Housing Competition Heats Up Out West
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KB Home (NYSE: KBH) has been scooping up acreage in California as it prepares to develop new housing communities in the San Francisco Bay area. The Los Angeles-based home builder just acquired sites for 182 new homes for a pair of communities in Dublin, California. KB Home is also expanding its Southwestern footprint in Austin, Texas where it plans to develop GeorgeTown Village, which will consist of 184 new home sites.
The developer is also doing something that is reminiscent of the auto industry. KB Home is starting an in-house financing arm through a partnership with Nation Star Mortgage. The new division, dubbed Home Community Mortgage, is structured as a limited liability company. It will provide financing options to KB Home customers and an added revenue stream for the home builder.
Last month, KB Home announced that its quarter-to-date preliminary net orders are trending 54% above 1Q 2011 levels. Shares of KB Home are up 14% year to date and the stock is slightly below its 52-week high.
Nonetheless, KB Home, along with the rest of the housing sector, must make way for some new competition. TRI Pointe Homes (NYSE: TPH) recently completed a $233 million IPO in which its shares advanced 12%. The newly public company expects to net $156.3 million and intends to invest in land, development, and home construction throughout the West and Southwest with the proceeds.
While TRI Pointe isn't entirely new to the housing scene, as it was formed at a precarious time for housing in 2009, it is new to the equity capital markets. TRI Pointe owns some 9,600 lots across California, Arizona, and Colorado, according to the company's S-1 filing. Sales at the company increased from $4.1 million in 2010 to $26.5 million in September 2012. TRI Pointe has yet to attain profitability.
TRI Pointe Homes was formed after the worst of the housing crisis had surfaced. Management began making land acquisitions in 2010 upon receiving a capital injection from Starwood Funds. As a result, TRI Pointe doesn't own any "distressed legacy assets" in economically stagnant places, the company indicated in its S-1 filing.
Although TRI Pointe Homes is investing in California, which is still recovering from the housing crisis, it was able to select its properties with the added benefit of hindsight of the credit crisis, while some of its competition may still be left with unwanted land. Timing has helped TRI Pointe in its recruiting efforts, and the company is led by several industry veterans from William Lyon Homes, which was a publicly traded company through 2006.
Ghosts of Crisis' Past
As good news continues to unfold in housing, the capital markets are still being haunted by the sub-prime crisis of yesterday. The U.S. government is suing ratings agency Standard & Poor's, which is owned by The McGraw-Hill Companies (NYSE: MHFI), for falsely representing the credit worthiness of the debt securities dating back to 2007 that imploded. The lawsuit - one that S&P calls "unjustified" and without legal merit" in a press release -- could fetch as much as $5 billion in damages, according to "The Wall Street Journal." Shareholders are taking the brunt of this fight so far with McGraw Hill shares dropping more than 10 percent on Tuesday, the day the lawsuit was filed, which was the stock's worst performance in a quarter-century, as pointed out by the WSJ.
The landscape in the housing market has shifted over the past five years and companies like KB Home are adapting to the new environment. Its decision to expand into financing is innovative, which helps to make this sector interesting once again despite the battles that are still being fought in and around these stocks.
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