Meritage’s acquisition of Atlanta-based Legendary Communities for $130 million may have been announced last week, but the seeds for its move into Atlanta were planted long ago.
“Probably for about two years, we’ve been looking in the market, talking to builders, and studying the geography, and meeting different people to learn who the players are and learn about the area,” Hilton says.
While Atlanta may have been the target for Scottsdale, Az.-based Meritage Homes, the Legendary purchase actually gives it a dominant position in South Carolina. Through buying Legendary, which closed about 496 homes last year and had revenue of $156 million, Meritage automatically becomes the number one builder in the Greenville-Anderson-Mauldin, S.C. market, owning more than 16 percent of the 2013 market share with 266 closings, according to Metrostudy data. It also owns almost seven percent of the market share in nearby Spartanburg, S.C. with 44 closings.
South Carolina appealed to Meritage Homes chairman and CEO Steven J. Hilton because of the presence of BMW and Boeing plants and their suppliers. “Overall, we like the South Carolina demographics and the favorable business climate,” he says. “We think South Carolina is a growing state and an important state to be in.”
While he thinks Meritage paid a “full price” for Legendary, Stephen East, a partner and senior managing director at the New York–based ISI Group, an investment research firm, sees potential for the public in South Carolina because of a lack of public supply. “You don’t have as much public competition [in South Carolina] as in some of the other markets,” he says. “So that’s attractive. They won’t kill it on volume but they’ll make money. That helps cover their overhead, as well.”
Opportunity in Atlanta
Make no mistake, Hilton sees Atlanta as the growth engine. In Atlanta (141 closings in 2013), Legendary controlled less than two percent of the market (and in Charlotte, it had 55 closings) in 2013. The company currently has 18 Atlanta-area communities listed on its website with three listed as “coming soon” and one listed as “grand opening.”
“Historically, Atlanta has been a strong private builder market,” East says. “The big advantage that publics have is going out and buying huge tracts of land. Atlanta hasn’t had that. They’ve just had smaller parcels and lot of the public advantages disappear. So, the question is ‘Do you know how to make money off of the vertical construction of the home? For Meritage, the answer is yes.’”
Legendary actually came out of the ashes of a Alpharetta, Ga.-based McCar Homes, a once-prominent Atlanta builder that fell on hard times. Richard B. "Bo" Means, a former banker and CEO at Legendary, started building out some of McCar’s lots as Legendary. The existing management team will be staying on board under Meritage, according to Hilton.
Legendary developed a good reputation over the last few years. “It’s [buying Legendary] a great move for Meritage,” says Bill Miley, director of Charlotte Market from Metrostudy. “The niche at Legendary is a great value on a fairly expensive house. The dollars per square foot is significantly lower than other builders in their price range, but their homes are well built.”
Hilton was also attracted the market position of Legendary and the fact that had options on many of their lots, which is less costly. “They fit in very nicely with what we do at Meritage,” he says. “We’re a strong first and second move up builder, as are they at Legendary. It’s a very complementary fit between the two companies.”
A Bigger Footprint
The day after the deal was announced Meritage announced that it was creating a new South Region that includes South Carolina, Georgia, and Tennessee under 25-year homebuilding veteran James (Jay) Thrower. Last year, the company bought Phillips Builders to establish a base in Nashville. The company also has an East Region that includes North Carolina and Florida,
“At the present time we still have some opportunities in the South,” Hilton says. “Charleston would be another market we would be interested in. Birmingham is a market we’re looking at and I think Kentucky is interesting. There are also potential smaller markets around those areas.”
Hilton thinks Kentucky might be the logical expansion point after he finishes in the South, but he doesn’t think it will happen in the next year or two. Meritage also has a Central Texas region and a West Region that encompasses California, Colorado, and Arizona.
“Out west, there’s the Pacific Northwest,” Hilton says. “There are more Rocky Mountain opportunities that we’re looking at. So there are some opportunities to grow into new markets in the West. After that, there might be some potential Midwestern opportunities and then maybe the Northeast. But I think those parts of the country are quite a ways down the road for us.”
With the price of raw land and the difficulty of getting entitlements, there’s really only one route to get mass in those markets. “The easy way for Meritage to grow is to acquire a builder,” Miley says.