Back to main

TRI Pointe Homes: Popular New Kid On Builders' Block

Posted
3/20/2013 4:21:00 PM
By: Investor's Business Daily
Referenced Stocks:DHI;LEN;PHM;TPH

WhenTRI Pointe Homes ( TPH ) stepped onto the homebuilding stage for the first time in 2009, it was a fresh face in an industry under siege. Homebuilders were going out of business or circling their wagons.

"We thought it would be a great opportunity to start at the bottom of the market," said Doug Bauer, TRI Pointe's CEO. "The beauty of starting a new homebuilding company is that we were without any legacy assets, liabilities or overhead."

Bauer and two colleagues had just quit their jobs with William Lyon, one of the largest homebuilders in California, to strike out on their own.

Like a lot of builders caught in the housing downturn, an overleveraged William Lyon had put growth on hold and downsized. It went through a prepackaged bankruptcy.

Over the course of more than two decades, Bauer had worked his way up to president and chief operating officer. Tom Mitchell and Michael Grubbs, who joined him at TRI Pointe, also had spent many years at William Lyon.

They named the new company TRI Pointe with the T standing for think, R for renew and I for inspire. It's based in Irvine, Calif.

Starwood Investment

Within a year, investor Barry Sternlicht's Starwood Capital Group was inspired enough to invest $150 million, enabling TRI Pointe to shop for lots of lots on the cheap. By the end of 2012, it controlled 1,550 lots, most of them in California.

They bought most of their land in leading California markets before the second half of 2012, when prices were still soft, says Citigroup analyst Will Randow.

Based on those low-priced land buys, TRI Point will have adequate land supply to build on through the first half of 2015, making it possible for it to achieve "outsized" earnings growth, Randow says.

But TRI Pointe is still at an early stage of building out its lots. It had closed on only 144 homes in all of 2012, for a total of 377 in the 3-1/2 years of its short life.

The homes are spread across portions of seven planned communities in California, including Rancho Mission Viejo in Orange County, developed by the Irvine Co., well-known to TRI Point's management team from their past ties with William Lyon.

The number of its completed homes at year-end was a pittance compared to the big publicly traded builders such asPulte ( PHM ),D.R. Horton ( DHI ) andLennar ( LEN ).

Yet on Jan. 31, TRI Pointe dared enter the public markets alongside those big names, pricing at the high end of its guidance, $17.

Starwood's majority stake was subsequently cut to 38%. Sternlicht is chairman of the board.

TRI Pointe was the first homebuilder to go public since 2004. Scottsdale, Ariz.-based Taylor Morrison Home is next in line.

TRI Pointe is as small as you can get in the land of publicly traded homebuilders, but investors lapped up shares in a red-hot homebuilders' market, thrilled at having a new name to invest in. After all, some of the established builder stocks had run up more than 100%.

"It was almost like a venture capital investment in that it was early in the company's history," said John Burns, president of John Burns Real Estate Consulting.

TRI Pointe shares have climbed 68% since the IPO, up 6% this week alone.

"There's a lot of appetite to invest in the housing recovery, particularly in the West where they have operations," Burns said. "And Barry (Sternlicht) has such a good track record that a lot of people want to invest beside him."

Having learned lessons from working at William Lyon, Bauer aims to keep inventory down to no more than three years.

He says he wants to turn assets quickly in order to generate "predictable cash flow and earnings."

TRI Pointe typically keeps project sizes to roughly 100 units so that it can start and close out its stake in a community in two to three years.

By June, the firm expects to start building models for a 149-home project in the Denver market, its first foray into Colorado.

"We call ourselves an opportunistic niche builder," Bauer said. "We build entry level to executive level homes of multiple product types to take advantage of opportunities wherever they are in California and Colorado."

TRI Pointe plans to eventually expand to Arizona, Texas and Nevada to further management's goal of becoming a regional homebuilder.

"We're not looking to build a national homebuilding platform," Bauer said.

The company lost money in 2010 and 2011 and is expected to post a slim profit of 4 cents a share in 2012. Analysts estimate 2013 earnings will jump more than 500%, however, to 23 cents a share, and rise to $1.03 the next year, according to Thomson Reuters.

Shifting Modes

Randow sees the company "shifting from land investment mode into revenue growth mode." He thinks revenue will double on a compounded annual basis through 2015.

The company plans to use the more than $200 million in proceeds from its IPO to buy more land. But land buys won't come as cheaply as before.

"Land prices in California are up 50% in the last year," Burns said. "They are probably up 25% in Colorado."

But home prices will likely keep rising to justify the higher land prices, he says. Prices in Orange County and other prime areas near TRI Pointe property, he says, are up at least 9% from a year ago.

And Randow said, "Even if they're buying at higher (land) prices for 2016 they're likely to buy in the better locations given their relationships (with developers) and track record. They've been doing this for 25 years."

Management's past track record and industry ties will get them invited to the table when land developers are looking to sell lots to builders, he says.