Homebuilder Price Performance Diverges In 2013 As Shorts Continue An Uneven Retreat [View article]
This summer will be a very good time to increase positions in the builders on a pullback. I bought more TPH yesterday when it hit $17.80. It's basically a growth story with no legacy issues. They now have 2,500 lots - mostly in LA, Silicon Valley, and Denver. They added 950 premium lots to their previous stash in just the last 5 months. I don't think KB Home bought that much in that space of time. KBH is the largest builder by volume in CA; TPH is probably the smallest. Go figure.
My targets remain the same - and the longer TPH stays down here in the basement without moving up like the others - the more sure I it is just biding its time before it marches north. TPH: $25/share; BRP: $45/share.
Homebuilder Price Performance Diverges In 2013 As Shorts Continue An Uneven Retreat [View article]
I have a quick few minutes on my lunch break to answer your query. Because we have corresponded for so long, and you live in Phoenix and I live in the SF Bay Area, we both have watched - first hand - the dramatic turnaround that began on January 1, 2012; and which commenced a little earlier in the stock market at the August to October, 2011 lows. We both owned Pulte. I got disgusted and quit; you hung in there with Pulte and made a killing.
Then in January, 2012, I got another chance with KBH and could see the same markings on it that were once on Pulte. I bought at $6.27, and the rest is history. (Never say the market won't give you a second chance, and maybe more).
But that is when I began seriously researching the companies I owned - not just from a technical and historical standpoint as before - but with the fundamentals as well.
I learned that a rising tide lifted all boats in the homebuilding market, but more specifically - the leverage that a company owned on the way down in the real estate cycle (that could ruin them) was what could give them outsized returns on the way up. That is why Pulte was #1 last year (right next to HOV, which is another matter, fundamentally); and why KBH will be the champion this year.
This is one thing the shorts do not "get" and the source of the fallacy about indebtedness and home-builders. The surest "bet" a bank could make is a mortgage on a house with rising equity and property values. But they don't act smart like that now, do they? Just like they stupidly "threw money" at anyone who wanted a loan 7 years ago. Clearly, banks do not seem historically-wise when it comes to risk-taking.
The difference in the two companies over the two years is that Pulte sold off some of its garbage, paid down some of its debt, just as the market began to turn upwards. They were a little early, but the CFO said they "did not need the cash" and paid off that big chunk in debt early in the recovery. That payment favorably skewed their credit ratios and they were off to the races.
Because PHM is so nationally diversified by geographies, it is truly a homebuilder ETF all on its own. They also got lucky. Who would have EVER BELIEVED that their home base - Detroit and the car manufacturing cities - would become one of the hottest real estate market turnarounds in 30 years?! Not me. But luck is always a part of these things.
KBH DID NOT sell their garbage, they kept every bit of it, the weed lots in the southwest and the Inland Empire of CA, the lost-cause residential lots adjacent to downtown Vegas, the SF Bay Area lots they bought at super-high prices in 2007-09. They kept it all; kept re-financing their debt (at super high rates) and then in February, 2012, rolled the dice with an expensive debt offering and went on offense in CA.
Like alchemy - in a rising market - their lead turned to gold - and they played "catch-up" all last year. All the one-off tragedies of early 2012 proved meaningless (losing their mortgage lender twice; losing the $250ML court case in Vegas that forced them to "pay" for land that is now the basis of their Vegas turnaround).
KBH also poured any cash above $350ML into new lots, because they knew the return on the lots would be 10x what the return on cash in the bank would be. In the last year their cash hoard has doubled, but their land-spend has been significantly more
NONE of this did the shorts get; and so the short interest steadily rose to 62% but/while the stock rose 220% to $20. Whose gonna win? Finally - after what must have been silent, sustained and massive losses - the short case on KB Home - the second most shorted stock in the S&P 1500 (that's really saying something, if you think about it) - ceased to have validity and slowly began to retreat with its tail between its legs.
Which leads me to TPH. Except for Brookfield (BRP) a builder is not going to hang on to land (dead money) for more than two or three years (unless it's forced to). What kind of super cool land deals did TPH miss out on in 2006 - 2010? I'm thinking NONE. Pulte bought Centex at the bottom of the market in 2009 and proceeded to lose every nickel of the $1.x billion they paid for Centex. The acquisition was a complete and total loss, and yet they picked it up at the "perfect time".
So TPH began buying developed lots - with Starwood's help - in 2010 and 2011 when the land deals were at their absolute best. And what they couldn't buy, they optioned. Once the IPO went through, they bought the lands they had options on, and then used the new IPO money to option more land at a particular price (which I assume they will buy later this year or next). So all of Tri-Pointe's land spend has been during 2010-2013, and most of those deals were because Starwood (their majority shareholder) had a minority legacy interest in those deals.
The people running TPH are the former management team of William Lyon homes, a large national builder who was taken private just before the housing collapse. They are specialists in CA real estate, and next to KBH, are quite a leveraged bet on a CA housing recovery in 2013-15. That's why I own the stock, and fully plan on it being worth about $25/share sometime later this year.
Homebuilder Price Performance Diverges In 2013 As Shorts Continue An Uneven Retreat [View article]
Dr. Duru,
You wrote, "The most attractive homebuilders are those in the hottest markets, growing margins, containing costs, and able to deliver inventory as pent-up demand increases."
That would be BRP, TPH, KBH, HOV, MTH, LEN and TOL. Toll is going to have a phenomenal second half. They are picking up some amazing lots in southern CA.
LEN owns the inside track on development of all of Treasure Island in the middle of the San Francisco Bay (under the brand new Bay Bridge) and Hunter's Point Shipyard in southern San Francisco (both sites add up to several hundred acres for a total of 18,000 homes); and the Mare Island Shipyard in the North San Francisco Bay (650 acres). Lots anyone? Funding has been a problem ($1.5 BL); but I don't think it will be a year from now.
For shorts waiting for these new-home builders to fold their tents in the night, it's going to be a long wait. We are on the cusp of a large real estate recovery. Might seem unlikely, yes? But how about compared to a year ago? That's what investors will be thinking next year too. The homebuilders are not going to "level off" until we hit 1.6ML starts per year.
TPH is my biggest position right now. They build nice homes in the best areas in the hottest markets in CA. Kinda regretting owning it this last month or so, but their completions are ramping, and they have enough lots for 2,500 CA homes going forward.
If, as you say, short interest in TPH has doubled in the last 3 months, let's just say the shorts are investing in a nice short-squeeze ahead. Kinda like what the shorts did with KBH last year: now the stock is up by a factor of 4 off the lows (in a year), short interest cut in half. DO NOT BET against a CA housing recovery, especially a Bay Area housing recovery. Real Estate in the SF Bay Area has doubled every decade since the 1950s.
Tri-pointe spent their IPO money on securing the developed lots they had options on, so every nickel of that will go right to their bottom line in the future.
Their completion trajectory over the next 4 years is going to look like a space shot. TPH built 36 homes in 2011 and 144 in 2012. Their ASPs per home grew 43% in a single year to $538,000. They owned or controlled 1,550 lots in CA on 12/31/2012. By April 1, 2013 they upped that number to 2100. Now it's May, 2013 and they've added another 407 lots to bring the total to 2,507. That's a 63% increase in 5 months. At the rate they are acquiring lots, they will probably double their home completions and revenues each year for the next 3 to 4 years. That's what you call a healthy growth rate. The new lots are in great areas too - Silicon Valley, Azusa, Riverside, etc.
To really understand Tri-pointe, the depth of their management, and the brilliant investment team behind them (Starwood) you have to read through their large IPO filing with the SEC. It was put together by John Burns Real Estate Consulting. It spells out page by page why Tri-Pointe, why now, what the data in their markets is saying about new employees per new home built, new jobs per demographic area - where Tri Pointe is building.
Global Real Estate Stocks: Time To Get Out? [View article]
You don't mention any specific stocks, but the Brazilian real estate stocks look like values to me - some of them have lost 90% of their capitalization in the last two years. One I follow - Gafisa (GFA) - is trading at 33% of book value. Stock has had a recent one-month sell-off too, but the company has raised an extra R$1.02 BL in free cash flow in 2012 year over year, even while the shares have dropped 25%. There are a couple of articles on Seeking Alpha about Gafisa. I consider it a deep value play.
Gafisa Rising - This Turnaround Looks Real [View article]
Their debt repayment schedule - 62% of ALL debt in 21 months - is onerous and ridiculous. What if YOU had a R$ multi-billion company and your creditors demanded that you paid off 62% of your debt in an extremely short time-frame? Further, all your debt is short-term debt - due within 3 years.
Truth is, GFA has got half of it in the bag already, and if it kept moving in the same vein as they have been - raising cash by selling Alphaville suburban homes and by selling off legacy and Gafisa projects - by January of next year they would have it all.
But the last 20% purchase of Alphaville is unresolved, status of Alphaville going-forward is unresolved; Gafisa and Tenda able to turn a profit is unresolved; final debt payment - how to get there - unresolved. No wonder investors are unresolved as to whether they want to stick around to see this through. Investors in GFA at this point in time are purchasing GLOBAL UNCERTAINTY.
Gafisa Rising - This Turnaround Looks Real [View article]
New Gafisa Realities
First of all, the lowered guidance, as much as 30 to 50%, is because the company is launching 50% fewer units in 2013 as they did in 2012.
An IPO of Alphaville spins-off 40% of GFA's revenues. Because shareholders will own an equitable piece of that (assuming the company plays fair to investors), current shareholders might get one share of Alphaville for every 2.5 to 3 shares of GFA that they own. After a spin-off, I believe shareholders retain their original GFA shares plus some Alphaville shares too.
GFA has plenty of operating cash to run the business for the next 16 months. But a spin-off Alphaville & it's a different company - their proven economic engine is GONE. They go back to their roots and start over.
A little history: the old GFA expanded (over-reached) all over Brazil for 7 years; added Alpha Ville and Tenda. Alpha Ville was the only division that was successful in the new markets they entered; Gafisa and Tenda got burned (badly). If the spin-off proceeds in April, the AlphaVille-less GFA will then only build in 2-3 cities, the cities they once specialized in - Rio and Sao Paulo.
There they will build high-rises for middle-class and low-income families. No more suburbia. It's a little like a nationally recognized builder in the states saying, "We're going to sell all our suburban outfits (operating in 32 states) and go back to what we do best: residential skyscrapers in NY and Boston."
So there is a lot of potential here, but a lot of uncertainty too. Tenda is a good idea that has yet to segue from vaporware (a nice idea) to hardware (something real), and turn a profit. In 5 years they haven't been able to do this. Now they say they can/will with their aluminum mold product. But the market has a wait and see attitude about this, mostly wait, and the share price seems to indicate a lot of doubt.
New Management? The only new person I see is Andre Bergstein, the young CFO. All the other officers have simply changed hats, and were in the room when every bad decision was made (2006-11).
As far as value goes, GFA is now trading at about 1/3 book value. If the company can execute successfully over the next 4 quarters, resolve Alphaville and create a profitable re-emergence of Gafisa and Tenda, then the new GFA could rise to its true value - somewhere between $10 to $12.
So that's a nice reward, but this investment is speculative and risky. GFA has to execute or it'll be gone. I could sense from the conference call that analysts might be frustrated with the company and did not seem to trust its ability to execute.
A couple of the analysts who phoned in asked for an estimate of GFA's cash generation for 2013, because that's critical for paying off the 2014 debt payment. The company wouldn't give guidance like it did in 2012, thus only raising the insecurity bar a little higher. We all know GFA needs the cash from unit sales and receivables to the tune of $800ML in 2013 or they won't be able to pay their 12/2014 debt payment. So free cash flow should be a big deal in the upcoming conference calls.
Gafisa Rising - This Turnaround Looks Real [View article]
* Nothing new in management there. Just changed the deck chairs on the Titanic. The CFO (11 years) - who oversaw the misplacement of financial resources that got them into this mess - is now the CEO of GFA. What's new about that? New what? Same people are in the room. They have just changed hats. Seems kinda good ol' boy to me.
The company maintains its dual role of mess-up and star ALpha group. If they sell that division, they could be left with nothing but the mess-up part.
"Mr. Osmo (now) holds the role of CFO and will maintain his position of CEO of AlphaVille through the end of the year, to continue to lead the development of the business plan that will support the purchase of the remaining 20% of AlphaVille, still owned by Alphapar. "Mr. Osmo has proven to be an invaluable leader at AlphaVille and has a strong track-record in strategy and finance. During this transition period, I will remain as IRO," said Mr. Calciolari.
Mr. Calciolari has worked with Gafisa for the last 11 years as its CFO, and the previous six, as its IRO as well."
Gafisa Rising - This Turnaround Looks Real [View article]
Good points. But on the "new management team" I could find only one new person - the CFO. All the other men seem to have been with the company for ages. I was surprised at that, because I read they had a new team. Do you know anything about this?
The other points I agree on. It's really management that you're buying when you buy a company, not the warehouses, workers and products. Guys like Steve Job are serial reproducers of brilliant ideas. You got Jobs - you got the ideas that will make money and find markets for themselves.
I have seen the Wall Street adage you refer to with Brookfield properties. It may one day be THE DARLING of the housing recovery; but for now just two analysts know about the company, and they didn't start following it til last quarter. Even James Cramer's fund (The Street.com) has recently picked up coverage of this builder.
With Gafisa - look for that free cash flow figure I mentioned - R$200ML/Q or R$800ML/yr. If the cash flow becomes consistent and sufficient enough, the debt payments are in the bag, and the rest is history. I saw KB Home (KBH) make this turnaround in Q3 '2012. Once the pivot point occurs, the company will rapidly advance. At that point, everything that had worked against the builder now works for it.
Final technical comments. Gafisa has had a history of being very volatile and making leaps of 25% in a single month. I haven't seen anything like that for months, but I looked back in time, and for YEARS the company has had a "spikey" way of jumping around - and up and down - with its share price.
Gafisa Rising - This Turnaround Looks Real [View article]
I agree with you, Caiman and Envoy are valued posters, and I have really enjoyed the dialog too. Envoy is right about the Alphaville IPO, or sale. It's a little confusing to me too: Sell Alphaville and their money problems are over; but their proven profit-generator is gone too. One of the "value trap-curses" of investing is a company with no debt - whose shares trade below the company's cash value - but who can't seem to make a buck with their products.
Right now - whenever GFA falls to $4 buyers come out of the woodwork to keep it up. This management team seems to create a lot of uncertainty with their moves. I guess certainty would cost them too much (fire sale prices for Tenda inventory?). But as long as they keep public attention on their cash generation, and the evaporation of Tenda and Gafisa's legacy projects runs apace, we should know by June what the near-term direction will be. For now, we might be watching paint dry for awhile.
Gafisa Rising - This Turnaround Looks Real [View article]
Last piece of important information: inventory at Market value which which will be sold in 2013/2014
Tenda - R$ 827 ML (R$ 460 ML of this is My House My LIfe - government-funded). 55% of inventory will be sold in 2013; the remaining 45% in 1Q2014 (per company's statement) Gafisa - R$ 1.232 BL Alphaville - R$ 812 ML
Total: R$ 2.871 BL in unsold 2012 Inventory carried over to 2013/2014. If even 50% of that inventory is sold, or all of it sold at a 50% discount, that's more than enough cash to pay off the company's December, 2014 debt payment of R$ 1.3 BL. At that point, the company would have achieved a 62% delevering in 2 years.
Possibly this is why the company has reduced launches for 2013 - they'll raise more cash by selling-off these remaining 2012 units, and yet at the same time, not re-investing all that cash into new launches. They can be prepared for new launches once the balance sheet is right-sized and the debt ratios are more reasonable.
Gafisa Rising - This Turnaround Looks Real [View article]
I just read through the Q4 and full 2012 earnings announcement. The highlights that mattered to me.
2012, GFA had consolidated launches among its 3 divisions of 27,107 units. In 2013 they estimate launches will be half of that - a range of 13,500 to 17,500 units. That is almost a 50% reduction in launches, and the cost to complete launches will also correspondingly go down.
GFA had R$1.62 BL in cash at the end of Q4. Their first debt payment (31% of all net debt) will be R$1.16 BL in December, 2013. They already have the cash to pay this debt with R$ 460 ML to spare. Their next debt payment (another 31%) is due in December, 2014 in the amount of R$ 1.3 BL. That is 7 full quarters into the future from now. If the company can continue to be cash-flow positive to the tune of R$200 ML per quarter (on average), they would approach that second debt payment in roughly the same position they are now (7Qs x R$ 200 ML + R$ 460 ML = R$1.86 BL minus R$1.3 BL debt = R$ 560ML cash on hand.
So those numbers tell the story for me. If there is another R$ 800ML in positive cash flow this year and an addtional R$ 600 ML in 2014, then 62% of their debt will be gone and yet they will have maintained sufficient liquidity to operate their business.
In 2013, the Gafisa and Tenda units are going to sell, close-out, and "be done with" all non-core housing developments in new markets that didn't work out. After that point, the write-offs stop. They will only be costing half the launches in 2013 that they did in 2012 and are selling off inventory to raise cash (de-lever). So the diminished mix must be enough to raise cash and remain profitable. (I hope)
But the company also said that it would be ramping launches again in 2013 for Tenda (12% of total) and for Gafisa (42%) and ALphaville (46%) and would generate LESS cash overall and put more working capital into its landbank. Bottom line for me: I don't care how they generate the needed cash flow of R$800 ML/year - from new launches or legacy sales - if they can do this over the next 21 months and pay off that 62% of total debt in such an ambitious manner, they will clearly be out of the woods.
BTW...I am not sure if I read this okay, but I think they lost (R$ 0.28) share?
Gafisa Rising - This Turnaround Looks Real [View article]
Last comment. Did you see the picture here for Tenda (http://bit.ly/10i4bGp)? That's the new aluminum-mold construction technique I linked in the film in my article.
Gafisa Rising - This Turnaround Looks Real [View article]
Further, where did all that debt come from? Most likely Tenda, maybe R$ 1BL during 2010-2012. They may have bled every bit of profit out the back door that Alphaville was bringing in the front door.
One of the articles also says that according to some members of the board, Alphaville doesn't have any "synergy" with Tenda and Gafisa, which - from the pictures I can see - seem to specialize in large urban constructions projects.
Well, that's true in one respect. It doesn't. Surbuban housing developments are an entirely different kind of construction business, but it's still "building". But being profitable and having great management is also what these 3 divisions DON'T have in common. Maybe Alphaville is already functioning as a semi-autonomous start-up within GFA?
Lastly, maybe the reason that Sam Zell is so interested in Alphaville (and only in Alphaville, it looks like) is that he believes this management team and floundering board are not smart-enough or together-enough to stop him.
This is solely my imagination, but one of the things I thought might be going on behind the February meltdown was that some wise guys had got a foot-hold on Gafisa's two near-term debt payment dates (November, 2013; and again in 2014) and were squeezing them for the full amount, thus preventing them from rolling the debt forward to a reasonable year in the future, like most builders would do. Not too far-fetched if you think about it.
The only reason a residential builder would have 2/3 of ALL its debt due in two years is that banks won't touch them in their present state. Maybe the company's proven they're unreliable and inconsistent, and the bond guys like the Zell suitors better. It's a choice: "somewhere over the rainbow"; or "a bird in the hand is worth two in the bush". Bond guys have steel flowing through their veins. They're paid to be realists and not get it wrong.
I guess there's one GFA on paper and in the public eye, and then there is another GFA behind the scenes. No wonder the stock price goes nowhere. Too much uncertainty.
Gafisa Rising - This Turnaround Looks Real [View article]
Thanks for the lead. Nice - that Google Translator - right on the page too. Nice little bit of information about Sam Zell. If he valued the entire Gafisa Group (GFA) in Spring of 2012 at $7.00+, then that is what it's worth. That would cover all his contingencies, cover all the perceived risk that he and his research team have uncovered. It also closely matches Caimon Valories and mine estimate of the company's worth.
You notice how the article speaks about the company's resistance to let its shining star go in a sale? Damn straight. But if there is any kind of peak in the Brazilian real estate market on the horizon, it would be the smart thing to do.
But my first question out of the gate: Why not an IPO? The guy that took this division to the moon could easily be its new CEO. He obviously is really good at what he does..
Second question, how does a division with a R$10.5 BL land bank (the single most important asset a builder can own, besides good management) get sold for R$1.8 BL? The brand saw its sales grow 32% and it added up to R$ 1.1 BL last year, equivalent to 42% of the group's total.
Thirdly, have you ever heard the phrase, "Sell your winners and let your losers run?" I haven't. At least not in professional business parlance. The same guy that did well with Alphaville will do well with an Alphaville IPO. The same guys that screwed up Tenda will screw up the "new" Tenda; and the management at Gafisa that couldn't make a nickel with their high-end units in the same kind of diversified markets across Brazil that Alphaville starred in, will likely do the same (but a little better) in SP and Rio because selling high-units there is like blowing bubbles in a bathtub.
None of this - except the $7 price tag that keeps arising from multiple sources - makes any sense to me. My druthers? Like the story of the talents in the bible, give the whole shooting match to the guy who turned Alphaville into a star, and let HIM figure it out.
Housing Stocks: Building A Foundation Or A House Of Cards? [View article]
Nice Article. See "Mean-Reversion Portends Explosive Homebuilder Spring" on Seekingalpha. Expresses similar thoughts, and something which should be oft-repeated, as you have done. Those government charts are really something aren't they?
I think the recovery will be just as extreme as the bust. We're building enough homes for the US, circa 1960. 2013 is the coming-out party.
Homebuilder Price Performance Diverges In 2013 As Shorts Continue An Uneven Retreat [View article]
My targets remain the same - and the longer TPH stays down here in the basement without moving up like the others - the more sure I it is just biding its time before it marches north. TPH: $25/share; BRP: $45/share.
Homebuilder Price Performance Diverges In 2013 As Shorts Continue An Uneven Retreat [View article]
Then in January, 2012, I got another chance with KBH and could see the same markings on it that were once on Pulte. I bought at $6.27, and the rest is history. (Never say the market won't give you a second chance, and maybe more).
But that is when I began seriously researching the companies I owned - not just from a technical and historical standpoint as before - but with the fundamentals as well.
I learned that a rising tide lifted all boats in the homebuilding market, but more specifically - the leverage that a company owned on the way down in the real estate cycle (that could ruin them) was what could give them outsized returns on the way up. That is why Pulte was #1 last year (right next to HOV, which is another matter, fundamentally); and why KBH will be the champion this year.
This is one thing the shorts do not "get" and the source of the fallacy about indebtedness and home-builders. The surest "bet" a bank could make is a mortgage on a house with rising equity and property values. But they don't act smart like that now, do they? Just like they stupidly "threw money" at anyone who wanted a loan 7 years ago. Clearly, banks do not seem historically-wise when it comes to risk-taking.
The difference in the two companies over the two years is that Pulte sold off some of its garbage, paid down some of its debt, just as the market began to turn upwards. They were a little early, but the CFO said they "did not need the cash" and paid off that big chunk in debt early in the recovery. That payment favorably skewed their credit ratios and they were off to the races.
Because PHM is so nationally diversified by geographies, it is truly a homebuilder ETF all on its own. They also got lucky. Who would have EVER BELIEVED that their home base - Detroit and the car manufacturing cities - would become one of the hottest real estate market turnarounds in 30 years?! Not me. But luck is always a part of these things.
KBH DID NOT sell their garbage, they kept every bit of it, the weed lots in the southwest and the Inland Empire of CA, the lost-cause residential lots adjacent to downtown Vegas, the SF Bay Area lots they bought at super-high prices in 2007-09. They kept it all; kept re-financing their debt (at super high rates) and then in February, 2012, rolled the dice with an expensive debt offering and went on offense in CA.
Like alchemy - in a rising market - their lead turned to gold - and they played "catch-up" all last year. All the one-off tragedies of early 2012 proved meaningless (losing their mortgage lender twice; losing the $250ML court case in Vegas that forced them to "pay" for land that is now the basis of their Vegas turnaround).
KBH also poured any cash above $350ML into new lots, because they knew the return on the lots would be 10x what the return on cash in the bank would be. In the last year their cash hoard has doubled, but their land-spend has been significantly more
NONE of this did the shorts get; and so the short interest steadily rose to 62% but/while the stock rose 220% to $20. Whose gonna win? Finally - after what must have been silent, sustained and massive losses - the short case on KB Home - the second most shorted stock in the S&P 1500 (that's really saying something, if you think about it) - ceased to have validity and slowly began to retreat with its tail between its legs.
Which leads me to TPH. Except for Brookfield (BRP) a builder is not going to hang on to land (dead money) for more than two or three years (unless it's forced to). What kind of super cool land deals did TPH miss out on in 2006 - 2010? I'm thinking NONE. Pulte bought Centex at the bottom of the market in 2009 and proceeded to lose every nickel of the $1.x billion they paid for Centex. The acquisition was a complete and total loss, and yet they picked it up at the "perfect time".
So TPH began buying developed lots - with Starwood's help - in 2010 and 2011 when the land deals were at their absolute best. And what they couldn't buy, they optioned. Once the IPO went through, they bought the lands they had options on, and then used the new IPO money to option more land at a particular price (which I assume they will buy later this year or next). So all of Tri-Pointe's land spend has been during 2010-2013, and most of those deals were because Starwood (their majority shareholder) had a minority legacy interest in those deals.
The people running TPH are the former management team of William Lyon homes, a large national builder who was taken private just before the housing collapse. They are specialists in CA real estate, and next to KBH, are quite a leveraged bet on a CA housing recovery in 2013-15. That's why I own the stock, and fully plan on it being worth about $25/share sometime later this year.
Homebuilder Price Performance Diverges In 2013 As Shorts Continue An Uneven Retreat [View article]
You wrote, "The most attractive homebuilders are those in the hottest markets, growing margins, containing costs, and able to deliver inventory as pent-up demand increases."
That would be BRP, TPH, KBH, HOV, MTH, LEN and TOL. Toll is going to have a phenomenal second half. They are picking up some amazing lots in southern CA.
LEN owns the inside track on development of all of Treasure Island in the middle of the San Francisco Bay (under the brand new Bay Bridge) and Hunter's Point Shipyard in southern San Francisco (both sites add up to several hundred acres for a total of 18,000 homes); and the Mare Island Shipyard in the North San Francisco Bay (650 acres). Lots anyone? Funding has been a problem ($1.5 BL); but I don't think it will be a year from now.
For shorts waiting for these new-home builders to fold their tents in the night, it's going to be a long wait. We are on the cusp of a large real estate recovery. Might seem unlikely, yes? But how about compared to a year ago? That's what investors will be thinking next year too. The homebuilders are not going to "level off" until we hit 1.6ML starts per year.
TPH is my biggest position right now. They build nice homes in the best areas in the hottest markets in CA. Kinda regretting owning it this last month or so, but their completions are ramping, and they have enough lots for 2,500 CA homes going forward.
If, as you say, short interest in TPH has doubled in the last 3 months, let's just say the shorts are investing in a nice short-squeeze ahead. Kinda like what the shorts did with KBH last year: now the stock is up by a factor of 4 off the lows (in a year), short interest cut in half. DO NOT BET against a CA housing recovery, especially a Bay Area housing recovery. Real Estate in the SF Bay Area has doubled every decade since the 1950s.
Tri-pointe spent their IPO money on securing the developed lots they had options on, so every nickel of that will go right to their bottom line in the future.
Their completion trajectory over the next 4 years is going to look like a space shot. TPH built 36 homes in 2011 and 144 in 2012. Their ASPs per home grew 43% in a single year to $538,000. They owned or controlled 1,550 lots in CA on 12/31/2012. By April 1, 2013 they upped that number to 2100. Now it's May, 2013 and they've added another 407 lots to bring the total to 2,507. That's a 63% increase in 5 months. At the rate they are acquiring lots, they will probably double their home completions and revenues each year for the next 3 to 4 years. That's what you call a healthy growth rate. The new lots are in great areas too - Silicon Valley, Azusa, Riverside, etc.
To really understand Tri-pointe, the depth of their management, and the brilliant investment team behind them (Starwood) you have to read through their large IPO filing with the SEC. It was put together by John Burns Real Estate Consulting. It spells out page by page why Tri-Pointe, why now, what the data in their markets is saying about new employees per new home built, new jobs per demographic area - where Tri Pointe is building.
Global Real Estate Stocks: Time To Get Out? [View article]
Gafisa Rising - This Turnaround Looks Real [View article]
Truth is, GFA has got half of it in the bag already, and if it kept moving in the same vein as they have been - raising cash by selling Alphaville suburban homes and by selling off legacy and Gafisa projects - by January of next year they would have it all.
But the last 20% purchase of Alphaville is unresolved, status of Alphaville going-forward is unresolved; Gafisa and Tenda able to turn a profit is unresolved; final debt payment - how to get there - unresolved. No wonder investors are unresolved as to whether they want to stick around to see this through. Investors in GFA at this point in time are purchasing GLOBAL UNCERTAINTY.
Gafisa Rising - This Turnaround Looks Real [View article]
First of all, the lowered guidance, as much as 30 to 50%, is because the company is launching 50% fewer units in 2013 as they did in 2012.
An IPO of Alphaville spins-off 40% of GFA's revenues. Because shareholders will own an equitable piece of that (assuming the company plays fair to investors), current shareholders might get one share of Alphaville for every 2.5 to 3 shares of GFA that they own. After a spin-off, I believe shareholders retain their original GFA shares plus some Alphaville shares too.
GFA has plenty of operating cash to run the business for the next 16 months. But a spin-off Alphaville & it's a different company - their proven economic engine is GONE. They go back to their roots and start over.
A little history: the old GFA expanded (over-reached) all over Brazil for 7 years; added Alpha Ville and Tenda. Alpha Ville was the only division that was successful in the new markets they entered; Gafisa and Tenda got burned (badly). If the spin-off proceeds in April, the AlphaVille-less GFA will then only build in 2-3 cities, the cities they once specialized in - Rio and Sao Paulo.
There they will build high-rises for middle-class and low-income families. No more suburbia. It's a little like a nationally recognized builder in the states saying, "We're going to sell all our suburban outfits (operating in 32 states) and go back to what we do best: residential skyscrapers in NY and Boston."
So there is a lot of potential here, but a lot of uncertainty too. Tenda is a good idea that has yet to segue from vaporware (a nice idea) to hardware (something real), and turn a profit. In 5 years they haven't been able to do this. Now they say they can/will with their aluminum mold product. But the market has a wait and see attitude about this, mostly wait, and the share price seems to indicate a lot of doubt.
New Management? The only new person I see is Andre Bergstein, the young CFO. All the other officers have simply changed hats, and were in the room when every bad decision was made (2006-11).
As far as value goes, GFA is now trading at about 1/3 book value. If the company can execute successfully over the next 4 quarters, resolve Alphaville and create a profitable re-emergence of Gafisa and Tenda, then the new GFA could rise to its true value - somewhere between $10 to $12.
So that's a nice reward, but this investment is speculative and risky. GFA has to execute or it'll be gone. I could sense from the conference call that analysts might be frustrated with the company and did not seem to trust its ability to execute.
A couple of the analysts who phoned in asked for an estimate of GFA's cash generation for 2013, because that's critical for paying off the 2014 debt payment. The company wouldn't give guidance like it did in 2012, thus only raising the insecurity bar a little higher. We all know GFA needs the cash from unit sales and receivables to the tune of $800ML in 2013 or they won't be able to pay their 12/2014 debt payment. So free cash flow should be a big deal in the upcoming conference calls.
Gafisa Rising - This Turnaround Looks Real [View article]
Nothing new in management there. Just changed the deck chairs on the Titanic. The CFO (11 years) - who oversaw the misplacement of financial resources that got them into this mess - is now the CEO of GFA. What's new about that? New what? Same people are in the room. They have just changed hats. Seems kinda good ol' boy to me.
The company maintains its dual role of mess-up and star ALpha group. If they sell that division, they could be left with nothing but the mess-up part.
"Mr. Osmo (now) holds the role of CFO and will maintain his position of CEO of AlphaVille through the end of the year, to continue to lead the development of the business plan that will support the purchase of the remaining 20% of AlphaVille, still owned by Alphapar. "Mr. Osmo has proven to be an invaluable leader at AlphaVille and has a strong track-record in strategy and finance. During this transition period, I will remain as IRO," said Mr. Calciolari.
Mr. Calciolari has worked with Gafisa for the last 11 years as its CFO, and the previous six, as its IRO as well."
Gafisa Rising - This Turnaround Looks Real [View article]
The other points I agree on. It's really management that you're buying when you buy a company, not the warehouses, workers and products. Guys like Steve Job are serial reproducers of brilliant ideas. You got Jobs - you got the ideas that will make money and find markets for themselves.
I have seen the Wall Street adage you refer to with Brookfield properties. It may one day be THE DARLING of the housing recovery; but for now just two analysts know about the company, and they didn't start following it til last quarter. Even James Cramer's fund (The Street.com) has recently picked up coverage of this builder.
With Gafisa - look for that free cash flow figure I mentioned - R$200ML/Q or R$800ML/yr. If the cash flow becomes consistent and sufficient enough, the debt payments are in the bag, and the rest is history. I saw KB Home (KBH) make this turnaround in Q3 '2012. Once the pivot point occurs, the company will rapidly advance. At that point, everything that had worked against the builder now works for it.
Final technical comments. Gafisa has had a history of being very volatile and making leaps of 25% in a single month. I haven't seen anything like that for months, but I looked back in time, and for YEARS the company has had a "spikey" way of jumping around - and up and down - with its share price.
Gafisa Rising - This Turnaround Looks Real [View article]
Right now - whenever GFA falls to $4 buyers come out of the woodwork to keep it up. This management team seems to create a lot of uncertainty with their moves. I guess certainty would cost them too much (fire sale prices for Tenda inventory?). But as long as they keep public attention on their cash generation, and the evaporation of Tenda and Gafisa's legacy projects runs apace, we should know by June what the near-term direction will be. For now, we might be watching paint dry for awhile.
Gafisa Rising - This Turnaround Looks Real [View article]
Tenda - R$ 827 ML (R$ 460 ML of this is My House My LIfe - government-funded). 55% of inventory will be sold in 2013; the remaining 45% in 1Q2014 (per company's statement)
Gafisa - R$ 1.232 BL
Alphaville - R$ 812 ML
Total: R$ 2.871 BL in unsold 2012 Inventory carried over to 2013/2014. If even 50% of that inventory is sold, or all of it sold at a 50% discount, that's more than enough cash to pay off the company's December, 2014 debt payment of R$ 1.3 BL. At that point, the company would have achieved a 62% delevering in 2 years.
Possibly this is why the company has reduced launches for 2013 - they'll raise more cash by selling-off these remaining 2012 units, and yet at the same time, not re-investing all that cash into new launches. They can be prepared for new launches once the balance sheet is right-sized and the debt ratios are more reasonable.
Gafisa Rising - This Turnaround Looks Real [View article]
2012, GFA had consolidated launches among its 3 divisions of 27,107 units. In 2013 they estimate launches will be half of that - a range of 13,500 to 17,500 units. That is almost a 50% reduction in launches, and the cost to complete launches will also correspondingly go down.
GFA had R$1.62 BL in cash at the end of Q4. Their first debt payment (31% of all net debt) will be R$1.16 BL in December, 2013. They already have the cash to pay this debt with R$ 460 ML to spare. Their next debt payment (another 31%) is due in December, 2014 in the amount of R$ 1.3 BL. That is 7 full quarters into the future from now. If the company can continue to be cash-flow positive to the tune of R$200 ML per quarter (on average), they would approach that second debt payment in roughly the same position they are now (7Qs x R$ 200 ML + R$ 460 ML = R$1.86 BL minus R$1.3 BL debt = R$ 560ML cash on hand.
So those numbers tell the story for me. If there is another R$ 800ML in positive cash flow this year and an addtional R$ 600 ML in 2014, then 62% of their debt will be gone and yet they will have maintained sufficient liquidity to operate their business.
In 2013, the Gafisa and Tenda units are going to sell, close-out, and "be done with" all non-core housing developments in new markets that didn't work out. After that point, the write-offs stop. They will only be costing half the launches in 2013 that they did in 2012 and are selling off inventory to raise cash (de-lever). So the diminished mix must be enough to raise cash and remain profitable. (I hope)
But the company also said that it would be ramping launches again in 2013 for Tenda (12% of total) and for Gafisa (42%) and ALphaville (46%) and would generate LESS cash overall and put more working capital into its landbank. Bottom line for me: I don't care how they generate the needed cash flow of R$800 ML/year - from new launches or legacy sales - if they can do this over the next 21 months and pay off that 62% of total debt in such an ambitious manner, they will clearly be out of the woods.
BTW...I am not sure if I read this okay, but I think they lost (R$ 0.28) share?
Gafisa Rising - This Turnaround Looks Real [View article]
Gafisa Rising - This Turnaround Looks Real [View article]
One of the articles also says that according to some members of the board, Alphaville doesn't have any "synergy" with Tenda and Gafisa, which - from the pictures I can see - seem to specialize in large urban constructions projects.
Well, that's true in one respect. It doesn't. Surbuban housing developments are an entirely different kind of construction business, but it's still "building". But being profitable and having great management is also what these 3 divisions DON'T have in common. Maybe Alphaville is already functioning as a semi-autonomous start-up within GFA?
Lastly, maybe the reason that Sam Zell is so interested in Alphaville (and only in Alphaville, it looks like) is that he believes this management team and floundering board are not smart-enough or together-enough to stop him.
This is solely my imagination, but one of the things I thought might be going on behind the February meltdown was that some wise guys had got a foot-hold on Gafisa's two near-term debt payment dates (November, 2013; and again in 2014) and were squeezing them for the full amount, thus preventing them from rolling the debt forward to a reasonable year in the future, like most builders would do. Not too far-fetched if you think about it.
The only reason a residential builder would have 2/3 of ALL its debt due in two years is that banks won't touch them in their present state. Maybe the company's proven they're unreliable and inconsistent, and the bond guys like the Zell suitors better. It's a choice: "somewhere over the rainbow"; or "a bird in the hand is worth two in the bush". Bond guys have steel flowing through their veins. They're paid to be realists and not get it wrong.
I guess there's one GFA on paper and in the public eye, and then there is another GFA behind the scenes. No wonder the stock price goes nowhere. Too much uncertainty.
Gafisa Rising - This Turnaround Looks Real [View article]
You notice how the article speaks about the company's resistance to let its shining star go in a sale? Damn straight. But if there is any kind of peak in the Brazilian real estate market on the horizon, it would be the smart thing to do.
But my first question out of the gate: Why not an IPO? The guy that took this division to the moon could easily be its new CEO. He obviously is really good at what he does..
Second question, how does a division with a R$10.5 BL land bank (the single most important asset a builder can own, besides good management) get sold for R$1.8 BL? The brand saw its sales grow 32% and it added up to R$ 1.1 BL last year, equivalent to 42% of the group's total.
Thirdly, have you ever heard the phrase, "Sell your winners and let your losers run?" I haven't. At least not in professional business parlance. The same guy that did well with Alphaville will do well with an Alphaville IPO. The same guys that screwed up Tenda will screw up the "new" Tenda; and the management at Gafisa that couldn't make a nickel with their high-end units in the same kind of diversified markets across Brazil that Alphaville starred in, will likely do the same (but a little better) in SP and Rio because selling high-units there is like blowing bubbles in a bathtub.
None of this - except the $7 price tag that keeps arising from multiple sources - makes any sense to me. My druthers? Like the story of the talents in the bible, give the whole shooting match to the guy who turned Alphaville into a star, and let HIM figure it out.
Housing Stocks: Building A Foundation Or A House Of Cards? [View article]
I think the recovery will be just as extreme as the bust. We're building enough homes for the US, circa 1960. 2013 is the coming-out party.