Analysts See Slow Growth Passage Helping More Than Hurting Standard Pacific Corp.
Orange County’s slow-growth initiative hasn’t caused much concern at Standard Pacific Corp., the county’s largest publicly traded residential construction company.
Although Standard Pacific does about 20% of its construction within Orange County, analysts and company officials believe that the firm will do just fine even if voters approve the June 7 ballot measure.
No matter what happens at the polls, the company will be able to feast on a fat backlog of 7,500 building lots. Depending on the pace of housing starts, those lots could keep Standard Pacific busy for the next three to five years, according to the company.
“The slow-growth initiative is more likely to help than hurt Standard Pacific,” said Timothy W. Hurckes, an analyst with Donaldson, Lufkin & Jenrette.
“It’s the kind of quality company that most developers would like to have build on their land,” Hurckes said. “Standard Pacific tends to be among the first to get invited in by the Irvine Co. and the other big developers. While they will continue to grow, other builders may get squeezed out.”
‘No Sudden Response’
Standard Pacific, which is based in Costa Mesa and does most of its business in California, has said that the initiative hasn’t affected the prices of the homes it builds in Orange County.
“Obviously this initiative is going to have an impact on Orange County housing, there’s no question about that,” President Ronald R. Foell said. “But we have not raised our prices in response to the initiative--there’s been no sudden response in the last few months.”
Nonetheless, Standard Pacific responded to at least one previous slow-growth proposal by raising prices: Poway, a recently incorporated town near San Diego, proposed in 1987 to cut by half the number of building permits it issued. Although the proposal was never adopted, it enabled Standard Pacific to raise prices by 10% in that area, according to Judy Hedin, an analyst with Wedbush Securities in San Diego. “The proposal had the effect of heightening demand rather than worrying the company,” Hedin said.
Standard Pacific specializes in building “trade-up,” houses, relatively elaborate structures with lots of bleached pine, tile counters and odd-shaped windows that appeal to affluent young families buying a house for a second time.
The market for trade-ups is expected to grow nationally by 45% over the next 10 years, Hurckes said.
Standard Pacific built 1,731 houses in 1987, up 2% from 1986, and had a year-end backlog of 682 orders. Net income for 1987 was $43.8 million, or $1.62 per share, compared to $25.7 million, or $1.11 per share, in 1986. Much of the increase, however, resulted from a reorganization of the company into a master limited partnership.
Although the average price of a Standard Pacific home in 1986 was $170,000, Hedin said the firm’s houses in San Diego and Orange counties now go for $275,000 to $300,000.
‘Vote for Continued Inflation’
“I look at slow growth as a vote for continued inflation in the housing market,” said Kenneth Campbell, president of Audit Investments, a New Jersey investment adviser specializing in real estate securities.
Campbell said he believes that Standard Pacific is a good investment because of its management. “The company is well-controlled financially. It has never been a fast-track, super-growth kind of company. While other companies come and go, it’s been around for years,” he said.
Hedin said she likes the company because she anticipates a continuation of higher housing prices over the next few years, which should widen Standard Pacific’s profit margins. Housing prices were up 13% in Southern California last year, she said.
That may be bad news for home buyers, but it is certainly good news for investors.
Standard Pacific is structured as a master limited partnership, which exempts it from paying the 34% corporate income tax and allows it to pay out larger distributions to its owners.
In addition to eliminating taxation at the corporate level, the MLP structure allows investors to shelter a portion of their personal income from taxation by claiming their pro rata share of the partnership’s depreciation and other tax deductions.
On the surface, buying into an MLP is just like investing in a corporation. For example, Standard Pacific’s partnership units trade on the New York Stock Exchange.
In other respects, MLPs are very different animals. While MLP units can be bought and sold like stock, their market price is based on different factors. Many investors tend to buy them for yield, like a bond, rather than for price appreciation potential, like a stock.
Standard Pacific is considered a yield-oriented partnership. “Of all the MLPs out there, Standard Pacific offers a higher-quality, longer track record and better outlook than almost any other,” Hedin said. “The company has a strong corporate structure in place. It is not just a slap-happy bunch of marketers.”
With an annual distribution of $1.20 and a recent trading price of about $9.75, Standard Pacific units are yielding slightly more than 12%. The company should be able to maintain the $1.20 distributions, analysts said, given its strong sales growth and healthy cash flow from operations.
Standard Pacific’s sales nearly tripled from 1983 through 1987, despite lackluster home building nationwide, Hurckes said.
“This company has been generating tremendous amounts of cash--enough to increase cash levels within the company at 10% to 15% annually while still providing a yield of 12% to investors,” he said.
But MLP investments are not risk free. One danger is that partnership units, unlike bonds, are not backed by a fixed amount of principal. The only principal, in a sense, is the partnership’s ability to generate cash.
Some MLPs, particularly in such industries as timber and oil, are designed primarily as tax shelters instead of as income vehicles and don’t have the ability to generate cash over a long period, said Caroline Williams, a corporate finance adviser with Donaldson, Lufkin & Jenrette.
“People need to differentiate between healthy MLPs with solid cash flow and those that can just support distributions for a year or two,” Williams said.
Downturn in Activity
The common stocks of other publicly traded home builders have taken a beating in the 12 months as higher interest rates have portended a downturn in building activity. Standard Pacific, however, has fared better than the industry as a whole.
The partnership’s units have fallen in value nearly 30% over the past year, compared to an average decline of nearly 40% for the common stocks of other builders.
But several analysts believe that prices haven’t fallen far enough yet to warrant buying Standard Pacific as a price play. They said they are waiting for the units to dip from their recent level of $9.75 to around $7 before they will recommend Standard Pacific as a buy.
