Stan Pac's private equity pact won't close the bid/ask gap. Try saying that five times fast.
As the industry's operators and financial players continue to search for a bellwether occasion that finally indicates the most opportunistic moment to invest capital in home building has arrived, each big deal that takes place is closely scrutinized for its ability to move the needle.
The most recent example: the multi-faceted Standard Pacific recapitalization with private equity firm MatlinPatterson Global Advisors, which was announced earlier this week.
In its wake, people are clamoring to get some insight into the valuation analysis that was used to determine the structure--and wondering what take-aways might be considered as virtual beta tests for the future.
David Matlin's office declined the opportunity to comment, but in this week's Digital Dirt, Big Builder talks to other private equity frontmen about the volume of organized capital that has been posturing on the industry's sidelines--and the ongoing struggle to value land and lot deals in today's unstable environment.
Escalating distress among private builders and banks is driving more availability of higher-quality land. Yet, still, very few sizeable transactions have taken place to date. The primary reason? A meaningful-though-shrinking gap stubbornly remains between the bid and ask.
"If you look at the two public land deals that were done [Lennar last Nov. and the Centex bulk land sale earlier this year], they were motivated by tax incentives, and I don't think that's the true market," said Mark Oei, managing director of Oaktree Capital Management. "That's only the market with a home builder being able to look back two years and put substantial dollars in their pocket."
He continued, "What it shows is that there is still uncertainty about the future--meaning the buyers, particularly the big funds, are pricing-in risk and complication and uncertainty to the point where pricing doesn't make any sense for the sellers."
In other words, in an illiquid industry like real estate that doesn't mark to market, the most notable activity so far is motivational.
Chris Mahowald, managing partner at RSF Partners who put together the Centex deal in March agreed that, to date, it's been very specific circumstances that create an incentive for something to get done quickly regardless of the economic consequences. But the pressure continues to build.
"You could make the argument that if the housing market continues to deteriorate and we can't buy or lend our way out of the continued downturn, there are a whole lot of projects out there that are really lot-development projects that are counting on home builders as take-outs, and the Calvary is not coming," said Mahowald.
Most people agree, however that it feels like the momentum is starting to shift. "The gap is closing," said Jeff Gault of LandCap Partners. "We are very optimistic and are seeing more and more real opportunity."
With the public capital market spigots shut off, this new source of cash is a scarce commodity. "We are a different kind of money," said Mahowald of not just his company, but private equity in general. "We are the anti-public capital. We have the ability to be more patient and creative and, in this environment, to not use leverage. The challenge now is how to underwrite it. You have to be really careful and use conservative absorption and pricing assumptions. It's everything we weren't doing two years ago when equity capital was inexpensive and there was so much economic freedom."
While private capital sources may consider themselves today's most logical solution providers, the competitive environment born around $150 billion of equity demands they bring on their best.
"We have had a number of conversations with both strategic and financial institutions," Stan Pac CEO Jeffrey Peterson told Big Builder of the company's decision to partner with MatlinPatterson. "We have been weighing a number of alternatives. They are a very successful firm. We have gotten to know their people and have seen a number of their portfolio companies and have done our due diligence. We feel confident that we can have a very good relationship."
Unlike previous public land deals, this most recent machination with Stan Pac wasn't spurred by a cash incentive from a tax carry-back. Still, amid fears of bankruptcy, its ability to cut one of the industry's highest debt-to-equity ratios virtually in half makes the motivation clear--secure solvency.
All this considered, while Stan Pac's new allegiance reduces the going-concern risk for the company, it appears it will have little immediate impact when it comes to the big-picture puzzle of evaluating opportunity.
According to John Peshkin at Starwood Land Ventures, since most investors do a "bottom up" valuation, a material indicator in the market metrics is what will eventually drive fundamental change. Deals alone won't make it happen.
That being said, Peshkin was quick to point out, "It's all about how you want to make your investment. Is this bigger? Is this quicker? The answer is yes. But is it better? That's yet to be seen."
Please e-mail me at email@example.com with any insight on these or other current issues.
In the meantime, here's more on what's happening in the trenches:
FLORIDA After a year-long fight between neighborhood groups and the builder over the project's size, the affordable housing development in Sarasota County called Palmer Place narrowly won approval this week.
PHILADELPHIA A new study shows that a city zoning law will likely deter all new residential construction in town--whether affordable or at market rate.
SAN FRANCISCO Next week, city voters will decide whether or not to approve Lennar's developmental plans for 770 acres in a neighborhood on the Southeast side that includes the former Hunter's Point Navy Shipyard and Candlestick Point. Lennar began negotiations on the site in 1999.
ORLANDO Claiming Engle Homes didn't disclose that there might be unexploded bombs in a community built on an old bombing range, homeowners have filed a class action lawsuit against the company and two other builders.