In earlier segments of The Big List, we met the principle cast of characters in TRI Pointe Homes quest for a big strategic play on Wall Street earlier this year. In Part 1, we noted how global and domestic urgency around yield crescendoed toward the end of 2012 and the beginning of 2013, driving capital into home building as investors wagered that housing's big turnaround had come.
In Part 2, we looked at a more granular level at the pedigree and essentials for a home building company to validate itself among such investors: talent with a track record in big time equity and debt markets; money (often in the form of major league private equity sponsorship); and relationships that would ensure continued and replicable access to well-priced building lots.
In this final segment of The Big List, we look at the last leg of the
When the debt market window began to open in the Fall of last year, Bauer, Mitchell, and Grubbs started investigating how they could get in on the low-cost money that big public builders were accessing to re-term their debt. A number of private companies, like Ashton Woods, David Weekley Homes, the Mattamy Group, and (then-private) William Lyon Homes and Taylor Morrison Homes issued high-yield notes ranging from $200 million to $550 million, at yields of from 6.5% to 9%, which was cheap compared with where those same rates had been.
So, Bauer and Grubbs considered doing something similar in the debt markets, and as they pursued options, it became clear that a Rule 144a equity offering was among them. Sternlicht’s call from Korea to Bauer on the sideline of his son’s Mater Dei football game put the kibosh on the Rule 144a equity offering.
“I knew that Doug and his team were ready for this,” said Sternlicht. “Doug was super nervous about it, but I felt that as long as they could replicate their structure and discipline, we could keep looking at new markets and grow this thing.”
Road Show Time
Immediately, Bauer contacted Citigroup Global Management managing directors Richard Moriarty and Clay Hale. They shifted from planning the Rule 144a equity offering to the Full Monte, an initial public offering, which meant the next four months would be rock-and-roll.
They picked every TRI Pointe operational and financial data point clean, from the time they turned on the lights in April 2009, to that moment, and poured it all out in excruciating, repetitive detail, along with extensive market-by-market analysis of the Southern California, Northern California and Colorado communities they were in, profuse testimony to their credentials, and lots and lots of spin. With all of this data, they created the TRI Pointe S-1 filing, a Securities and Exchange Commission registration form that became a template for nearly every other private company that came up in their wake.
As a 2009 start-up, Grubbs knew that TRI Pointe would be able to go public under relaxed standards—especially with pre-registration disclosures—under the 2012 Jumpstart Our Business Startups (JOBS) Act. This law gave the team a lot of running room ahead of an intense amount of scrutiny that would come as soon as they told the world of their brash idea.
The TRI Pointe narrative highlighted its leadership brain trust—including not just Bauer, Mitchell, and Grubbs, but Sternlicht himself, as TRI Pointe’s chairman of the board—as well as its local intel and relationships on the land front, its lack of “legacy land,” its marketing, design, and construction experience across a continuum of product types and price-points, its financial and operations accountability and management, and its geography.
What two decades of working together have given Bauer, Mitchell, and Grubbs—besides the ability to finish one another’s sentences and retell one another’s jokes—is this: enough experience, knowledge, and skill in the game that they could trade on their history. Enterprise home building vectors Wall Street’s interest in an operator’s ability to buy (land, labor, materials and sales) and Main Street’s interest in that same operator’s capacity to sell (a home, a community, a lifestyle). They’d proven that that vector is their zone.
“Rich didn’t need convincing,” Bauer said. “He said to me, ‘You guys got a hell of a good story’ for Wall Street.”
After all the research and registration filings with the SEC, the final stage of an IPO process occurs in New York, when top management takes its pitch book, its “good story,” and presents to the assembled sales teams of the investment bank bookrunners, who’ll be critical to attracting investors to the new offering. In TRI Pointe’s case, the lead managers were Citi, Deutsche Bank and FBR Capital Markets.
Doug Bauer and Grubbs, the chief architect of TRI Pointe’s financial and investment narrative spent a day in New York just after New Years, and got the reception they’d hoped for from the first circle of Hell, the investment bank crews.
“Go, TRI Pointe,” became their mantra for the next three weeks, as they tried to keep their heads on straight after investors began clocking in their orders at $20 million a pop.
By then, they’d gotten the sense that investors were champing at the bit. They were ready to put the grisly downturn years behind them, but surrounded by no- to low-yield investment opportunities, many of them were sitting on top of funds that needed to be put into play as investment.
The big challenge to Bauer and Grubbs was going to be “how are you going to replicate and even improve on your margins when you put all this money to work in land investments and scale your operational model?”
That’s the thing about “small bets” working out. People are going to ask you to explain how you’re going to strike all that lightning in a bigger, more complicated bottle.
“The way they’d phrase the question,” explained Bauer, “is they’d observe that we’d bought all these lots in 2009, ’10, and ’11 that were pegged to our two-to-three year horizon when land was cheaper, and fewer companies were out there trolling for it, and they’d ask ‘how are you going to compete in 2014, 2015 and beyond, when you’re competing against other big players for the same lots in those same land-constrained market arenas?’”
The answer comes down to knowledge, optionality, and relationships. What TRI Pointe’s brain-trust believes is that they’re going to be able strike it very big when they’re right about a land deal, do okay on most others, and lose very little when they’re dead wrong on one. Land acquisition is a true meld of art, science, and alchemy. It starts with who you know, graduates up to what you know (about local regs, business trends, transportation projects, etc.) and ends with the magic of adding value to what was there all along. What distinguishes Bauer, Mitchell, and Grubbs most is that they know A, B, and C lots by heart, perhaps as well as any team in home building.
With a book ready for orders, they were off on a two-week 24/7 global, song-and-dance marathon, starting out in London and Frankfurt before heading back to do half-days or days in Boston, New York, Princeton, N.J., Philadelphia, Baltimore, San Francisco, Denver, Kansas City, Chicago and back to New York. Their iPads had access to a Citi app that allowed them to see the investor data on their “book” as the orders tracked in. Tom Mitchell became the self-pronounced “adult” of the three-some, agreeing to see to the business’ domestic challenges and opportunities, while Bauer and Grubbs packed their bags for a two-week blitz of the institutional investor communities in Europe and the U.S.
“Normally, you want to build 10 percent of your book in Europe, so it was helpful for us to start there and build momentum before we came back for the U.S. stretch of the road show,” said Bauer. “It was a terrific drill for us to start in Frankfurt and London. Investors there are not as familiar with California real estate trends, so we had to articulate our story in a more nuts and bolts way.”
Red-eyes, rehearsals, and Red Bulls were the order of the days in London and Frankfurt. The pre-meeting omens were good, bad, indifferent.
“Arriving at the Dorchester Hotel [in London] at 6 a.m. to freshen up in my room before our first day of investor meetings,” said Bauer. “The staff escorted me to my room, opened the door and a man half naked flew out of his bed screaming....whoops...wrong room!"
But when they collapsed back in their seats on the flight back from Frankfurt to LAX, they’d gotten the big thumbs up from the global marketplace. The mojo was rising. Before and after many of the investor meetings, Grubbs shot a 30-second “Tout” video of Bauer, creating an informal video log of their amazing journey
The U.S. meeting schedule was brutal, including two days of New York meetings, one-on-one for 45 minutes at a shot, from sun up to sun down.
“We handled a lot of tough questions from a lot of smart people, and multiple people from the same organizations,” said Bauer. “It was fascinating to see the book build.”
Finally, the moment came. After an almost full day of meetings in Chicago on Wednesday, Jan. 30, Bauer and Grubbs were met at O’Hare by Tom Mitchell. They flew to New York, where Citi’s Rich Moriarty and Clay Hale hosted them, along with Sternlicht, their wives, and a number of other key players to dinner at the vaunted Wine Cellar in the basement at 21 in midtown.
The wine was good. Barry Sternlicht raised a glass of it and said, on the night before TRI Pointe started trading on the New York Stock Exchange:
“In all my years of taking companies public, I have never seen such flawless execution by the management team and bankers, and the incredible investor demand as I have seen with the TPH IPO."
The toast, in fact, affirmed Sternlicht’s own sense of how, why, and when big money moves into our out of real estate. It also affirms TRI Pointe’s unusual sprint from Starbucks napkin diagrams to a $538 million company, ranking among the nation’s top 16 public home building companies.
The next morning, Bauer’s test of intestinal fortitude amounted to 10 endless seconds leaning on the NYSE opening bell. When it was done, and after the market set the opening TPH price at $19.56, Sternlicht said to him, “What have you done for me lately?”
“That’s why I love you, Bauer,” Sternlicht said.
“Let’s go climb another mountain,” Bauer replied.