Pulte Sold the Ranch and Bought into its Future
[THIS POST HAS A CLARIFICATION TO ADDRESS AN ILLOGICAL MATH HYPOTHESIS BELOW]
Pulte’s just completed (Dec. 30, 2009) cents-on-a-dollar agreement to sell 1,999 lots near Tampa, Fla., caught our attention, and put us to mind the Ancient Romans’ god Janus — from whom this month gets its name – who had the gift of looking at both the past and the future.
Why would Pulte’s divestiture of what are still regarded by land strategists as ”A” lots at a firesale price recall Roman myth, other than that we’re just strange?
Here’s why. (But, yes, we are just strange as well).
Janus, the god of gates and doors, is most closely associated with beginnings. Even pre-recovery, the moment for Pulte and all its public and private home builder peers is about both beginnings and endings.
Builders paid insanely for land when they felt they had to, and some of them now–mostly publics–can take the closest thing possible to a mulligan on that insanity.
The way we look at it, Pulte paid $29 million (not including probably $5 million in soft costs on engineering, consulting, etc. and probably another $4 million on partial construction of a phase abandoned some time ago). They got $5 million from the new buyer, Bob Sierra, which would mean they lost 82 cents on the dollars they paid for the land.
What they get back from the government as a tax carryback refund probably makes up for more than half of that amount, which brings them up to a net of about 65 to 70 cents on their dollars from 2004.
[CLARIFICATION: A kind reader points out correctly that the math of the previous two paragraphs doesn't make sense. If Pulte lost 82 cents on its dollar, ($29 million minus the $5 million Sierra paid, which is a $24 million -- or 82.7% loss against the original purchase price), then how could a tax carryback refund of the maximum 35% ($8.4 million) take them back up to 65 cents on their dollar? It doesn't. Without guidance from Pulte as to the specific cash payment for the land, it's not clear what they're net is after they add up the $5 million from Sierra and the check from Uncle Sam. Guessing 65 cents on the dollar is merely to say they're -- fairly -- trying to capture as much cash in the new market environment as they can.... If it's 40 or 50 cents on their original dollar vs. 65, it's still better than just having what the new land buyer is willing to pay for it--that's the point.]
Pulte’s Wiregrass Ranch exit ramp–terminating at yearend, where Pulte would qualify to mark the transaction for a big refund from Uncle Sam against profits dating back to 2005–stretches back to 2008. That’s when Pulte decided to pull the plug on its role and commitment to master-develop 5,000 acres of the noted Porter homestead in the Wesley Chapel area east of Tampa Bay. A big factor in that decision–as if an upside down and backward Florida real estate market were not enough–was the passage by Pasco county of mandates for more than $560 million in improvements to the property, payable by the developers.
This, after all the money Pulte had paid the Porter family to acquire the tract for 12,000 homes and a huge commercial development. As yesterday’s St. Petersburg Times reports:
Wiregrass Ranch is destined for more than just homes. Landowners won permission to build enough stores — 2.7 million square feet — to cram into three shopping malls. Its projected office component — 1.4 million square feet — could fill two downtown Tampa office towers.
With one major exception, the $105 million Shops at Wiregrass mall at Bruce B. Downs and State Road 56, the property remains largely undeveloped.
Here’s the way Pasco County clerk recorded Pulte’s aggregated purchase of the property from the Porters, with Wiregrass Ranch as the seller:
| Book/Page | Sale Date | Purchaser | Doc Stamps | Sales Price | |
| 6009/0198 | 8/31/2004 | Pulte | 45,826.20 | 6,546,600.00 | |
| 6009/0202 | 8/31/2004 | Pulte | 58,552.90 | 8,364,700.00 | |
| 6009/0206 | 8/31/2004 | DiVosta | 89,472.60 | 12,781,800.00 | |
| 7317/1713 | 12/14/2006 | Pulte Home | 9,433.90 | 1,347,660.00 |
That’s $29 million, although the St. Petersburg Times reports that Sierra bought a portion of the land that Pulte paid $12.8 million for in 2004.
Here–from a knowledgeable real estate executive in the area– might be an explanation for the misunderstanding:
What I believe is that Pulte/DiVosta acquired several parcels for 29MM. They subsequently/simultaneously cut a deal with Pasco County to build Chancey Rd (roughly 10MM road improvement partially serving the community) in exchange for 1999 units of density.
Several of the initial parcels purchased were designated for a golf course to support the DiVosta component. Sometime in 2007, Pulte abandoned the DiVosta component and traded land with the Porter family – Pulte gave back the golf course designated lands in exchange for some other lands, contiguous to the original land purchases – and entirely eliminating the golf course. Both Wiregrass Ranch (Porter) and Pulte recorded two distinct 15MM sales on the same date – August 15, 2007, in consecutively recorded transactions with the Pasco County Clerk. Book Page 7602/0613 thru page 0629. Both transactions had $105,000 doc stamp payments and had different property legal descriptions. The net effect to each party was zero dollars, but each ended up with new/different land.
I believe that the entire record of transactions indicate that Pulte’s land basis was 29MM. The property that Sierra bought was the sum holdings of Pulte, but in a different configuration than the original purchase. In effect, the 1,999 units were planned for the aggregation of the parcels and not just the 12.8MM portion.
I don’t know for sure if the above is absolute fact, but public records would indicate so. There are also publicly recorded development agreements between Pulte and Wiregrass which would support the story.
Now, arguably, those are the details. What about the Roman myth reference?
Here’s what we think. (The press relations folks at Pulte could only say, “As we are involved in land deals as both a buyer and seller, we have a corporate policy on not commenting on specific land transactions.”) Fair enough.
- A — Pulte had said as it acquired Centex that it wasn’t going to sell land, and yet, here we have an NOL refund motivated large land sale. Nevermind that this deal had nothing to do with the Centex merger–net, net, it means that Pulte’s practically out of West Central Florida. Here’s a comment: “With the exception of what’s left of Trilium in Hernando County and Harrison Ranch in Manatee County. Everything else they own in this market came from Centex – strictly entry level product.”
- B — Pulte management might easily have been convinced that if they’re not going to take anything positive out of the land holdings on a “present value” basis, why not have the government write a check for at least some of the value?
- C — As it operationalizes its Centex acquisition, it may have reckoned with greater urgency its opportunity to lean on the Centex operation and price-point during the next couple of years. Entry level is a must, and Centex is Pulte’s entry level present and future. What’s more Centex talent can probably do the buy-opportunistically and sell profitably model as well as anyone for the next 24 to 40 months as the market moves back toward normal.
- D — For Pulte, DelWebb is looking back at the past and forward at the future. There’s less present for DelWebb, unless and until it comes up with lower-end and possibly event “entry-level” active adult models that have less capital intensiveness and greater appeal to boomers who’ve played too much to plunk down a traditional DelWebb community number.
By their nature, land acquisitions in the 2003 to 2006 period reflect evaluations built on forecasts and assumptions that proved to be fictional. Demand reality remains stubbornly unclear, but what we’re deciphering from the Pulte move–especially since its management said earlier that no significant land sales would occur after both a flurry of NOL transactions and its Centex coup–is that its operationalized and re-rationalized plans for land could put it in the selling, buying, and swapping mode, especially to get its Centex brand communities running at full tilt through the first half of 2010.
Anyone who doubts a strong relationship between those checks Uncle Sam is cutting for tax carryback refunds and the checks public builders can write to re-stock on land at a lower cost base better look hard at who the most aggressive buyers are when the finished lot deals arise.
That’s why this image of god with the gift of looking both forward and backward has some merit in our random brain.
The Housing Crisis’s New Black for 2010
We’re six days into a new decade, a day some observe as the feast of the Epiphany. We’ve had an opportunity to read 4,000 lists of 2010 predictions, and from them we conclude that 2010 may either look a lot like 2009 or be very different.
We descend moralistically from Emerson, so we’re obsessed right now with meting blame precisely, and with lessons learned. Vitriol feels good and accountability sounds good.
One thing we learned in 2009 comes down to this: Push does come to shove. No ifs about it. In nine or so months we’ve seen an earnings recovery, a commodities recovery, an equity markets recovery, and lately, an inventory recovery, but all that won’t quiet the bears.
In New York starting about 1991, around the time that Anna Wintour picked up the baton from Helen Gurley Brown as arbiter of style musts and fashion faux pas, we’ve fixated over being early to discover “the new black.”
Rather than a list of predictions, we’ll give you housing’s — particularly for-sale new construction housing — “new black” or the 2010 version of what was currency in 2009. A hint on the first assertion: When almost every data point looks downright calamitous, 2010 comps can be your best friend in the world.
- Y-O-Y is the new SEQ
- Strategic re-default is the new strategic default
- Bair Trust Corporation is the new RTC
- W is the new L, which was the new U, which was the new V
- Deja Vu is the new Lessons Learned
- Washington is the new Wall Street
- Easy money is the new Dodo Bird
- Disastrous savings rate is the new reckless spending
- Structural challenge is the new cyclical headwind
- “I’m back” is the new “I’m still here.”
And we’ll go out on the limb and give you one more for free.
- ROGS (return of Glass-Steagall) is the new TBTF
Housing 2010 Megatrends: Stopgaps are Not a Key to Survival
As part of our 2010 megatrends series, we’re catching up on land transactions that took place before buyers and sellers closed their books on 2009, and we suspect we’ll be pursuing thread on this topic for a bit.
One such sale closed Dec. 29, 2009, and was one of the more noteworthy portfolio-type deals that occurred, according to Will White, Tuscon, Az. manager for Land Advisors, which around holiday time was also involved in an $11 million sale of land in Deland, Fla., from St. Joe to Kolter Land Partners, motivated by favorably revised tax-carryback rules.
The details of the Dec. 29 deal: D.R. Horton purchased 203 mostly-finished (72 are unfinished but graded) lots in five neighborhoods of Tuscon that were the entire remaining assets of what had been Canoa Homes. The sale price was $5.8 million. Canoa parent company, Phoenix-based SunChase Holdings shut down Canoa’s operations about a year ago, and gave Land Advisors the assignment to move the portfolio in November, with an aim to get done before 2009 ended.
Here’s the breakdown on the lots: Continental Reserve – 55 finished lots, Mirasol – 72 graded lots, Rancho Loma Alta – 5 finished lots, Sahuarita Highlands – 54 finished lots, Sycamore Canyon – 17 finished lots.
“Characteristic of many of the other deals we’ve been seeing in this market of late, this one went quickly–with a total deal time of about 30 days–and was a cash transaction,” says White. Five bidders–four home builders and a residential development company, were in the running for the Canoa portfolio, he says.
The $29,000 per lot average across the portfolio reflects home builders’ sense of a need to supply themselves with lots at the lowest-possible price for 2010 and 2011, and are willing and able now to pay cash on opportunistic occasions.
We called D.R. Horton Tuscon division vice president Eric Montgomery to discuss Horton’s plans for the Canoa lots, but Montgomery did not return the call today.
Earlier in the year, White notes, it took months to generate interest, particularly among strategic (home builder) buyers, and they mostly were only willing to make commitments based on soft take-downs and rolling options.
Mid-year that all changed, and home builders have been competing with one another to pay cash for finished lots as they reload for 2010 inventory turn and cash generation opportunity.
As we’ve asked in this space a number of times since we first got wind in May-ish of ’09 of the rampant demand for finished lots, not just in the Phoenix area, but in California, D.C., and the Atlanta market, to mention a few of the transactionally active markets, is lot demand especially among strategically motivated home builders a leading indicator of the single family new home market? Is end-user/home buyer demand so encouraging that home builders should be tripping over one another to secure finished lots?
Only one way to find out. Internal return and hurdle rates–or what passes for them these days–get calculated with more art and alchemy and unnervingly unsatisfying data. At one or two absorptions per community per month, most home builders are dead reckoning their way through the shoals of land acquisition right now. Without visibility on real demand, both expense and revenue projections are packed with assumptions.
The achievement we saw progress on in 2009 that has megatrend ramifications for 2010: more home building companies institutionalized “asset-lighter” land strategies, exiting the real estate speculation business.
In some cases, the move was a tourniquet, in others it was a morphing into a home building enterprise of tomorrow. The question for home building management, vis a vis their land pursuits today and tomorrow, is how many of the responses to market conditions in the past 36 months have been temporary and/or stop gap measures.
A bigger question might be which market forces you’re banking on to be cyclical and which are structural. Simplistically, we’ve seen the weaker companies do all they can to try to react to the cycle, while the better smarter companies have been using the down cycle to get at structural difference. Job number one is scarcity. Without it, another 25 to 30% of private home builders, and two or three more public companies will succumb in the next 12 to 18 months.
The megatrend we envision in 2010 might best be described as “asset-right,” which comes of the belief that the strong will discipline themselves as buyers of lots as much as they do as builders and sellers of homes. And there will be far fewer of the weak.