Exit from Development Proves Costly to Big Thrifts
Some of the nation's largest thrifts are paying a steep price for their forced march out of the real estate development business.
"The timing is about as bad as it could be," said Joseph Jolson, thrift analyst at Montgomery Securities, San Francisco.
The combination of stiff new capital requirements and miserable real estate markets is making disposal of the thrifts' development businesses painfully expensive. They are losing hundreds of millions of dollars dumping the properties just as the economy is battering their earnings.
Subject to Writeoffs
But any success in reducing this exposure is also subject to the countervailing impact of huge writeoffs that are necessary when properties are sold at a loss.
What's a thrift to do? Several have elected to bite the bullet.
Glenfed, CalFed, HomeFed, and Great American lightened their real estate portfolios by a total of $589.5 million since their peaks in 1989. Meantime, the first three have made loss provisions of $286 million.
That leaves these four institutions with real estate assets in which they had invested slightly more than $1 billion. Great American's $164.6 million is now in the hands of the Resolution Trust Corp., since the thrift was seized Aug. 9.
Plummeting values and thinning ranks of real estate investors have not extinguished hope of reducing this exposure even further, however.
Tough Assignment
Los Angeles-based CalFed, for example, is aiming to unload $119.8 million of residential properties by the end of the third quarter, according to James Hurley, senior vice president. Because of the severe problems in the commercial real estate markets, he said, it is difficult to say when those operations will be off the books.
CalFed developed homes and commercial and industrial projects through three subsidiaries and is planning to withdraw from the business totally. The company has whittled its $541 million of investment in properties at midyear 1989 to $345 million on June 30, 1991.
Now staggering under a burden of nonperforming loans and out of compliance with capital regulations, HomeFed faces similar pressures to unload properties.
"We will be totally out of the business in thee or four years," said William D. Nichol, chief financial officer.
San Diego's HomeFed is selling some of the projects in bulk sales and continuing with plans to finish some others.
Likewise, Glendale-based Glenfed reduced its its real estate development business by $118 million, to about $262 million, in the fiscal year that ended June 30. Bulk sales and auctions have helped to sell apartment buildings.
Glenfed's goal is to be out of the development business by June 30 of next year, said Stephen J. Trafton, vice chairman and chief financial officer. "We believe we have made some pretty significant progress," he said.
Real estate markets have been lousy ever since the Financial Institutions Reform, Recovery, and Enforcement Act became law on July 1, 1989.
Capital requirements established under the law for real estate development activities were so tough that virtually every thrift decided to get out of the business at the same time.
Deductions Escalate
To comply with the law, thrifts must deduct from capital part of their investment in any properties they sell at a loss. That "haircut," which started at 10% of investment, now stands at 25%; it is to increase every year until it reaches 100% in 1994.
To make matters worse, introduction of these requirements coincided with one of the worst real estate markets in American history. Prices were plunging, and financing for buyers of the properties was drying up. The thrifts found they could not sell their entire real estate companies, so most are getting out house by house and building by building.
"The regulators sent out a clear signal that most people should not be in this business," said Sam Lyons, president of Bryant Financial Inc., Westlake, Calif., the development company of Great Western Financial Corp., Beverly Hills.
CalFed set aside $125 million for possible losses in the third quarter 1990 on the disposition of its development company. H.F. Ahmanson & Co., Irwindale, has set aside $88 million. Glenfed Inc., has set aside $91 million for possible losses on these assets. HomeFed Corp. has reserves of $70 million.
Expectations Challenged
While the reserve numbers do not translate directly into losses, they provide a good benchmark.
The thrifts could have cut their losses, critics contend. Some institutions expected unrealistic prices when they initially tried to sell their development companies as a whole, said Richard Sprayragen, a partner at Kenneth Leventhal & Co., the Los Angeles real estate accounting firm.
"Now they are looking at bigger losses" as the markets continue to deteriorate and a "longer time frame since they are disposing of this property-by-property," he said.
HomeFed had $1.1 billion in development properties, compared with its assets of $17.7 billion at the end of 1989. Many of HomeFed's projects were with joint-venture partners. HomeFed's investment in the developments was $350 million at yearend 1989 and that has been slashed to about $275 million now.
Ambitious projects ranged from a 917-acre planned community on San Francisco Bay to more than 6,000 acres in various developments around HomeFed's base in San Diego. HomeFed had been in the development business for 20 years and most of its developments are residential.
Mr. Nichol of HomeFed disagrees that those that rushed to market will do better. With California's housing markets recovering somewhat, he expects HomeFed to get better prices for having moved a little more slowly. "If the markets cooperate, we will not have to take any losses at all," he said.
Ahmanson has three development arms, which had $748 million in investments at year-end 1989. That total is "about the same" today, according to Jack A. Frazee, executive vice president and chief financial officer. These units developed a wide variety of projects from single-family homes to office towers, with most of Ahmanson's activity in California.
An effort to sell whole companies has pulled them off the market when bottom fishers turned in the only offers. "We have capital and we don't have to sell at fire sale prices," said Mr. Frazee.
Exit Planned by Ahmanson
Ahmanson has plans to be out of the business by mid-1994. The residential development segment, which totals $341 million, will be liquidated in 12 to 18 months.
"You won't see a dramatic reduction until the fourth quarter of 1991," said Mr. Frazee. He declined to say when Ahmanson would be out of the commercial business.
Glenfed, which lost $231.7 million this fiscal year, partly due to the $91 million in provisions for Glenfed Development, has disposed of about one-third of its development company. Like Ahmanson, Glenfed had tried to sell the entire company, but when no buyers materialized, decided to sell it property-by-property.
Great American Bank, San Diego, had $313.1 million of its $15.9 billion of assets invested in real estate developments at year-end 1989. A spokesman said the total was $164.6 million at year-end.
First Nationwide Bank, San Francisco, which had $652.2 million invested in its development business as of June 30, declined to discuss its plans.
Various Techniques
CalFed, like Glenfed, has used auctions and markdowns to get the properties moving.
More fortunate was Coast Savings Financial Inc., Los Angeles, which had a partner, Alan I. Casden, in its CoastFed Properties Inc. It was able to sell its half back to Casden Co. in January 1990 and did not take a loss on the transaction.
But Coast took notes and properties from Casden as part of the payment and said in its 1990 report to shareholders that "could result in a need for Coast to establish reserves for losses." The subsidiary mostly built apartments in California.
Great Western is about the only company that is retaining its development subsidiary, Bryant Financial. Bryant's $125 million investment in properties makes it small relative to Great Western's $39.7 billion in assets.
Only Single-Family Units
Bryant has built only single-family houses in California at prices under $350,000, considered fairly affordable in the Golden State. The subsidiary sells "a couple of hundred homes a year," according to Mr. Lyons.
"Even though this requires substantial capital, the return is sufficient to keep it," he said. Great Western has no expansion plans for it, however.
For the others, the development companies are an impediment to capital that they cannot retain. And the disposition is causing a clash between capital and economic decisions for the thrifts. Said Glenfed's Mr. Trafton: "It is forcing transactions that have little basis in economic value."
PHOTO : Selected Thrifts' Real Estate Development Investments
PHOTO : SPOTLIGHT ON SAN DIEGO: Apartment Vacancy Rates
