Orange County’s residential real estate industry is poised to add another public company to its ranks, following a reverse merger involving Landsea Homes, the Newport Beach-based homebuilding subsidiary of China-based real estate company Landsea Group.
A deal that would see Landsea Homes bought for $344 million in stock by a blank-check entity out of New York was announced last week.
Factoring in debt and other considerations, the builder is expected to have an enterprise value in excess of $600 million once the deal closes, according to regulatory filings.
The deal would make Landsea OC’s third-largest residential real estate-focused public entity by market valuation, trailing Irvine-based TRI Pointe Group Inc. (NYSE: TPH) and FivePoint Holdings LLC (NYSE: FPH).
Landsea won’t be going public via a traditional initial public offering. Instead it’s being bought by a special purpose acquisition company, or SPAC, LF Capital Acquisition Corp. (Nasdaq: LFAC).
LF Capital, backed by executives with ties to several banking and investment firms, raised more than $150 million in proceeds in its own 2018 IPO and has until the end of this year to complete a reverse merger.
The deal with Landsea is expected to close by the end of the year; the company will be Nasdaq-listed under the ticker symbol “LSEA.”
Landsea’s existing ownership group will retain about a 67% stake in the company post-merger, which estimates a $510 million equity value for the company when the deal is done. Existing sponsors of the SPAC will have a 4% stake in Landsea and the remainder of the company’s stock will be held by the public.
“We have always had the goal of taking this company public,” Landsea Homes Chief Executive John Ho told the Business Journal.
Ho was the company’s first employee when its parent, Landsea Green Properties Co.—a publicly traded company listed on the Hong Kong Stock Exchange (HKSE: 106)—set up the national homebuilding arm in Pasadena in 2013.
The company later moved its headquarters to Irvine, and then to Newport Beach in 2018, where the new public company will remain based.
“We have always intended the company to be a long-term, sustainable entity. Going public will allow us to help further establish our brand and leverage our platform to continue to fund growth,” Ho said.
Executive leadership at the builder will remain the same, with Ho staying on as CEO and Michael Forsum remaining president and chief operating officer. Two LF Capital executives, including CEO Scott Reed, will have spots on the nine-member board.
“Landsea Homes has established a unique and differentiated homebuilding platform with significant growth prospects for the future,” said Reed, founder of BankCap Partners, a bank-focused private equity firm. “We believe this transaction will allow Landsea to reach its true growth potential.”
Landsea Homes currently has about 250 employees.
Landsea counts some 5,400 home lots in California, Arizona and New York.
Local projects include IronRidge, a 608-home development in Lake Forest it launched in 2015, and Lido Villas, a 23-unit townhome project near Newport Beach’s Lido Village shopping area that sold out this year.
Last year, it boosted home sales in OC by nearly 70% to 135, its busiest year ever here, earning it the No. 12 spot on the Business Journal’s list of the area’s largest homebuilders.
Companywide revenue last year totaled nearly $631 million, a 66% year-over-year increase.
It forecasts a 10% increase in revenue this year to $697 million, with a target of reaching nearly $1.2 billion in revenue by 2022.
In 2019, it reported 597 home deliveries with an average sales price of $953,000. In 2018, there were 290 deliveries with an average price of $1.2 million.
It has increased its deliveries of late, bolstered by a growing focus on more affordable homes.
The company expects 1,462 deliveries this year at an average sale price of $476,000.
Its entrance in the Arizona market aligned with this lower price point, as the company moved away from high-price metro areas into more affordable markets located near these major cities.
“Arizona was the next step in our evolution to direct our investment in traditional single-family homebuilding in markets where we saw net positive migration,” Ho said.
It did so by acquiring two Arizona builders in the past year—Pinnacle West Homes and Garrett-Walker Homes—making Landsea a top five homebuilder in the state.
It plans on entering new markets using a similar acquisitive strategy as the one deployed in Arizona, as well as land buys.
Landsea is currently targeting Texas and Florida for growth opportunities. The two states hold eight of the nation’s top 20 largest new home markets, such as Dallas, Austin, Orlando and Tampa.
A land deal in Anaheim is also expected, according to regulatory filings.
Landsea currently has about $324 million in total debt and $80 million in cash. Following the merger, it believes it will have in excess of $400 million available for additional acquisitions and land buys.
Landsea’s method of going public is one that’s been growing in popularity as alternatives to traditional IPOs, especially in times of market uncertainty.
“Lots of companies have been looking at this alternative IPO process because it costs less than a typical IPO, and the timing is more certain,” Ho said.
SPACs, or blank-check companies, raise funds to go public as a shell company, and typically have a two-year timeline to acquire another firm to take public before the SPAC must liquidate and return its cash to investors.
LF Capital went public in June 2018. Its initial June 2020 deadline to make its acquisition was extended as a result of the COVID-19 pandemic.
Landsea decided to go the SPAC route last year, opening talks with several dozen companies, according to Ho.
It chose LF Capital in March, officials said, due to the company’s significant cash holdings and strong sponsorship, which includes New York investment management firm BlackRock Inc.
The last OC company to use a SPAC vehicle to go public was Irvine’s Allied Esports Entertainment Inc. (NYSE: AESE), which completed a deal with a Minneapolis-based blank-check company, Black Ridge Acquisition Corp., a year ago.
Irvine-based car company Karma Automotive, like Landsea backed largely by Chinese funding, also is said to be considering a similar deal as a way to tap increased investor interest in electric vehicles.
Roth CH Acquisition, a SPAC headed by Byron Roth, CEO of Newport Beach investment banking firm Roth Capital, raised $75 million in May and is searching for an acquisition candidate.
Deal, Demand Pickup
The deal was temporarily tabled when COVID-19 hit, though it picked back up in June, coincidentally a month of strong gains for Landsea, when it posted record net orders of 219 with a value of $111 million, besting its prior record month set in February of 215 orders with a net total of $91 million.
“2020 started out to be a record year and held strong until mid-March when COVID-19 hit, and the market stalled as a result of shelter-in-place orders. After we were deemed an essential business, we started to see a pickup in activity in May, with buyers wanting to take advantage of low interest rates, and work from home trends bolstering demand.
“Our July sales were even better than 2019,” Ho said.
He points to the company’s shift to entry-level and move-up segments as a driver of new buyers, specifically millennials, which now make up the largest homebuying sector.
“Landsea has one of the strongest balance sheets in the industry,” Reed said in a conference call following the announcement, noting that the company has a 16% net debt-to-net book capitalization, which is “significantly lower in relation to competitors,” like TRI Pointe with 30.2%, and new William Lyon Homes parent Taylor Morrison Home Corp. (NYSE: TMHC), which has a 47.5% capitalization.