William Lyon Homes lays the foundation for future growth

Newport Beach home builder William Lyon Homes has a history almost as interesting as its founder and namesake.

William Lyon flew combat missions in the Korean War, commanded the Air Force Reserve and was chief executive and chairman of AirCal in the 1980s before selling the regional airline to American Airlines, the Los Angeles Times reported.

Known as “the General,” Lyon was a key player in the post-war Southern California housing boom. He got his start in home building in 1954 with Luxury Homes, a company he launched to build homes for military veterans. He sold the company in 1968.

In 1972, Lyon launched William Lyon Co., a precursor to William Lyon Homes. The company has built more than 75,000 residences in California, Arizona, Nevada and Colorado.

But it hasn’t been a smooth ride.

Like many builders, William Lyon Homes struggled after the financial markets nearly collapsed in 2008 and housing values tumbled. The company filed for Chapter 11 bankruptcy protection on Dec. 19, 2011, emerging two months later with a capital infusion and reduced debt.

The company’s stock began trading through an initial public offering last May.

The 90-year-old Lyon remains executive chairman. His son, Bill, is the company’s chief executive.

The company rode the housing wave last year. It earned $128 million in net income, compared with a loss of $12 million the year before. Revenue rose to $573 million from $373 million the previous year.

“This strength was driven by large pent-up demand, historically low mortgage rates, attractive affordability, improving job markets and low new-home inventory,” Bill Lyon said in a Feb. 14 conference call with analysts.

“We firmly believe that the fundamentals remain strong for the industry and there continues to be sustainable underlying demand for our homes.”

The latest

Last year, William Lyon Homes sold 1,360 new residences, a 43% increase from the 950 it sold the year before. Its biggest market was in Arizona, where it closed on 448 homes. It sold 324 in Southern California.

“We have carefully selected the location of our communities to be in close proximity to job centers that offer highly sought-after lifestyle characteristics and strong school systems,” Bill Lyon said in the earnings call. “In 2013, all of our markets were strong, experiencing increased new home sales and healthy home price appreciation.”

Bill Lyon said the company’s books are in good shape, thanks in large part to its IPO and the more than $100 million it raised in an October bond offering. A year earlier, it picked up $325 million in a senior note offering.

“Both of these capital markets events have enabled us to lay the foundation for our growth plans in 2014, 2015 and beyond,” Bill Lyon said.

Accomplishments

The final three months last year marked the eighth consecutive quarter that the company posted an increase in homes ordered and completed. Fourth-quarter revenue from home sales was up 85% from a year earlier.

With more than 50 years of home-building experience, William Lyon is one of the most experienced home builders in the United States. As executive chairman, he has helped the company ride the housing recovery to new profits.

“We have a well-established operating platform in place with an experienced management team and excellent reputation for delivering high-quality homes,” his son said.

The company also has “a strong land supply and attractive real estate markets in the western region of the country,” he said.

Challenges

The housing market’s recovery has started to cool, with price gains tapering off after a robust first half last year.

There’s another reason for concern: Federal Reserve policy could lead to a rise in interest rates, which could reduce demand for new homes and increase monthly payments for new borrowers.

The Fed has been buying Treasury and mortgage securities in an effort to reduce long-term interest rates and spur the economy. But the central bank has started pulling back on what was $85 billion a month in purchases, formally called quantitative easing, to $65 billion last month. The Fed is expected to further reduce purchases by $10 billion a month until it halts them in the fall.

“If the fed continues reducing QE purchases, it will likely have a consequent impact on long-term interest rates, underscoring a key risk to the continuity of the robust pace of housing market recovery,” said David McMullin of WhiteSand Research.

Analyst views

Four analysts recommend buying William Lyon Homes’ stock and one says it’s time to sell.

“We continue to view William Lyon Homes as an intriguing play on the ongoing U.S. housing recovery predominantly based on its impressive pricing power, attractive geographic positioning and potential for further margin expansion given its demand leverage into 2014,” McMullin said.

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Pfeifer writes for the Los Angeles Times.