The Big List

Kelly Mitchell climbed out of a Lincoln Town Car during rush hour Thursday morning, this past January 31, and steadied herself on her heels and her husband Tom’s arm. The two of them turned their collars to a bone-chilling, soaking mist, typical of New York City in mid-winter.

Showers twisted and taunted umbrellas’ ribs, and flew helter-skelter through the downtown financial district canyons. On the sidewalk that runs along the cobbled street, the Mitchells joined two other couples, Doug Bauer and his wife Kathleen, and Mike and Peggy Grubbs. The six of them closed ranks and slid into a throng of people making their way in choreographed chaos to their offices, laden with coffees, paper bagged muffins and bagels, newspapers, briefcases and backpacks draped over their shoulders, Bluetooth headsets, smartphones and e-readers, all the edibles, apps, accessories, and caffeination of a workaday morning on Wall Street.

It was around 7:30 a.m. The three Southern California couples did their best take on banker suit-clad, New York-numbed businessmen and women, herding to a job. A tide of humans coaxed them toward the doors of George B. Post’s 1903 neoclassical masterpiece, the New York Stock Exchange building at Wall Street and Broad Street.
Kelly shielded her eyes from the pesky, penetrating spray, glancing upward at the NYSE edifice, and let out a soft shriek she couldn’t quite stifle.

“My gosh, look at that!” Under John Quincy Adams Ward’s lustrous NYSE building pediment, a straight shot down from the 22-foot central statuary figure of the goddess Integrity, and flanked on either side by American flags, Kelly pointed up at a larger than life TRI Pointe Homes’ banner, rustling, furling, and slapping itself in the bitter blowing rain.

They stared. It dawned on them then that they were suddenly in as card-carrying, full-privilege members of an exclusive club of some dozen or so publicly-traded home building enterprises with an iron-clad grip on a quarter of a fast-growing new-home market.

Even more important, the TRI Pointe flag flapped and fluttered a clear, unmistakable statement about housing writ large. The year 2013 would not follow the “Rent vs. Own” script many observers and experts expected to play out in a clawing and scratching early recovery scenario. Instead, the narrative turned itself upside down and backwards, as a fissure in the fabric of pent-up global financial demand tore open that day.

The new plot line? In Wall Street’s collective mindset became: “Own, or else.” Or, in a single word about the boom-bust-boom housing economy: Now.

After three years running of exasperating false starts, green shoots, head fakes and wishful thinking that would inevitably ultimately swing the housing sector back into despair, this was a long-awaited turn, a secular shift from stop to go. Finally, the answer to housing’s “yes or no” question was “yes.” Nature abhors vacuums and big time capital abhors the vacuum of opportunity to grow with impunity.

So now, TRI Pointe had seemingly tripped the wire that set energy in motion, exploding in the physical form of hundreds of millions of dollars into the void that so recently had rendered residential real estate a vague sinister nothingness. Space– real estate as expressed in built or raw square feet—was, with TRI Pointe’s detonation, colliding with time, as in money flowing into the space, no longer waiting on the sidelines.

An avalanche of capital triggered in an instant, betting against still stiff odds that housing’s American Dream-fueled juggernaut was revving up its engines. Was it too much too soon? It’s too early to say. Some, like John Burns of his eponymous real estate consultancy, see a decoupling in the market. Demand for land, in Burns eyes, has gotten way out ahead of demand for homes.

That’s all well and good if affordability—mapped to home prices, interest rates, and carrying costs–household incomes, and lifestyle changes drive unit volume demand as they’re supposed to. As yet, it’s hard to say because extra tight supply and an initial surge of demand have jacked up prices faster than normal. So, what happens as more supply hits the market? Will demand for homes keep growing?

What recovery, so far, has shown is the need for more supply. What it hasn’t shown—and here’s the rub—is the need for greater capacity. Big difference.

“We’re in the second inning of a [fundamentals driven] recovery, I’d say,” Burns said recently. “The public capital markets are in the sixth or seventh inning.” When greed leapfrogs fear as a financial markets motivator, the adrenaline rush is similar to when a favored sports team—trailing most of a game—seizes momentum and rallies to take a lead. The feeling is that nothing’s going to stop them now.

For housing at the beginning of 2013, three stars– yield starvation, house price stability, and the opportunity to invest in a liquid proxy for housing’s rebound–suddenly aligned to form a supernova. And in that flash, private home builders emerged as instantaneous, more-than viable contenders for cash and prizes in an IPO contest that could include a dozen companies or more. Investment bankers began smiling and dialing in hopes of landing the job of getting them to the runway show. The last home building enterprise to go public was Comstock Homebuilding, which raised $73 million through an IPO in December 2004.

Now, just past midyear, the2013 version of home building’s high fashion show may be nearly over. On Wednesday, July 24, WCI Communities priced in at $15, the low end of a reduced price range for 6.8 million shares of the company, whose operations focus on Florida’s southeast and west coasts.

Since, January 31, nine private companies have either initiated or completed initial public offerings to sell and trade equity shares in their future, raising proceeds upwards of $1.2 billion in new capital. A few companies still plan to navigate the time-sucking gantlet necessary to take a private company public. Some of those companies will never make it across the IPO finish line. Still others ideate because they, too, just plain need the money to have a chance in the land game and don’t know a better way to get it.

The chief executive of one such private home building company who is trying to mastermind profitable growth and engineer his own firm’s IPO said on the heels of the TRI Pointe deal, “You can’t not think seriously about this option.”

So, what was it? What is it about TRI Pointe? Which characteristics, prospects, and promises were the particular forces that shifted the international investment community’s seismic equilibrium from buzz-kill to sugar-rush?
Here are three:

1. Seasoned talent – a pedigree of both operational excellence and comfort with public equity and debt market dynamics

2. Real estate – a land-lean lot draw-down model based on about three years’ supply, free of legacy encumbrances, and strong, on-the-ground relationships with people and organizations who have access to deep pipelines of finished and unfinished home building lots

3. Money – A private equity sponsor who happens to be one of real estate’s few genuine geniuses and market makers

A fourth is over-simply, timing. Be it talent, real estate, or money, success in each of these three dimensions relies on the ability to exploit asymmetries –sometimes fleeting ones—that separate winning from losing. So, every firm that has successfully traversed the ground from private to public in TRI Pointe’s wake this year has had to test positive for these three ingredients in fairly robust combination.

Ones that have a strong operational pedigree but lack prior Wall Street finance experience have a tougher shot at a successful IPO. Ones that are smart operators, who have accessed the public equity and debt markets before, but lack a big time equity heavyweight also stand to encounter Wall Street investor resistance. The model, the people and their relationships to land supply, and the checkbook … combine those three elements and Wall Streeters would bet their future on your history.

Sounds simple, eh?

What the TRI Pointe inflection did prove is that Wall Street and the international investment community had become utter believers in American housing’s turnaround on short notice. Suddenly, they were convinced that the downturn’s much-bloodied falling knife had hit the ground, and that the upward trajectory of a new cycle was clearly under way.
The question of how is important. It bears on who will win and who might not survive a recovery that could be quite as treacherous for some as the miserable downturn it follows. It is the way to tell whether success will come because a housing cycle has turned positive as it always does, or, rather, because a particular organization’s skill set of vision, talent, and proficiencies amount to a more liquid, more consistent, more sustainable continuum of outcomes than its competitors can achieve.

To understand, we need to reverse-engineer TRI Pointe’s astonishing moment at Wall Street and Broad to see how much of the éclat owes to the particulars of THP’s rapid ascent as a home building wunderkind, as opposed to a “rising-tide-lifts-all-boats,” cyclical magic wand.

Kelly’s husband Tom Mitchell and two longtime work soul-mates Doug Bauer and Mike Grubbs had confabulated TRI Pointe Homes in Southern California over makeshift white boards, legal pads, and laptops at their respective kitchen tables, their wives meting out coffee, baked treats, occasionally something nutritious, as well as equal measures of confidence-boosting adrenaline and angst-ridden support, some 46 months earlier. That was amidst the wreckage of housing’s lowest low point in at least three generations. Now, the six of them had parachuted in behind lines into Manhattan’s storied financial arena, for their allotted 15 minutes of fame.

Allotted? Yes.

Deserved? Check.

Sustainable? Anyone’s guess, but one of residential real estate’s most powerful high-rollers, Barry Sternlicht, has bet big money that the Bauer, Mitchell, Grubbs tandem will scale and replicate their land-buying, neighborhood-building, and home selling model into one of home building’s top enterprises in a fraction of the time it took the industry’s other dozen or so mega players to reach their current mass.

“Long term businesses are about management teams,” Sternlicht said of TRI Pointe CEO Bauer, president and COO Mitchell, and CFO Grubbs. Sternlicht, chief executive of Starwood Capital, and arguably one of residential real estate’s five most powerful people, and who’d invested $150 million of Starwood money into 18-month-old TRI Pointe in September 2010, said, “We had a great team in place, one that could both tell our story, and, at the same time, not get distracted by the time and energy it takes to go public. It was important that they had been kicked in the butt a few times by then, which they had, and that’s good about their background.”

Still, it all might have been a dream–the teeth-rattling rain in January, the TRI Pointe banner flapping on a pole jutting out from the NYSE facade, the throbbing masses of people very much not like themselves, the squadrons of Lincoln Town Cars, each emitting a single well-dressed, well-heeled, well-spoken Wall Street denizen, ready or not for another day of engagement. It felt surreal.

Here they were, celebrants in global finance’s temple, about to enter the privileged recesses of the NYSE, where they’d be fed, feted, hosted and toasted at breakfast in an inner dining sanctum among the exchange’s senior-most officials.

In a blur of dream time, they would step out on to the marble-balustrade balcony that juts out and overlooks the hive of the trading floor. For a giddy stop-action moment, they’d do nothing but cheer, grin, hoot, and clap their hands, awaiting the signal to open the market, standing there their wives and with the likes of Starwood ‘s Sternlicht and Marc Perrin, Tom Flexner, Global Head of Citigroup as well as managing director Rich Moriarty, Deutsche Bank Equity Capital Markets Group managing director Warren Estey , and Moelis & Company managing director Robert Crowley for their Mr. DeMille moment.

In this preternatural time-lapse frame, the TRI Pointe brain trust would revel in the attention and become the sole reason for jubilance in an alternative universe’s fleeting spotlight–not just as spectators, but as the spectacle itself. They would be players in the big game now. It was a reality beyond their dreams.

By all rights, it all could have been a dream.

It would have made far more sense in some ways for Bauer, Mitchell, and Grubbs simply to rub their eyes, pinch themselves, clear their minds of delusions of grandeur, and go back to the painstaking job of piecing together a small, promising home construction and marketing company with a Southern and Northern California footprint and roots in housing’s darkest hours in the middle of 2009. That’s what the tepid recovery math suggested they’d do, anyway.
To get a sense of that math, for a moment, let X equal TRI Pointe Homes, a three-going-on-four-year-old home building company with seven community projects selling homes at a rate of about 3.6 per month, about 750 building site lots on its books, and a yet-to-break-even fee-builder track record of early performance. Let Y equal “the recovery,” up to this point, an arguable phenomenon that displayed an ever-so-slight advantage among supporting currents over headwinds, a rebound smarter observers could most-generously describe as anemic.

How then could X plus Y equal Z, the January 30 initial public offering of TRI Pointe Homes equity stock to investor shareholders who would value the company at $537 million, upwards of $238 million more than its principals had up to that moment mapped its value?

How could a company go in a single instant from being less than a rounding error among home building’s dozen big multi-regional public enterprises to being No. 16 among their formidable peers, competing for building lots, labor, materials, and buyers for upwards of one of every four new single-family homes sold?

And how could the TRI Pointe IPO–followed in April by Taylor Morrison’s IPO, Century Communities’ IPO in early May, in mid-May by William Lyon Homes’ IPO, and, later by UCP LLC and WCI Communities — trigger a beauty pageant runway show of private home building company IPOs, registrations to go public, or conversations about tapping the public equities capital markets?

How could the TRI Pointe IPO conflate, spontaneously and at warp-speed, it seemed, into the “Singularity,” a moment through which housing’s eight-year dreaded past poured purified of toxins into a vibrant, promising, resilient future?

There’s an answers to each of these questions: “this is home building; this is what happens.” One alternative answer comes down to a very simple thought that is very hard to do. Buy the right land.

What money and its technologically-hotwired investment algorithms can do supremely well today is to detect asymmetry between what is and what should be, and fill the void. “What is,” is that household formations had been suppressed for the better part of the past five years. “What should be” is that the measure of that suppressed household formation could be regarded as “pent-up demand.” What those algorithms can’t yet do is to discriminate. It takes people, preferably people who have strong, trust-tested relationships to properly suss out where people will want to live, and thus where to build.

“Capital markets can’t distinguish between C lots and A lots,” said Sternlicht. That’s where fellows named Bauer, Mitchell, and Grubbs figure into the picture.

Home building, it turns out, shares more than casual kinship with realms turn-of-the-last-century biologist D’Arcy Wentworth Thompson explained this way: “everything is what it is because it got that way.” So, in home building, what isn’t likely tends to happen, and what is highly likely often doesn’t come about.

The only acceptable explanation for these common anomalies and departures from logic might be that we’re never quite clear on what’s likely or not until we’re looking back at it as a past event, reassembling the data, reordering our assumptions, and giving what has happened a cause that may or may not be the truth, but seems to be a reasonable reconstruction.

Typically, then, it’s common to say we knew a given event was or wasn’t going to happen all along.
What was hardly plausible 12 months ago is that a three-and-a-half year old mini-me home building company with $22 million in home sales in its best, most-recent, year yet would go public in January of this year, joining companies whose revenues are clocking in at $1 billion or more a quarter.

What was a preposterous notion—until it happened–is that the TRI Pointe deal to infuse itself with equity investors’ life-blood would act as a flashpoint for global investors to determine that housing’s big turn–from fear to greed–had finally come, and that they had literally billions of dollars in funds starved for yield, ready to plow into action once evidence of that big turn became clear.

But the TRI Pointe IPO happened because this is home building, and home building may not be magic, but it’s nothing if not an odd, time-tested, cyclical, love-hate alchemy between building lots and optimists. It takes an optimist to turn raw dirt in some far-off locale into location, location, location, a property an owner desires and a prospective owner might covet.

Here’s two ways that most home building company executives are optimists. One: they believe that the fabulous gains of their upside success will far exceed the losses of their mistakes and downside. Two: they believe they’re better by far than the rest of their home building peers at knowing the value of land and what happens to that value over time. In both cases, builders believe asymmetry favors them.

So, one such optimist, Doug Bauer, didn’t happen to be the least bit nervous about the $233 million wager equity investors would signal confidence in placing on TRI Pointe’s future that morning. He was sure all the hundreds of millions of dollars flowing in were well-placed and would be well-invested.

As hundredths of digitized microseconds slipstreamed towards one of the world’s iconic signals—the clang of the 9:30 market opening bell—the NYSE’s kinetic din loudened.

It was an unordinary moment–or rather an extraordinary one– on an ordinary day, where IPOs occur at a rate of one every couple of days normally, but have been gathering speed since 2013 began. Since the 2002 dawn of the Sarbanes-Oxley era and a trend toward selling out vs. getting the public to buy in, an average of 100 or so companies each year have been going public. The third week of July alone, 11 companies planned to price their stock and begin trading equity shares in one of the major exchanges, including home builder/developer WCI Communities.

52-year old Doug Bauer set his game face for a blend of poise and euphoria, neither to excess. Inside, his pulse raced. Standing at the podium on the vaunted balcony, he was about to press the button and open the market. He was nervous. He was nervous because he’d been told that if he didn’t hold the button down for a full-count of ten seconds, a display of unchecked chutzpah, he’d be given a resounding Bronx cheer, booed off the podium. He steeled himself, pressed, and held.

http://www.youtube.com/watch?v=c135oI6AW7M

Tomorrow’s episode: Where the deal got started, and the TRI Pointe pedigree.