Tri Pointe Homes' purchase of Weyerhaeuser's homebuilding division will give homebuilder nine-year supply of land, lots, exceeding average supply of about 7.4 years for other leading US homebuilders

Allison Oesterle

LOS ANGELES , December 17, 2013 (Investor's Business Daily) – A couple of months ago Tri Pointe Homes was a smallish homebuilder with a heavy concentration in California and little fanfare on Wall Street.

Today the company is poised to become one of the nation's 10 biggest builders as it prepares to move into a handful of new, high-growth markets from one coast to the other.

For that, Tri Pointe ([STOCK[TPH]]) can thank its proposed buyout of Weyerhaeuser Co.'s ([STOCK[WY]]) homebuilding division in a $2.7 billion deal announced Nov. 4.

The acquisition brings Tri Pointe around 27,000 lots and five brands: Pardee Homes in Southern California and Nevada; Trendmaker Homes in Texas; Maracay Homes in Arizona; Winchester Homes in the Washington, D.C., metro area; and Quadrant Homes in the Puget Sound region of Washington.

The deal is expected to close by the end of the second quarter of 2014. When it does, Tri Pointe would have a market cap of around $2.5 billion, going by current stock levels. That would move it into the top 10 among U.S. homebuilders. The company's current market cap is about $600 million.

Good Supply Of Land

Officials involved in the deal said the Weyerhaeuser unit, known as Weyerhaeuser Real Estate Co., or Wreco, will give Tri Pointe nine years' worth of land and lot supply.

According to industry reports, that compares favorably with the roughly 7.4 years of average supply for leading U.S. homebuilders like Pulte Group ([STOCK[PHM]]), D.R. Horton ([STOCK[DHI]]) and Lennar ([STOCK[LEN]]).

Part of Tri Pointe's new supply will be in and around large urban markets such as Las Vegas, Houston, Phoenix and Seattle.

A majority of the lots — more than 16,000 — are in California, where available land in top markets is shrinking.

On a conference call with analysts, Tri Pointe CEO Doug Bauer said the combined company will give Tri Pointe "a stronger and deeper California market position, a relatively high average-selling-price product line (and) land positions and brand recognition in the nation's most attractive markets."

Wall Street reacted favorably to the news. Tri Pointe's stock, which touched a low of 13.43 on Oct. 9, has since rallied about 35% and currently trades near 18. The stock went public in late January at an IPO price of $17.

Even before the deal was announced, Tri Pointe was seeing sales increase sharply. For the past five quarters, revenue has risen by at least triple-digit percentages from a year ago. The Wreco assets should kick growth into an even higher gear, analysts say.

"The acquisition of about 27,000 lots in several of the nation's best housing markets will permit Tri Pointe Homes to continue its robust growth pace," Brendan Lynch, analyst at Sidoti & Co., noted in a report.

"In addition to bolstering inventory, we think Wreco's land .. . will contribute to gross margin expansion to 23.5% in 2014 and 24% in 2015, vs. our call for 22% in 2013," Lynch added.

Under the terms, Weyerhaeuser shareholders will get 130 million shares, or 80.5% of the combined company. Tri Pointe will get 19.5%.

However, Tri Pointe's management will run the firm. Bauer will remain as CEO and Barry Sternlicht will continue as chairman. Sternlicht's Starwood Capital Group owns a large stake in Tri Pointe.

The Tri Pointe-Weyerhaeuser deal is part of a recent trend that has seen homebuilders use acquisitions to gain quick entry into new markets.

In July, Ryland Group ([STOCK[RYL]]) made its fourth acquisition in a year when it bought the operations and assets of Cornell Homes, a developer in Philadelphia, western New Jersey and Delaware.

In September, Meritage Homes ([STOCK[MTH]]) announced its acquisition of Phillips Builders, a Nashville-based builder.

Weyerhaeuser, a timberland owner that makes wood, container board and paper products, began exploring the idea of selling its homebuilding unit in June.

In a statement at the time, Weyerhaeuser CEO Dan Fulton said that "given the improving fundamentals of the housing market, we believe now is a prudent time to explore strategic alternatives for this business."

The Tri Pointe-Weyerhaeuser deal was structured as a tax-free Reverse Morris Trust, which allowed Tri Pointe to buy a larger firm while Weyerhaeuser shareholders would own the majority of shares.

When the deal closes, Tri Pointe will have a chance to expand well beyond its current market, which mainly focuses on houses in California and Colorado that sell for $300,000 to $1.5 million.

"We have accelerated our long-term plan to be a leading regional homebuilder in some of the nation's fastest-growing markets," Bauer said on the conference call. "The combination of Wreco's local market knowledge and Tri Pointe's strong and established history of success should result in a powerful and focused homebuilding company."

Prices And Revenue Growing

He made those comments following Tri Pointe's third-quarter earnings release. The company posted earnings of 15 cents a share, topping estimates for 9 cents. Revenue rose more than 480% year over year to $58.5 million, above views for $44.9 million.

The average selling price of homes delivered climbed 57% to $624,000 as Tri Pointe benefited from the opening of three communities in Southern California.

New home orders nearly doubled to 135 from 74 a year earlier, while homebuilding gross margins improved to 23% from 11.7% the prior year.

Tri Pointe said it will have nine active communities by the end of 2013. It expects to open 20 to 24 new communities in 2014, excluding the Wreco assets.

"We project that Tri Pointe will sell all of the remaining homes in a few of the nine communities that are open, resulting in an active community count of 27 at year-end 2014," analyst Lynch noted.

Analysts expect Tri Pointe to post full-year EPS of 47 cents in 2013 and $1.09 in 2014.
(c) 2013 Investor's Business Daily, Inc

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