Blackstone Group LP (BX:US)’s credit arm agreed to acquire a group of housing development sites from Hovnanian Enterprises Inc. (HOV:US) with plans to sell them back to the homebuilder under a $125 million deal.
Funds managed by Blackstone’s GSO Capital Partners LP will give Red Bank, New Jersey-based Hovnanian the right to buy lots back on a quarterly basis, the companies said today in a statement. GSO has already bought six parcels totaling 620 lots costing $65 million, including both acquisition and future development expenses, they said.
“We firmly believe that the U.S. residential real estate market has bottomed and that Hovnanian is uniquely positioned to capitalize on the recovery,” Doug Ostrover, GSO founding member and partner, said in the statement.
Hovnanian jumped 7 percent to $2.76 at the close in New York, the best performance in the Bloomberg Industries homebuilder index. The 13-member gauge added 1.7 percent. The company’s bonds rose to the highest price since May 2011 and the cost to protect against its default declined after the announcement.
Hovnanian, New Jersey’s biggest homebuilder, has been depleting cash to replenish its land portfolio and take advantage of distressed prices to boost its profit margins. Competition is increasing for well-located properties as the housing market improves, and that’s forcing homebuilders to use more cash upfront to acquire properties rather than to use so- called option arrangements to buy parcels over time, said Megan McGrath, an analyst with MKM Partners LLC.
While the deal with GSO Capital frees up money for Hovnanian to make more purchases as demand for new homes improves, it brings in a “middle man,” she said.
“The market loves it when they can improve their liquidity and it positions them to buy new land,” said McGrath, based in Stamford, Connecticut. “The medium-term concern for me is making sure they’re buying that new land at a good price that offsets any margin they’re giving up in this deal.”
Demand for new U.S. homes is rising after sales fell to a record low in 2011. Purchases reached a two-year high in May, according to the Commerce Department. Hovnanian, based in Red Bank, New Jersey, reported an unexpected profit in its fiscal second quarter as orders jumped 52 percent.
Hovnanian and New York-based Blackstone plan to identify additional land parcels totaling as much as $60 million to add to the portfolio, the companies said. GSO also intends to raise its equity stake in Hovnanian by exchanging $15 million of the homebuilder’s notes for about 3.9 million shares.
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