A High Yield Bond For A Housing Recovery

Includes: CAA
by: Bondsquawk, CFA

By Rom Badilla, CFA

Fueled by historically low mortgage rates and declining inventories, the U.S. housing market is on the road to recovery. With positive signs across almost all markets, the rebound is broad-based which should benefit companies in the homebuilding sector. Here is a bond that we covered previously and should perform as the recovery in the housing market gains momentum.

Standard Pacific Corporation Senior Note (CUSIP 85375CAX9)

  • 8.375% Fixed Semi-Annual Coupon
  • May 15, 2018 Maturity Date
  • $117.22 Dollar Price

4.74% Yield to Maturity

  • +414 bps Yield Advantage over comparable maturity U.S. Treasury
  • ‘B’ Rating by Standard & Poor’s which falls on the High Yield spectrum

Company Profile

Standard Pacific (SPF) which is headquartered in Irvine, California, is a builder of single-family attached and detached homes typically ranging in price from about $165,000 to more than $1 million and in size from 1,500 to 3,500 square feet. SPF has a particular focus on the move-up buyer which accounted for more than 70% of 2011 sales.

Key Reasons

Great turnaround story: With 3Q2012 results, SPF produced $21.7 million in Net Income, the fourth straight positive quarter. The latest EBITDA figure at $25.6 million is the sixth straight quarter in positive territory. The trailing 12 months of EBITDA stands at $76.5 million.

Consistency in profitability: Gross margins for SPF have increased from 19.0% from a year ago to 20.6% in the third quarter. The latest gross margin result is better than most of its peers as the average of the High Yield homebuilding sector is at 18.8%.

Robust demand: New Orders in the latest quarter came in at 989 homes which is an increase of 29% from the same quarter last year. Due to declining inventories in the marketplace, homebuilders have better pricing power. The average selling price for SPF was at $369,000, an increase of 7% from a year ago.

Purchasing of land should payoff in the years ahead: According to JP Morgan analysts, Susan Berliner and Richard DeGaetani, SPF has increased its Lot Position by 35.5% since the end of 2008, which is the highest growth rate in its peer group. JP Morgan believes that “those that were aggressive buying land over the past few years will benefit the most and obviously, those that pulled back will likely have weaker operating performance.”

Improving liquidity: Cash Balance increased to $479.5 million in the third quarter which is a 14.2% jump from the same quarter in 2011.

Disclaimer: The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.