As banks slowly work their way back into becoming builders’ financial partners again, private equity investors say their capital will continue to play a role in bankrolling the housing industry’s land acquisition and construction projects.
For example, Mountain Real Estate Group, which focuses on equity investment, has $300 million in residential commitments outstanding, and its deals for land acquisition or home-building capital have averaged around $10 million. FBR Capital Markets lately is homing in on rental properties, and recently raised $230 million from 30 investors for a company that had 700 rental homes in its portfolio. Since the fall of 2009, GTIS Partners has acquired 22,000 lots on behalf of various builder partners. And Ridgewood Real Estate Partners, which started out as a land bank and has since morphed into a developer, is now looking for raw land deals in prime locations in Phoenix, Las Vegas, southern and central Florida, and the Eastern Seaboard.
“You want to worry less about profits right now and more about doing enough deals to build your business,” said Ralph Grebow, Ridgewood’s principal, who joined with representatives from the other three companies to form a panel on private equity financing at Builder’s Housing Leadership Summit, held in New York earlier this month.
Grebow conceded his company hasn’t had much luck partnering with builders on acquisitions. And other panelists acknowledged that the returns they expect for the money they invest (typically in the mid 20% range) will never be some builders’ cup of tea.
Builders “need to match your fixed asset life with your liability life” before jumping at private equity financing, advised Jamie Pirrello, the managing partner of Berkeley-Columbia Consulting Group, who moderated the panel.
The panelists insisted that there still isn’t a lot of financing capital available to small and midsize builders, and that demand for private equity is likely to remain strong for a while. But capital isn’t monolithic, and these companies are approaching market opportunities in different ways.
FBR Capital Markets has about 60 deals in place that take advantage of Rule 144A, which allows investors to avoid the process of filing with the U.S. Securities and Exchange Commission when assets are being sold to equity partners. “It’s permanent capital that you can obtain quickly,” explained Daniel McCann, FBR’s managing director.
GTIS Partners is looking to capitalize on the shortage of finished lots by investing in more land on its own, and “eventually rolling it out to builders,” said its vice president Teddy Karatz. And Mountain isn’t averse to working with builders on deals in smaller markets such as Colorado Springs, Colo., and Madison, Wis., said Joel Kaul, its managing director. He addded that his company might gravitate into mezzanine financing next year, too.
These windows of opportunity, of course, will inevitably narrow. McCann, for one, expects several public REITs to form around investing in rental properties. He also sees the benefits on investments in major mergers and acquisitions (FBR brought in investors for last year’s sale of Taylor Morrison) “to be measured in years, not months.”
And banks that all but abandoned the housing sector in recent years are inching their way back with a deal here and there. Grebow, though, recommended to his audience that they use bank financing “for construction only.” He and his fellow panelists also advised builders to tread cautiously into any financing. “If it doesn’t make sense and won’t produce enough profit, don’t do it,” Grebow said.
John Caulfield is senior editor for Builder magazine.