The latest slump in new housing sales might be bad news for the current bottom line for builders, but it makes for just the right market for buying land, Standard Pacific Homes CEO Ken Campbell told analysts Friday.
"If there is a silver lining to the housing market, I think it's the land market," Campbell said. And Standard Pacific is and will be taking full advantage of it by buying land, both finished lots and raw parcels, now and through the end of next year. Campbell said earlier this year that the company planned to spend $300 million to $400 million on land this year but now estimates it will be closer to the $400,000 mark.
"We are quite enthused that the land buying opportunities improved and if anything we will accelerate our land buy by the end of this year early next year," he said.
At the end of its second quarter the company had $270 million of approved land purchases and option contracts outstanding, of which $126 million is expected to be bought in 2010 and $144 million to be purchased next year and beyond. It spent $103 million ($79.4 million in cash) to buy 1,875 lots, 78% of them in California.
"We bought a lot of land," Campbell said. "We said we were going to and we did."
He said the company is on the verge of announcing the closing of a $50 million land deal with 1,600 lots, one of several of that size in the company's pipeline.
"We are not going to build 1,600 homes" there, he said. Standard Pacific would develop the parcel and then sell the extra lots to other builders. "We are going to take a little bit more of a land development role, as we have done before very successfully, particularly in California," Campbell explained.
Campbell didn't rule out forming joint ventures with other builders to develop and sell large parcels simply because there are some large land parcels for sale that would tax Standard Pacific's financing ability.
"If you take the SunCal parcels that Lehman owns, they have individual blocks of land in there that are worth hundreds of millions of dollars," he said. And that doesn't include the costs of development that can be double that in California. "In that case, we don't have the capital to do it ourselves, but if we did something in that case it would be a joint venture."
Analysts questioned whether the company might want to re-think those purchases in the wake of second quarter sales which were down 38% to 719 homes from last year and down 5%, from 759 homes, in the first quarter.
Campbell responded that you don't make land purchases based on one-quarter's sales drop. "We are buying land for a company that we expect to use over the next three to seven years," he said. And now is the right time to buy because other builders are backing out of commitments to buy in the wake of waning sales. That is particularly true in the company's main, land-constrained California market.
While Standard Pacific's orders drifted down, the rest of its second quarter numbers trended toward the positive. For one thing, the company made a profit, $10.7 million ($0.04 a share) versus a net loss of $23.1 million ($0.10 a share) in the same quarter last year.
Sales prices of homes were up considerably, to $355,000 on average versus $326,000 in the quarter before and $300,000 last year. Sales prices in backlog are even greater than $355,000, Campbell said. Part of that increase was a result of three homes that sold for more than $6 million as well as a larger percentage of more expensive California homes in the mix.
Gross margins, too, were up to 20.9% versus 18% last year, driven by improvements in home construction costs plus price increases that were achieved on California sales.
Campbell said the 21% plus margins should stay in the future as well.
"Our strategy that has been in place for a year and a half is on track and producing results," Campbell said. Though he didn't ignore the latest sales issues builders are encountering.
"It's impossible not to acknowledge the weak market," he said. "My view of the home building market, although I'm the new guy, is I think the job market has to improve before the home building market will. Any movement (up in sales) without jobs is a blip in my mind."
The market will recover, he said. When is the bigger question.
Campbell encouraged analysts to take a view longer out than the last quarter. "For us it's not how many houses we were selling last week, it's about how many we sell over the next five years."