It's hard to live like a prince when you're flashing a pauper's income statements. WCI Communities (NYSE:WCI) doesn't get it yet, but it will. The troubled real estate developer has rebuffed billionaire investor Carl Icahn's advances, a gutsy move that will prove costly if a better offer for the company isn't waiting in the dilapidated wings.

Icahn's offer to buy tendered shares at $22 expired over the weekend. Plenty of shareholders offered up their stakes, but Icahn balked as WCI held firm to its poison pill provision to ward off hostile takeovers.

It's just the latest chapter in a story that appears likely to end in heartbreak, rather than the storybook ending that shareowners hope for.

Silent cranes on the skyline
Icahn began snapping up shares of WCI last year, amassing a nearly 15% stake by the time he made his disenchantment public with the company's leadership three months ago. His February filing revealed that he sought to replace the entire board of directors at the company. He followed that up a month later with an unsolicited offer to buy the company at $22 a share.

WCI is on the block. It hired Goldman Sachs (NYSE:GS) to explore "strategic alternatives" back in February. Icahn's offer was just a 16% premium to where the stock was at a day earlier, but it was a 60% markup over where WCI shares were when they bottomed out last summer.

That's worth noting because the fundamentals at WCI have only gotten worse since Icahn's offer. WCI has posted wider-than-expected losses over the past two quarters. Even the most upbeat analyst doesn't expect a return to profitability until 2009 at the earliest.

The company posted dismal first-quarter results earlier this month. It wasn't just the loss. Revenues fell by 40%. New orders were off by 41%. The backlog of orders dropped by a staggering 58%. In other words, as bad as things look now, it's only going to get worse.

WCI's biggest problem is in its condo business. Building high-rises in a booming Florida real estate market seemed like a great idea a few years ago, but mechanical cranes are rusting away as development slows to a crawl in deflating coastal markets.

Things have gotten so bad at WCI that condo unit net orders this past quarter clocked in at a negative seven. Yes, there were seven more early buyers defaulting on their purchase contracts than those who signed on the dotted line.

We know that Florida-intensive developers are in a bind. St. Joe (NYSE:JOE) is Florida's largest private landowner, but it's in the process of winding down its homebuilding business. Others like Lennar (NYSE:LEN), Beazer (NYSE:BZH), Levitt (NYSE:LEV), and Hovnanian (NYSE:HOV) have hit rough patches in the Sunshine State.

The proud and the not so loud
If things are going this badly since WCI's stock hit rock bottom last summer, taking the 60% premium and running would be a pretty good exit strategy. However, WCI is too proud for that, especially if the offer is coming from a serial restructuring artist who has already vowed to wipe out the boardroom.

"WCI's current directors are best suited to deliver value and navigate the challenging housing and real estate market," wrote the company in a letter to shareholders this month, explaining why it had chosen not to back Icahn's tender offer or his slate of new directors.

Going by the past couple of quarters and Wall Street's opinion of how the next few quarters will play out, the company's navigational skills don't look so hot right now. It's tough all over, true, but if the company didn't see the downturn coming, why should we trust it when it feels that a better offer will be coming?  

This brings us to the "inadequate" offer by Icahn. If the real estate sector is so darn cheap right now, where are the private equity buyouts from hungry outfits that seem to be buying everything that isn't bolted down in most of the other sectors?

The argument in favor of developers is that many are trading at ridiculously low book value multiples. WCI is actually trading for less than its shareholder equity. But what do you think red ink and asset writedowns do to book value?

Allow me.


Book Value per Share

Q3 2006


Q4 2006


Q1 2007


What we've got here is a reverse auction. If the next few quarters continue to eat away at WCI's fundamentals, it's in every potential buyer's interest -- including Icahn's -- to wait as long as possible. Absent a turnaround, WCI will continue to deteriorate.

The company is certainly not worthless, but it wouldn't surprise me to see it settle for less than $22 a share after a few more painful quarters. Then again, that would involve swallowing pride. Sadly, as far as bittersweet drinks go, that would be an unaccustomed dram down WCI's scratchy throat.

Longtime Fool contributor Rick Munarriz lives in Florida and hopes that the local market bounces back sooner rather than later. He will have no problem chugging down his pride if that happens. He's also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.