by Will Ashworth | May 16, 2013 12:37 pm
It might not have been the best day for William Lyon Homes (NYSE:WLH) — the California homebuilder that went public today at $25 per share — to hit the market.
The stock jumped initially but has shed around 4% since then, putting its pricetag just above the original offer. Homebuilders across the board are in the red as well, including Taylor Morrison Home Corp. (NYSE:TMHC) and Tri Pointe Homes (NYSE:TPH) — the two other stocks in the sector that just came public this year after a more than eight-year dry spell for the sector.
TMHC and TPH have suffered losses of over 1% and nearly 5% respectively today alone, dwindling their total gains since their offering prices to 16% and 6%.
Still, one bad day doesn’t mean you shouldn’t consider the new kids on the block in a booming sector. So which of the three is the best bet for your portfolio? Let’s take a look.
General William Lyon started building homes with his brother in 1956. While his company soon merged with Presley Cos. and tried a shot at the public market, Lyon took William Lyon Home private in 2006, valuing it at $900 million.
Within three years, it reached out to hedge fund Colony Capital for a $206 million lifeline and by December 2011 it had entered Chapter 11 proceedings with a reorganization plan that saw Luxor Capital Group take majority control of the homebuilder in return for a reduction of its debt.
The company we see today is a slimmed down version of its previous self, with Lyon’s son running its business and the Lyon family holding an 18% economic interest.
By setting its IPO price higher than the original range, the company will see net proceeds of $150 million, which will be used to buy up land currently under contract or in non-binding letters of intent. It currently has $34 million in deposits for land acquisition and another $185 million under development.
Clearly these proceeds will come in handy to speed its growth. Of its owned inventory, which is everything from deposits on land to finished homes, Southern California represents 36% of its total and Arizona another 39%. The remaining inventory is spread among Nevada, Colorado and Northern California. Located in some of the best potential housing markets in the U.S., it’s got a shot at reviving its former glory.
The big downside for me is that it’s still generating an operating loss, although that loss is shrinking. Plus, the economy must keep moving in the right direction … and that’s hardly a guarantee.
Taylor Morrison Home Corp. builds homes in California, Arizona, Colorado, Texas, Florida and in the Canadian province of Ontario. It’s been public for a little over a month. TPG Capital, Oaktree Capital Management and JH Investments acquired it for $1.2 billion in July 2011 with $620.3 million in cash and the remainder financed.
From a private equity perspective, the group paid more in cash than the average transaction, which is good news, and it sat with a 47% debt-to-capital ratio as of the end of March. That’s very healthy.
Plus, Taylor Morrison reported first quarter earnings yesterday that were very strong. Home closings revenue increased 66% year-over-year to $366.8 million. Even better, adjusted gross margins on those closings were 340 basis points higher at 23.4%. As a result, its net income increased 136% to $24.3 million.
To top it off, Builder Magazine — the trade publication put out by the National Association of Home Builders — just named Taylor Morrison Builder of the Year.
Founded in April 2009 by three former employees of William Lyon Homes, Tri Pointe Homes got a $150 million injection of capital in September 2010 from Barry Sternlicht’s private equity firm Starwood Capital. After the IPO, which raised $156 million in net proceeds for the acquisition of land, Starwood held 45% of the company — a good name to have behind the company.
Tri Pointe reported its first-quarter results earlier this week, posting a one-penny profit compared to a nine-cent loss a year ago. In terms of land, it acquired 301 lots valued at $38.4 million while also controlling an additional 474 lots. With a backlog in home development that saw the average sales price increase 33% in the quarter to $539,000, it’s no wonder CEO Doug Bauer said, “Our strong performance is a direct result of the operational execution of our strategy and taking advantage of improving market conditions in all of our core markets.”
Plus, the company projects at least 350 homes will be delivered this year generating revenue of $205 million or more. With a great balance sheet and plenty of growth in the pipeline, look for it to push profitability much higher in the next two years and with it its stock price.
Of the three homebuilders, I’m going to definitely pass on WLH despite today’s mild gains. A bankruptcy not too far in the rearview mirror and no profits? Doesn’t really suit my taste.
The two remaining are polar opposites: Tri Pointe is the up-and-comer while Taylor Morrison is an established champion. If you are a risk-averse investor I’d go with Taylor Morrison. However, if you are looking for significant capital appreciation, you’re more likely to achieve it with Tri Pointe.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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