled are on land they own in full.

From the final 10-Q:
"Based on the 719 closings that took place during the last twelve months, our land inventory represented an 18 year supply versus our target of maintaining a four to six year supply."

With sales in decline from 2005 on, and far too much inventory piling up, the company started a death spiral.

Total Liabilities
Q1 03: $157,388,000
Q1 04: $244,857,000
Q1 05: $258,458,000
Q1 06: $252,350,000
Q1 07: $216,430,000
Q1 08: $244,416,000

Shareholder' Equity
Q1 03: $136,274,000
Q1 04: $171,882,000
Q1 05: $190,482,000
Q1 06: $192,186,000
Q1 07: $156,745,000
Q1 08: $63,880,000

Their land assets are undoubtedly overstated. They can't sell the land for anything near the stated book value and they'll bear the interest expense on the financing for many years while they gradually try to sell off homes. Meanwhile, interest payments continue to get "capitalized" into the (over)stated value of land on their books ($11.6 million vs. $8.8 million a year ago).

Dominion's credit facility had to be renegotiated in January 2007, when their rising losses were in violation of the terms. I suspect that the creditors decided that another renegotiation in 2008 was futile and that they should explore alternatives to forcing the company into bankruptcy.

2007 8-K statement.

Many small regional builders have already gone under in the ongoing housing meltdown. Many more will follow. Dominion was likely among the first of the bigger builders to go because of regional factors that hit them sooner, but most of the other major builders face the same structural problems.