Beating the Vultures to Prime Land Pickings
A dozen or more “opportunity” vulture funds were making a lot of noise a little over a year ago, waiting to strike when the time was ripe. But for a smattering of land fund deals, the time never became ripe.
During the back half of 2008, bank land asset portfolios became enmired in the broader toxic asset seize-up that remains an 800-lb. gorilla in the financial system’s living room, and the global destruction of value declawed many of the vultures. What’s more, pro land sellers are not ones to roll over and die just because it’s the toughest real estate marketplace since the Great Depression.
A much-anticipated reset of lot prices from a dollar to cents-on-a-dollar became a full-fledged standoff. So far, while all eyes are on Lehman-SunCal and LandSource’s Newhall Ranch as potential game-changing revaluations, a broad-based lot re-pricing has been slow to arrive to the market.
Still, it seems that where opportunities are cropping up as an exception to the rule, it’s not vulture funds but real live home builders who are jumping in to snatch them up.
In a post yesterday, we talked here–”Home Builders Join in Renewed Pursuit of Land”–about home builders positively teeming on bids for prime-location, finished lots in the Phoenix market.
We also hinted in an earlier post that we’d start reporting word of as many “start-ups as shut-downs.”
This morning, we received this press announcement:
IRVINE, Calif. – June 12, 2009 – Is a recession the right time to build new homes? According to Trumark Companies it is. The 20-year land development company that designs and entitles quality residential neighborhoods and builds office, R&D and retail properties is taking advantage of the market downturn to launch Trumark Homes – a homebuilding company unencumbered by the financial challenges faced by existing builders.
Trumark Homes recently acquired 4.38 acres of land in the Inland Empire community of Upland, Calif. The homebuilding company will develop Wyeth Cove, 39 single-family courtyard homes ranging in size from approximately 1,717 to 2,401 square feet. Construction is set to commence in August 2009; opening date as early as 2010.
“We will be the new generation of home builders who are responsive, focused and unburdened by legacy issues, large bureaucratic systems or broken projects,” said Michael Maples, principal of Trumark Homes and co-founder of Trumark Companies. “Our strategy is to leverage our real estate knowledge and expertise to build a large West Coast homebuilding company targeting both Northern and Southern California markets, initially targeting the distressed market niche.”
Those who know and played the Resolution Trust Corp. game in the early 1990s are excited right now. They look at the vultures and see a possibility for a light poultry-like lunch.
Bottom Dollars
The Second Derivative has spoken. Or has it?
Everywhere, smart and experienced people have begun to find their own words to say that the bad news may still be bad, but is growing worse at a slower rate. Toll Brothers CEO and Chairman Bob Toll says as much in his comments about 80% of the nation’s housing markets in a “first signs of light” interview with CNBC “Mad Money” host Jim Cramer.
The steepness of the deterioration is changing to a more gradual decline. Not everything is as bad as it was. Things have to shift from nightmarish, to horrible, to frightening, to bad, to concerning, before they can flip across the gulf to okay, no?
Bob Toll contends that if you’re out in the field, you’ve already started to get a sense that things are improving, and we hear that from a number of people in a number of markets. The traffic that fell off a cliff in September and October of last year when the financial crisis crescendo-ed began to respond to reset price levels, better interest rates, and government stimuli.
But there’s so far to go.
If you are a believer in the “green shoots” theory, then you’ve got to be thinking there’s something that’s going to cause consumer spending to regain a comfortable stride despite a widening sphere of dread about job and income loss. You’ve also got to believe that residential investment will reemerge as a positive in spite of home price deflationary forces that may be expected to continue.
Calculated Risk puts it this way in comments about the President’s top economic advisor Lawrence Summers’ assessment of where things are:
The “unremitting freefall” might be ending, but what will be the source of growth? Usually residential investment (RI) and personal consumption lead the economy out of a recession – and both remain severely impaired this time. There is too much excess inventory for any meaningful recovery in RI, and the process of repairing household balance sheets has just begun (I expect the savings rate to continue to rise for some time).
Meanwhile, too many banks can’t rise above their profound technical solvency issues to do much more than sit and wait for more deposits and more cash from U.S. taxpayers, via the Treasury. They’ve crimped investment in households, in communities, in companies, and in the future–existing only in cryogenic suspension as once-prized borrowers pick a number and get on line to wait for markets to reopen.
“Green shoots” theorists have not only to believe in the resumption of consumer spending and residential investment, but the reignition of willing buyers and sellers of assets among people who’ve been paralyzed by fear to put a price tag on just about anything.
Like other things, housing downturns have phases and stages, whatever their duration or depth.
At this stage, when construction lending is for all intents and purposes shut down, and when banks are awaiting word of their fate from regulators and White Knights before they engage in the world of markets, and when buyers of homes are doing all they can to postpone the need to move before it’s absolutely necessary, one real estate player in the mid-Atlantic market describes survival this way.
“We’ve done all we can with our lenders, and all we can with our costs. Now it comes down to one thing, or we’re done. We’ve got to sell something. We know there’s not a lot selling in our market, but there is something. So our life depends on stealing a sale from somebody else–existing homes, or foreclosures, or another new-home builder. Either we’re going to steal the sale, or we’re not going to be here.”
This is what it’s like even as “green shoots” theorists talk about a “bottom” as if it were encouragement that next bank payment or two might be last ones to stress about.
Staying Influence: It may be the next best alternative to staying power.
You still hear it plenty these days, even in these worst and most uncertain of times. It’s what a private home building company executive will tell you makes the biggest difference between his operation and public residential construction companies that may or may not find this or that market fit to build in.
“We’re here to stay.”
When he says it, it’s certainly about selling new-homes to people who want or need them, with a solid name in the community to back up the promise. It’s a way of expressing the belief that real estate–and home building–is local. If prospective home buyers view you as part of the community, and they know where you live, doesn’t it make sense that they’d put more trust in you with the biggest purchase decision they’ve got to make?
It may. But that’s only part of what they mean when they say, “We’re here to stay.”
It’s just as much a statement about buying land from a developer or a farmer. During the run-up of the early 2000s, land was a game of magic numbers, and developers and land sellers got to name their price on home building lots. Now, those public builders who were tripping over one another to outbid everybody on every piece of dirt that showed up in auction are now tripping over one another to exit markets that don’t pencil for them. For, developers and land sellers, “we’re here to stay” means they can and will work with you, even to the point of soft take downs, so that you’ll have access to lots and they’ll continue to have a willing buyer in the market.
It’s also about a local banking relationship that may go back generations. Yes, today so many of the community banks you used to deal with have been scarffed up by regional, national, and even global players. Now, after talk up the kazoo about partnerships for the first several years of the decade, many of those “partners” are among the disappeared. Your accounts have been turned over to special services “don’t call us, we’ll call you” departments whose business goal seems exclusively set on getting as much of the money they may have loaned you back in their tills immediately, while discussion of continuing to lend as they said they were going to is out of the question.
Clearly, a bank partner will mean something different to the average private home builder when this crisis has run its course. But “we’re here to stay” today means that capital in the community, in the submarket, in the marketplace, might set its sights on home builders whose word is their bond. Even before the global credit and liquidity reset values to assets, people locally know what locations are worth, and they’re going to pay for them. Being a “we’re here to stay” kind of builder is an opportunity for people and banks who still have money and want to put it to work investing in something they know.
“We’re here to stay” means that your subs, trades, and materials suppliers won’t get left in the lurch, like with the others who just pull up their stakes and exit the market.
“We’re here to stay” is also about hiring people with more attitude and, maybe, less aptitude. If you’re like most private home building companies, you’ve had to let go of no less than half, and more likely seven people in 10 who worked for you in 2006. It’s the same everywhere. Who you’ve got left has to not only be an “A” player for today’s market, but has to help you have the ideas to deal with even a worse times than now before they get better.
Ultimately, the truth in the claim “We’re here to stay” depends on being able to build a home in a desirable community, fast, well, and efficiently, things you can only do if you’re in a local people business. Per-square-foot direct costs mean more to being here this time next year than perhaps ever in the history of U.S. home building. That’s sole proof of a home builder’s staying power.
Herb Allison Gets Promotion and a Raise to Run TARP
The President has nominated Fannie Mae CEO Herb Allison to take the helm of the U.S. Treasury’s Troubled Asset Relief Program.
- The Wall Street Journal reports on the nomination.
The 65-year old former chairman of TIAA-Cref and Merrill Lynch executive will probably get a raise. He’s been taking no salary in his current job, running Fannie Mae since September, when the Fannie and Freddie Mac got put under government conservatorship.
Merger Rock & Roll Begins: Pulte Gets Centex
Pulte Homes and Centex Corp. agreed to a stock-for-stock merger transaction that makes Pulte the planet’s largest home building company. Remember home building?
The Wall Street Journal reports this a.m.
Pulte Chief Executive Richard Dugas Jr. said the deal would combine Centex’s strength in the entry-level and move-up categories and Pulte’s strength in the move-up and active adult community segments, forming the largest U.S. home builder.
Pulte last month adopted a shareholder rights plan with a 5% trigger to help preserve tax assets that would be lost with an ownership change.
Under the deal, which also includes $1.8 billion of debt, Centex shareholders will receive 0.975 Pulte common shares for each share of Centex they own. Based on Pulte’s Tuesday closing price of $10.77, the deal is valued at $10.50 per Centex share, a 38% premium over Centex’s Tuesday close of $7.62. Pulte shareholders will own about 68% of the combined company, while Centex’s will own about 32%.
More on this later. What do you think? Who’ll D.R. Horton–which has stocked up $1.8 billion in cash “dry powder” pick as its dance partner? Will Lennar sit back and become a large-cap also-ran? Unlikely.
Here’s a perspective from Reuters, which notes that Pulte CEO Richard Dugas will take over as chairman and CEO of the combined company:
Experts predict more strategic stock-for-stock deals this year in distressed sectors, as they help companies reduce costs while allowing shareholders to benefit when conditions improve. With such transactions, companies in struggling industries can bulk up without having to deplete much-needed cash or trying to raise scarce and costly debt financing.
Here’s CNBC’s report and quick analysis on the merger from this morning.
David Goldberg, UBS’s Home Building & Building Products analyst, has this first-blush observation:
Although at first glance we believe the deal represents strategic advantages for both companies, we await further details on the exact benefits. That said, this deal will provide greater operating leverage as Pulte expects to realize ~$250mn in cost savings annually through reduced overhead. Further, it gives them access to high quality lots, well positioned geographically and across price points, while preserving cash.
Here’s how the companies’ press release addresses what will happen to Centex CEO Tim Eller:
Mr. Eller will join the board of directors of Pulte as vice chairman and will serve as a consultant to the company for two years following the close of the transaction. The board of directors of Pulte will be expanded and will include four current members from the Centex board, including Mr. Eller, and eight members of the current Pulte board, including company founder and current Pulte Chairman William J. Pulte.
Make Over Mondays
Know the feeling? A month ends, and you check it off. It’s another month you don’t have to stare down from the front end. We don’t imagine there’s a home builder out there who doesn’t relish the thought of seeing the tail lights of 2009.
So, what happens these Mondays, the day that not so long ago in people’s memory was the day you practically needed an armored car to pull up and take all the deposit money from the weekend past to the bank?
These months, Mondays should be about all the little things because the big things are beyond our control. This limbo we’ve all gotten to know so well, like a form of progressing malnutrition, is about the stubborn distance that lies between a bid and an “ask.” There are four money buckets: The money you’ve got; the money you’ve got coming in; the money you owe; and the money you need. The amount that one or more of those is out of balance is probably the extent to which you’re watching Bloomberg news in the mornings, as opposed to ESPN.
You can control the weeds in the flower beds of the sales models. You can control the number and the quality of the smile-and-dial phone calls you and your sales associates make to make your quotas. You can control the energy-level of affirmation for every sales success one of your team nets. You can control the follow through and care every one of your customers gets so that they’re your No. 1 branding strategy. You can keep dialing your bank or bankers, and let them know where you are with your business. You can keep showing up at the country club, because those local club deals are still one of the No. 1 ways capital will find its way back into real estate. You can go out into your market and find a land seller or developer who just might be willing to make you an offer you can’t refuse on a piece of dirt that would move even in today’s horrid environment.
You can buy up some REOs, taking them off the market, and using your subs and your staff, you can make them available for rent or rent-to-own. You can dial back your costs far enough to zero out all but the essentials and offer your services as fee builders.
These are some of what people mean when they talk about “all the tricks” in the book. It’s the book for down cycles. One of its rules is you mark off weeks and months as you survive them, and put those days behind you. You then start a new week or a new month like a baseball player who starts each game “0-for-the-game.”
Everyone’s at that same starting point, and while an 80-year stalemate between big and ask has got things gummed up from a macroeconomic standpoint, this is the first April of the rest of your life, and it’s time to get things rolling.
After all the trillions and all the programs and all the efforts to lure in the private sector, the only sure way to counter toxic assets is with assets that aren’t toxic. And one of the only ways to get to assets that aren’t toxic is to help house buyers get past their fear of risk. They need assurance that what they’re puchasing will be the property they’re committed to making their home.
I Say, About that Toxic Asset Plan…
This ADD-sufferers’ version of the Geithner Put comes from the Financial Times, which uses explainer-graphics and a we-can’t-make-this-stuff-up voiceover to make the toxic asset plan clear enough for the dullest of us knives in the drawer.
Here’s a link to The Geithner Plan Explained from FT.com. You won’t regret the time it takes to register for the site.
Reality Bites as Ratings Agencies Downgrade REIT Debt
From MULTIFAMILY EXECUTIVE, by Les Shaver: Single-family sneezes and the world economy, including apartment real estate investment trusts that are assumed to run contracyclical to single-family for-sale trends, get pneumonia. The reason this venue is called Housing Crisis is that the convulsion hits equally both the supply and the demand side of housing, whether you’re talking for-sale or for rent. And it’s hitting not only the balance sheet but also the daily and weekly access to normal working capital, assuming steady cash flow.
There’s an analysis on how tumbling fundamentals and squeezed access to credit have put a pall on REITs’ business and risk outlooks for the next stretch from Multifamily Executive senior editor Les Shaver.
S&P said the ratings were prompted by constrained access to debt and equity capital and concern that the struggling economy will put even greater pressure on cash flow. The agency said “heavy credit revolver usage (in excess of 50 percent), weak debt service coverage, and an over-reliance on earnings from fee-driven and/or asset sales activity are key areas of focus.” It also views the common dividend coverage as a “drawback,” given the need for REITs to preserve liquidity.
“Fundamentals in the multifamily sector are coming under pressure,” says George Skoufis, a director for Standard & Poor’s. “Their debt protection measures are kind of weak. In the previous cycle, they came in with a little bit more of a cushion. Their numbers are a little weaker, and their leverage is a little higher.”
Multifamily and commercial construction lagged the residential for-sale downturn, and many have another leg or two down as employment deteriorates and corporate earnings erode by virture of more conservative money habits among consumers and challenged consumer sentiment. Too, anecdotally anyway, demand for one- and three-bedroom apartments has decline while demand has stayed strong for two-bedroom apartments–an indicator of increased “doubling-up” among people who might choose to live with roommates to weather the downturn.
Local Intel–Update 3/26 with Fixed SlideShow ;-)
People don’t buy nor do they sell homes pegged to national real estate trends. Nor even do potential investors or sellers of land make their decisions based on Case-Shiller or any broad stroke metric. Real estate is as local as the next door neighbor’s property line and the length of the drive or walk to necessary destinations like the school, or transportation, or shops, or healthcare.
Especially since job markets are in convulsion–real estate analyst John Burns calls for employment to retreat to 88% of adults who seek full-time work in the next couple of years–waves of local recesssions, lowpoints, and recoveries will occur in different locales at different moments.
The Concord Group, a land use and real estate consultancy, has plotted a recovery timeline for a number of geographies based on job and household formation dynamics that economic drivers have set in motion. No secret to the formula is that land prices, notoriously sticky, will exhibit give first and come closer to “bid” prices as soon as clarity emerges on the latest Geithner plan for banks’ toxic assets.
Once land truly resets and trades resume at some volume, the lot cost-base of new homes will firm up, and a corrected normalized level of volume and pricing will take shape.
Big Builder editor Sarah Yaussi has produced this brief drill-down of the Concord Group analysis, with commentary from Concord principal Andrew Borsanyi.
The Redemption: Geithner Plan a Wall Street Hit
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
– William Shakespeare, English dramatist & poet (1564 – 1616)
–”Hamlet”, Act 1 scene 3
Click image for access to Geithner's Wall Street Journal Op-Ed piece today.
The pipeline of trillion-dollar federal policy programs today offers the latest one that has made U.S. Treasury Secretary Timothy Geithner the sudden darling of Wall Street. Odd that several weeks ago–two weeks into his new job description–many of those same Wall Street denizens declared Geithner worse than useless, and as recently as last week, there were over-unders on when he would be headed out Treasury’s revolving door in ignominy.
Back those few weeks, the appetite for a groundwork of principles that would support a plan was not there, but now that the plan has been filled-out and articulated, critics are shutting up long enough for Geithner to appear to know what he’s talking about when he refers to the global financial complex and the trouble that it’s in.
Now that Wall Street investors appear to have bought-in to the details, the credibility capital Geithner seems to have lost when he opened his mouth in amid the crawl of stock tickers in mid-February now is back within his grasp.
The question remains though. What does the program fix? Borrower? Lender? Anyone?
Economics Nobelist, Princeton professor and New York Times columnist, Paul Krugman spells out the administration’s and Geithner’s theory underlying the current plan to wrest toxic assets from the banking system, a theory he disagrees with.
But banks can also fail even if they haven’t been bad investors: if, for some reason, many of those they’ve borrowed from (e.g., but not only, depositors) demand their money back at once, the bank can be forced to sell assets at fire sale prices, so that assets that would have been worth more than liabilities in normal conditions end up not being enough to cover the bank’s debts. And this opens up the possibility of a self-fulfilling panic: people may demand their money back, not because they think the bank has made bad investments, but simply because they think other people will demand their money back.
Bank runs can be contagious; partly that’s for psychological reasons, partly because banks tend to invest in similar assets, so one bank’s fire sale depresses another bank’s net worth.
So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?
Clearly, the assumptions underneath the administration’s plan embrace the latter of the two causes. So the program and the process, and the articulation, and the defiance that accompanies the roll-out of the Public-Private Investment Program rely extensively on a conviction that restoring calm and confidence–even a measure of greed–will get a flow of funds going.
But the base of the problem remains. Bad loans occurred. Lenders and investors took bad risks around those loans. People bought homes they should not have bought–20%-plus of them were investor purchases for flipping purposes during the final two or three years of the run-up–and now the reset on the value or lack thereof of those loans and the investments on top of the loans, will be deferred as a complex delay-the-pain mechanism kicks into action, aggregating what was bad into a toxic pool for a later day, and setting refurbished bank balance sheets back into business like an afternoon at the dog-groomers.
The wager here is twofold. One is that investors, lured by the virtual elimination of risk, will find that this is the place for all that pent-up liquidity that had been awaiting “the floor” for asset pricing before it moved in for the strike. Two is that borrowers will exhibit a more steadfast commitment to the obligations of their loans.
In our need for instant gratification and immediate solutions, we may have a blast of “good news,” that can bouy spirits and keep stocks on an upward trajectory for the month.
But we can see in our closer look beneath the headlines on existing home sales, starts, permits, etc., that there’s a lot of work to do, and much of that work is going to be a good, old-fashioned work-out between buyer and seller based on what a property is worth today, and tomorrow, and the day after, to someone who wants to live in that property.
Borrowing and lending are part of real estate in North America. So Shakespeare’s admonition could never be taken literally. But a great dramatist and poet of today would probably figure out a way to add to the phrase somehow. “Neither a borrower nor a lender be (unless there’s sufficient skin-in-the-game for the borrower and unleveraged capital on the part of the lender).”