What do we make of home building's latest consolidation masterstroke, Taylor Morrison's $166 million acquisition of the land positions Bensalem, Pa.-based Orleans Homes had established in Chicagoland, and Charlotte and Raleigh?
Remember, first, that only a couple of months ago, we were reporting on Taylor Morrison's incursion into the re-energized Atlanta market, with the $65 million purchase of JEH Homes, the market's 10th largest builder.
So, a couple of our thoughts on the motivations and impetus of Taylor Morrison. One is this, if you look at our current BUILDER 100 listing, which ranks companies on their 2014 unit volume, you'll see Taylor Morrison in there at the No. 7 position. Now, we know that the Ryland-Standard Pacific combination moves them to the No. 4 spot, nudging NVR back to No. 5. Very likely, Taylor Morrison's two recent buys, of JEH and the Orleans assets, will also leap-frog them over both KB Home and NVR into sole possession of the No. 4 ranking among America's most powerful home building enterprises, and one with solidified and vibrant operational presence, now reaching northward from Florida into Georgia, the Carolinas, and into the heartland.
Stay tuned for a mid-Atlantic coup, which we believe is entirely likely for builders such as Taylor Morrison, Standard Pacific, Meritage, and possibly even a New Home Company.
Now, what's important about that--looking at buyer motivations right now--is not exclusively about sheer heft, for at the moment, size in the right land and product positions is more important than sheer unit volume. It's a fascinating moment in the recovery cycle, and strategics in home building are cadencing their every move on real-time intelligence as to where, when, and how-much to invest to bring on new communities they're confident will turn predictably and reliably. Stakes are high, mistakes can be very costly precisely because capital players are teeming with enthusiasm about playing in the residential real estate space right now.
For instance, buying the No. 10 builder in Atlanta was not a move motivated by a craving for mere market share and unit volume for Taylor Morrison. It was more about the particular land positions where it believes its program can add value and derive greater opportunity. Market share in the $300,000 and up price-tier is more important to Taylor Morrison than market share period.
So, the same is true with the Orleans asset purchases. In buying Orleans communities in Charlotte (which actually extends T-M into South Carolina as well, with two Rock Hill, S.C. neighbs), Raleigh, and the outer burbs of metro Chicago, Taylor Morrison is adding incremental volume opportunity, yes, but that volume is not just any volume. It's mid-move-up to second-time move-up volume, which is where demand in the market has demonstrated its sustainable momentum.
The belief system works--very roughly--like this. Orleans' owned and controlled lot portfolio of 21,000 sites in those three markets priced in at about $79,000 a lot. So, again in very simplistic terms, Taylor Morrison's management and owners believe that the value they'll be able to create, and the product and production programs they'll bring to bear in these operating arenas will allow them to price their homes and communities some "x" value higher than what Orleans was charging, and achieve some "y" value higher in profitability.
This gets at the gist of (company) buyer motivations right now in home building. Their bet in each acquisition is that they can take a lot and get more value into it and more value out of it than the current owner can. And it's true in many cases, because acquirers can commit the kinds of product design, marketing clout, and operational systems to bear to both get higher ASPs and lower out-of-pocket costs through their scaled systems.
Let's review, for a moment, seller motivations. Chalk one up as "Wall Street wants consolidation, period." Institutional investors sense that 23 or so public companies is wildly over-capacitized (if that were a word). Meaning, this: there's a lot of over-head and capital and profitability trapped in company management structures that comprise the home building sector writ large. Investors would like to see fewer players doing more of the work, assuming that technologies, iterative practices, scalable operations, etc. would off-set the time-honored "localism" that has prevailed in the real world of residential construction.
At any rate, hedge fund and private equity players that plowed investments into the space opportunistically five and now six, and seven years ago, are antsy to exit. This Orleans divestiture allows Strategic Value Partners and Anchorage Illiquid Opportunities Offshore Master, and possibly even Bank of America distressed debt desk, a long awaited "out" to their engagement, and not a moment too soon. Other, home building companies with hedge fund and private equity players are under the gun now to resolve their positions and pony up because the patience of this money has worn thin. And buyers are out there.
Home building is, first and foremost, an upfront capital intensive endeavor. Lenders are more than happy to finance construction projects, but getting access to acquisition and development money is sort of similar to getting a mortgage these days. The money is there, and the players are willing, but the process is agonizing, and flawed.
So, private home builders, who before this Spring were thinking, "it's definitely time to sell," are now in the middle of a robust selling season, going great guns with their vertical programs, and saying to themselves and others, "Maybe we can make a go of it as independents after all."
But that's going to seesaw back and forth, because access to capital to buy land is going to continue to be tough, and the prices for lots are not going to be a game for the feint of heart.
More deals. Lots of new opportunity.