Will Private Home Builders Cut it in 2011? We Think the Answer is Yes.
Something funny’s happening on the way to public home builder domination of the low-pulse, anemic housing recovery.
Without question, public companies have made big strides, not only in their own operational disciplines but in the way they flex their muscles in the markets they have chosen to fight out the early stages of a new cycle competitively.
It’s Darwinian reality at this stage for the publics not just to make their numbers, but to make their less-well capitalized private brethren go out of business while they do it.
And public companies aren’t the only well-resourced menace to the well-being of private home building companies right now, either. Clearly, national political expedience favors saving the banks in favor of saving new-home building capacity, so government will sooner and more emphatically look to support the disposition of the 8 million or so properties in the foreclosure-distressed financial asset bucket than to promote the kind of economic well-being that would lead to demand for new construction.
Private home builders, in other words, have cyclical, structural, competitive, and political currents to fight upstream in; it’s no wonder so many of them have gone under in the past four years, a loss not only in capacity, but in the character and culture of home building. No one can deny that while publics have leveraged their heft, the patience of their capital, and their growth in professional disciplines to a competitive advantage, many of their home building operational innovations have come by way of private home builder acquisitions along the way.
Meanwhile, private home building companies, the incubators of much of what is “better practices” in home building–for arguably, best practices will be a phenomenon of some future stretch for the industry sector–are facing their steepest challenges yet, even after four years of cleverly surviving the teeth of the worst downturn ever since housing became its own industry sector.
Still, we talked this morning with Dan Ryan, the eponymous leader of Dan Ryan Builders, based in Frederick, Md., and operating in six states–Maryland, Virginia, West Virginia, Pennsylvania, North Carolina, and South Carolina.
There are three essential bullet points to Dan’s report on his 2010 performance:
- Settlements increased from 397 in 2009 to 502 in 2010, a 26% rise
- Although operations in Raleigh didn’t make a profit, outlier markets like Morgantown and Charlestown, West Virginia more than made up for the losses, bringing the company into the black for the year
- The market dynamics allow Ryan to “grind through” challenging land holdings to diminish the pipeline of less profitable lots
For 2011, Dan Ryan–whose father Jim Ryan founded Ryland Homes; whose Uncle Ed Ryan founded Ryan Homes of NVR; and whose cousin Bill Ryan founded and runs William Ryan Homes, a builder in the Chicago market, as well as Florida, Arizona, and Wisconsin–is pushing. He sees his company–thanks to an expected contribution of 80 homes out of the Raleigh operation, which has five decorated new models raring to go for Spring Selling Season traffic–doing another 30% quantum leap to 650 homes.
We’re hearing equally sanguine fast-growth scenarios from our friend Eric Lipar at LGI Homes in Texas, from Ken Balogh at Ashton Woods out of Atlanta, from Jay Lewis at Surrey Homes out of Orlando, and from a number of other private mini-powers.
Where do they get their moxie, especially when everybody knows bankers are essentially loathe to use the ink of their rejection stamps when it comes to lending to home builders.
Unless.
Unless what?
Well, unless there’s not only moxy but a clean, well-positioned, reliable plan to turn money into more money. That’s what some private home builders have been able to demonstrate, and that’s why they’re still in the game.
And when they’re able to shift gears from “survival” mode to “let’s kick ass” mode, they’re a force to be reckoned with.
Surrey Homes does it by careful segmentation. In both buying land and building and selling homes, Jay Lewis believes Surrey should steer clear of the fray of first-time buyer, entry level homes, a ferociously fought battle in the land of Disney magic. Instead, he’s positioning Surrey as a move-up and second move-up offer, where his rather unique twist on customer care–a five-year full warranty and a designated service and satisfaction follow up program–can actually help him move the metal.
For Ryan, it’s about keeping the fire in the belly he feels as a principal lit among his trusted associates. Word is, Ryan spent one weekend day recently going out personally to the home of one of his best sellers in the West Virginia market because he’d heard she was feeling burnt-out and frustrated. After his visit, she arrived back on the job and has been rocking the sales in the pre-selling season weeks.
Ashton Woods offers another part of the story of how privates can and will compete with publics. It’s called the land committee, and private companies don’t have them in the same sense as publics, whose land committees are a necessary part of a deal to acquire parcels opportunistically. Some times this slows them down.
In one case, recently Ashton Wood scored on a parcel that was sought-after by several publics in the Atlanta area–Madison Park, off Old Alabama Road in the Roswell area. Ashton bought it out of the banks by virtue of their ability to close, and their knowledge of the value.
Because they didn’t have to put their bid before an underwriting committee, Ken Balogh and his team landed the deal, and blasted through 45 of the 49 homes in the community in 2010. Here’s a few photos showing construction on some of the few homes left to be settled, at 3,200 square feet and ranging in the high $300s to low $400s.
We commented on what an uplifting sight all the actual home building activity on the site was, and a sales manager commented, “Yes, we’ve had folks from other home builders come over just to hear what it sounds like.”
Rumors of the death of private home building companies are premature.
We have one idea to offer that maybe they haven’t thought of as such. Why not develop a “pent up demand” home? One that intentionally recognizes that young adults and/or aging parents will be part of the household. We think there’s a future for this as a new product.
Home Builders’ Plan to Narrow the Gap Between New and Used Homes
In Orlando the week before last, we confess that we didn’t spend a whole hell of a lot of time on the exhibit hall floor. The reason is that we wanted to spend time with home builders, and, by and large, a lot of them weren’t spending time on the floor either.
It seemed to us that what a lot of the builders wanted to do was to spend time with other builders, finding out how it’s going in regions other than the ones they operate in, etc. A remark uttered in one of those informal compare-notes sessions from one of the builder executives there is haunting still.
He referred to the fact that banks were still not opening the spigot of lending to private home builders for new construction, and that Federal policy wanted it that way.
“They’ve got seven or eight million foreclosures to clear out somehow; as for us [little private home building companies], they’d like a lot of us just to go away.”
Quite a few conversations, as a matter of fact, centered on the question of whether we thought that more home builders would head into obsolescence in 2011, or having made it this far through the troubles, would see the light of day at the other side.
It’s hard to say, and we have to admit that while we’re relatively sure this Spring is not going to ignite a rebound, we’re far from sure what the “selling season” that gets formally underway in about three weekends will hold.
As for home builder casualties, we believe there will be some this year, but that they’re probably going to be more a function of the ownership or management’s age demographics and less a byproduct of an inability to find some means to stay solvent.
The sad but true statement from the home builder above reflects a common sentiment. Multiplier-effect or no on jobs, consumer spending, local tax revenue, government policy support for new construction has more than worn out its welcome. And now, if housing is going to shift from being a link in the middle of the economic train to being the engine, it’s going to have to do it on its own two feet.
So, we have what the superb housing and economics online gadfly Bill McBride refers to in his Calculated Risk Web analysis as “The Distressing Gap.” Simply, it’s the ratio of the number of existing homes sold for each new home sold.
For about the past 15 years, SAI Consulting’s Fletcher Groves points out that the “Distressing Gap” has averaged one new home sold for every six resales. In 2010, Groves notes that that ratio has morphed into a multi-headed monster– 1:16. This means 16 resales for every new home sold. The fact that many of the resales are distressed sales — either short sales, duress sales, or sales in some stage of foreclosure — is the reason for Calculated Risk’s name for the infographic, “the Distressing Gap.”
Here’s the picture of it now:
with premission from Calculated Risk
Economically, this information means one thing, which is that, under present circumstances anyway, there is an overcapacity of home building in the nation. This is the context for our friend in Orlando’s sentiment that “they’d like a lot of us just to go away.”
However, within the framework of the industry sector, the Distressing Gap is part of what benchmarks opportunity for some home builders, most likely at the expense of others.
Why is it that when you talk with the strategic management of a home building company–whether they’re small or large, private or public–they always say they want to have access to capital like a large public company but they want to work and care for customers in their markets entrepreneurially like a solid private company? In other words, if you’re a public, you find yourself emulating NVR, and if you’re a private, these days, you kind of want to take after Shea.
Neither of these two companies perfectly captures the public capital access with private entrepreneurial culture, but they’re probably as good as home building can offer.
Now, as for the Distressing Gap, the fact that it’s taking 16 resales to get sold for every new home relates to one of the anomalies of this downturn versus others. We wrote in Builder Pulse this morning:
In downturns past, foreclosures never amounted to much in the plot line of recovery. New-home builders could roll back their pricing to beat resales sellers, and that would reignite an economic daisy chain of positive effects. With estimates of as many as 8 million foreclosures to clear from this point, the government, lenders, investors,etc. don’t want to hear from added new-home capacity. Still, consumers vote with their feet, and they’ve wanted new when they can get it. The “normal” ratio of new-homes sold to resales is about 1:6. By the end of 2010, the ratio spread to 1:16. We’d peg survival for the top 200 home building companies in 2011 as reliant on getting that ratio back down to a 1:10 run-rate by the end of the year. Or else there’s just too damned much capacity.
The operational opportunity we’re talking about has to do with the stars-aligning moment that brings new, low price, low interest, lower monthly energy cost into a fleeting, don’t-miss-it instant.
Fear of losing this window of time when all of these advantages converge may be the spark of urgency buyers need.
Now, the buyers who’ll put the new-home community on their back for the next several months may not be the ones production home builders have customarily depended on, especially in the past decade.
Builders’ got competent at ushering the borderline credit-worthy aspiring home buyers across the crevice of spotty credit histories and insufficient resources.
There’ll always be buyers like that, although getting prospects from a 540 to a 640 FICO is going to elongate a lot of timelines for closings. The early-recovery buyers that home builders need to do a better job at courting are ones who have better credit, more cash, and traditionally have looked for already established communities for their families in locations with proven track records of providing what they’re after.
Some fair amount of that Distressing Gap is people finding the resale house of their dreams for a foreclosure song. Some of it is investor buyers buying up homes in bulk for another flip as the market gains a little bit of traction.
At any rate, builders need to close the gap. They won’t do that by competing on a national scale, but within submarket arenas that have eclats of opportunity to buy right and sell fast.
What we came out of Orlando with was the sense that there are builders who feel confident that although the new-home environment will be characterized by distress, there will be a one-two punch opportunity to get just the right real estate deal and offer just the right product to push the ball up the field. This is how they plan to narrow the gap.
Add This to the Flashes of Positive News: Traffic is Up
A leading indicator that’s turned solidly positive for construction is the American Institute of Architects Architecture Billings Index (ABI) for December, which hit its highest level since 2007. A lagging indicator that has turned positive, existing home sales blew through consensus estimates by a run-rate figure of 430,000 home resales in a 12-month period.
What’s more, pending home sales have cobbled together a run of positive reporting periods, initial jobless claims are tacking together a four-week moving average that is encouraging, and most of the regional economic measures of demand for goods and services reflect expanding structural demand building momentum across the board.
Now, take away from the positive tidings the fact that the European nations’ debt minefield could set off a global daisy chain of financial white light moments, and the fact that domestically, we’re seeing local governments writhe under the tyranny of past and present misguided capital planning, and closer to home, the fact that the pig in the python of foreclosure clearance seems to be stuck somewhere between the paperwork the lawyers and common sense.
Clearly, with still nearly one of every 10 employable adults out of work and both the tangible and psychic ripple effect of that phenomenon, there’s still big questions hovering over the 66% of the economy that comes from consumer spending. Don’t forget all that household debt that’s still there to be dug out of.
On the other side of it, big questions hover over the appropriate balance of for-sale versus for-rent housing, as well as the appropriate balance of government versus private sector investment in housing finance, as well as the appropriate way to securitize loans and make them safe for slicing and dicing into global structured investments.
When it comes down to it the two big question areas have to do structurally with how people can earn a living in society today and how valuable the property is that they would buy to reside in if they so choose.
Big questions.
Which brings us back to the news. The news is that amid the burgeoning signs of life in the broader economy and a feint pulse-beat in housing, we’re hearing reports that traffic numbers are up, specifically in California, post the holiday-season torrents of December.
According to our sources, traffic data is spiking normally for this part of the seasonal cycle. This is noteworthy because last year’s business was artificially stimulated, and this year, it’s working on its own two feet. Demand is simply demand.
We asked our sources two things. One is whether they thought that the 50 basis point spike in interest rates was playing a part in the motivation of potential buyers, and the answer was “probably.”
The other is does anything in the traffic in the neighborhoods suggest that people are turning to new because of any anxieties they might sense over who actually owns the title for a distressed property deal. The answer here is less clear. The broad sense is that people are tiring of the rigors of trying to purchase homes out of foreclosure. But there’s no one expressing an explicit anxiety that has arisen from the mess in the processing of foreclosures by mortgage servicers.
Still, the news is that traffic is up.
This is but a two-week moving average, and therefore not a true real estate trend. We’ll have to see how this tracks into the more formalized Spring Selling Season, should it actually evolve this year.
One thing we’re hearing many builders express is the delight they’ll have as they reach mid-year, and they can stop comp-ing their performance to months where the home buyer tax credits were playing havoc with prospects’ timing.
Will home building’s spring push create urgency?
Call this the “feed the beast” Spring selling season. The Starts calvacade of estimates is in full swing, and we’re hearing the gamut from optimism to bearishness. The National Association of Home Builders’ chief economist David Crowe is sanguine, calling for a mini-recovery of 21% improvement over abysmal 2010′s 474,000 single-family housing starts, to 575K s.f. units.
On the other hand, economists like Ed Sullivan (hmmmm) of the Portland Cement Association, focus more on the could-be downers in the near-term landscape. Sullivan’s forecast for single-family starts in 2011 is for a niggly 492k s.f.s, a mere 3.4% increase of this horrible floor.
In between the extremes, economist Tom Lawler is guessing there’s reason to project 520,000 single family starts, based on the drivers he stacks up in his model.
Pretty big spread, eh?
Well, the home builders we’re in conversations with here at the International Home Builders’ Show in Orlando this week are approaching the coming buying season (should it develop) with guarded optimism.
“We’ve got to feed the beast or we’re out of business,” one private home building company president tells us. “Our job now is to win share at somebody else’s expense.” The hope for new-home builders is that they can win it mostly at the expense of distressed and existing sales, which outnumber new-home sales by 12 or 14 to 1 these days, depending on where you’re doing the counting.
With distressed clearing, well, in distress due to robo-boneheads moves by the mortgage servicers and actual property ownership open to debate thanks to “shoddy” documentation, the window is open for smart new-home communities to pull out the stops to bring home buyers out to the neighborhoods and start tugging on their heartstrings.
Now that the home buyer tax credit adrenaline is long forgotten and slight interest rate upward gyrations have started to play on people’s trigger fingers, the biggest clouds of uncertainty we’re hearing about from the folks gearing up for Spring selling fall into these categories:
- pricing – how quickly will the big nationals concede to slower-than-modeled absorption rates, drop pricing, impair more land, and bring the market down in its entirety another notch or two?
- credit tightening — on the one hand, we hear that a builder can work a prospective home buyer’s credit score up as much as 100 points within a year if they’re willing to pay down credit cards, clean up their unpaid balances, etc.; on the other, banks are being more stringent than ever in running credit, and will knock a potential buyer’s rating down below FHA minimums of 640 and VA and USDA minimums of 620 at the drop of a hat. Will policy and market conditions put banks back into the business of trying to lend more to home buyers, or while those conditions continue to make it a hostile borrowing environment?
- renegade appraisers — what recourse do builders have when he as seller agrees on a selling price, the buyer agrees on the price, but the appraisal comes in sometimes significantly lower than the contracted selling price? most private home builders will scotch the deal, even at the risk of having to take a home off the market for four months to comply with FHA rules and try to resell the home with a more appropriate appraisal? Will an increase in new home sales transactions solve this problem? It’s hard to know, at least while the banks seem to have no incentive to value properties at higher prices these days.
- differentiation — every community needs a story; price alone won’t do it. What are the memory points? where’s the magic? is the home going to save $1000s a year in energy costs? is there a design difference? a service level narrative that makes your homes stand out?
We’re impressed about companies like Orlando-start up Surrey Homes, which has placed most of the eggs in its basket in the move-up mid-$300s to mid-$400s market, which enable principal Jay Lewis and his team to offer a high finish product that works as a more-than-feisty competitor to a David Weekley community across the street in the Belle Isle.
What appears to work for Surrey–which closed 31 homes, with 38 sales in its first year of operation in 2010, and made money–not only is its position, not competing with all the entry-level players, but its DNA.
Surrey’s, “The Surrey Home Difference” offers a 4-year wall-to-wall warranty on all its homes, and a monthly scheduled maintenance visit for that period of time as part of the price of the home.
Lewis points out that, by and large, builders support their new homes this way anyway, so why not leverage the service in the marketing message?
Differentiation, service, credibility… these elements will eventually be the components of what we’ll refer to as the turning point in creating urgency, but only in hindsight.
More to come on our community visits in the next couple of days.
What’s clear is that builders are building. Starts will likely be up, more in the middle range than the high or low previously mentioned. But a big part of what happens with the number will be home builders’ collective and individual ability to create urgency …. where there is none.
Who’s at the International Builders Show, and Who’s Not? And Why?
The story of the home builders show, as the National Association of Home Builders International Builders Show is known, continues this year to be who’s not attending, and why.
Last year, the show in Las Vegas perched itself amidst what in hindsight can only be regarded as the great false promise of the downturn–a buoyancy bought by taxpayers for the relief of crisis symptoms that lasted as long as the adrenaline flowed and no longer.
This year, the show in Orlando perches itself amidst what can only honestly be described as on the cusp of something–maybe good, maybe not so bad, or maybe pretty bad.
Why many home building company executives are not here this year is plain and simple. There’s too much to do back at the fort. And it’s not all good either.
For as much as January 2011 will be all about tuning the engine, and getting every part of it in fine racing form for when–32 days or so from now, the weekend after Dallas hosts Super Bowl 45–the rite of Spring Selling is to begin, some builders are back home not getting ready to ramp up but to scale back.
It’s all well enough that data points are going to edge sporadically to the positive from time to time, but solid corporate profits, record amounts of accumulated cash on the books, and a pattern of sustainable end-user demand forming in the inner core of the economy haven’t much budged either the hiring needle nor the one that moves when consumers are free-spending again.
What’s more, one of the builders we were hoping to see at the IBS in Orlando this week says he’s not coming because his very busy right now trying to get his buyers qualified for a loan. “We can work and get our buyers to a 560 or even a 580 credit score, but now the minimum score our buyers need is a 620 or even a 640 and we’re just not getting our buyers to that mark in the time we have,” this builder tells us.
What this suggests to us–especially in light of the fact that the ongoing foreclosure crisis is going to massively slow the resolution and liquidation of distressed resale inventory–is that demand for new-home construction may come strongest this year not from the usual early adopters in a housing cycle–the first time buyers.
We think it’s more likely, given the credit score demands, the down payment requirements, etc. that it’ll be buyers who can bring more of their own equity to the equation who’ll be the most ripe to court.
They’re discretionary buyers whose reason for not coming off the sidelines up until now has had more to do with the sense that the moment was not right than that a life stage or life event propelled them into the housing arena.
Because lenders are going to be saddled with their foreclosure woes for months and months to come, we don’t believe the tight credit environment is going to get much better for buyers anytime soon. Nor is it likely that the universe of potential home buyers has been expanding leaps and bounds in such a poor jobs and income stretch.
What we do see is that household formations have been suppressed for the past several years, and that builders all together have produced few enough starts to have begun to create scarcity.
So, builders can and have directly impacted the part of the supply challenge that they have any influence over, and they need to do the same thing with part of the demand challenge.
What home builders can’t do–at least in a vacuum–is hire enough people to bring the unemployment rate down, the consumer confidence index up, and household debt into balance.
However, what they can do on the demand side of the equation is to invent desire. This is part of the plotline that has run through enterprise home building for as long as it’s been around… certain kinds of home building companies can bridge the often wide gap that separates aspiration from attainment. They can do it at the entry level, and much like car companies who have made luxury features much more attainable, home builders can do the same at every other price point.
A long-winded way of saying, we completely understand why there are many home building executives who are too busy to be here in Orlando for the International Builders Show. This year, at this moment, it feels as if visibility is an impossible business notion.
Ask home building executives why they’ve gone out and spent billions on reloading their lot pipelines and are overseeing hive-like disciplines at new and retooled communities around the country right now, waiting for the last whistle to blow on Sunday night Feb. 6.
They’ll tell you, “This is what we do.” If there are no buyers they can see with their own two eyes right now, that doesn’t prove to them that they’re not out there somewhere hiding.
This is why it’s critical to thoroughly understand the “pent-up” market of double-ups, children in basements; ad hoc families who’re sharing places while one gets its feet on the proverbial ground.
Pent-up demand is real demand. It’s just hiding. It may be that 2011, apartments may get that pent-up demand. But not if the for-sale guys have anything to say about it. Which is why they’re not in Orlando, dodging the horizontal rain.
The Current Buzz on Taylor Morrison Homes
U.K.-based Taylor Wimpey and its plans for its North American Taylor Morrison unit were all the buzz rolling into the holidays before the year ended.
What’s gone on, why the recent mainstream media eclat? First, on November 30, the Financial Times’ Ed Hammond reported:
Taylor Wimpey has launched the sale process of its North American business in a move that could earn the UK’s second-largest housebuilder an expected £600m (about U.S. $928 million).
Then, just after the New Year, Reuters’ Helen Chernikoff reports:
British homebuilder Taylor Wimpey (TW.L) could sell its U.S. homebuilding subsidiary Taylor Morrison to current management, a private builder or private equity firms, people familiar with the matter said.
Forget for a moment that our own publication, Big Builder had this to say in concluding a cover story on Taylor Morrison for its September issue:
Bottom line, Redfern and Palmer have four legitimate and one long-shot option—with sundry variations—to consider as the marketplace improves or gets worse on its way to an eventual recovery in the next 12 to 24 months.
From their vantage point, they may be motivated to:
Do nothing Issue an IPO Sell to a financial player (or possibly more likely a club deal) Sell to a home builder (or possibly more likely parse up the regions to optimize value) Allow Palmer to try to take the U.S. operation private via a leveraged buyout with a private equity partner It’s been noted that [Taylor Wimpey chief Peter] Redfern brought on last year J.P.Morgan Cazenove to explore alternatives, and there’s no paucity of scrutiny and criticism of the company’s every move. It’s widely thought that whatever the entity may be worth, now—while stocks of the home builders as a sector are getting hammered by the markets—is not the moment to push for a deal.
But who’s to say what might happen if recovery gains a toehold as 2010 closes out, suggesting a real-live selling season in 2011? Then, land, specifically lots in various stages of development, becomes scarce again.
Usually, this volume level of noise means either that a deal’s already in the works, or that it’s nowhere near being done.
We think it’s the latter–that nobody’s about to land Taylor Morrison this week, or this month, or possibly even this quarter.
The much more likely disposition of assets near term is the sale of the Lehman-SunCal portfolio of tracts, some of whose early recovery viability make them highly desirable to a number of the operators. It wouldn’t be surprising to see transactions on Lehman-SunCal parcels as soon as the next week or two, and certainly by the end of the month.
Still, people were talking Taylor Morrison just before the year ended, and although to hear them you might think otherwise, it’s because there’s an awful lot of interest among home builders in the Taylor Morrison “thing.”
We call it that because, among the most likely buyer universe for Taylor Morrison–the public national home builders–there are three distinct value propositions through which to assess whether it’s worth incurring the $1 million 0r so in due diligence costs and put in a bid.
Those three value propositions would be:
- The 14,000 lots that make up the lions’ share of Taylor Morrison North American assets, a pretty healthy chunk of which are raw/unfinished lots that would timeline years hence before they’d be ready to for inventory turn primetime, and also a pretty healthy chunk of which are located in Arizona and Florida, which it’s hard to see as near-future high-demand markets;
- The operation Taylor Morrison–an intensely lean overhead structure that blends a high-end land planning and design culture with a merchant-builder bang-em-out ethic–which has proven to be a feisty operational competitor in its respective arenas
- The brand Taylor Morrison, which, arguably connotes upper market quality and attention to design.
As a matter of fact, our industry sources say that the first round of invited bidders needed to respond to JP Morgan–which is handling Taylor Wimpey’s exploration of a sale–by yearend. According to executives who would have reason to be familiar with the process, about half of the organizations JP Morgan invited to bid actually put in a bid.
A few of the folks on the public home builder side tried to, let’s just say, work on the asking price a little bit by indicating they’re not currently a bidder in this round. We’re of the understanding that there’ll probably be several go-rounds of invitations to organizations, working with bidders, and making one or more of the deals stick.
Chernikoff’s article reflected what we’d heard from several of the public home builders–that the geographic footprint concentration in Arizona and Florida, the number of raw lots versus finished lots, and Canadian Monarch division, which represents a high-rise product that is a challenge or opportunity to a U.S.-based operator all its own–make Taylor Morrison an overly complex, if not too big, a pill to swallow right now.
This, we’re regarding as negotiation speak, pending what the shape of demand for new homes takes as the 2011 Spring selling fest gets underway.
In a sense, some of the urgencies and ultimately the motivations around the sale of Taylor Morrison will base themselves more on how sensitized a potential buyer is to the tipping point in home buyer demand. If it’s not going to materialize in 2011, then the raw lot pipeline and complexity around re-selling a segment like the Canadian operation become obstacles for those who have more immediate business motivations, i.e. the public home building companies.
This is why Chernikoff emphasizes the possibility of purchase by a financial player–a fund that might have longer term horizon on returns, playing time against money. Here’s Chernikoff’s analysis on that point:
Other sources said private equity firms, including Starwood Land Ventures and hedge fund billionaire John Paulson’s Rain Tree Investment Corp, are also evaluating the deal. Those firms could retain the current management team, which wants private equity backing to buy the company.
It’s been speculated that Paulson’s significant moves into land deals in the past couple of years presage a Matlin Patterson-style play into an operator platform. Actually, someone we were talking to noted that Paulson is a major–if not the largest–shareholder of Beazer Homes stock right now, which may or may not explain why Beazer took a good hard look at the Taylor Morrison book, before saying, “no thank you, not just now.”
Starwood might be thinking similarly. Starwood has a vested stake in what happens with its land pipeline, and as yet, has a relatively minor invested stake among operators. So it too might be looking for a platform such as Taylor Morrison to help it monetize its land and generate greater value in the equation.
Chernikoff ably reported that she’d confirmed that at least one private home building operating company had submitted a bid, but heaven forbid she speculate on which of the private builders could do that.
If the near-$1 billion value on the land is Taylor Wimpey ceo Peter Redfern’s line in the sand, there are not even a handful of private home builders with the capital to buy it. It might make sense that the Canadian owners of Ashton-Woods or Mattamy Homes–both of which have been in expansion mode through the downturn could assemble capital.
What we’re not counting out, however, is that after a bit of haggling and creativity vis a vis some of the incongruous pieces of this deal, plus a bit of clarity on what happens with the 2011 home buyer demand trajectory, we’ll see a legit public company acquisition.
Or we’ll see Ms. Sheryl Palmer succeed in reeling in a financial backer for an operation she’s shown a passion for and level of competence.
But if you’re looking for a deal fix, look first to the Lehman-SunCal parcels. They’re going to be a load of fun as they go down.
Builders Grow Bullish on their New Neighborhoods
As 2011 begins, we reckon there are upwards of 5,000 new-home big builder–public and private–communities active, mostly concentrated in 15 states.
The story of 2011 for Big Builder will be what happens at the 4% to 5% of neighborhoods that just have or will “grand open” to today’s new-home buyers, reduced in national terms to a trickle below 400,000 in 2010.
These new neighborhoods–we’re guessing in the range of 200 to 300 production home builder communities–most likely concentrated in the states of Florida, Georgia, Ohio, North and South Carolina, and Texas, with the metro areas of D.C., Phoenix, and Riverside-San Bernadino thrown in for good measure will serve as a proxy for the narrative that will be high volume home building’s recovery program for 2011 and 2012.
At an absorption rate of 1 per week per new home community, this sets up a run-rate of about 15,600 new-homes in a 12-month period (assuming 300 new neighborhoods) once all of these new communities open their doors for sales.
How can the sale of just under 4% of the new-homes sold in a 12-month period, a mere $3 billion or so in home building revenues, figure so importantly as to stand for example as a proxy for the big builder universe?
Here’s how.
- many of the new communities are or will open on lots that have reset in price to levels builders assumed they could sell profitably out of the gate, or at least appreciate into profitability with velocity, scale, and lot appreciation
- many of the home products in the new communities have been transformed around heat-mapped value features in the homes, design and construction features that zero in on buyer preferences rather than scatter-shot expense … i.e., perceived value is in, while
- cost engineering has taken out expense on items that consumers don’t say they prefer
- waste has been eradicated, operational efficiency optimized, and suppliers have been hammered down to shadows of their former selves on pricing
- selling, merchandising, and marketing disciplines are in take-no-prisoners mode
What happens at the builders’ new communities in 2011 and 2012 will add two more chapters to the plotline of The Great Recession–New Home Edition. One will be about market share. The other will be about demand creation.
Public home builders have worked for more than two years to get their financial houses in order and what 2010 proved is that most of them are at or close to profitability even in the sub-400k new-home sales universe. An increase in market share over the next 12 to 18 month stretch will go far to improve their profit picture because they’ll generate more revenue without needing to spend all that much more to get it.
This is why they’ve tightened their geographies and focused.
What’s interesting in looking at the kind of land purchases builders made during the Spring 2009 to Spring 2010 lot-buying spree is that one can see each builders DNA play out in their land acquisitions. Some, like D.R. Horton and NVR (in its markets) locked up everything they could. Others were selective, with an emphasis on large-tract, multi-year build-out horizons in master planned communities. Still others bought lots to turn them soon–like now. They’re not interested in pipelining lots and playing a real estate land appreciation game with them as part of their business plan; they want cash, sales, turns, and profits sooner than later.
Come Super Bowl Sunday this year, they’ll be weeding out the garden beds and spiffing up the model park to show their new communities for all they’re worth. Do they know that if they build it, the buyers will come?
Of course not. “But this is what we do,” says the CEO of one of the top 10 nationals. “We build now.”
So, the new neighborhoods in places like Jacksonville, Dallas-Fort Worth, Cincinnati/Dayton, Orlando, Ft. Meyers/Naples, Denver, and Atlanta, are going to tell us a lot about how the high-volume sector is going to work.
Publics aim now for market share, and they’re going to leverage that for profits so they can corner even greater share of markets that are responsive to new-home appeal vs. available existing supply.
What they’re also going to do–particularly if the broader economy performs as it has begun to show itself–is to try to time the inflection point on shadow inventory supply to where they will focus on demand creation.
The story at last will be scarcity. Once distressed inventory peaks this year and starts to turn, focus will shift to how little new-home supply there actually is. That much of the plotline will begin in 2011: market share and demand creation.
Stay tuned as we begin to focus on builders’ new communities–the ones big builders opened in late 2010 or early this year. We’ll see recovery math in how they perform, especially if some of the early job creation that’s taking place occurs where there are operational footprints.