As capital-intensive businesses go, home building and land development are at the top of most anyone's list. Pair that with the cyclical nature of the industry and it's easy to see why creative investors are developing new capital strategies to swoop down on opportunities as they surface within the changing marketplace.
“There is always opportunistic capital looking to take advantage of weakness in a market,” says Steve Friedman, a partner in the real estate practice of McLean, Va.–based Ernst & Young. “That's capitalism. You just get different classes of investors interested at different points of the cycle.”
While the industry declines, along with its executive's fortunes, we're seeing land funds generating a new level of interest, fresh institutional money scrutinizing the landscape, and even SEC filings for new vehicles to fund acquisitions of operating businesses.
Builders are looking to keep land off balance sheets and walking away from option deposits, but some segments of the financial community believe that now is a good time for land buys. Although few close to the deals can comment, sources confirm that “there are a couple of new funds that are trying to get started and other groups trying to put together land funds to take advantage of the unsettled nature of the market right now.”
The home building industry's decline has piqued the interest of institutional money, hedge funds, and other money managers. They are focusing energy on evaluating whether or not the home building stocks have hit bottom, what the upside is, and how long it will take to materialize.” No one has done anything yet, but there are a couple of groups looking hard at it,” Friedman says.
Perhaps the newest entity to surface in the industry is an SEC filing for a Special Purpose Acquisition Company, or SPAC. A SPAC is a publicly listed shell company with only an identified management team, created specifically as a vehicle for the acquisition of operating businesses. The reward comes if it is successful enough to identify and acquire an undervalued private company, then run it as a savvy public company, driving up its value on the public market. “It's definitely cutting edge, especially for home building,” says Mitchell Nussbaum, a partner at Loeb & Loeb, a national law firm with SPAC transaction experience.
SPACs evolved out of the SEC's desire to curb the abuses of “blind pool” or “blank check” companies that stockbrokers and promoters used to fleece investors in the 1980s. But they have emerged from the affiliation and continue to obtain credibility in the capital markets arena based on their performance. Across all industries, between 50 and 60 exist.
“This is a very different situation,” Nussbaum says. He points out that, while a SPAC is essentially a shell, the transaction is done with a full initial public offering (IPO) with legitimate underwriters and significant access to capital and substantial management teams. “In today's market, you'll be looking at getting a very substantial deal. Without a substantial management team, you won't get the deal done at all,” he says.
The industry is now getting its first look at a home building SPAC. Initially filed on June 8, under the name of Builders Acquisition Corp., this SPAC is located in the state of Delaware and lists Michael D. Sivage as the entity's chairman and CEO. Jamie Pirrello, former COO of Mandarin Homes, is listed as the entity's CFO. JMP Securities is listed as the underwriters.
Due to SEC regulations during the filing process, no one directly involved with Builder Acquisition Corp. could speak to us. An amended filing with the SEC occurred on July 28, and experts familiar with SPACs estimate the entire process will run three to four months before becoming effective.
“It's never been done before in home building,” Friedman says. “But that doesn't bother me. It's the fact that builder IPOs don't get the enhanced value of the offering because they trade at a reduced multiple—a discount to the typical S&P. It just means [the SPAC management team has] the added pressure to buy a company at a greater discount.”