A few minutes on the phone yesterday with Dan Ryan, a principal in the $83.3 million deal through which his Dan Ryan Builders sold a 60% stake in itself to Sumitomo Forestry, were a gentle reminder of the single, pure bedrock of all home building mergers and acquisitions: land.
Now, smarter people than me will debate that, claiming economic values of sellers and buyers may also include people, operational processes, and other tangible and intangible "gets" that sustain, secure, produce, and project current and future value.
In this case and under these circumstances, land is the root value, and here's two compelling reasons.
Sumitomo Forestry wants more of it so that it can play out its stated plan to become "a leading homebuilder in the United States," with a near-term future goal of 5,000 homes built and delivered across its four operational spheres: Henley USA (Seattle), Bloomfield Homes Group (Dallas), Gehan Homes (Austin, Dallas, Houston, San Antonio, and Phoenix), and now, DRB.
One only need to take a look at Wall Street today, and the shocks around the Chinese financial turmoil to see that for cash-flush organizations in the Far East and other emerging markets, "safe haven" is literally, land in the United States. We
Interestingly, Sumitomo's portfolio of U.S. home building operators--which we've been told is intended to work as a group of confederated but autonomous companies under the Sumitomo Forestry America aegis, is beginning to show a strong resemblance to a group of five companies under another big name in forestry Weyerhaeuser, that sold to TRI Pointe for $2.8 billion, closing in mid-2014.
In a robust, volume-driven, growth-bound operating model, Sumitomo may lever its capital investment with its forest product opportunity models as a vertically integrated play, both in the U.S. and the Australian residential construction market where it is also growing. Sumitomo, Mitsui, the long-time majority shareholder of SoCal-based MBK Homes, and Sekisui House are together becoming a materially important, scaled investment in new residential construction in the United States.
For these companies, the motivating need is a better return yield on invested resources here in North America than they can derive from domestic residential development and housing operations in Japan. Simple.
They understand home building business and operations, and they're smart enough to be teaming up with proven, capable, growing, enterprising operators of a certain, critical mass as regional power players. And the spread between what they get from investing a dollar in real estate in Japan vs. investing one in the U.S. is significant enough to motivate them.
In each case, the intelligence of the partnership is in the particular alignment of needs. Sumitomo teams with an already strong player ... with potential to be stronger, and a need for capital to do that.
Dan Ryan Builders has been growing at a double-digit percentage growth from the time early after the Great Recession ended, way back in 2011 or so. Fact is though, the markets in the mid-Atlantic where his 13 or so market operations in eight states (including D.C.) are getting thicker and dicier and more ferociously competitive by the day, as big publics use their heft to box out less well-heeled players from the land position opportunities, the tracts that will produce under challenging conditions, etc.
Dan has been competing from the day he started his company in 1990 after he departed the company his uncle Ed had founded, at least in part--NVR--and he's now going to have resources at his disposal to be more than a nimble counter-puncher in the middle Atlantic region, among developers and land sellers who want buyers who can write a check rather than structure complicated, time-released take-down deals.
Each of the companies Sumitomo has taken a piece of has that similar fire-in-the-belly drive to compete against the big guys, head-to-head, on an even playing field, for once, and show them that private operator approaches to relationships-driven, process-focused, home buyer customer-centric nimbleness can outplay sheer clout and the ability to cut a big check at the drop of a hat.
What this says to us is that the land game, for what it is, is getting fiercer, bloodier, and more consequential, even as the market is sending mixed signals about raw and absolute demand levels over the next year.
So while the motivations on the buyer side of the M&A equation in this case is, broadly, the U.S. as a "safe haven," the seller side goals are more about the ability, on a sustained basis, to buy the right lots at the right price at the right moment. Period.
No assertion as to what is going to happen in the next 24 months in the home building landscape comes without its layering of "ifs" and caveats.
Precision--in both timing and place--in land buying, development, internal rate of return analysis, product optimization, and pricing to generated pace and profit ... precision and land are either synonymous or calamitous during the next 24 to 36 months. The data had better be in front of you and it had better be right, and it had better be the base for decisive action that fits your program.
The "or else" part is that our audience may not include you because this next stretch of "recovery" is going to get rough in patches.