Real Estate Shows Further Declines: DR Horton (DHI), Great Wolf (WOLF), MGM Resorts (MGM)

Economic data has not been so encouraging lately. The Commerce Dept reported personal income and consumer spending unchanged in June following recent advances, causing Treasury Secretary Tim Geithner to proclaim that unemployment may rise again. And today the NAR reported sales of existing homes lagging 18.6 percent below sales for this period last year.

The economic environment for real estate continues its downward slide. DR Horton met expectations with its third-quarter earnings report today, but a tax benefit of $152.7 million accounts for 60 percent of income reported.

In the commercial sector, Great Wolf and MGM resorts fared poorly. WOLF reported a narrower-than-expected loss of $0.41 per share (excluding nonrecurring charges) but MGM surprised to the downside with a loss of $0.35 per share (again, excluding nonrecurring charges) vs. an expected loss of $0.24 per share.

Here’s a closer look.

DR Horton (NYSE: DHI)

DHI, the largest homebuilder in the US, reported net income of $50.5 million for $0.16 earnings per share on 50.7 percent higher revenues. In the year-ago period, the company reported a loss of $0.45 per share.

Sales orders declined 3 percent in the third quarter – an indication that the stimulus allowed the company to unload excess inventory. The company reported a 60 percent increase in closings over the year-ago quarter to 6,805 homes. For the first nine months of FY 2010, homes closed increased 40 percent to 16,594; for fiscal year 2009, the company closed a total of 16,703 homes.

The company reported write-downs in inventory and land options to the tune of $30.3 million for the third quarter, or about 8.75 percent of equity.

For the first nine months of FY 2010, the company reported net income of $253.9 million or $0.78 per diluted share. A tax benefit of $152.7 million accounts for 60 percent of income reported.

Recognizing the deteriorating fundamentals in the homebuilding industry, Donald R Horton, Chairman of the Board, stated:

“As we expected, market conditions in the homebuilding industry have become more challenging after the expiration of the tax credit at the end of April. Our net sales orders declined significantly in May and improved modestly in June and July. However, we will continue to focus on providing affordable homes for the first-time buyer, controlling our costs and contracting for new communities with attractively priced finished lots while maintaining our strong balance sheet.”

Comments: DHI continues to write-off assets with “inventory impairments” accounting. While this may improve earnings in future quarterly reports, reducing equity weakens its book value and debt-to-equity ratios. In fact, its LT debt is just shy of total equity and total debt exceeds it. Although the company improved gross margins and reduced overhead, its debt ratios need improvement. With home sales slowing and unemployment rising, the company is not likely to outperform in the current economic environment. If we assume the stimulus was contributed about 25 percent to the increase in closed homes, then closings could drop 25 percent or more next quarter. And the $0.15 per share yearly dividend is not worth the risk.

Great Wolf Resorts (NASDAQ: WOLF)

WOLF reported a second-quarter net loss of $(12.8) million, or $(0.41) per diluted share (excluding nonrecurring items), compared to a net loss $(5.7) million, or $(0.18) per diluted share for the same period a year earlier. Analysts had predicted a $0.49 per share loss.

Revenues the 2010 quarter totaled $68.4 million compared to $68.6 million for the 2009 quarter. Despite expansion plans, the company continues to struggle with occupancy at Great Wolf resorts with same-store revenues and occupancy declining, although revenue per occupied room increased.

The company claims that the boost in revenue per available room “has substantially outperformed the overall U.S. hotel industry during the recession over the past two years.”

Comments: WOLF restructured its debt to improve its balance sheet, but debt levels still remain high. The company is highly leveraged. It has a debt/asset ratio of .68x and a debt/equity ratio of 2.64x. Further slowdowns in the economy could maim this company.

MGM Resorts International (NYSE: MGM)

MGM bucked the trend and got a boost following its early-morning earnings, but ended the day slightly lower.

In its second-quarter earnings report released today, MGM recorded a diluted loss per share of $2.00 compared to a $0.60 loss for the year-ago quarter. Net revenue decreased 2 percent compared to the 2009 quarter, reflecting lower occupancy, a lower average daily rate, and lower revenue per room.

The company wrote-off more than $1.12 billion in impairments (or $1.69 per share) in the quarter. The company also retired debt, reducing equity by another $0.11 per share.

The company is touting its new program, Mlife. “M life, our new customer loyalty program, was introduced two weeks ago at Beau Rivage and the response has been outstanding,” said Mr. Murren. “We are very excited about the opportunity M life presents to our Company, especially when coupled with the superior assets in our portfolio.”

Comments: MGM’s operating results aren’t stellar, and its debt/equity ratio stands at 3.36x. A recent insider purchase may have tipped the scales to bring investors back to the table. Still, short interest remains high at over 34 percent of float. The company has a beta of 4 so you could get a technical bounce on a good trading day.

Disclosure: No positions.