Orange County’s contingent of publicly traded homebuilders and land developers have struck a defiant tone to confront the choppy homebuilding market that rattled the industry—and battered their stock prices—in the latter part of 2018 and early 2019.
“We were in a slow period because of a steep rise in interest rates, but we are not standing on a cliff,” Larry Webb, chief executive of Aliso Viejo’s the New Home Co. Inc. (NYSE: NWHM), told the Business Journal last week.
Wall Street hasn’t gotten that message, yet.
Nearly $2 billion in combined valuation was lost from the area’s trio of public builders and developer Five Point Holdings LLC (NYSE:FPH) over the course of the last year, making it one of the weaker-performing industry sectors in OC during that period. Public companies based here on average saw a 22% gain in stock value over the year (see related story, this page).
The local contingent of homebuilders hasn’t enjoyed the recovery seen by the overall market since last December’s swoon, as questions continue to be asked about the health of the local and national market for new homes.
There are increasing signs of optimism.
Improving market conditions the past few months — lower interest rates, a faster pace of sales, and more supply, in particular—has set up the industry for a spring home-buying season that the Wall Street Journal noted last week is “shaping up as the best in years.”
Chapman University economists Jim Doti and Fadel Lawandy last week told the Business Journal that OC home sales this year “might be better than what we originally forecast last December” based on improving local metrics.
Executives at the area’s collection of public builders and developers—valued at about $19 billion in total, if factoring in the country’s largest builder, Lennar Corp. (NYSE: LEN), which is based in Miami but runs much of its day-to-day operations out of Irvine—said they’ve taken steps to prep their businesses for the expected busy period now kicking off, although strategies differ.
Irvine’s TRI Pointe Group Inc. and New Home Co. have both pivoted to building more affordable options in the region, with the Inland Empire a growing focus.
“We are focusing on building more affordable housing than ever before,” Webb said.
He forecasts the company’s average selling price will hit $750,000 by the end of 2020, a far cry from the company’s $2 million average a couple years ago, when it was selling a collection of pricey homes along the coast of Newport Beach.
TRI Pointe, likewise, expects its average selling price to drop this year.
Newport Beach’s William Lyon Homes Inc. (NYSE: WLH) has gone big in Irvine, with its 536-unit Novel Park project prepping to open at the Great Park Neighborhoods that features its share of lower-priced homes, and also has expanded its out-of-state presence.
FivePoint, meanwhile, remains full speed ahead at its master development in its hometown of Irvine. Execs there say sales trends run counter to the narrative that the national homebuilding industry is on shaky ground.
“We’re very cognizant [about] what we are hearing about the market in general in the United States, and the other markets in California,” said Emile Haddad, chief executive of FivePoint. His firm operates locally under the name of FivePoint Communities, which is developing the Great Park Neighborhoods.
“But honestly, we haven’t seen it,” Haddad said last month when describing the pace of sales at the Irvine project, which while gearing up to open William Lyon’s Novel Park there has already sold land for the project after that.
2009 Survivors
Haddad and Webb speak from experience when stating the current market conditions aren’t as bad as the national reports might let on.
FivePoint, New Home and TRI Pointe each started their respective firms in 2009 in the teeth of the Great Recession, which saw the homebuilding industry pummeled over a multi-year period. Several of their competitors, and companies they once worked for, went out of business.
Those three companies started from scratch, while William Lyon Homes spent the period extracting itself from a financial situation that many suggested didn’t appear survivable.
Though late 2018 brought price reductions and its share of uncertainty, it’s nothing compared to ten years ago.
“Almost every demographic indicator for housing was positive,” Webb said of late 2018, when the market started getting wonky.
“There is low unemployment, high consumer confidence, and there isn’t a lot of overbuilding like what was happening in 2006.”
Generally speaking, “the market paused in the back half of ’18, corrected in the first quarter and is now on solid footing, as we begin the 2019 spring selling season,” Lennar executive chairman Stuart Miller told analysts in late March.
OC Outliers
Orange County’s base of large master planned communities has remained an outlier in terms of new home sales, according to area officials.
“We had one of our best sales months at Cadence [Park] at the Great Park in February,” Haddad told analysts a few weeks ago, after his company’s latest earnings report. “The Great Park is performing in a very consistent way.”
Jon Jaffe, the president of Lennar who in 2005 worked with Haddad (then the builder’s chief investment officer) to buy the land for the Great Park Neighborhoods, concurs in terms of OC’s relative strength.
In OC, “square footage [pricing] hasn’t reduced and price points remain at a higher overall level,” than what’s seen elsewhere in the country, Jaffe—who works out of Lennar’s West Coast base in Irvine—said late last month.
Lennar’s willing to pay up to keep active in OC. Property records indicate that it is one of two builders that’s been tapped by FivePoint to build a forthcoming 518-home project at Great Park Neighborhoods.
FivePoint indicated last month that a pair of undisclosed builders paid $218 million for 41 acres, or $421,000 per home lot, and $5.3 million an acre.
That’s a higher per-acre and per-home price than what Lyon paid for the land that will hold Novel Park, and a sign of continued strength in Irvine’s new home market, Haddad noted last month.
For New Home Co. and TRI Pointe, South County has also been a good source for home sales above $1 million, as well as some lower-priced offerings.
That area’s Rancho Mission Viejo development will ultimately have close to 14,000 homes and about 5 million square feet of commercial space.
Other builders in the community include Scottsdale, Ariz.-based Meritage Homes, Irvine-based MBK Homes, Costa Mesa-based Warmington Residential, William Lyon Homes and Lennar.
Rancho Mission Viejo has been a boon for TRI Pointe, which has had success with its 72-home Viridian project that launched a year ago with prices around $1 million.
Division President Tom Grable referred to it as one of the company’s best-selling projects during a tour last month.
“What has made us successful is being able to provide personalization to homebuyers,” Grable said. “Especially millennials, which are now one of the two largest buying segments. They want choices, and our platform is built on that.”
A few miles away in the Ladera Ranch development of Covenant Hills, sales are brisk for New Home Co., which has one of its more expensive offerings there.
“Our Sky Ranch project is selling very well in the $2 to $3 million range,” Webb said, adding that it is launching another project in the area next year.
Inland Empire, Texas
While the area’s big sources of new homes continue to draw attention, OC’s builders also are looking more for deals outside OC.
William Lyon Homes, which last year bet big on the Inland Empire and Texas markets through its $460 million buy of Newport Beach’s RSI Communities, continues to expand its out-of-state offerings.
Reports from Texas indicate the company in late February bought a 212-acre community in the Houston area, for a 758-home development that’s getting ready to see work start.
The price it paid for the land hasn’t been disclosed.
William Lyon had more than 8,000 home lots under its control in Texas at the end of 2018, edging out California as the most of any state it sells in, according to regulatory filings.
New Home Co. will focus more on the Inland Empire, Sacramento and Phoenix where “there are more opportunities” to meet its goal of increasing affordable housing, Webb said last week.
“We are anxious to do more here, but we are having trouble making the numbers work,” Webb said.
The company’s partnership with the Irvine Co.—which helped kick-start New Home and TRI Pointe’s operations a decade ago—has been a lucrative one, and one that allows it to keep its foothold as a builder in the area, Webb added.
“We want to be able to continue building on Irvine Co. property, as well as at Rancho Mission Viejo and the Great Park, but we want to keep the majority of homes under $1 million,” Webb said.
Ontario and Azusa, meanwhile, have been strong markets for TRI Pointe.
“I know a lot of people get concerned about California but we’re very blessed to have very strong assets with a very strong margin profile, at least here in Southern California,” CEO Doug Bauer said earlier this year during a conference call.
Stock Battering
A strong spring selling season can’t come soon enough for stock holders of the area’s building contingent, which unlike some of their national peers have yet to see much improvement in prices since the overall market’s December swoon.
TRI Pointe, the largest builder based in OC by market value, has seen its stock fall some 27% year-over-year. It ranks No. 15 here by market value; a year ago it was 11th.
Five Point Holdings’ stock has fallen more than 40% over the same period, William Lyon shares are down about 45% and New Home has declined by more than 50%.
Lennar, which counts a market value of about $15.4 billion and last year bought Irvine’s CalAtlantic Homes, has seen its stock fall some 20% over the same period. Its shares have been on an upswing in 2019.
New Home Co.’s stock is undervalued, Webb argues, due to its smaller scale and East Coast skepticism regarding California.
“They’ll continue to be skeptical until we grow our business and expand into other markets,” Webb said. “But my focus is not on share price. It is about lowering our leverage, increasing cash and delivering high-quality homes.”
To bolster its cash flow, the company is reevaluating its land options, and plans to reduce acquisitions this year.
“We have already seen an uptick in sales this year, so we feel positively that what we saw last year was just a pause,” Webb said.
