A bullish, high-profile performance by the public builders positions them to pull away from the pack.

By Iris Richmond

The impressive performance of the public builders in 2001, despite the downturn, surprised skeptics and believers alike. The home building sector was the No. 1 performer in the Dow Jones Industry Group last year as well as in the S&P 500 Industry Group. The builders? composite shareholder return for the year was 27.5 percent, compared with the S&P?s negative 12 percent. In a flurry of fourth-quarter activity, the builders? return of 43 percent earned them a ranking as the third best performer in the S&P 500.

?I suspected that we could perform much better than historically, but I never expected the industry to perform as well as it did,? says John Stanley, long-time equity research analyst at UBS Warburg. ?The whole group is marching down the same road right now, and it?s dramatically less cyclical. [The industry has] been more bullish than anyone out there.?

They?ve been bullish about growth as well. Hungry for market share, the top builders gained through acquisition and organic growth in 2001. A number of public builders deployed capital internally to make share repurchases. NVR, Toll Brothers, and Ryland, for example, bought back a combined total of nearly 4 million shares.

Consolidation was more than a bit player contributing to the group?s success. The year witnessed several public-to-public deals, notably the industry?s largest-ever acquisition, Pulte?s $1.8 billion purchase of Del Webb in July 2001. Schuler, Newmark, Forecast, and more recently Crossmann, are other examples of smaller public firms being absorbed. With the mega-companies? current buying power, there are more mergers to come.

?Consolidation is not unique to home building, but it is a unique, long-awaited period where the industry as a whole is becoming less fragmented,? says Joe Sroka, equity research analyst at Merrill Lynch.

Public-to-public acquisitions have a bigger role still to play. Analysts declare all the companies below the top tier as potential acquisition targets.

?None of the companies are blatantly wearing ?for-sale? signs around their necks, but some are a little more covertly saying, ?hey, we?re ready to dance,?? observes Stanley.

The power of Lennar?s cash flow position makes it a clear favorite for analysts, who pick it to make the next buy. (For more about big builders? liquidity, see ?Liquid Gold?).

Bigger, Bolder

So, the power rests increasingly at the top, in the hands of a small group that has all the makings of a juggernaut. A.G. Edwards analyst Matthew Moyer says the success of consolidation makes it easy to logically conclude that the fate of the public builders 10 years from now will be an industry with five or six major players.

Stanley sees the same picture. ?I expect to see the list winnow down to something closer to 10, and then fall to five companies that will have 60 percent to 80 percent of the market. To get there, they?ll have to start feasting on their large neighbors as well as the small ones.?

The industry has heard this before, notably in the ?80s. But analysts say the combination of smart management and technology will support larger operations in a way that wasn?t possible before. The top tier of public builders (Centex, Lennar, Pulte, D.R. Horton, and KB Home) closed on a combined total of 118,262 units last year. Just five years ago, the five largest builders contributed 57,392 closings, and prior to that, in 1991, 31,763.

Not only does size attract more investors, it affords access to relatively inexpensive financing to abet purchases of the most attractive pieces of land, and it provides other efficiencies. In simple terms, these builders were able to build the same house for less, thereby effectively lowering their cost base and enabling them to take away market share from their smaller competitors.

Since 1990, the public builders ? now numbering fewer than 30 ? have grown market share from 10 percent to more than 20 percent. That?s concentrated among the biggest players. Last year, the top 10 captured 17.2 percent market share, up from 15.2 percent in 2000, according to Raymond James & Associates. For 2002 and beyond, the top builders continue to set aggressive market share goals. D.R. Horton, for example, aims for 10 percent share in each of its markets by fiscal year 2004.

Given the uncertainty of the economic tide, even the strongest may suffer to some degree in the near term, but analysts are confident that the pain, if felt, should be temporary.

?We?ve concluded over the past 12 to 18 months that this time, it?s different,? says Deutsche Bank Securities analyst Greg Nejmeh.

Assuming the top 10 were to double again over the next decade, reaching 35 percent by 2010, the group?s unit volume would enjoy a compounded annual growth rate of 7.4 percent.

Top 10 Companies by Gross Revenue (in billions)

Centex Corp. $7.8
Lennar Corp. $6.0
Pulte Homes $5.6
D.R. Horton $4.7
KB Home $4.6
The Ryland Group $2.7
NVR $2.6
Toll Brothers $2.2
M.D.C. Holdings $2.1
Beazer Homes USA $1.9
Source: BIG BUILDER Surveys

Private Subsidiaries of Publicly Held Parent Company (Ticker)

(Ranked by Gross Home Sales 2001)

Gross Home Sales*

Gross Revenue '01*
Net Income*
Backlog in $*
Lot Inventory
2000
2001
(% change)
2001
(in units)
(Controlled under option)
Brookfield Homes/Brascan Corp., Ontario, Canada (BNN.A)
$892
$1,003

$1,176 (12%)

$85

$347 (972)

56,000 (5,700)

Taylor Woodrow Homes/Taylor Woodrow PLC, Middlesex, UK (TWODF)

$769
$721

$880 (6%)

N/A

$402 (1,919)

9,802 (N/A)

Morrison Homes/George Wimpey PLC, London (WMPY.L)
$628
$701

$693 (13%)

$66

$214 (898)

5,900 (4,260)

Jim Walter Homes/Walters Industries, Tampa, Fla. (NYSE: WLT)
$246
$238

$24 (-3%)

N/A

N/A (1,879)

N/A (N/A)

MBK Real Estate/Mitsui & Co., Tokyo (MITSF)
N/A
$96

$96 (N/A)

N/A

N/A (92)

N/A (N/A)

*Figures in millions

Public Builders (Ticker)

Ranked by Return on Equity (ROE)

Net Income
Gross Home Sales
2001 Gross Revenue
Pre-Tax Net Margin
Backlog in $
Lot Inventory
Company
ROE
2001
2000
2001
(% chg.)
2000
2001
P/E Ratio
(in Units)
(Controlled Under Option)
NVR (NVR)
79.0%
$237
$2,268
$2,560

$2,624 (13%)

11.5%
15.0%

11.61

$1,512 (5,558)

N/A (0)

Arvida/JMB Partners* (XXCAC)
48.0%
$102
$479
$417

$455 (-21%)

N/A
23.0%
N/A

$211 (751)

0 (N/A)

37.0%
$48
N/A
$768

$790 (0%)

N/A

10.0%

4.46

$177 (542)

4,906 (3,461)

Lennar Corp. (LEN)
34.0%
$418
$4,900
$5,468

$6,029 (9%)

11.3%
13.4%
9.08

$1,982 (8,339)

55,371 (73,158)

Meritage Corp. (MTH)
34.0%
$51
$515
$743

$744 (43%)

10.9%
11.1%
7.47

$375 (1,602)

4,386 (10,611)

Weyerhaeuser Real Estate Co.**
29.8%
$150
$1,071
$1,218

$1,428 (5%)

15.3%
16.6%
N/A

$597 (1,788)

17,900 (7,900)

29.1%
$132
$2,286
$2,680

$2,740 (17%)

6.6%

8.3%

9.29

$917 (4,577)

20,076 (23,392)

28.7%
$214
$1,763
$2,181

$2,230 (23%)

13.0%
15.0%
9.04

$1,411 (2,727)

24,644 (14,502)

M.D.C. Holdings (MDC)
27.4%
$156
$1,701

$2,077

$2,126 (21%)

12.7%
13.4%
7.77

$760 (2,882)

13,524 (6,059)

27.4%
$11
$272
$282

$287 (6%)

5.1%
6.1%
8.86

$187 (623)

2,276 (2,300)

Schuler Homes (SHLR)
27.0%
$96
$674
$1,600

$1,600 (133%)

10.6%
10.0%
16.26

$524 (1,692)

15,000 (14,600)

Crossmann Communities (CROS)
25.8%
$54
$621
$798

$798 (29%)

9.4%
11.1%
9.07

$280 (1,983)

18,104 (17,673)

25.3%
$84
$1,556
$1,890

$1,930 (22%)

5.4%
7.2%

8.92

$815 (4,122)

16,512 (14,806)

KB Home (KBH)
24.5%
$214
$3,800
$4,502

$4,574 (16%)

N/A

7.1%

7.82

$1,910 (11,225)

47,400 (38,858)

M/I Schottenstein Homes (MHO)
24.0%
$55
$901
$950

$981 (5%)

7.8%
10.4%
8.37

$559 (2,331)

10,000 (6,000)

Centex Corp. (CTX)
23.3%
$371
$4,316
$5,117

$7,758 (21%)

5.6%
7.5%
9.59

$2,013 (9,476)

45,600 (50,800)

D.R. Horton (DHI)
23.2%
$281
$3,676
$4,290

$4,728 (30%)

8.4%
8.7%
10.95

$1,830 (8,716)

62,094 (115,000)

23.0%
$111
$1,416
$1,376

$1,385 (-3%)

12.6%
13.1%
8.07

$445 (1,397)

15,306 (2,176)

19.3%
$64
$1,106
$1,694

$1,742 (53%)

20.5%

6.1%

9.43

$773 (3,033)

10,970 (25,835)

Dominion Homes (DHOM)
19.0%
$15
$325
$389

$396 (21%)

4.7%
6.6%

6.52

$201 (1,032)

7,318 (8,057)

Pulte Corp. (PHM)
18.0%
$302
$4,261
$5,361

$5,560 (29%)

9.5%
N/A
8.65

$2,100 (8,678)

81,200 (34,800)

The Rottlund Co.*** (RTLD)
17.3%
$8
$245
$251

$260 (-3%)

5.6%
5.4%
N/A

$122 (546)

3,084 (N/A)

Newmark Homes Corp.**** (NHCH)
17.0%
$25
$607
$589

$630 (-2%)

6.3%
6.1%
7.32

$193 (752)

1,725 (2,122)

Capital Pacific Holdings (CPH)
N/A
$9
N/A
$401

$420 (8%)

N/A
N/A
N/A

$87 (266)

2,823 (8,137)

The Fortress Group (FRTG)
N/A
-$9
$683
$259

$260 (-62%)

0.6%
5.4%

4.13

$117 (403)

1,614 (2,719)

*subsidiary of St. Joe Co. (NYSE: JOE) based in Jacksonville, Fla.

**subsidiary of Weyerhaeuser Co. (NYSE: WY) based in Federal Way, Wash.

***Rottlund went private March 2002

****subsidiary of Technical Olympic, a company based in Athens, Greece

P/E ratio provided by Marketwatch.com

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