Hovnanian Enterprises Inc. (NYSE:HOV) and GTIS Partners LP, a New York-based real estate private equity firm, are teaming for a fifth joint venture, this one involving 2,340 lots in eight states upon which the JV expects to reap more than $1 billion in revenue from future home sales.
The deal provides Hovnanian, which has had difficulty raising fresh capital due to the market-wide scarcity of high-yield bond financing, with $120 million in cash. Total value of the deal was put by GTIS at $160 million, with 25% funded by Hovnanian and 75% by GTIS. Hovnanian will manage the JV.
The lots, 40% of which are finished, are located in prime markets in Arizona, California, Florida, Illinois, Maryland, New Jersey, South Carolina and Virginia. Among those markets are Phoenix, North Scottsdale, greater San Jose, Orlando, Libertyville and Napierville (outside Chicago), Egerton in Maryland, Monroe and Lincroft in New Jersey (the latter adjacent to HOV's headquarters in Red Bank), the Cane Bay Master Plan near Charleston, S.C. and in Willowsford, Loudoun County, Va.
According to Rob Vahradian, senior managing director and head of U.S. investments for GTIS, and Ed McDowell, managing director at GTIS, the homes to be built will include a mix of upscale single-family move-up and active adult product as well as town homes, some of which are slated for the first-time home buyer market. The communities, they said, are close-in suburbs near active employment centers with good schools.
The GTIS exectuvies would not specify how many of the lots were owned by Hovnanian prior to the transaction but did note that some of the lots were owned, others optioned or under contract. The first tranche or the JV, involving seven communities, has closed.
"We are extremely pleased to announce another partnership with GTIS Partners," said Ara Hovnanian, chairman, president and CEO of Hovnanian Enterprises. "Our two teams have developed a strong working relationship through our previous ventures and we look forward to continued success working together."
The relationship between the two firms began in 2009, when the strategy was the opportunistic acquisition of distressed land assets, according to McDowell. "The housing market has evolved," he said, and thus, "the strategy has evolved."
Since then, the companies have teamed on some $300 million in five joint ventures involving more than 4,000 lots in 34 communities.
In Hovnanian's fiscal second-quarter 2016 earnings release earlier this month, CEO Hovnanian said, "Along with increasing our land and land development spend during the second quarter to $187 million, we have taken the steps we outlined in March to increase our cash position and paid off the $87 million principal amount of debt that matured on May 15, 2016. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017."
At the time, the company's total liquidity was $125.6 million. Total debt at the time was $1.765 billion.