Two hours to the east of Orange County, clear skies and rolling hills grace spanking new subdivisions, where two-story homes sell for as little as $235,000.
Prices like those are drawing buyers to Pardee Homes’ Cielo subdivision in Beaumont, the way nectar draws bees.
Renters Lilly and Charles Payton bought a four-bedroom house there after learning their $1,807-a-month house payment would be just $7 more than their rent. Brent and Jorgina Lukacs saw an opportunity to move to a family-friendly neighborhood for under $250,000.
“The biggest thing here is affordability,” said Lukacs, who has a 2 1/2-year-old son, two pet Yorkies and a boxer.
Nurses, teachers and first-time buyers like Lukacs and the Paytons are making Cielo the hottest selling project not just for Pardee, but for its parent company, TRI Pointe Group of Irvine.
A year ago, Pardee and TRI Pointe were competitors. Now they’re one company, thanks to a mega-merger completed last year.
The $2.7 billion deal, financed through the issuance of new stock, joined TRI Pointe with five homebuilding companies spun off by forest products giant Weyerhaeuser Co.
The merger catapulted TRI Pointe from a startup six years ago to the nation’s 17th biggest builder, with 1,000 employees, operations in eight states, 3,100 closed sales and gross revenue totaling $1.7 billion, according to Builder Magazine.
Just two years earlier, Builder Magazine ranked TRI Pointe 156th among U.S. homebuilders, with 170 closed sales and $79 million in gross revenue.
Some experts see the merger as a harbinger of more consolidations to come – exemplified by Standard Pacific’s recently announced deal to combine with The Ryland Group, creating the nation’s fourth biggest homebuilder.
Others analysts note that it was just the latest in a wave of mergers dating back to 2013, as investors seek to cash out and builders seek to expand their market share.
Merger now complete
July 7 will be the first anniversary of TRI Pointe’s merger with Weyerhaeuser Real Estate Co., or WRECO, a transaction TRI Pointe CEO Doug Bauer likened to “a guppy swallowing a whale.”
One year in, Bauer says, the six homebuilding operations are integrated into one.
All six continue to operate under their original names, with projects in California, Las Vegas, Phoenix, Tucson, Denver, Houston, Seattle and the Washington, D.C. area.
“The integration and the transition is behind us,” Bauer said recently. “And we’re really unlocking what we call the embedded value that’s present in the combined companies.”
In May, Builder Magazine named TRI Pointe the 2015 “builder of the year,” primarily because of last year’s merger.
John McManus, the magazine’s editorial director, called TRI Pointe’s trajectory from 2009 startup to homebuilding giant “a rocket-thrust takeoff.”
“There wasn’t a better story in the homebuilding business in 2014,” McManus said of the TRI Pointe-WRECO merger.
While a number of homebuilding companies started up during the depths of the downturn, TRI Pointe’s three co-founders – William Lyon Homes veterans Bauer, Tom Mitchell and Mike Grubbs – had a unique ability to gain access to capital, McManus said.
“I don’t think TRI Pointe has a secret sauce. They do pretty much what other homebuilders do,” McManus said. “But they do it at a level of execution and integrity that does put them in a class of their own.”
Homebuilding stock analysts also praised TRI Pointe for successfully merging with the Weyerhaeuser builders.
Analyst Patrick Kealey of FBR Capital Markets in Arlington, Va., recently upgraded TRI Pointe to “outperform,” saying that its stock is undervalued.
TRI Pointe “is making good progress integrating its WRECO acquisition from 2014, and we expect this will be the primary driver of earnings in an improving housing environment,” Kealey wrote.
The merger came together just as homebuilding experienced a new bounce.
TRI Pointe’s first-quarter profits, for example, were double from a year earlier, company reports show. Sales were up 79 percent.
“It’s been a success so far, and there haven’t been any negative surprises. (Mergers) don’t always happen that way,” said Alex Barron, founder and senior research analyst of El Paso-based Housing Research Center.
Barron noted that TRI Pointe stands to profit from Weyerhaeuser land acquisitions made years ago when prices were cheaper. Since then, the value of those lots has gone up.
“They have a good team, they’ve had a good strategy, and they had good timing,” he said. “All those stars aligned.”
Early beginnings
The idea for starting TRI Pointe grew out of a lunch meeting between Bauer, former president of William Lyon Homes, and Dan Young, homebuilding chief of the Irvine Co.
The Irvine Co. was restarting homebuilding operations and wanted Bauer to put together a firm to build and sell for the Irvine Co. on a fee basis.
Soon, TRI Pointe started expanding outside the Irvine Ranch. In 2010, global real estate investment firm Starwood Capital Group pumped $150 million into it, and Starwood’s CEO, Barry Sternlicht, joined the board as chairman. Sternlicht, who had known Bauer for 20 years, called TRI Pointe’s founders a “seasoned management team.”
In January 2013, TRI Pointe raised an additional $156 million by becoming the first homebuilder in eight years to go public. Less than 10 months later, it reached a deal to merge with the five Weyerhaeuser builders.
“Who would have guessed?” Bauer said. “I guess that’s what’s great about America…We’ve been very blessed and fortunate.”
More growth
Bauer and officials at TRI Pointe’s newly acquired companies noted that homebuilding operations were only a tiny part of Weyerhaeuser’s overall business.
“Now we have a parent company that does just what we do,” said Mike Taylor, Pardee’s Inland Empire division president. “There were a lot of years where the ability to get capital and grow was constrained.”
Taylor also said that under Weyerhaeuser, decision-making was top-down, coming from corporate headquarters. Under TRI Pointe, each division is autonomous.
“We love having the ability to basically put our own business plan together and get that plan approved an execute it,” he said.
Bauer said TRI Pointe trusts the judgment of the individual firms because they have experienced management.
Meanwhile, TRI Pointe has partnered with imortgage and First American Title Insurance Co. to offer mortgage and title insurance to customers, bringing extra revenue to TRI Pointe.
12 sales a month
The homes in Pardee’s Cielo project are gated and have a community pool, barbecues and dressing rooms. The homes, which are part of Pardee’s master-planned Sundance development, sit on 2,500-square-foot lots.
Pardee reports that it has sold 60 homes out of Cielo’s 92 homes during the first five months of the year – an average of 12 a month.
“Everything over four (sales) a month is a lot,” said Barron, the housing analyst.
Kim Saunders, 45, moved into her new Cielo house over Mother’s Day after watching it being built from the ground up. She’s sharing the four-bedroom house she bought for $253,000 (including upgrades) with her son and daughter.
“I really fell in love with it when I saw it,” said Saunders, who became a homeowner for the first time since losing her last home in the housing crisis. “I didn’t want a big yard because I work a lot.”
New college grad Laura Merritt, 22, had been looking for her very first apartment when her parents surprised her with a brand new four-bedroom house in Cielo.
Laura’s mom, Jeanette, said she and her husband decided to buy a house for their 22-year-old daughter so she could live near their home in Cherry Valley, a few minutes north of Cielo. And it’s a good investment, she said.
The couple paid about $250,000 for a unit with a small patio and a downstairs guest room. Similar homes in Redlands, 15 minutes to the west, cost almost $200,000 more. In Irvine, they’re selling for $500,000 more.
“We like the floor plan. It’s spacious and got plenty of room,” she said. “We work in Redlands, and we know the prices there are much higher.”
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We sat down with TRI Pointe CEO Doug Bauer recently to discuss his transition to head of the nation’s 17th biggest homebuilder. Here are excerpts.
Q: How has your job changed with the expansion?
A: (Laughs) I’m on a plane quite a bit more. That’s probably the biggest change.
When you’re a public company and you’re the CEO, not only do I spend a lot of time with the investment community in New York and Boston and the Mid-Atlantic, but also, (Chief Operating Officer) Tom Mitchell and I split up the operations of the company.
With scale comes, obviously, more responsibility. But the key to anything is really having a great experienced team of homebuilders.
Q: Are you going to retain all of the original brands?
A: Yeah. Totally. And that’s one of the keys in our minds to be successful.
Each one of those six brands have three distinct advantages to what we describe as a very local business. No. 1, they have great relationships with the land sellers. No. 2, they have great relations with the subcontractors and the trade partners. And No. 3, they attract great people, great team members. And those three legs are the most critical legs to the stool of a homebuilder.
Q: Your first-quarter earnings report shows a 79 percent increase in new orders. Net earnings doubled. What’s happening?
A: Generally speaking, the housing market is very strong. Especially here in California. Especially here in Orange County.
As you probably know, 2014 was a pretty choppy year for new housing. As we enter 2015, it’s definitely rebounded well. We have seen good job growth. I think the unemployment rate is down to 5.4 percent. Household formation in the fourth quarter blipped to over 1.1 million.
My belief is that housing has a very strong, long-term momentum built into it. And it’s going to come also from the millennials.
Q: What’s next?
A: Our job is to unlock that embedded value of the companies that we’ve acquired. And now that these team members are part of a pure homebuilding strategy versus a timber REIT strategy, everybody’s really fired up for the future.
As a public company, we’re only a little over a year old, so we have a long way to grow and we’re very excited about the future.
Contact the writer: 714-796-7734 or jcollins@ocregister.com
