Homebuilder New Home Company could raise up to $173 million in an initial public offering.
The New Home Company certainly is “new,” having started only a few years ago. The founders — which include Larry Webb, Wayne Stelmar, Joseph Davis and Tom Redwitz — invested $10 million of their own money into the venture in August 2009, sensing that the real estate market would eventually rebound and that it was time to pick up properties at dirt-cheap prices.
Keep in mind that the housing bubble got its start back in 2002, when the S&P/Case-Shiller US National Home Price Index was about 129 or so, and eventually peaked at 189 in June 2006. As the market began to crumble, millions of Americans defaulted on their home loans and the financial crisis plunged the U.S. economy into a recession. The index would sink all the way back down to 129 — a level at which it would remain until early 2012. So the timing of the bet certainly looks good in hindsight.
From 2011 to 2012, revenues surged 31% to $55 million, and the company lowered its operating loss from $1.8 million to $876,875. Its most recent financial results were promising, too. During the first quarter of 2013, revenues came to $4.67 million, up from $4.1 million, and income from operations went from a loss of $535,994 to a profit of $342,786.
New Home focuses primarily on the California market, with developments in Orange County, Los Angeles, Santa Clara, San Mateo, Marin and Yolo. The founders have extensive backgrounds in these areas, having worked at companies like John Laing Homes and Watt Residential Partners.
New Home utilizes a joint venture strategy that involves getting minority shares in projects. This has allowed the firm to lower its risks and leverage capital across more opportunities, especially in high-growth areas. It also has developed a system to allow for more customization of homes — to this end, the company has design centers at each project, leading to higher margins as well as lower cancellation rates.
The broad picture for the real estate market is heartening, too. Last year, homebuilding permits increased by 29%, and the annual median single-family existing home price rose by 6.6%. That momentum has continued into 2013.
And yet, the IPOs of homebuilders this year have actually been mixed. While Taylor Morrison Home (TMHC) is up almost 9% since going public in April, Tri Pointe Homes (TPH) and William Lyon Homes (WLH) are off a few percent since their IPOs.
The concern here has been interest rates, which have been ticking up, and which threaten to slow home sales should they continue to do so. Per New Home’s S-1:
“Substantially all purchasers of our homes finance their acquisitions with mortgage financing. Rising interest rates, decreased availability of mortgage financing or of certain mortgage programs, higher down payment requirements or increased monthly mortgage costs may lead to reduced demand for our homes and mortgage loans. Increased interest rates can also hinder our ability to realize our backlog because our home purchase contracts provide customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event that they cannot arrange for adequate financing. As a result, rising interest rates can decrease our home sales and mortgage originations.”
In short: New Home could face a shaky going early on in its publicly traded life.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.