Crown Purchase Adds to Horton’s Momentum

Last week’s report that D.R. Horton is nearing the finish line in its purchase of Crown Communities is just another move in a busy month for the Fort Worth, Texas-based Builder. At the end of April, the company announced plans to launch its third brand, the entry-level Express Homes brand.

Crown Communities is the Atlanta metro area's No. 1 builder in unit volume. It reported 2013 revenue of $370 million on closings of 1,540 units, according to Metrostudy. By purchasing Crown, Horton, the No. 2 builder in the market, Horton would more than double its marketshare to just shy of 15 percent in a resurgent Atlanta market. That could help it corral lots, while also controlling labor costs.

"Historically, it's been really tough for any of the public builders to get the critical mass that they needed; that market has always been difficult," says Stephen East, senior managing director in the ISI Housing Research section of the ISI Group. "Getting up to a 15 percent market share will make a huge difference versus the way that market has operated historically from a land perspective and a trade perspective. I think it will help them with the trades and seeing more of the deals that maybe historically went to the private guys."

The Crown deal is highly complementary, giving Horton greater geographical diversity in the Atlanta metro area. It currently has strength in the North Atlanta counties, with less activity in the southern vicinities, while Crown's strengths are in the southern counties, with less presence in the North.

Atlanta, ultimately, would seem to be a good fit for the Express line. On the supply side, there are plenty of lots available for the entry-level buyer. And on the demand side, Atlanta has a very strong rental market in the Class A and B range, serving those demographics most likely to buy homes. For the year ending in March, the city's Class A apartment rents had increased 8 percent and the city's Class B rents had grown 6 percent. Occupancies for both were at 95 percent, according to Dallas-based research firm Axiometrics.

“With occupancies as high as they are and rents going up as much as they are, I think pretty soon we are going to see some renters compare what it costs to buy a house versus paying rents,” says Eugene James, Metrostudy’s Atlanta regional director. “There’s no doubt in my mind that we’re going to see apartment dwellers jumping ship and buying a house here soon.”

Last October, D.R. Horton made a similar play to add scale in the Charlotte, N.C. market, buying Regent Homes, the No. 6 player in that market at the time, according to Metrostudy.

“By making the Crown acquisition, it gives them tremendous economies of scale,” says Tony Avila, co-founder and managing principal at San Francisco–based Encore Housing Opportunity Fund, a real estate fund manager that invests in residential real estate. “It’s an accretive transaction. It can increase their market share and they can spread their expenses across many more homes. It’s a very opportunistic transaction.”

Executives with knowledge of the transaction confirmed that a deal closing and announcement is imminent, possibly within the next week. Sources close to the acquisition say Crown’s CEO, Francis Downey, will remain in place, and that Crown will run as an "owned but separate" operation for the time being, as it's a highly efficient one.

Crown Communities, which achieved a BUILDER 100 ranking of 28 in the soon-to-be-released 2013 special report on the nation's 200 largest home builders by volume, is a privately-held company operating in Georgia, South Carolina, and Alabama.

Crown is primarily a value-oriented builder that generally occupied C and D locations during the downturn, according to Metrostudy's James. It acquired a number of distressed lots through banks.

“They were building a relatively large product for a low price-per-square-foot,” he says. “They’re appealing to first-time home buyer to first-time move-up buyer.”

With Atlanta’s growth (it’s currently No. 3 in the country in permits), more mergers could be on the horizon. “It would not surprise me if we saw other acquisitions taking place in metro Atlanta, as well as other parts of the country,” James says.

Express Addition
Express Homes, which is ramping up in 13 markets and four states, aims squarely at the entry-level buyer with prices from $120,000 to $150,000. Repeated attempts to reach D.R. Horton for comment were not successful, and an executive we spoke with from Crown Communities would neither confirm nor deny the suggestion that an announcement was near, saying, “we are a private company and we don’t discuss rumors on the street.”

D.R. Horton's commentary on its second quarter earnings call provided a lot of color about the strategy behind Express, which is an effort to court the buyer sitting on the sidelines because of price increases.

“There's no question that with the price increases that we've experienced in our industry over the last couple or three years with all the pricing power we have had, we've really depleted that pool of affordable buyers,” CEO and president Donald J. Tomnitz on the company’s earnings call.

But with Express, Tomnitz thinks Horton will create a, “whole new pool of affordable buyers that let us expand our footprint and our revenues.”

With lower-priced product lines, margins are almost always lower. But Horton hopes it can more-than-offset that with higher volume. The Express line won’t require options and upgrades, so Horton’s cycle times will be dramatically reduced.

“We're budgeting as close as we can to our current margins, but probably slightly lower,” Tomnitz said on the earnings call. “But don't forget, we're planning on turning that product line as much as three times per year. So basically our return on that segment of the business will be just as good, if not better, than our normal business. In fact, it will be better.”

In general, Wall Street seems to like D.R. Horton’s operating strategy. Before the Crown news came out (but after the Express line was announced), UBS said: “We continue to believe D.R. Horton is among the better positioned builders for the recovery given management's operating acumen. Specifically, while its exposure to the first move-up segment has increased in the current environment, we expect the company to gain a disproportionate share as entry level buyers re-emerge, reflecting its ability to control costs and keep pricing below competitors.”