Albert Praw by lethalinterjec


									    MBA 280                                                                              Spring 2007

                                      Case: Hearthstone
    Professor: Thomas Davidoff, Source: Wall Street Journal, Date Appeared: July 12, 2006

1     Introduction

2     Article
By James R. Hagerty                                          Despite the large potential gains, he says,
Wall Street Journal. (Eastern edition). New              many banks and investors shy away from invest-
York, N.Y.: Jul 12, 2006. pg. B.11                       ments in raw land without approvals for devel-
    Most people struggle to figure out what the           opment. “Everybody hears the horror stories of
cooling U.S. housing market will do in the next          developments that didn’t get entitlement,” says
few months. Jeff Barcy and Albert Praw are                Mr. Barcy, who was an investment banker at
trying to anticipate where people will be buy-           Credit Suisse First Boston, specializing in real
ing homes five to eight years from now and how            estate, before joining Hearthstone in mid-2005.
much they’ll be paying.                                  He calls it “entitlement risk” and says: “That
                                                         scares off a lot of capital.”
    Mr. Barcy, 36 years old, is chief executive
officer of Hearthstone Inc., a San Rafael, Calif.,             Moreover, with home sales slowing, land
firm that since 1992 has invested in housing de-          prices have come down in some places. Home
velopments with money from institutional in-             builders have cut back on land purchases, and
vestors. Now, Hearthstone has teamed with Mr.            some are dumping land back on the market.
Praw, 58, a former KB Home executive, to move            “It’s a great time to be a contrarian investor
into the land-development business.                      in land and think five to eight years out instead
                                                         of three months out,” Mr. Barcy says.
    Their plan is to find agricultural or other
types of land not yet zoned for housing, ob-                 To determine where to invest – and minimize
tain planning approvals for new communities              the risk of buying land that proves to be difficult
and then sell the land to home builders. Buy-            to develop – Mr. Praw says the new venture will
ing such land is dicey because in many of the            study such things as immigration, demographic
most desirable locations – such as California,           trends and job growth. He also will rely on lo-
Florida or Hawaii – it can take five years or             cal contacts and partners. “There’s no magic
more to overcome resistance from environmen-             bullet,” he says.
tal activists, work out arrangements for roads               Hearthstone and Mr. Praw recently set up
and utilities and get all necessary regulatory en-       a joint-venture company, Landstone Communi-
titlements. It is a complicated legal and politi-        ties, where Mr. Praw serves as chief executive
cal “chess game” with no certain outcome, Mr.            officer.
Barcy says.                                                  Hearthstone’s Path of Growth funds,
    But the greater the difficulty in getting per-         launched last year, will invest in land acquisi-
mission to build homes, says Mr. Barcy, the              tions made by Landstone as well as in those
bigger the potential “pop in value” for investors.       of other development companies. Hearthstone
As land moves from agricultural uses to zoning           aims to raise $2 billion of capital to invest in
for homes, the value can multiply by as much             such projects.
as five times, he says.                                       Already, the California Public Employees’

Case: Hearthstone                                                                                      2

Retirement System, or Calpers, has committed               In December, Hearthstone joined with ICI
itself to investing $450 million in the initial Path   Homes of Florida to acquire 9,000 acres of tim-
of Growth fund. A Calpers spokesman says the           berland near Jacksonville, Fla., for $65 million.
giant pension fund has earned 15% annual re-           It is likely to take four or five years to get that
turns on investments in residential land devel-        land zoned for housing, Mr. Barcy figures.
opment and construction of single-family homes             Hearthstone also is looking at possible ac-
since 1992.                                            quisitions in the Antelope Valley, near Los An-
    Mr. Barcy says Hearthstone may sign up             geles.
another large investor in that fund, subject to
                                                           Hearthstone continues to provide financing
approval by Calpers. He declines to identify the
                                                       for other land developers. One risk is that the
investor. This year, Hearthstone expects to seek
                                                       venture with Mr. Praw will make Hearthstone
more investors for additional Path of Growth
                                                       look more like a rival to those longstanding part-
                                                       ners. Mr. Barcy says he hopes not to clash with
    Most of the competition in land devel-
                                                       Hearthstone’s partners in bidding for land. “It’s
opment comes from local or regional compa-
                                                       a big world out there,” he says.
nies. But Hearthstone also is likely to bump
up against developers financed by investment                Hearthstone originally planned to form a
banks or private-equity firms. For instance, an         joint venture in land development with KB
investment fund run by Lehman Brothers Inc.            Home, but KB decided not to proceed with that,
last year helped finance a $120 million purchase        Mr. Barcy says. A KB spokeswoman cited
of land in Chino, Calif., by SunCal Cos., a big        “changing dynamics” in the housing market.
land developer based in Irvine, Calif.                     When KB dropped out of that deal, Mr.
    Hearthstone is focusing on markets in-             Praw decided to leave KB after 16 years at
cluding Arizona, California, Florida, Hawaii,          the builder and form his own joint venture with
Nevada and New Mexico.                                 Hearthstone.

3    Questions For Discussion

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