This week, Weyerhaeuser Company (NYSE:WY) completed the split-off transaction of its homebuilding business, Weyerhaeuser Real Estate Company ("WRECO"), which may also be looked at as the acquisition of WRECO by TRI Pointe Homes (NYSE:TPH). The "Reverse Morris Trust" transaction results in TPH being primarily held by WY shareholders that tendered WY shares. Other investors may soon join them in this investment.
Approximately 205 million of the rightly 585 million WY shares that exist were tendered, or about 35% of all shares. Weyerhaeuser shareholders tendered so many shares that only 28.55% of the tendered shares were accepted. This may indicate that there is some unfulfilled demand from within the WY shareholder base, including some short-term holders that will now be obligated to acquire shares of TPH on the open market.
Going into this split-off, TPH had a substantial short position and it is likely that many played the event by shorting TPH and simultaneously acquiring WY to tender and cover the short. Such activity could be part of why TPH declined in the months preceding the split-off, while WY shares spiked up. If such investors required a greater conversion to cover their short positions, this may result in a short-term period of short covering for TPH, as well as the possible corresponding selling of WY shares by those arbitrageurs.
On this side of the merger, TRI Pointe is substantially larger than it was previously. TRI Pointe was primarily focused on California, with some assets in Colorado, before this deal, but WRECO will increase its land position from 3,000 to more than 30,000 lots. The deal also increases TPH's geographic diversity, while maintaining its focus on California markets, where TRI Pointe now holds approximately 19,000 lots.
WRECO was being valued at about four times the size of TPH, and though it was not core to Weyerhaeuser's ongoing REIT conversion and focus on forestland, WRECO was among the leading national homebuilders, with over one billion in annual revenue. WRECO was one of the 20 largest national homebuilders, and the combination with TRI Pointe may bring it into the top 10 in terms of both annual revenue and closings.
TRI Pointe's Chairman is Barry Sternlicht, who founded Starwood Hotels (HOT) and the Starwood Capital Group. Sternlicht's oversight may attract interest, and his presence is likely a sign of a reasonably thorough plan for the WRECO assets. The larger entity, with its greater asset base, may also be able to secure more favorable credit terms, and have significant assets to divest in the event of needed cash or a compelling offer.
Additionally, TRI Pointe's now substantially larger market valuation should require some additional investment into TPH. This deal took the homebuilder from a small-cap to a mid-cap, and this move should bring it onto the radar of a broader investor-base, including many funds that do not allocate into small-cap equities.
TRI Pointe's market valuation is now around the value of many of the bigger homebuilders in the U.S., such as Ryland Group (NYSE:RYL) and Standard Pacific (SPF). Many funds that invest in homebuilders and real estate more broadly will likely soon begin the process of accumulating a TPG position that will correspond to its new size. This should especially be the case for index funds that allocate by market weight, which most passive funds do.
At the end of June, the S&P Dow Jones Indices announced that they would not be including TRI Pointe in any S&P 1500 index at the completion of the transaction (or this week). Such an inclusion appeared unlikely, but homebuilder ETFs and funds that are focused on construction and management should likely soon be compelled to allocate into TPH, or increase their allocation. For example, the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) and iShares U.S. Home Construction ETF (NYSEARCA:ITB) both have Ryland and Standard Pacific in their top 25 holdings, but not TPH or WY. By this time next year, it is likely that at least ITB, if not both it and XHB, will have TPH in its top 25 holdings. Given TPH's market value, it appears ITB will develop around a 2.5-3% position in TRI Pointe.
For the above reasons, it appears likely to me that TRI Pointe will receive more attention and investment in the coming months, and that it will become an important holding to funds that focus on residential construction. Moreover, TRI Pointe should benefit in the near term by short covering from those arbitrageurs who received fewer shares through the Weyerhaeuser tender than they anticipated. These factors should benefit investors in the coming quarters.
Disclosure: The author is long WY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Family members hold TPH and WY.