Today, we're going to dive in behind the headlines to explore an intriguing new joint venture that pairs up Texas super-regional McGuyer Homebuilders Inc. (MHI) and Hillwood Communities.
Here's the quick low-down on the deal from a press statement from the two companies:
Hillwood Communities, in partnership with
McGuyer Homebuilders Inc. (MHI), announced today its first Houston-area
master-planned community, Pomona, located in the heart of the rapidly growing
Highway 288 corridor in Manvel, Texas. The 1,000-acre $700 million property
will feature a relaxed, coastal community of approximately 2,100 single-family
Hillwood’s vision for this project is to bridge today’s modern lifestyle
conveniences to a simpler, laid-back character found in the charming Gulf Coast
communities of the South.
Here are two related news articles, one from the Houston Chronicle's Nancy Sarnoff with a topline on the project, and this one from the Houston Business Journal's Jenny Aldridge on the opportunity in the Highway 288 corridor.
Here from Aldridge's account:
“It’s the next city in the path of growth,” said Fred Balda, Hillwood Communities president. “We are no longer pioneering anything new. Our job is to continue to be creative in finding vibrant space.”
Nearby, already-established master-planned communities, such as Sedona Lakes, also located in Manvel, and Shadow Creek Ranch in Pearland are selling well.
Now, let's step back a moment and parse this deal out, because while it's certainly of interest that Houston has bloomed yet another new masterplanned community, making it a veritable hive of MPC activity as the granddaddy of them all, The Woodlands nears build-out, there are other noteworthy issues to take a look at.
Metrostudy regional director for the area, David Jarvis, notes that although it may seem that everybody and his brother seem to be launching new masterplanned communities in Houston, the rate of build-out actually still exceeds the number of MPCs set to open.
"We're basically just replacing the old ones," says Jarvis. "That's not really keeping pace with demand here."
So let's look at the issues.
One, of course, is money.
The genesis of this project traces back to the early years of the past decade, as MHI painstakingly assembled 1,000 acres from scores of mini-deals--an estimated 40 separate transactions--that took place across 2003, 2004, 2005, and 2006. McGuyer (MHI) operates in Houston, Austin, Dallas and San Antonio under several different brands, and looked at the 288 corridor geography as one of boundless value.
What happened next, everybody knows. Seven years later, Houston's jobs, household formations, and household incomes dimensions are all blasting off on a sustainable upward trajectory, and McGuyer is ready to put that 1,000 acre parcel to work as the 10-year gold-mine it is.
The good news for MHI is that they were able to carry the cost of holding onto the tract through the bad times, leaving it in mothballs until the moment was right to bring it online. Now is the moment, especially as Highway 288 Corridor masterplan Shadow Creek Ranch nears its build-out.
Only problem is, those thousand acres need to be developed into a community, into buildable lots, into a place and a destination that Houston's well-heeled young professionals would be attracted to, and while it's certainly a plus to own the property, it's a bit frustrating to have one's proverbial hands tied behind one's back because of not having the available funds to plow into the place-making and development it will take to make the land the "real deal."
So, MHI was stuck. That is, before McGuyer (MHI) president Gary Tesch struck up conversations in 2012 with Dallas-based Hillwood Communities (think H. Ross Perot Jr.) senior VP Brian Carlock.
At the moment the conversations with Hillwood started, Tesch felt he had two options: 1. hold the property until he could line up enough capital via project lending to plow the enormous upfront costs into horizontal development, or 2. sell the land to another strategic or financial player.
Before, say, late 2012 or early 2013, buyers were not coming out of the woodwork for Texas properties, or Tesch might have leapt at the chance to unload the land. So option 2 was unlikely, and option 1 was daunting, because of the scarcity of big-number acquisition, development & construction lending in the marketplace.
But Tesch discovered, as he and Carlock discussed a role for MHI as a builder in another of Hillwood's recently announced masterplans, in Little Elm, a northern suburb of Dallas, came upon a #3 option.
Hillwood would come into the newly structured land venture as majority equity owner, redo the masterplan, and cut MHI into both home building and land sale opportunity.
Hillwood eats, sleeps, and breathes what MHI needed done. Net, net, in an exchange for equity in the land, MHI and Hillwood now are teamed up in a way that will trigger Hillwood's cash investment in the land development, infrastructure, amenitization, and placemaking marketing and MHI McGuyer gets a double-benefit in the upside.
For one, MHI will have prime pick of the lots for its Coventry and Plantation brands in a market where demand is outstripping supply. Other builders who've signed on to take down lots and build in the community, which will open in early 2015, are David Weekley Homes, Highland Homes, and the Weyerhaeuser/TRI Pointe brand Trendmaker.
On the other hand, MHI will also net some of the upside on the sale of lots, not only through to its own system of home building brands, but also to the other builders who opt in for the 2,100-lot pipeline that Pomona represents.
"This type of partnership, of a large regional builder with a huge masterplanned developer, doesn't happen often," Tesch said. "It's a win for them in that they don't have to put out capital to acquire the land, and a win for us in that we don't have to deploy cash to develop it. Also, it's a better way to get the quality Texas builders into the mix."
Carlock agrees that the deal built on a creative, efficient structure that limited the necessity of adding debt and, therefore, served risk tolerances well, even as it plays off the respective strengths of the partners--Hillwood in making places that distinguish themselves as offering a higher-end living experience, and MHI in building homes that blend into that tonier Southern genteel feeling they're trying to capture at Pomona.
"With the Mustang Bayou at the spine of the community, and branding the creek lifestyle with trails, channels, parks, and playgrounds, in addition to the commitment to leave about 300 acres as green open space, we feel we're going to have a very special community that truly fills a void for the market," says Carlock.
Back-of-the-envelope calculations of 60-to-65 foot lots at $1,100 or $1,200 a front foot would average out to about $72,000 per developed lot. This, appropriately figures to about just a bit north of 20% of the home prices, if revenue at build-out is about $700 million.
Which means that Hillwood and MHI each share proportionate (but not equal) parts of about $140 million to $150 million in the sale of the lots.
Good looking deal from where we sit.