With Weyerhaeuser win, TRI Pointe scores a triple-double

The morning TRI Pointe Homes announced it had triumphed in the auction for home building’s biggest mergers and acquisitions deal of 2013—Weyerhaeuser’s five-gem portfolio of regional power operators—for $2.7 billion, ceo Doug Bauer said he and his brain trust—chief operating officer Tom Mitchell and chief financial officer Michael Grubbs—will be glad to go back to their day jobs.

“We’ve been working on this deal for months, but virtually non-stop with [Starwood Capital ceo] Barry Sternlicht and his team for the past two weeks. It’s been exhilarating, and we’re blessed with the outcome, and now we get to go back to doing what we do, running our company,” Bauer said in a brief conversation with BIG BUILDER yesterday, on the heels of the announcement.

In rough round numbers, the $2.7 billion price tag for the Weyerhaeuser home building network works out this way. It’s $700 million in cash to Weyerhaeuser shareholders, plus 130 million TRI Pointe shares valued at just shy of $15.40 each. The Reverse Morris Trust structure of the transaction effectively gives Weyerhaeuser shareholders ownership and earnings from a new separate entity that TRI Pointe will operate.

The other round numbers underlying the deal, of course, is that the $2.7 billion total works out to $100,000 per lot, a figure useful only insofar as it may send a message to present and future investors in the residential real estate and construction space.

In an IPO-crazed, yield-thirsting Wall Street environment, the $100k per lot benchmark raises the TRI Pointe-Weyerhaeuser deal’s key question, which is central to any major M&A transaction: Is the $2.7 billion a price or is it a value?

The difference here is as critical as it is obvious. What outside observers to the deal are left to conjecture is that TRI Pointe and its fabulously beneficent Uncle Starwood believe—despite fiercely oppositional viewpoints as to timing, trajectory, and direction—that housing’s inflection point has come, and a pivot into a sustained, if not rambunctious, recovery has begun.

We’re not going to jump into debate over whether Wall Street equity urges and hormones are creating bubbles in markets like technology or real estate right now. That’s fun for another day.

Today, what we will look at are a few angles for home building and real estate investment strategists that we haven’t seen covered in the mainstream media. Wall Street Journal staffer Kris Hudson’s terrific deal recapand Reuters correspondent Soyoung Kim’s scoops into the deal helpfully outline the financial structures, top line motivations, and broad implications of the deal.

For instance, we do feel that the resolution of the TRI Pointe-Weyerhaeuser combination will in short order precipitate a flurry of lesser M&A conclusions that have been dickering around asset pricing, management team roles, and exit strategies.

Here’s Hudson’s lines about further consolidation in home building, which we feel will carry through yearend at an abnormally strong pace.

TRI Pointe's rapid rise is the latest sign of a wave of consolidation in the home-building industry as the market recovers from the housing crisis. Seeking growth at a time when traditional sources of financing are tight, builders are looking to grow through mergers, acquisitions and by accessing capital through the public markets.

Five builders conducted initial public offerings in the first half of this year—the most since 1993—and another three now are awaiting IPOs.

But let’s back up a bit and zero in on the micro operational dimensions of the TRI Pointe deal. Importantly, to make the transaction a success, messaging is vital to ensure that people who work at Weyerhaeuser’s five companies—Quadrant Homes in the Northwest, Winchester Homes in the D.C. market, Pardee Homes on the West Coast and Nevada markets, Maracay Homes in the Arizona market, and Trend Maker Homes in Texas—can finally exhale.

Since June, those operators have labored under the cloud of unknowing, trying to keep focus, execution, and forward-looking strategy and tactics in motion despite the uncertainty of who would buy and what would become of them.

TRI Pointe ceo Doug Bauer’s number one “morning after” message is clear in showing the love. “In the history of major home building M&A transactions, when has there ever been one before where people working at the operating company knew their continuing role in the new combination is critical and clear?” Bauer said. “The five Weyerhaeuser companies will continue to work as they have, as largely independent operators competing in their respective competitive arenas. Those people are great, and they don’t have to say to themselves, ‘the acquirer has another division right down the street’ from us in our market. They’re it.”

So, while the outside world focuses largely on the asset value of the 27,000 lots—about 15,000 of which are in the still-hot California market—Bauer and his day-to-day strategic and tactical team will zero in on keeping a proven core of Weyerhaeuser talent on the beam, motivated, and driven toward taking an upper hand in the four regions brand new to the TRI Pointe footprint.

It should be mentioned that operators of the five Weyerhaeuser companies have also been shouldering some burden of a REIT capital structure that can suppress home building performance. Free of having to deliver tithes of cash to the mothership of shareholders in the REIT, the five operators may be able to add velocity and oomph to their game plans under the new aegis.

In his own words, Bauer outlines five principal bullet-point benefits of the transaction:

• TRI Pointe adds a ‘best-in-class’ management team • Enhanced geographic presence
• Deepened California footprint, about 15,000 lots in California, with opportunity for both home sales, and land sales
• Expanded land holdings (3/4 year inventory pipeline)
• The true pure-play home building operations, vs. the REIT capital structure, unleash operational and financial opportunity among the five separate companies
• Liquidity: shareholders now participate in a mid-cap stock rather than a small-cap stock, which previously hampered TRI Pointe’s trading performance. Now there are 161 million shares trading vs. 31million, which is a more liquid platform.

So, what are we seeing occurring during the balance of 2013 and early 2014, now that this deal has consummated?

• Between six and a 10 private company transactions (mostly selling to public company acquirers) completed during the remaining seven weeks of 2013; the on-again-off-again Shapell Homes deal in California will finally trade to Brookfield Residential, Standard Pacific, or Toll Brothers.
• An LGI Homes IPO price in excess of its upper $15 proposed share price
• Another IPO relaunch, probably The New Home Company, will get back on track for an early 2014 date with the New York Stock Exchange
• Land-sellers will be forced, by interest rate roulette, to pick their moment in the next six to 10 months, and put their inventory up for sale, at the risk of missing "the dance" if they mistime their offerings
• Operationally, price vs. pace will continue to be home building’s biggest day-to-day question, as externalities that have weighed on home buyer sentiment—policy uncertainty, interest rates, and taxes—recede and center on one locus: jobs and income.

Margins and optionality are where home building leadership and management skills will either step up or try to play the uncertain tide of recovery.

Meanwhile, TRI Pointe’s Bauer, Mitchell and Grubbs go back to doing their day job, which now means running one of home building’s top 15 enterprises in the United States.

When we talked to Starwood’s Barry Sternlicht in the Spring for our earlier The Big List report on TRI Pointe’s dash toward going public on Jan. 31, 2013, one of the things Sternlicht said was, “it’s my job to get Doug, Tom, and Mike to think bigger.”

Guess he succeeded at that.