Wednesday, September 8, 2010

When and Where to Jump In? Hedge Funds Can’t Always Save Home Builders

SEPTEMBER 8, 2010, 2:29 PM ET
Robbie Whelan

Wall Street Journal

Dozens of home builders—mostly small, privately-owned companies—have lost business or gone under because of the housing bust. Some of them have turned to private sources of capital for a way out. But hedge funds can’t always be saviors.

Local press in California last week reported that a deal between Luxor Capital Partners LP, a small New York hedge fund with just over $1 billion in assets, and bankrupt builder California Coastal Communities, Inc., fell through after Luxor got cold feet and let the deal’s Aug. 31 expiration date expire.

Luxor was going to provide $184 million in high interest rate financing to bail out a luxury housing development in Huntington Beach, the Brightwater project, which is saddled with $181.5 million in debt. Irvine-based California Coastal, which was traded on the Nasdaq stock exchange, filed for bankruptcy protection last October. Brightwater was its main source of debt problems.

In a securities filing, the builder said that despite the deal being canceled, the company “continues to have discussions with its stakeholders regarding a consensual restructuring; however, there can be no assurance that such a consensual restructuring can be achieved.” Dismal stuff. An employee of Luxor did not immediately return a call Wednesday seeking comment.

California Coastal wouldn’t be the first builder to turn to private capital for post-crash support.

In May, Atlanta-based builder Beazer Homes USA Inc., harried by legal troubles and a plummeting stock price, got a lifeline from hedge fund titan John Paulson’s Paulson & Co., which bought 5 million Beazer shares. In August, the hedge fund upped its long position to 5.8 million, then doubled down on housing by making a $42.5 million bid to buy the assets of Engle Homes. Yes, this is the same Paulson & Co. that made massive bets in 2005 and 2006 against the housing market.

Others have formed potentially lucrative joint ventures with private financiers. Toll Brothers Inc., a luxury builder with a relatively strong balance sheet, announced an investment partnership with private equity firm Oaktree Capital Management LP to buy $1.7 billion in distressed real estate loans, and in early 2010, Lennar Corp. teamed up with several private equity funds to buy into a $1.22 billion distressed real estate portfolio. 

All of this investment activity points to a popular mantra among investors in land assets and distressed real estate loans: There are fortunes to be made during a downturn. Michael Burry, a former hedge fund manager and one of the stars of Michael Lewis’s recent book “The Big Short” and one of the few small value investors who presaged the housing crash and actually did something about it, told Bloomberg news yesterday that he is bullish on farmland: “There is some value out there in real estate. You have to buy it right. It’s not in general. There’s an awful lot of people out there looking to buy these distressed properties.”

The home builders are not yet back to the darling status they enjoyed during the go-go days of the housing boom, but investors seem to be taking an interest and lending a hand. For home builders, who, as we report today, are walking away from their own land deals more and more often, that could be good news.

Follow Robbie on Twitter at @RWhelanWSJ