Is Bigger Better For Builder TRI Pointe?

Investor's Business Daily

Now that it has leapfrogged up the ranks of homebuilders for a coast-to-coast scope, TRI Pointe Homes wants to become the poster child for a new kind of builder.

Call it a hybrid: a cross between a publicly traded builder with a national presence and a small, regional builder with local connections, says CEO Doug Bauer.

Monday's $2.8 billion merger with the homebuilding division of timber giant Weyerhaeuser (WY) gave Irvine, Calif.-based TRI Pointe Homes (TPH) five new regional homebuilding brands, with operations stretching to the East Coast.

The deal enabled Weyerhaeuser, a real estate investment trust (REIT), to focus on its core timberland and wood-product business.

Bauer says that the acquisition positions the company for the housing recovery in some of the nation's most attractive housing markets — in areas such as Southern California, Texas hot spots Houston and Austin, Arizona and around Washington, D.C. And he expects to build a whole new business template.

"The big guys have deep pockets, and the regional guys are a little more nimble," he told IBD. "The new vision for TRI Pointe is what I call the next generation of homebuilder, a family of regional homebuilding companies.

"You maximize your income by running a local business at a regional level, but you have the deep pockets, economies of scale and (financial) sophistication of a public company. It's the best of both worlds.

Investors seem skeptical of the deal. TRI Pointe stock fell 1.7% Wednesday. And Thursday, shares fell 3% intraday to around 15.

TRI Pointe hasn't traded above its January 2013 IPO price of 17 since late May.

Stock Market Hopscotch

Until the Reverse Morris Trust merger closed on Monday, TRI Pointe had been one of the smaller publicly traded builders in the U.S.

It operated in just two states, California and Colorado, and had 3,000 developable lots, though that was up from virtually nothing in 2009, when Bauer and his partners started the firm from scratch.

Now it has more than 30,000 lots, a market capitalization lifted from just over $500 million to $2.6 billion and 900 employees, up from 150.

The five new homebuilding companies from Weyerhaeuser include Pardee Homes in Southern California and southern Nevada, Quadrant Homes in Washington state, Maracay Homes in Arizona, Trendmaker Homes in Houston, and Winchester Homes in Richmond, Va.

Bauer plans to keep the company names and management teams.

"My job is to steer this family of homebuilders to generate results as a pure homebuilder vs. being part of a REIT," he said.

Under the REIT structure, he says, returns from homebuilding operations often were plowed back into the parent company for general operations. Much of the profits were returned to shareholders.

But the deal has a potential downside: more inventory than Bauer wanted.

Having learned the pitfalls of being stuck with too much in a downturn when he worked for California builder William Lyon Homes (WLH), Bauer had vowed to keep inventory down to no more than three years' worth.

Now inventory is at nine years, due in large part to Pardee Homes in California.

"I've adjusted my horizon to five years (inventory)," Bauer said, adding that he thinks it'll take about three years to achieve.

"We're going to focus on project sizes of no more than 500 units so we can build and sell them in 36 to 48 months," he said. "That will allow us to weather the ups and downs of the housing business.

As for further expansion, he puts Texas at the top of the list near-term, using the new Houston homebuilding operation as a springboard.

"In the short run, probably the closest market I'd like to focus in on is Austin, to the northwest of Houston," Bauer said.

He says that the new TRI Pointe is comparable in size to such builders as Standard Pacific Homes (SPF), Ryland Group (RYL) and Taylor Morrison Home (TMHC), which also went public last year. Like TRI Pointe, those builders have struggled in the stock market and have low Relative Strength Ratings from IBD.

TRI Pointe will also compete in many of its markets with Lennar (LEN), the No. 1 homebuilder in the country by market cap.

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