Money Key to Home-Building Hopes : Finance: Despite slump, new firm's owners are confident because banks back them. Other builders look to stock market for capital in wake of S&L; troubles.

By JOHN O’DELL

Sept. 12, 1991 12 AM PT

TIMES STAFF WRITER

NEWPORT BEACH —

Dale Dowers and Hadi Makarechian are starting a home-building company in Orange County--in the midst of a two-year industry slump that has dozens of established builders on the verge of collapse.

You may ask: Are these men crazy?

Not likely, Dowers says with a smile.

The new company, Capital Pacific Homes Inc., believes it has a secret weapon: money.

It has financing from a consortium of banks in the Southland and from East Coast banks and private lenders who Makarechian dealt with before moving West.

And the dapper builder, whose family ran a major construction business in Iran before the fall of Shah Reza Pahlavi in 1979, said he has also been raising cash through the sale of assets of his Washington-based building firm, Shamron Corp., in anticipation of starting up on the West Coast.

The funds the company can call on provide a hefty base for the aptly named Capital Pacific, which Makarechian formed with Dowers--formerly president of Costain Homes in Newport Beach--after their joint bid to acquire Costain fell through early this year.

And having access to capital in today’s market is what the building game is all about. With the thrift industry in ashes and other, traditional sources of development funds drying up, builders with their own money and access to credit can seize opportunities that others can’t touch, Dowers said.

Dowers and Makarechian aren’t alone in their thinking.

At about the same time they were furnishing their offices on the 12th floor of a high-rise in the Newport Center business complex in June, former Irvine Co. executive Roland Osgood was shaking hands with officials at Kaufman & Broad Homes in Los Angeles, sealing a deal to start a new K&B; subsidiary, to be called Vintage Homes, that would build homes priced at $150,000 to $250,000.

And two other well-established Orange County home builders have apparently decided that the recession is at or near its nadir and that now is a good time to start offering common stock in their companies.

At Standard Pacific L.P. in Costa Mesa, a return to the stock market is academic: Investors already buy and sell the company’s limited partnership units much like stocks. Switching to a stock form of ownership only broadens its potential market, making the common stock available to institutional buyers who are prohibited from buying limited partnership units, or individuals who are afraid to because they are not familiar with that form of investment.

For Presley Cos., a large regional builder with headquarters in Newport Beach, the decision to launch an initial public offering at the height of a recession strikes some observers as bold and others as questionable.

Presley plans to sell at least 10 million shares of common stock at $15 a share in its offering later this month.

If all goes well, the company will have about $75 million to finance operations and pay down debts after paying offering expenses and distributing a special $73-million dividend to existing shareholders.

If the market isn’t there for Presley shares at $15 each--and several market analysts have suggested that the asking price is too high, by as much as $5 a share--Presley still stands to raise a substantial amount of cash if it opts to sell the offering at a lower price.

And taking the company public relieves its major owner--developer William Lyon, head of the nation’s largest home building firm, the William Lyon Co.--of the pressure of chasing capital for two large home-building firms that operate in the same basic markets, said one analyst who asked to remain unidentified.

Tapping into the stock market to raise capital is one of the few ways that today’s home-building companies can beat the credit crunch, said Michael Meyer, managing partner and real estate industry consultant at the Newport Beach office of Kenneth Leventhal & Co., accountants.

Meyer believes investors are willing to buy housing company stocks now because they are betting that the per-share price of well-run companies has nowhere to go but up during the next few years.

And as building industry analysts have raised a cry in recent months about impending housing shortages because of the lack of current building activity, the price of major publicly traded home-building companies’ stocks has begun rising, Meyer said.

He cites a recent report by the Realty Stock Review, which said the share price of an index group of major publicly traded home-building firms had more than doubled to $13.95 in July from $6.20 in November, 1990. In November, 1989, when the California housing market still was booming, the index price for the stocks was $11.76.

“This is exactly the time to be raising capital,” said Mark Matheson, an analyst who follows several regional home builders’ stocks for Cruttenden & Co. investment bankers in Newport Beach. “With capital you can take advantage of those who are running away from the market.”

For builders with cash, the Southern California residential market is the one bright spot in the industry today, according to Meyer.

“Real estate gets all grouped together in people’s minds, so the black eye that commercial real estate has gotten is causing a severe contracting of credit and capital to the home-building industry as well,” Meyer said.

“People forget that there is an ongoing demand for houses. The population here still is increasing, and there will continue to be a demand for houses for years to come.”

At Vintage Homes, whose Newport Beach offices are a few miles inland of Capital Pacific’s at Jamboree Road and Bristol Street near John Wayne Airport, President Osgood makes no secret of his delight at being backed by a company with deep pockets.

“We have a great advantage today in that we have the capital resources so we don’t have to go hunting for funds,” Osgood said.

Makarechian, the chairman of Capital Pacific, said it would have been impossible to start a new building company in Southern California when the building boom was in full swing two years ago.

“You have to have a project to be a building company, and in 1989, when land was appreciating at 30% a year, there weren’t many landowners or builders who would have sold,” he said.

But in the current market there is a lot of land for sale, much of it at discounted prices, added Dowers, the company’s president.

“Look at the last recession, in 1981. The Fieldstone Co. started then,” he said, referring to one of the most successful home builders in Southern California. “They would not have had the opportunities in a boom that they had in a recession.”

At Capital Pacific, Dowers provides the knowledge of the Orange County housing market while Makarechian provides the Eastern financial links, corporate liquidity and a wealth of experience in high-density and high-rise residential construction techniques--experience the partners say will come into play in Southern California in years to come.

Capital Pacific, which plans to specialize in smaller developments close to major job centers, just closed escrow on its first project, a 38-unit town home tract in the Phillips Ranch development in Pomona. Dowers said the land price was steeply discounted, but would not be more specific.

He said the initial land costs were low enough, however, so that the company will be able to offer the homes in the $150,000-$200,000 range.

The company also intends to develop apartments, starting with projects that top out at five stories, Dowers said, but easing into taller projects as the political climate becomes amenable to high-density residential development.

“There will be a time, in the next four or five years, that people will start allowing high-density high rises in built-up areas along the coast here, like they have in Santa Monica and Long Beach,” Makarechian said.

“And when they do, with our financing and background, we’ll be ready for it.”

Anatomy of a Recovery The building boom of the ‘80s began after the 1981-82 recession, so today’s ever optimistic housing developers are looking ahead to the next growth cycle. O.C. Housing Market Housing demand in 1989 surpassed supply, which typically puts upward pressure on prices and encourages developers to resume building. But a large number of unsold new homes has kept many builders on the sidelines. Resale Home Prices As the existing unsold inventory of new homes is brought up, buyers are also expected to bid up prices for resale homes. Annual percentage change, inflation adjusted ‘95f: 4.1% Source: Chapman University Center for Economic Research

Bullish on Building Homes

Despite the recession, the outlook for housing remains strong enough to encourage builders with sufficient capital. Two new companies have recently formed in Orange County; two others plan to convert to stock ownership.

NEWLY FORMED Vintage Homes

Founded: 1991

Headquarters: Newport Beach

Employees: six

1992 goal: To build and sell 100 homes.

Capital Pacific Homes Inc.

Founded: 1991

Headquarters: Newport Beach

Employees: five

1992 goal: To build and sell 100 to 150 homes.

RESTRUCTURING OWNERSHIP The Presley Cos.

Founded: 1956