The Big List, Part 2 continues the inside story of TRI Pointe Homes' flashpoint moment, January 31, 2013, a game change moment in the relationship of the largest public home builders and privately held companies, as well as the link between global capital and the home building sector.
(see Part I)
Four months earlier, Bauer stood at the sidelines of one of his son’s Mater Dei High School football home games after work one Thursday evening around 6 p.m. When his cell phone signalled, he checked to see who it was before upsetting his work-life balance.
Caller ID: Barry Sternlicht
Sternlicht, Bauer knew, was in Korea. Bauer could guess this call was not likely to be of the casual “hello, how’s the game going?” variety. The outcome of the game was a win for his son’s 9-0 freshman squad last fall. The outcome of the call was TRI Pointe’s January 31 IPO. Sternlicht’s epiphany in Korea changed the direction Bauer, TRI Pointe’s management, and its group of financial services advisors were heading in as they developed a strategy to tap the capital markets for a big strategic blitz starting in 2013.
“We knew we needed to raise capital,” Bauer said. “We had all of 1,550 lots, 775 of them owned and the other half controlled. We knew that to grow, we’d need to buy land, and to be able to buy land out ahead of our growth. The debt markets at that time were open, so that was an option. We were approached by FBR Capital Markets about a “Rule 144a equity offering,” and headed down that road. The risk there was that if we did a private placement and wanted or needed to go public at some point—and the market had no appetite for companies going public--what happens then?”
The answer was plenty of risk. Nevertheless, Bauer and his investment bank partners set in motion a capital raise through a Securities and Exchange Commission Rule 144a equity offering. This mechanism allows qualified institutional investors to trade a company’s securities among one another for a two year lock-up period. The 144a would have been a way for TRI Pointe to raise cash immediately, and have to go public, sometime within the two-year time-frame. But a big dollop of its optionality would have been placed in the control of the institutional investors and their interests, which could potentially force a listing at a time that may not have been as opportune for TRI Pointe.
Sternlicht, whose $150 million investment in TRI Pointe two years earlier—in September 2010--made Starwood Capital an 94 percent owner, went instead with his gut. Instinct told him the moment had come for a bigger play, and so he invoked majority owner’s rights. Sternlicht is one of those players: he’s more often than not right about his instincts, and then as his instincts play out, they tend to self-fulfill –for they cast disproportionate influence many others’ behaviors. That’s what a guy who runs a company with $20 billion in real estate assets can do.
“When I’m offshore and I can’t sleep is when I do my best thinking,” said Sternlicht. “This is when, as a principal owner you overrule your investment bankers and challenge your management to think bigger. Doug was super-nervous, but I told him that he and his team would show well” among investors.
In other words, the market maker got a feeling it was the right moment to make the market. The call to Bauer during the Mater Dei football game would change home building’s playing field for 2013.
Fast forward from the moment of that call to the moment Doug Bauer’s standing at the podium on the balcony overlooking the NYSE on January 31, fretting about coming across as a wimp if he didn’t lean on the opening bell for a good long count of 10 seconds.
An instant after the bell sounds, human “market maker” specialists assemble in the pit below, iPads in hand. For an IPO, it’s these market makers—for the one time in their existence as traded securities—who set the market price for the stock, shouting prices back and forth, old school style. What happens is that there are bids and asks for a low, medium, and high range for the stock, and the traders “triangulate” around these three ranges to set the initial stock valuation.
“The traders are yelling the bids and asks right before your eyes,” recalled Bauer. “It’s not a computer exercise that one time; that’s your opening price.” For TRI Pointe, it was 19.56, a couple of dollars on the plus-side premium to their high-range asking price of $17 per share.
Ironic, for TRI Pointe is all about triangulating around value.
In its name, “TRI” stands for “think, renew, inspire,” three verbs, three imperatives. Its principals are three dynamos, Bauer, Mitchell, and Grubbs, who each worked wearing many hats at an executive level for General William Lyon for two decades, and at least two major boom-and-bust cycles.
“Bill would often remind us that, as home builders, we were not very far above wildcatters, drilling everywhere we could in hopes of a strike,” said Bauer. “Maybe that’s why one of my primary traits now is what I call ‘productive paranoia,’ which is that my urge to grow fast is offset by a sense of caution and the need for a solid plan.”
TRI Pointe’s DNA and deep skill-sets triangulate from the January 31, 2013 market-open date at the NYSE, to the Sternlicht call to Bauer during his son’s football game in September 2012, to the early 1990s. This was the moment Bauer, Mitchell and Grubbs were entrusted with $5 million in project level equity funding to run William Lyon Homes, a privately held flanker company to the General’s more vaunted home construction company, Presley Cos.
“We cut our teeth on adversity management,” Tom Mitchell said of the earlier Lyon days, when Bauer, Mitchell, and Grubbs took on one deal after another, with the California Public Employees Retirement System looking over their shoulders and writing checks as they bought assets piecemeal from the “old” Lyon company, worked them out financially, and built on them using the operations of the NewCo.
Bauer, Mitchell, Grubbs were the heart of the order of a lean team that built the littler private company into a large public home builder through a reverse merger with Presley in 1999, to become what is now known as William Lyon Homes. From that moment in 1999 until Lyon bought back its common shares and became private again in 2006, the company delivered over 2,800 homes per year on average, generated revenues averaging over $1.0 billion per year and increased shareholders’ equity from $53 million to over $600 million.
If TRI Pointe may be regarded as an up-and-comer in today’s public home building pantheon, its principals were calling audibles from an up-and-comer playbook they knew by heart from the Lyon days. Bauer, Mitchell, and Grubbs apprenticed as young Turk home building executives under mentors like the General himself, the Irvine Company’s Ray Watt and Dan Young, Standard Pacific founder Ron Foell, Fieldstone Communities founder Peter Ochs, and other legends including Barry Sternlicht himself. Their tutelage combined field experience in mortgage lending, home building and community operations, accounting, and deal-making, and an immersive education in the art and science of public equity and debt sale and management.
Their stock-in-trade disciplines included zero-tolerance spreadsheets, internal rate of return hurdles, direct-cost take-outs, and on-time, on-budget, on-contribution execution, and they iterated, built homes, and built trust among home buyers, with land sellers, with trade partners, and with one another.
Bauer, Mitchell and Grubbs were fixers who needed to work both in the weeds and to see the big picture. And just like many of home building’s current generation of CEO-level leaders who brought grit, opportunism, and fearlessness to the Resolution Trust Corporation mess of the early 1990s, the three young execs became the Tinker-to-Evers-to-Chance combination in the middle infield of General Lyon’s executive line-up.
They’d reverse-merged Presley into privately-held William Lyon Homes in 1999, and then spent the 2000s’ first decade toggling back and forth between public debt raises, public equity capital, buying themselves back into a privately held company, taking on private equity, etc., nearly every financial capital structure in the book.
“The biggest lesson that we learned from 25 years in the business and the reverse merger that translates into what we’re doing at TRI Pointe is that we’re going to be more disciplined about taking on too much land—more than three years’ supply—and too much debt,” said Bauer. “You can always sell a house, upturn or downturn, but you can’t always sell land.”
The three departed Lyon in early 2009. Although emotionally it felt like cutting the umbilical, they each felt that a “different kind of home building company” would work.
So, they designed one whose foundation was an asset-light, legacy-free, moderately-leveraged, high-efficiency, high-touch business model . They believed this type of company would map well to the low-volume, dark days of the mid-Great Recession, and then, as the economy improved, they’d be spring-loaded for growth as they scaled their per-unit disciplines, their balance sheet management, their customer focus, and their relationships with land sellers. Only problem was, there was no acquisition, development, and construction money out there in the wide world.
They pivoted out of the gate to a fee-based vertical construction model. This meant they were spared having to sink land and development costs into their business. The other edge of the sword, however, was that they’d have to work magic with the asymmetry potential of building as contractors and marketers to profit on their per-home fee.
Longstanding relationships with The Irvine Company and Resmark Capital gave TRI Pointe its operational starting line, and for about a year, into the Spring of 2010, Bauer, Mitchell, and Grubbs put their William Lyon 2.0 playbook into action. Their first full year of operation, in 2010, TRI Pointe grossed $4.1 million in home sales, but the good news for them is they started paying most of the Starbucks tabs, gas money, and building their new homes in Irvine Ranch made the days go by quicker than sitting around in their kitchens making plans.
They weren’t going to make a living on 3-to-5 percent fees on homes they built for others, but their first deals gave them “cred” in what is known to be a ferocious market, and they could do some proof-of-concept work on construction operations, financial accountability, and customer care processes, which they regarded as strategic anchors to what they were trying to set in motion. What’s more, in those early fee-building days, they got to spectrum out their product portfolio, offering both higher-end and entry level models, ranging in size and design complexity at multiple price-points.
“When [Irvine Company president] Dan Young asked us, along with The New Home Company and four other builders to be part of their 2009 and 2010 “Executive Builder” program at Woodbury and Woodbury East neighborhoods, he said, ‘you guys have a building program with an excellent reputation,’” said Bauer. “That affirmation, coming as it did before we built one house as a new company, was huge.”
Some 186 fee-built home deliveries later, in the fall of 2010, TRI Pointe upped its ante. Bauer, Mitchell and Grubbs, had proven they were a skill-set. Now they needed to map it to a strategy. Trouble was, acquisition, construction, and development dollars from lenders were nowhere to be found.
Tom Mitchell described the TRI Pointe predicament, certainly one that has continued to bedevil private home builders even as traction and confidence build through the middle part of 2013.
“If we were going to stretch beyond fee building, we were going to need access to project level equity financing, the kind you’d set up on a deal by deal basis, but the financial community was having none of that,” said Mitchell. “We were saying to ourselves, we can do this, hitting choppy little singles, pulling our hair out on these little returns. But that’s not what our strengths are. We knew we’d have to switch gears.”
This instant was where professional talent and personal relationship sometimes fuse to make destiny. “Switching gears,” in this case meant making a call that took 25 years to become just the right thing to do. Bauer, you see, had met and befriended Barry Sternlicht that long ago when both men and their young families were vacationing on the beach in Mexico. They followed one another’s business trajectories and successes, helically distant and helically never straying far. As Sternlicht’s Starwood enterprise expanded through the 2000s, he’d call Bauer from time to time, hoping to lure him away from Lyon.
Bauer, Sternlicht said, would graciously blow off his overtures over the years. “He was loyal [to General Lyon] to the core. I guess he envisioned himself as the captain braving the stormy seas.” Until 2010, that is, which is when TRI Pointe needed, as Mitchell said, to shift gears. This time, it was Bauer who initiated the call to Sternlicht, a phone call that resulted in Sternlicht greenlighting a $150 million equity investment in TRI Pointe for an 94 percent share of the company.
This deal put TRI Pointe on the map, literally speaking. After fee-building in SoCal through the mid-part of 2010, the Starwood investment allowed Bauer, Mitchell, and Grubbs to dig in as merchant home builders in November 2010, with the purchase of a tract in Southern California’s Simi Valley. By the end of 2012, the company had acquired 966 lots in Northern and Southern California, opened up operations in Colorado, and delivered 191 homes to buyers. The lot count at the end of 2012 was 775 owned, and 775 controlled lots, two-to-three years of inventory for 20 communities or so.
Thing is, when you “control” 775 lots, you’ve got a marker on them, but then you’ve got to be able to pay to take them down. So, TRI Pointe needed another $150 million to $165 million to do that. Now, these lots lay in job centers, transportation corridors, and fast-growing urban infill and suburban California neighborhoods. If it wasn’t TRI Pointe, somebody would be anteing up the $100,000 per lot price tag for the land. That’s the way it works.
Part 3: the home stretch, filling up "the book," and what's next for TRI Pointe, and home building capital access post Fed tapering.