Short Palm Harbor Homes

1
Short Palm Harbor Homes

• Kevin Wu
• McIntire Investment Institute
• March 28th , 2005

2
Company Overview

• Vertically integrated operation produce, market,
  and finance manufactured homes and modular homes
• Discovery
• Nationwide
• CountryPlace
• BankSource
• Concentrated in Texas and Florida

3
Industry Overview

• Manufactured Housing
• Industry recovering from massive slump
• Slump caused by over-aggressive lending and
  resulting defaults
• Several lenders left market unavailability of
  financing
• Modular Housing
• Experiencing unprecedented growth
• Being adopted by elite architects

4
Manufactured Home Trend
5
Industry Overview

• Other factors
• Repossessions
• Reduce demand for new homes
• Proportional to defaults
• Interest Rates
• Manufactured home loans 2-3 higher than
  traditional mortgage

6
Competition

• Traditional on-site construction
• Champion
• Fleetwood
• Clayton (Berkshire Hathaway)
• Returning to profitability
• Cut costs when Palm Harbor was expanding

7
Manufactured Housing

• Moving upscale in manufactured housing
• Units flat year over year
• Sales increased 7, units down 1
• Competitors still concentrating on low cost
  housing
• Champion returning to profitability

8
Manufactured Housing

• Inventory increasing despite idling of plant in
  Texas
• Closed 12 retail stores
• Same store sales down
• Q2 27.3 in units, 22.5 in dollars
• Q3 21.6 in units, 8.6 in dollars

9
Manufactured Housing

• Hurricanes have helped demand
• Significant demand in Florida for replacement
  homes
• Temporary spike in demand
• Texas still weak

10
Modular Homes

• Regular home built in chunks
• Being adopted in low density areas
• Prestigious architects (Time Magazine)
• Relying on modular homes sales to support company
• Increased to 19.7 of sales from 10.8
• Popular in North Carolina and Florida as
  replacement homes

11
Modular Homes

• Count as real estate
• Eligible for mortgages
• Market exposed to same risks as traditional homes
• Interest rates

12
Interest rates

• Effect of rising interest rates
• Manufacturers hope that rising interest rates
  will help manufactured home sales
• Test for correlation
• Mortgage rates vs. Manufactured home sales
• Monthly data from 1971
• ? -0.12439
• John Diffendal BBT Capital Markets
• Manufacturers looking for hope

13
Interest rates
14
CountryPlace Mortgages

• Chattel Mortgage (property loan)
• Need to securitize loan portfolio to continue
  operations
• Offering will be made when portfolio reaches
  170M (2nd half calendar 05)
• SP does not see recovery in manufactured housing
  ABS market
• Conseco, Oakwood bankrupted
• Palm Harbor forced to provide financing
• High delinquencies and loss rates remain

15
Debt Obligations

• Issued 75M in convertible notes in first quarter
  05
• 3.25
• Each 1,000 in principal amount convertible to
  38.5803 shares
• 11.2 dilution

16
Debt Obligations

• Broke covenant on Floor Plan Facility in Q2
  (ended Sept. 24)
• Obtained waiver for Q3
• Management does not expect to be in compliance by
  this quarter
• Renegotiating covenant for next quarter

17
Debt Obligations

• Current outstanding balance on Floor Plan
  Facility 23.9M
• Cash
• Q2 05 Q3 05 Q4 05
• 67.6M 34.0 24.6M

18
Other facts

• 54 of outstanding stock owned by
• Lee Posey (recently ill)
• Capital Southwest Corp.
• FY 05 ended March 25th

19
What to look for?

• Overly optimistic?
• Q4 05 EPS estimate (0.01) and 0.12
• Q3 05 EPS (0.20)
• Q4 seasonally weakest
• Manufactured Home shipments to come down from
  anomalous jump

20
Risks

• Manufactured housing shipments continue January
  pace
• Modular housing continues to grow at its current
  rate
• ABS market improves and Palm Harbor is able to
  make offering profitably

21
Revenues EPS
22
Ratios