Home building’s metamorphosis from Wall Street dog to darling is complete.
Building companies that survived the recession only because of lifelines cast by private equity capital investors just a few years ago are now salable enough to transform into publicly held companies. In the past few months, two—TRI Pointe Homes and Taylor Morrison—have issued successful public stock offerings, and a third, William Lyon Homes, is underway. And it’s likely there will be more soon.
“It’s exciting times. It is easy to get a little euphoric,” Sheryl Palmer, Taylor Morrison’s CEO, told an audience gathered at Hanley Wood’s Housing Leadership Summit last week, shortly after completing her first analyst call as a publicly held builder.
Likewise, Doug Bauer, CEO of TRI Pointe, a California-based builder who issued the first IPO the sector has seen in years last January, was relatively astonished at how his company’s fortunes have changed in such a short time. TRI Pointe was created by three former William Lyon Homes executives several years ago.
“We were down on our backs for four or five years,” said Bauer. “It’s gone from zero to 60 just like that. There is a ton of demand out there.”
“If you are a home builder today and you need to raise money, it is through the capital markets, whether debt or equity,” Travis Borden, senior vice president at Moelis & Company, a global investment bank that also advises clients on capital raises, told the Housing Leadership Summit audience.
TRI Pointe’s executives never really thought the public stock sale route would work for their organization because it has a regional, versus a national, footprint. But a national footprint “is not necessary now,” Borden said.
Richard Moriarty, Citigroup Global Markets' managing director, explained to the audience: “I think investors are looking for growth, and this is one of the few opportunities for growth.”
How long will it last and how much more room is there on the stock exchange for public builders? The best guesses by the summit participants was 26 to 27, the number of publicly held builders at the peak of the home building market in 2005. There are 19 now, counting the three most recent additions.
However, the publicly traded builder route isn’t right for every builder.
“It’s not going to be for everybody,” said Borden. “There’s more disclosure, more government oversight—some of those things are going to be non-starters” for some builders. It also takes more CEO time to manage things, the new CEOs said.
For Taylor Morrison the decision to move from private to public was a matter of debt at 5% versus debt at 7.75%. “To properly compete in our space we had to go public,” she said.
It offered another advantage too for the private investors who backed Taylor Morrison’s purchase from its British parent company Taylor Wimpey. “Quite honestly, it’s the preferred exit plan for private investment,” Palmer said.
TRI Pointe’s Bauer said becoming a public builder hasn’t changed the way the company operates.
“We had a vision when we started the company,” Bauer said. “We pay attention to the customer. We are not going to change the DNA of our practices. We are not going to change our color, change our spots.”
Teresa Burney is a senior editor for Builder magazine.