During the back half of 2008, bank land asset portfolios became enmired in the broader toxic asset seize-up that remains an 800-lb. gorilla in the financial system’s living room, and the global destruction of value declawed many of the vultures. What’s more, pro land sellers are not ones to roll over and die just because it’s the toughest real estate marketplace since the Great Depression.

A much-anticipated reset of lot prices from a dollar to cents-on-a-dollar became a full-fledged standoff. So far, while all eyes are on Lehman-SunCal and LandSource’s Newhall Ranch as potential game-changing revaluations, a broad-based lot re-pricing has been slow to arrive to the market.

Still, it seems that where opportunities are cropping up as an exception to the rule, it’s not vulture funds but real live home builders who are jumping in to snatch them up.

In a post yesterday, we talked here–”Home Builders Join in Renewed Pursuit of Land”–about home builders positively teeming on bids for prime-location, finished lots in the Phoenix market.

We also hinted in an earlier post that we’d start reporting word of as many “start-ups as shut-downs.”

This morning, we received this press announcement:

IRVINE, Calif. – June 12, 2009 – Is a recession the right time to build new homes? According to Trumark Companies it is. The 20-year land development company that designs and entitles quality residential neighborhoods and builds office, R&D and retail properties is taking advantage of the market downturn to launch Trumark Homes – a homebuilding company unencumbered by the financial challenges faced by existing builders.

Trumark Homes recently acquired 4.38 acres of land in the Inland Empire community of Upland, Calif. The homebuilding company will develop Wyeth Cove, 39 single-family courtyard homes ranging in size from approximately 1,717 to 2,401 square feet. Construction is set to commence in August 2009; opening date as early as 2010.

“We will be the new generation of home builders who are responsive, focused and unburdened by legacy issues, large bureaucratic systems or broken projects,” said Michael Maples, principal of Trumark Homes and co-founder of Trumark Companies. “Our strategy is to leverage our real estate knowledge and expertise to build a large West Coast homebuilding company targeting both Northern and Southern California markets, initially targeting the distressed market niche.”

Those who know and played the Resolution Trust Corp. game in the early 1990s are excited right now. They look at the vultures and see a possibility for a light poultry-like lunch.

“In the past four to six weeks, we’ve seen a sea change,” said the CEO of a leading publicly-traded home building company. “Until then, most of the interest in lots was coming from financial investor players. Now it’s home builders. There’s eight or 10 home builders aggressively in the lot market right now.”

Investment “land opportunity funds” have been trolling the residential landscape all along, trying to snap up prized lots for a song. But as the global credit crisis unfolded, many of these vulture funds either went dark or remained on the sidelines, not knowing when to pounce.

Meanwhile, home builders were scarcely able to underwrite new land acquisition, given that their balance sheets needed every bit of cash in the event of another year of sales paralysis. What’s occurred in the past few months is that everybody’s witnessed that if prospective buyers are given enough incentives, a healthy complement of them will show up looking to buy.

Home builders who’ve pursued an asset-light land strategy have actually done well enough at working through their dirt inventory since the turn of the new year to reach a point where they need to replenish.

Other builders may not be so fortunate, but still need land. They need land that’s less expensive than the stock of lots they’ve got so that they can bring more affordable home communities to market during the earlier stages of a housing recovery. So these companies represent as urgent a demand for cheaper lots as those who are running low on lots.

All told, the strategic demand for lots from builders is putting pressure on land prices, even before they settle at the low cents-on-a-dollar level that many expected they would. Experts who are involved in land deals nationally estimate that prices for lots have reverted to about 2002 prices, which is a higher number than many would have guessed a few months ago.

“Where we thought we’d be paying $35,000 a lot, we’re paying more like $45,000,” the head of one large national home builder said.  “Prices didn’t come down as far as we thought because there are more builder buyers for these lots than we thought there’d be.”

Two of real estate’s most vaunted new-home residential development entities–LandSource/Newhall Ranch & Farm and what is known as the Lehman Brothers’ SunCal–are still considered bellwethers for resetting land prices. But they’re currently slogging through complex and drawn out bankruptcy proceedings.

Word from the field is that the most exuberant land aquisition market right now is Phoenix, but that California (excluding Southern California) and Texas have also seen the reemergence of home builder buyers for residential lots.

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.

ProSalesmagazine.com has been the bleeding edge reporter on the collapse of Stock Building Supply–one of residential constuction’s juggernaut roll-up companies–from the time United Kingdom-based owner Wolseley Plc ran up the white flag of capitulation, to Wednesday’s sale of a 51% stake to private equity players, The Gores Group.

ProSales’ lineup of news and analysis on Stock’s stunning implosion and frantic survival tactics include a number of reports this week: 

Click for expert Stock analysis.

• Stock’s Revival Plan Calls for 2,200 More Job Cuts
• Bankruptcy Court Lets Stock Keep Running During Chapter 11 Story
• Stock’s New Majority Owner Looks to Grow Story
• Stock: Expect More Store Closures Story
• Chapter 11 filings and notices Link
• Information page on Stock’s website Link
• Timeline of Stock’s acquisitions since 1985 Link
• Wolseley Takes $262mln Hit on Stock Deal Story
• 51% of Stock Sold; Dealer Files Ch. 11 Story

The expression “recession-proof” conjures the image of protection from all that is a mess with money, income, and one’s livelihood.

Home builders are getting creative at doing everything in the book to get people who can buy a home in these worst of times to do so, and Chicago-area builder Bigelow Homes struck a note that caused both buzz and deals.

Big Builder editor Sarah Yaussi has this analysis of Bigelow’s effective sales promotion around the recession-proof theme.

The builder has this newsclip posted on its own Web site to support the push.

Tape measure home runs these days now all come with a cloud of uncertainty, given all the ways players seem to need or want to supplement their own strength.

The House That Ruth built had capacity to seat 57,545 fans, but it was almost like an unwritten law that gave any fellow the right to say that he was there at the stadium in the Bronx the day of The Mick’s legendary dinger. We were eight years old, but have enjoyed the license of any New Yorker and Yankee fan to white lie about being eye witness to our idol’s feat of wonder.

Which brings us to yesterday’s Pulte-Centex mega-deal, which at the very least, has energized a nearly comatose industry with talk of possibilities.

And just like that May evening in 1963 in the Bronx, it seems suddenly to be the case that everybody in the home building industry worked at one time for either one or the other of the companies. A fair number of people have put in time at both.

None of them are surprised that the deal–whether it makes strategic sense or not–ultimately happened; the timing is the only thing that dismays who we’ll call “The Ex-ers” to describe the host of former management and operational folks we’ve canvassed to try to make more sense of the $1.3 billion take-over.

The trouble most Wall Street investors and their representatives have on a fundamental level with the home builder sector is that, even when they’re allowed to put their head under the hood of the company they don’t know what they’re looking at. Home sites, neighborhoods, management talent, manufacturing capacity, distribution skills, sales and marketing … it simply doesn’t all add up.

So it’s when home building veterans themselves look at this deal–beyond the fact that Pulte bought $1.3 billion in cash, some actual number-to-be-named later in cost savings (i.e. nobody we spoke with believes there’s $250 million annually in overhead costs that can come out unless everyone at one of the companies is fired)–there’s some insight into what’s going on and what can be expected.

Here’s some topline notes from the “Ex-ers.” We’ve seeded out malice and speciousness, but left some of the spicier speculation in for audiences to decide on how credible the observation is.

* Centex CEO Tim Eller is said to have talked over the years with Bill Pulte and, more recently, with Richard Dugas about the cultural fit of the two companies on a regular basis. Most recently, in 2004, Mr. Eller was disappointed to learn that his company would never succeed in being the “acquirer” in a deal, and therefore, until now, he’s been unmotivated to pursue it.

* Both Pulte founder Bill Pulte and current CEO Richard Dugas have long coveted greater access to what they call Targeted Consumer Group 2 and 4, which is Pulte’s segmentation designations for entry-level buyers. Pulte himself retained ownership of a brand “American Homes,” which was one of the company’s acquisitions through the years, specifically to aim at entry-level consumers.  More recently, Pulte was said to have been very close to doing a deal to acquire C.P. Morgan’s Carolinas operations to give it entree with the entry-level buyer. The Centex play is simply a more grandiose execution of a plan that’s been in place for years.

* The Centex acquisition gives them a possible brand line to make more successful inroads into more affordable single-family product. One issue there is that Pulte’s insistence on higher quality behind the wall could counteract unit profitability on more affordable Centex houses, and Pulte’s purchasing team won’t be able to go toe-to-toe with subs and manufacturers on unit prices and time cost studies, now that the more experienced talent has left the building, so to speak.

* The big question is the savings. The $250 million a year number is hard to fathom, given that you can take out division presidents, payroll, marketing and sales, and a lot of other corporate headquarters people who are redundant in the organizations. But with more than 950 active communities, Pulte will still need supers, sales people, and managers in the field dealing with issues like keeping bonds current, paying the insurance, dealing with special service area zoning and other issues that require constant updated vigilance.

* Pulte has recently restructured costs out of corporate around 200 of its communities in the last year, with some attention to KB Home’s lower cost production and management system. Dugas is said to feel he has an effective corporate-directed neighborhood restructuring model now, and it will probably use this template to go through rationalizing Centex’s 490-some communities.

* Centex–and Pulte too, for that matter–have many many unprofitable markets. In its heyday in 2005, a third of Pulte markets contributed more than 90% of the company’s profitablity. Now, between Pulte and Centex, fewer than double digit markets will be expected to be profitable over the next 12 months. This means the “return to profitability” mantra for Wall Street is sheer spin.

* As for whether this deal will precipitate others, a look at companies balance sheets rules out a number of possiblities–at least as acquirers. “Ex-er” speculation is that Lennar CEO Stuart Miller would probably be the most likely of the bunch to leverage Lennar’s balance sheet strength to do something. Word is Miller came this close to a done deal with Bob Toll in 2005/06, but Mr. Toll woke up the next day and said he’d changed his mind. A Lennar/KB Home combo is also a possiblity in the minds of many.

 No doubt, we’ll keep talking to people, and a lot of those people will have been “there,” which is to say Pulte and/or Centex in the the recent past. What would you like to know from them?

The New York Times reports:

Homebuilding stocks tacked on significant gains early Wednesday after Pulte Homes said it would buy Centex for about $1.3 billion in stock. Investors seemed encouraged to see that, despite a severe housing slump and wildly lurching markets, two major players in the home construction business could agree to a stock-based merger.

Shares of Lennar, which builds and sells mostly single-family homes, were up 9 percent in the first hour of trading.

Here’s CNBC home building and real estate analyst Diana Olick’s take on the deal.

Pulte’s $1.3 billion stock-for-stock purchase of Centex is probably more important right now for the cost cut-ability being bought versus the today’s revenue from Centex. Two companies’ tripping over one another for customers in so many markets for so scarce a number of buyers made getting to the finish line–past the threat of liquidity crunches, missed debt payments, and financial dislocation–a pretty scary challenge.

For when you mash two large home building companies together, subtract $250 million in overheads, and re-rationalize geographies, product lines, subcontractors, and manufacturers, you’re suddenly looking at pro formas for a grail-ish sounding below-$40-per-square-foot in direct costs. This may just be the only ticket to the finish line (a ka survival) for companies, however much they boast about their cash “dry powder.” Value re-engineering and retooling will be critical to capture the savings, but bloodletting in mass layoffs inevitably will be the biggest part of what’s going on here.

This is really two companies awakening to a recognition of reality. The epiphany? “The world needs one less of us.”

That may not be a normal mergers and acquisitions strategy, but normal mergers and aquisition strategies really don’t exist in home building. As home building industry financial consultant Ivy Zelman says, why buy legacy assets when you can buy land cheap or soft-take-down your way through the doldrums.

 What companies are waking up to a third of the way through the year they hope is the worst year ever in home building is that if they want to be around on the other side, it’s going to take more than a treasure chest of cash to ensure that. Cash, after all, burns.

So we’ve got a strategic acquisition where the impetus of the strategy is “we’ve got to build houses cheaper so we can move them through the teeth of the maelstrom.”  Even though the combined companies build in 59 markets today, the likelihood of that being the case in six or 12 months is almost unimaginable. Pulte’s footprint a year from now is probably far more concentrated.

Their opportunity is to scale in enough markets–entry level and first time move up–to get with the earliest waves of absorption recovery, at low enough price points to avail of tax credits, and mortgage buy downs, and FHA and agency lending, etc.

This assures Pulte of being able to concentrate more, get margins up, and avoid at all costs having to reach into its trove of cash to run everyday operations.

The other part that makes sense not only for Pulte but for other players is the potential ability to separate home building operations and merchandising from its real estate development business. We understand that D.R. Horton and Lennar have had a similar exploration–where Horton would stick to its home building operational expertise, and draw on Lennar for its real estate strategy and development skills. We’ve seen Ryland in a strategic alliance with Oak Tree. We’ll see more asset-light home builders strategically tied to land strategy and finance companies.

We know that consolidation of this ilk will occur, although, probably after a rather protracted dance of the tail feathers since there are still some big egos in the way of what makes sense strategically.

There’s pressure on every public builder to explore a public-to-public merger because this deal makes it abundantly clear that there’s lots of cost and lots of capacity that needs clearing before this thing can turn around.

An overall reduction in capacity is the only way to reintroduce scarcity into the home building supply and demand equation.  We believe we will see other top 12 home building companies try follow suit, because $250 million in cost savings is going to sound pretty attractive to boards and note holders in the near term.

It’s basically saying that the 40% to 60% downsizing in people and operations that has taken place since 2006 gets home building organizations a little past half-way there. That’s quite some pain to go.

Pulte Homes and Centex Corp.

The Wall Street Journal reports this a.m.

Pulte Chief Executive Richard Dugas Jr. said the deal would combine Centex’s strength in the entry-level and move-up categories and Pulte’s strength in the move-up and active adult community segments, forming the largest U.S. home builder.

Pulte last month adopted a shareholder rights plan with a 5% trigger to help preserve tax assets that would be lost with an ownership change.

Under the deal, which also includes $1.8 billion of debt, Centex shareholders will receive 0.975 Pulte common shares for each share of Centex they own. Based on Pulte’s Tuesday closing price of $10.77, the deal is valued at $10.50 per Centex share, a 38% premium over Centex’s Tuesday close of $7.62. Pulte shareholders will own about 68% of the combined company, while Centex’s will own about 32%.

More on this later. What do you think? Who’ll D.R. Horton–which has stocked up $1.8 billion in cash “dry powder” pick as its dance partner? Will Lennar sit back and become a large-cap also-ran? Unlikely.

Here’s a perspective from Reuters, which notes that Pulte CEO Richard Dugas will take over as chairman and CEO of the combined company:

Experts predict more strategic stock-for-stock deals this year in distressed sectors, as they help companies reduce costs while allowing shareholders to benefit when conditions improve. With such transactions, companies in struggling industries can bulk up without having to deplete much-needed cash or trying to raise scarce and costly debt financing.

Here’s CNBC’s report and quick analysis on the merger from this morning.

David Goldberg, UBS’s Home Building & Building Products analyst, has this first-blush observation:

Although at first glance we believe the deal represents strategic advantages for both companies, we await further details on the exact benefits. That said, this deal will provide greater operating leverage as Pulte expects to realize ~$250mn in cost savings annually through reduced overhead. Further, it gives them access to high quality lots, well positioned geographically and across price points, while preserving cash.

Here’s how the companies’ press release addresses what will happen to Centex CEO Tim Eller:

Mr. Eller will join the board of directors of Pulte as vice chairman and will serve as a consultant to the company for two years following the close of the transaction. The board of directors of Pulte will be expanded and will include four current members from the Centex board, including Mr. Eller, and eight members of the current Pulte board, including company founder and current Pulte Chairman William J. Pulte.

Very telling speech on the failures and the “pro-cyclical” nature of many banking mechanisms. Given on March 11, 2009. Jamie Dimon, CEO of JP Morgan.

This is more about how and why we’re looking at a tax bill of trillions to deal with over the next stretch of years.

Hat tip: Wine Rex