After paying a record price for a privately held builder, Emaar pumped another $614 million into it.
The odyssey of John Laing Homes
Emerging from several days of negotiations at a seaside resort in San Diego, California, Mohammed Ali Alabbar was exuberant. In one fell swoop, the chief executive of Emaar Properties had bought a major US homebuilder and transformed his company into the world's largest property developer. "This agreement will provide Emaar with an important gateway into the US real estate market," he said in June 2006, announcing that Emaar had acquired John Laing Homes for US$1.05bn (Dh3.85bn).
But last month, less than three years later, it seemed Mr Alabbar was addressing a different world. John Laing was teetering on the edge of Chapter 11 bankruptcy protection. Mr Alabbar soberly explained that the focus of Emaar "was to mitigate the negative impact of the global financial crisis by facing up to the new economic realities and identifying innovative strategies to sustain businesses in an unprecedented downturn".
The two statements mark an incredible arc for Emaar, which has found itself thrust into a new, challenging financial world. Despite the changes, neither Emaar nor John Laing are throwing in the towel. Emaar is making plans to emerge from the recession as a major regional developer, while John Laing Homes said it was returning to two core businesses: luxury homebuilding and the southern California market.
To observers, these cutbacks are a sign of the new tools and strategies that will be needed to survive the dramatic reversal of the tides. "It's all about survival of the fittest and cash conservation in this market," said Chet Riley, an analyst at Nomura Securities in Dubai. "There are issues coming and we are seeing these companies move into a position where they have a lot of cash. They need to consolidate, pull back to core operations - whatever it takes to get through this."
Mr Alabbar's optimism in 2006 was understandable as most of the world was enjoying a property boom. The deal with John Laing was part of the rise of Dubai into a truly global business force. With the expertise and reach of its new subsidiary, Emaar would build everything from the world's largest tower in its hometown of Dubai, to suburbs in California, to master developments in Karachi. "These are the boom times," he had told the New Yorker magazine several months earlier. "These are the days we should just push the accelerator to the max."
After buying the company for what was then a record price for a privately held builder, Emaar pumped another $614 million into John Laing as part of an ambitious growth plan for the two companies. In the three months after the purchase, John Laing quadrupled its land bank to 4,400 lots, according to US media. Larry Webb, then chief executive of the company, said he expected revenue to soar to $10bn by 2011.
Emaar Design Studios was also born of the venture as a powerhouse of architectural and design ideas for Emaar's projects around the world. One condition of Emaar's purchase of John Laing was for 11 of the company's top executives to remain at the company. It was a tacit guarantee that Dubai would be able to tap the homebuilder's expertise for its rapid growth into other countries. Meanwhile, other US property construction companies were cutting back as the malaise from the subprime mortgage crisis spread across the housing industry. Sales of new homes were beginning to decline as mortgages became more difficult to obtain. Prices fell more than 25 per cent from June 2006 to last November, according to the Case-Shiller US Home Price Index.
Eventually, even Emaar's cash resources were not be enough to fend off the rising waters for John Laing, especially because the credit crunch had spilt over into the UAE and dramatically slowed sales. On Feb 20 this year, after weeks of rumours, John Laing filed for bankruptcy protection, describing a debt burden of $977m. The pain from the turmoil in the housing market had been etched deeply into the company, according to the filings. Up to Nov 30 last year, the company sold just 560 homes and had revenue of $287m, compared with $1.65bn in 2006 on 2,269 home sales.
The problems were even becoming apparent in 2007, when revenue dipped by 42.5 per cent to $948m on 1,371 home sales. Just days before the bankruptcy filing announcement, three banks froze the company's accounts and the landlord for its spacious offices in Irvine, California, had threatened eviction, according to the filings. Its staff had been steadily pruned to 90 from a high of 1,100 two years earlier.
Bradley Sharp, the chief restructuring officer for the company, said in the filings that a combination of new homes sold and prices "has substantially eroded both the profitability of homebuilding and the cash flow that homebuilding activities generate". "The continuing turmoil in the [US] housing market, with aggressive price discounts and concessions offered by many homebuilders, and the significant increase in foreclosures affecting the resale market have all contributed to buyers' unwillingness to make buying decisions in an already weak and confused housing market," Mr Sharp said.
"Additionally, due to lack of mortgage financing, the ability of buyers to close their transactions once they have made a decision to buy continues to be an issue." Phoenix and California were the hardest hit markets. According to the Case Shiller indexes, average prices in those areas fell by an average of 31 per cent and 28 per cent respectively from their peaks up to August 2008. Emaar declined to comment directly on the troubles at its subsidiary, but the company gave a hint of the problems to come just a week before the bankruptcy filings when it posted a Dh1.76bn loss for the final quarter of last year.
That was attributed to a Dh1.77bn write-down in goodwill on John Laing and another Dh919m because of lowered value of its inventory of land and homes. Combined with a previous Dh750m write-down, the total was about Dh3.4bn on a total investment of more than Dh6.1bn in the venture. While the news was grim at first glance for Emaar, analysts have praised the company's decision as an important step in turning things around. Emaar's share price has risen by 9 per cent since the announcement, after several weeks of dizzying drops.
Bobby Sarkar, a property analyst from Al Mal Capital, said the company's decision to write down the full amount of goodwill associated with the company when it could have distributed the losses throughout this year would be beneficial in the long run. Emaar was protecting itself from further losses by forcing John Laing to shed everything but its core assets. John Laing, facing enormous difficulties, is not giving up. It said in a statement that the bankruptcy process "will allow it to significantly reduce debt from its balance sheet while facilitating a strategic reorganisation of the company, which will place it in the strongest possible position to sustain its momentum despite extremely challenging market conditions".
The company is going back to basics. Mr Sharp said in the filings that it would focus on high-end home construction and southern California, the long-standing flagship of the company's operations. firstname.lastname@example.org