Dustin Bogue: This Time It’s Different

dustin bogue, ucp, benchmark communities, monterey, santa clara, fresno, pico holdings, bay area news, housing development, home construction

dustin bogue, ucp, benchmark communities, monterey, santa clara, fresno, pico holdings, bay area news, housing development, home construction

In homebuilding, circumstances are ripe for continued recovery and an increase in M&A activity.


[dropcap]D[/dropcap]ustin Bogue founded Union Community Partners in 2004 to acquire and develop undervalued property in Northern California. UCP buys distressed notes, finished lots, partially finished lots and entitled land in several California markets. In 2008 the company was bought by publicly held PICO Holdings Inc. and the name was changed to UCP LLC. Since then, UCP has acquired nearly 6,000 residential lots and invested more than $190 million in California and Washington state. 
In 2010 the company formed Benchmark Communities to build homes. Currently, Benchmark is building in Monterey County, Santa Clara County and Fresno County.

[contextly_sidebar id=”8addcaf61ad48611fb0dbe25f3dc6016″]Bogue began his career in the Northern California title industry. After several years in residential and commercial development services, he started with Wellington Corporation of Northern California as director of land acquisitions and development. He and the executive team at Wellington created two portfolio technology start-ups: Bridgewater Ventures, an early-stage venture capital company, and Cenatek Inc., a solid-state storage device company where Dustin acted as executive vice president. He furthered his career as vice president of development and sales at Landcastle Real Estate before setting out on his own.

UCP was spun off as its won publicly traded company this past July.

Q: You founded UCP in 2004, arguably near the top of the last housing market cycle. Are we in the same phase now, nearly 10 years later? What insights do you have on the market, and how is this cycle different?

DB: The current housing environment is different than 2004 in many ways. First, 2004 marked the top of a long run of an inflationary housing cycle making home affordability, especially in the Bay Area, extraordinarily low. That is to say, the percentage of people making a median income could afford a median priced house.

In contrast, today, evidence of a housing recovery in most of our markets like the Bay Area, includes decreasing levels of existing home inventory, high affordability, an increasing volume of new home sales and increasing home prices. Secondly, though we have seen significant home price appreciation through 2013 in many Bay Area markets, this appreciation is resulting from historically low pricing levels, which is indicative of the market attempting to return to the mean and progress in a normalized fashion. We refer to this as the Square Root shaped recovery.

Q: The housing market in the Bay Area has regained momentum, but only in certain areas. Santa Clara, one of the markets where you operate has seen a strong resurgence in the industry, but some other areas have not seen as much recovery. What are the major drivers of that recovery in your mind, and how do you see them spreading, if at all, into other regions?

DB: Every market in which we operate has experienced pricing momentum resulting from historically low supply of both resale housing stock and new home development. In the core Bay Area markets, we have seen significant household creation and job creation, which are core long-term growth drivers of the housing industry. This combination of affordability, low resale home supply, job creation and household creation is likely going to foster an environment that will cause homebuyers to move from the core Bay Area to other housing markets that match their lifestyle and affordability. This has happened this year in places like Mountain House, Tracy and Manteca. Morgan Hill, Gilroy and Hollister have also experienced robust growth in 2013.

Q: What were your goals in going public in July, and did your achieve those goals?

DB: Our goal was to complete a public offering that provided us with sufficient capital to execute our growth strategy going forward and we are pleased we achieved that. It should be noted that despite having weathered the storm of one of the United States’ most uncertain economic times, PICO Holdings, Inc., our parent company at the time of the IPO, remains a committed partner. We believe we have a great business with considerable potential and we remain focused on executing our strategy to facilitate sustained growth and create long-term shareholder value.

Q: Tri Pointe Homes recently purchased Weyerhaeuser’s homebuilding business. Do you foresee more consolidation in the homebuilding industry across the country vs. California, and if so, what is driving that consolidation?

DB: Yes. In fact, I believe you will see more M&A across the industry for three reasons. First, there is a lack of high quality and developable land, and much of this limited supply is in the hands of smaller regional builders. Second, it is very difficult to grow a large homebuilding platform in new markets organically; it takes a great deal of patience and market expertise. Third, small and medium sized homebuilders are structurally short of liquidity and financing and require strong balance sheets to grow.

Q: One of the challenges in the Bay Area for homebuilders is available land for development. There has been a lot of infill, high-density work under development lately. What is your prognosis for homebuilding in the Bay Area? Do you ever see that trend reversing here?

DB: The municipalities have more to say about the direction of future housing stock than anyone else and in today’s political climate, there is a very deliberate push to high-density nodal design and transit-oriented developments. In fact, it is quite difficult to find appropriate land and gain support at the municipal level for low-density development. Accordingly, for the near term, I do not see this trend reversing in core markets.

That being said, as you migrate out of the core, some of the more bedroom-oriented communities in the Bay Area are planning to provide more of the low- and medium-density single-family detached development the core cities are not. At UCP, we actively seek land acquisition opportunities where others might seek to avoid complexities, as we believe we can add significant value through our expertise in entitlements, re-entitlements, horizontal land planning and development, and by designing and selling homes to our core customer base.

Q: What will you look forward to in the next year? Where do you think the opportunities lie for your organization?

DB: We will remain focused on growing our business and sticking to our disciplines. As we have announced, we are opening new communities in Southern California in 2014, and we will be opening new communities in the Puget Sound market in the future, as well. We are always seeking opportunities that will allow us to grow our footprint geographically and further anchor our investments in core growth markets characterized by highly favorable long-term economic and demographic fundamentals.

We believe we are well positioned to grow the enterprise, because we already own all the land we need to meet our business plan through 2015, and we only utilize about half of our land supply. This is one of our core competitive strengths that affords great opportunity to grow and maintain our investing disciplines.

Q: What do you fear in the coming 12 to 18 months? What should we all be on the lookout for as the year turns?

DB: I believe that some of the most significant risk facing the housing market in general currently resides in Washington, D.C. If we can maintain a reasonably stable political climate and keep interest rates at or near where they are today, over the short term I would expect to see the economic recovery gain momentum.

Furthermore, the residential homebuilding industry is cyclical in nature and is sensitive to changes in economic conditions such as levels of unemployment, consumer confidence, availability of financing and interest rates. However, the best way to protect against cyclicality is to remain diligent in identifying the best opportunities in the best markets—and not always following the herd.

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