Executive Corner: Dealing with equity partners

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Don Dykstra, president of Bloomfield Homes (Southlake, Texas), says a recent deal with Sumitomo Forestry provides the builder with confidence to increase leverage.

August 19, 2013

The slow speed and nature of the current economic recovery is one in which home builders looking to scale up need to find capital. Bloomfield Homes bolstered its access to credit recently by selling a 50-percent stake in the company to Sumitomo Forestry Seattle Inc., a division of Tokyo-based Sumitomo Forestry Co., Ltd. The timber-and-building-materials trading company?s U.S. holdings also include two home builders in Washington?Henley USA, Seattle, and SFC Homes, Bellevue.

The partnership provides Sumitomo with an entry into the growing Dallas/Fort Worth market as well as 3,500 lots secured by Bloomfield, which posted $88.9 million in sales and 402 closings last year. The Texas builder expects to hit $135 million with 600 closings during fiscal 2013. President Don Dykstra discussed the advantages of the partnership and why it is the right fit for Bloomfield.
 
Q: What does the deal with Sumitomo Forestry bring to the table for Bloomfield Homes?
A: We believe the partnership with Sumitomo Forestry provides the opportunity for Bloomfield Homes to grow to its full potential. During the downturn, we accumulated a significant number of entitled land that now can be developed at an accelerated pace to take advantage of current market conditions.  
 
Q: Did you consider going to the bond market or an IPO before choosing an equity partner? Why was an investment partner a better fit for Bloomfield than the other two choices?
A: At our size the bond market or an IPO were not viable alternatives. Bloomfield Homes did not need an equity injection, but the owners were interested in taking some money off the table. Although the Sumitomo Forestry transaction did not increase equity, it did result in financially stronger ownership. That gives both our lenders and the management team the confidence to increase leverage under the current bank lines of credit. Our intent is to continue our practice of reinvesting earnings into the business to support the future growth.
  
Q: How did you go about looking for an equity partner, or did Sumitomo approach Bloomfield?
A: We were introduced by a local market research company and over time determined that our business philosophies were very similar. Over the last few years we had met with a number of public builders, investment bankers, and private investors, but the fit was never just right. One of our main criteria was to continue using our current business model, rather than trying to convert to another philosophy.
  
Q: As a result of this deal, are you looking to expand your footprint in Bloomfield?s current market and/or will you build in new Texas markets?
A: Our immediate focus is to achieve our 2013 goals in Dallas/Fort Worth. In addition to a 50-percent increase in volume in 2013, we expect to end the year positioned for continuing growth for the next several years. With regards to opening new markets, Sumitomo Forestry has expressed their desire to grow their business in the United States, and we intend to support them anyway we can.
 
Q: In light of rising mortgage interest rates and tight labor, what?s your forecast for Bloomfield?
A: We are currently delivering approximately 50 homes per month utilizing only 10 floor plans with all inclusive specifications. This is very efficient for our trade partners as well as our own team. We believe our labor contractors are more profitable working with us than some of their other customers. Interest rates are outside our control so we will try to monitor the effects on the day-to-day business and make adjustments as best we can.

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