A LEAP YEAR'S 8,784 HOURS TOTAL 416 less than the number of homes Irvine, Calif.-based Standard Pacific Corp. expected to deliver to the U.S. new home market in seven states in 2004. For Standard Pacific chairman and CEO Stephen J. Scarborough, and for Scarborough's senior management counterparts at large home building companies across the nation, the more-than-one-house-an-hour trick might be impressive, but they will remain under pressure to outdo themselves in 2005. How to wow Wall Street with four more quarters of magical growth metrics as they keep their ever-expanding operations in sync with those quantum leap expectations practically forces big builder CEOs to describe acquisitions with the precision-tuned verbiage of a politician. Neither do they want to underplay the importance of mergers and acquisitions, nor should they like to betray over-reliance on M&A as they talk of tomorrow.
“I think we are all seeing opportunities to leverage the strong management teams we have, the relationships in our markets relative to land, our capabilities in developing land, our subcontractor relationships, and our economies of scale as they relate to purchasing capabilities and clout,” says Scarborough, who's overseen eight Standard Pacific acquisitions in the past seven years.
As a group, even with no blockbuster deals, big builder acquisitions in 2004 continued at a $1 billion-plus pace for the fifth consecutive year, as they re-scoped out their strategic ambitions and sought to assemble the pieces under more sweeping, expansive, and varied product and geographical empires. The “consolidating-but-not-consolidated” characterization of the big builder sector is likely to continue as long as these companies can keep gobbling up small builders as they round out product line and geographical market strategies. Typically, these smallish purchases turn into a big production builder's “organic growth” story the following year, as the scale of added capital and product resources unleashes fast out-of-the-gate closings by the acquired company in the next 12 to 24 months.
Growth Potential Fueling the appetite for acquisition, three key drivers continued to factor into big builders' 2004 M&A activity: instant revenue growth, the year-two opportunity to cite accelerated “organic growth,” and continued initiatives to demonstrate “cycle-immunity” to Wall Street by diversifying geographically in product type and prices available to home buyers.
“First and foremost, we have been growing internally, through existing opportunities,” says Scarborough, “and we've been complementing that growth with acquisitions that expand the company's reach geographically and also by product and price point.”
A hankering for product and geographical diversification motivated Standard Pacific's move into more moderately priced markets than in its home state of California, Scarborough adds. Scarborough points to Florida as the poster child for such a move, as well as an example of unleashing organic growth potential. This year, for the first time, the company will build more homes in Florida than in California. Standard Pacific has been in California for 38 years. It has operated in Florida for just two full years. “The growth in Florida is staggering,” Scarborough says, “60 percent year over year.”
Despite the opportunities that come with acquisitions, their desirability has exerted relatively little upward pressure on price tags. Still, it's hard to report on costs because transaction terms of these small deals often remain undisclosed.
“Prices have been stable now for a few years,” says Michael Kahn, president of Michael P. Kahn & Associates in Ponte Vedra Beach, Fla., who has represented buyers and sellers in numerous home builder mergers and acquisitions. “There is neither a downward nor upward trend.”
Tony Avila, managing director and head of real estate investment banking for JMP Securities, says the indicators are somewhat mixed. “I think valuations are higher because earnings are higher, and multiples of book value are definitely higher. But I don't think multiples of EBITDAhave grown much,” he explains.
Learn more about markets featured in this article: Los Angeles, CA.