Story of Two Turnarounds: William Lyon Joins Homebuilding Party
By DANIEL D. WILLIAMS
William Lyon Homes Inc. is back in step with its peers, riding a wave of investor enthusiasm for public homebuilders fueled by a strong residential market.
The Newport Beach-based company,formed in 1999 when Gen. William Lyon merged his resurgent private company with the floundering public Presley Cos. he chaired,has seen its share price rise from the 9 level at the beginning of 2000 to nearly 18 last week.
For the nine months ended Sept. 30, the company reported a 23% year-to-year increase in earnings to $27.4 million on sales of $290.3 million, up 14%.
Low interest rates, a vast imbalance between jobs and housing and the scarcity of buildable land have factored into strong demand in the residential sector. Public builders such as William Lyon, Irvine-based Standard Pacific Corp. and Los Angeles-based KB Home have been among the beneficiaries.
“Demand is higher than we’ve experienced in a long, long time due to low interest rates,” said Wade Cable, president of William Lyon Homes. “People see it as a good investment.”
“The industry in general has skyrocketed,” said Michelle Wolkoys, managing director of the Orange County office of The Meyers Group. “And William Lyon has kept pace.”
It wasn’t always so.
In the early 1990s, homebuilding came out of the recession and companies such as Standard Pacific, KB Home and Dallas-based Centex Corp. posted increasing gains.
But not the then-Presley Cos. Burdened by a large debt and Inland Empire land still worth less than when it was acquired in the late 1980s, Presley was flirting with bankruptcy by 1998.
In 1999, Lyon engineered Presley’s purchase of William Lyon Homes for $48 million, with Lyon and his son upping their stake in Presley from 15% to 49.9%. Presley was renamed William Lyon Homes Inc. The deal boosted the company’s financial position and added valuable Orange County land to its portfolio, while it retained tax credits based on Presley’s years of losses.
The private William Lyon Homes was itself a product of hard times. Gen. Lyon, a homebuilding giant for decades, saw his empire reduced to rubble by the late-1980s downturn, with lenders winding up taking virtually all the assets of his William Lyon Co. as he doggedly worked through the disaster without resorting to bankruptcy. He also had to give up much of his stake in the Presley Cos. in a restructuring that saw lenders take 70% of the company.
In 1993, Gen. Lyon started William Lyon Homes and that year sold two houses. By 1998, the company had sales of $68 million and cleared a profit of $6.3 million.
Since the merger, William Lyon Homes shares have steadily increased in value, even bucking a downturn in the sector in 1999 caused by rising interest rates.
Cable says the company’s success has been due to a strong market, not by altering William Lyon’s business strategy.
“We’ve not really changed anything. We are still a merchant homebuilder,” Cable said.
“They’ve been very profitable,” said Walter Hahn, a real estate real estate consultant with E & Y; Kenneth Leventhal Real Estate Group. “They paid down their debt, strengthened their balance sheet, acquired Presley Cos., and stuck to their formula for building mostly moderately priced homes. That’s primarily what they do and that’s the market segment that’s been booming.”
But there are signs the boom may be fading somewhat.
Mortgage rates are expected to begin climbing again this year. And signs of slowing are evident in the housing market since Sept. 11, something William Lyon Homes has warned about in its federal filings. Some analysts, meanwhile, have begun tempering their enthusiasm for the sector (see story below).
But the company has an intangible asset in Gen. Lyon, according to Cable.
“His reputation carries weight with land sellers,” he said.
And that’s a key in today’s market. With buildable land as scarce as it is in OC, the biggest challenge for homebuilders is in acquiring lots.
According to Cable, the way sellers operate in today’s masterplanned communities, it’s a closed market, almost a private club.
“The owners identify a product mix up front, and they will tap three or four builders on the shoulder. It’s not open to the public, so having a good rep in the homebuilder industry is very important,” Cable said.
The government, with its entitlement and various regulatory hurdles to clear, offers a further roadblock to smaller builders and startups that have shallower pockets.
“The government has made the process more expensive, making it very difficult for someone to enter market,” Cable said. “Clearly, you need ability to stay the course.”
