M and A for Another Day
A piece in yesterday’s Wall Street Journal reports we’re not going to see merger and acquisition fever hit the home building sector “anytime soon.”
The story is misleading in a couple of ways.
It springs of a theory that a “bottoming out” in the new home market will itself precipitate a flurry of M&A deals, which may be correct. Few if any players in home building think that the dozen or so bigger public companies will remain a constant even in the next 12 months.
Still, the theory’s broad strokes don’t take one very far toward understanding what will trigger another big M&A deal, because one guy’s “bottoming out” is still another guy’s rapidly “falling knife.” One of the article’s misleading notes is that there’s concurrence about the new-home market having hit bottom. There isnt’t.
Just as many capable home buyer prospects still won’t pull the trigger to buy a home right now for fear that prices are still falling and that they’ll wind up like so many recent home buyers who are currently underwater on their mortgages because of the erosion, the same fear still rules commercial real estate acquisition and development. Buying lots at any price could and will still put some purchasers in the position of overpaying vis a vis their costs to build, market, and sell a home on the lot. There will still be losers in this game of risk.
However, the second misleading perspective in the WSJ piece is comes with its analyst quote.
“What does public-to-public M&A get you except more land and more write downs,” says Robert Stevenson, a housing analyst at Fox-Pitt Kelton. “It doesn’t make much sense.”
Analysts can talk all they want about how home builders should not be looking to add land to their portfolio right now, but that is precisely what many of them have got to do to kick-start sales. They need cash. They have land. But the land they have is not necessarily the land they need to jumpstart the market. The land they need to catalyze sales sooner than later is land that they can build for an entry-level, first-time buyer, … a non-contingency buyer.
Like Hovnanian reported yesterday, it and other companies are under lots of pressure to buy lots that were formerly selling for $220K for as little as $25K a lot. Look closer at Hovnanian’s latest absorption data. They’re averaging 7-and-a-half sales per store (community) per quarter, which is a 26% improvement quarter-on-quarter. What’s likely to be the case is that in the current home mortgage finance environment, there’s probably more first-time buyers in the mix of its current absorptions than historically.
So while the analysts note that Hovnanian is off from historical absorption rates of 40 to 50 sales per community per quarter, it’s fair to say that the company’s had to focus a disproportionate amount of effort on first-time buyer sales just to keep the volume and cash spigot flowing. In a sense, it’s probably selling better against the first-time buyer segment then it had historically, and it will continue to have to to survive its leverage and cash crisis.
Why are other home builders reporting encouraging results in the past five months compared with the fourth quarter of 2008? Most of the more sanguine reports come from home builders with a strong “monthly payment” based product for first-time buyers.
Trolling for lots at bargain basement prices enables public home builders to set up new stores–open communities–and sell homes at the “new reality” price level and still make some margin.
We’d agree that there might not be a raft of me-too M&A deals in the wake of Pulte’s acquisition of Centex. But not for the reasons and theories underlying the WSJ article.
Any company that plans to count on a cash pipeline for the next 12 to 18 months needs lots — different lots in many cases than the ones they already have. So, it’s not ludicrous to imagine another land-motivated M&A deal. Further, another huge factor in the Pulte-Centex acquisition is the elimination of a competitor. The industry could stand for one or two more take-outs to get to a more suitable capacity level.
We do know that many or all of the public home building company CEOs have been in conversations with one another about buying each other. It happens frequently, and all of them expect that the time will come when the dozen of the biggest will wind up as a handful of firms. So, while we wouldn’t call for a chain reaction of deals, we would not count out one or more in the next six months.
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