EVEN FIGURING IN AN ADRENALINE rush, Chris Clemente and Bruce Labovitz were just plain tired. They had just wrapped up a national tour that a fame-hungry rock band or stump-speeching politician wouldn't attempt: 22 cities and over 100 meetings in a mere 11 days to drum up support for what they hoped would be the first home builder IPO in nearly three years. The company: Reston, Va.-based Comstock Homebuilding.
That was the evening of Dec. 13, 2004, and CEO Clemente and CFO Labovitz were huddled in New York City's Palace Hotel, poised at the process's final step. By the conclusion of that “pricing meeting,” as it is known, they would know whether their IPO would fly, although the response from the road show had suggested a green light was coming. At stake was some $5 million—no small chunk of change for a builder that closed about 300 homes in 2003—and a year's worth of late-night hours pumped into the IPO prep marathon. That culminating moment was the tip of the iceberg, capping a journey to find the best means of raising enough capital to fuel Clemente's ambitious growth goals.
Men With A Plan Ask Clemente how long he'd been thinking of taking the company public and he'll tell you 20 years, with only a hint of hyperbole. Not coincidentally, that's the age of the company, which Clemente founded in 1985. The actual wheels of the deal, though, were set in motion in late 2003 when Comstock executives, considering all options for raising capital, determined that the private financing deals being put before them didn't mesh with their vision. Such offers, he said, came with a two to five year exit strategy, which would then be followed by either a company sale or IPO. “So we decided it would be advantageous to just go ahead and do the IPO ourselves,” says Labovitz.
Comstock's executives then went to potential underwriters and found BB&T Capital Markets to be among the most enthusiastic about the IPO possibilities for the Washington, D.C.-area home builder, who's only other market is Raleigh, N.C. “BB&T was the first group we dealt with that was both positive on the potential for an IPO raising less than $100 million and coupled that with a roadmap that made sense because they were putting us in front of small cap investors, not just home building investors,” says Clemente.
The strategy worked well. Originally the deal was designed as a $54 million IPO: 3.6 million shares at between $14 and $16 a share. But, explains Clemente, “The demand for the offering was so strong that we were able to price at the top of the range, which was 16, and we were able to increase the size of the deal by 10 percent.” Then, the underwriters exercised their over-allotment option, bringing the total to 4.55 million shares at $16 a share. The take when all was said and done: $72 million. The year of sweat had paid off.
Risks And Rewards As with any IPO, questions remain—for one, can a builder going public be successful by operating in only a couple of markets? Analyst Ivy Zelman and her company Credit Suisse First Boston don't provide coverage on Comstock and therefore won't comment on the company specifically, but she says that a builder who operates only in one or two markets can be attractive to some investors because it affords them the opportunity to reap all the rewards of a red-hot market. Of course, as in most any investment, the higher the yield potential, the greater the risk. As an example of a builder who has made the strategy work Zelman cites WCI—coincidentally, the last home builder to go public, in early 2002. WCI went public while operating only in Florida, giving investors the opportunity to zero in on that high-yield market. The builder has since moved beyond its borders, and, in fact, Comstock has left open the option to do so as well.
“Sure, that's always a concern or an issue,” says Todd Bencil, an analyst with BB&T, when asked about Comstock being in only two markets. However, he points out, there's an upside: Comstock is in one of the best markets, and it has a proven track record of going head to head with the big builders there.
But not every rocket-launched IPO ends in glory, even in the home building industry, points out Zelman. Exhibit A: Ira Norris' Inco Homes of Upland California, which started out with a smashingly successful IPO and then ended up in bankruptcy when market forces intervened.
What can make a builder who goes public successful in the long term? Zelman says she likes the chances of a home builder who is ahead of the curve in a specific niche area, citing urban infill as one possible hot spot. “If someone came along and went public that was doing that, I think that would be a blockbuster,” she says.
In fact, Comstock does plenty of infill and even likes to pour concrete, something many other home builders are reticent to get into. Instead of being diverse in number of markets covered, Comstock seeks diversity through product: townhomes, single- family, mid-rise wood-frame condominiums, and concrete high rises—all of which it tries to balance equally.