News & Analysis

Norwest takes dividend out of homebuilder

Minneapolis-based Norwest Equity Partners executed a dividend recap on homebuilder Highland Manufacturing, signaling a possible firming in the HUD-code homebuilding space.

By
Ken MacFadyen
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After a long stretch of distress in the HUD-code and modular homes space, Norwest Equity Partners has executed a dividend recap that allowed the firm to recoup nearly its entire investment in Highland Manufacturing Company.

Steven Farsht, general partner, Norwest Equity Partners

Norwest Equity Partners, based in Minneapolis, originally acquired the business in 2000 at a time Norwest general partner Steven Farsht referred to as a terrible period for the manufactured housing industry. A huge amount of excess capacity depressed the space, which coincided with a drop in the amount of financing available to consumers, and together those factors drove the industry into the ground. 

“This is a much different sector than the housing industry,” Farsht told PEO. “We could see that the sector was really going into a downturn when we acquired the company, so we overequitized the business, leaving no debt whatsoever on the balance sheet.”

Farsht added that the company actually built up its capacity while the market was still going south, and even moved to expand into the modular home space, which would give Highland exposure to the “normal” home-mortgage market.

Farsht couldn’t disclose Highland’s financial performance, but he cited Warren Buffett’s 2003 acquisition of Clayton Homes as a possible sign that the market has finally bottomed out. Also, Farsht described that the HUD-homebuilding space reacts inversely to the traditional real estate market when interest rates rise.

“As rates go down, people tend to move to stick-built homes rather than the manufactured space,” he said, adding that we’re currently in a rising interest rate environment.

The industry is also expected to be a major factor in the rebuilding effort for the wreckage left behind by Hurricane Katrina. According to the Norwest press release, early estimates of the manufactured homes needed in the rebuilding effort hover around 150,000 units, which would eclipse the annual industry-wide output of 140,000 units.

Bank of the West provided asset-backed senior financing in the recap, and Norwest’s stake in Highland remained unchanged. The firm could not comment on the overall value of the recapitalization.