Century Communities has leveraged proceeds of its $241.5 million Rule 144a equity offering earlier this year to snatch up a beachhead in Austin and San Antonio. With the acquisition of Jimmy Jacobs Homes, the No. 156-ranked builder among the BUILDER's "Next 100" rankings, Century's a legit public on the prowl. BIG BUILDER's John McManus reports and adds commentary.
Here are the top line take-aways from news of the acquisition:
* The deal shifts Century Communities from a
Colorado Front Range power house into one of home building's 20 or so multi-regionals on the prowl for volume-based expansion
* It serves as a bellwether to highlight intensifying urgencies and opportunities--particularly around the way capital goes to work--among both buyers and sellers in today's home building landscape
* More broadly, the deal reflects a shift of emphasis among new residential construction players from gains via price increases to plain old volume-driven growth, a higher-stakes, grind-it-out stage in housing's early recovery
* finally, and on a more personal note, the deal represents the 100th successful mergers and acquisition transaction in a quarter-century span for one of the industry's legends, Florida-based Michael P. Kahn.
The deal, announced yesterday with a press statement from the company, marks the second private-to-public acquisition in as many weeks where the public home building company buyer was represented by Michael P. Kahn & Associates.
Last week, Kahn helped engineer a Meritage Homes deal that expanded Meritage's footprint in the southeastern United States, with the acquisition of Phillips Builders in Nashville, a market suddenly crawling with public builders.
This graph from the press statement highlights details that accompanied the Century-Jimmy Jacobs Homes deal, including a number of land transactions that BIG BUILDER sister company Metrostudy has identified as two of the markets with the "scarcest" supply of ready-developed home sites:
Century Communities announced that it has entered into six other transactions in Austin. As a result of these transactions Century Communities will now own or control 915 lots in Austin and San Antonio. These acquisitions bring the Company’s total land position of owned and controlled lots to over 5,700, an increase of over 23% since the end of the second quarter of 2013.
Here's a read from Madison Inselmann, Metrostudy regional director for Austin, on the fit:
Jimmy Jacobs’ product aligns nicely with what Century Communities does out in Denver. In Austin that looks like $250K to $500K, a segment of the market that accounts for 57% of the new home market. Therefore, the 140 or so VDL they picked up from Jimmy Jacobs’ numbers allow them to get their floor plans on the ground, quickly, in developments that already match their target profile. That VDL count will be in addition to what Century’s local guy has been able to put under contract. As is the case when going into any market, it’s smart to hire local and that hire has paid off for them in getting lot positions in a tight and fast moving Austin market.
Texas, mind you, has four of the top 10 markets Metrostudy named as the "scarcest" for lot supply.
The Century deal for Jimmy Jacobs aptly is Kahn's 100th successful M&A transaction since he started advising home building company buyers in 1988. (We'll have a related story on Kahn in tomorrow's BUILDER PULSE.)
Stay tuned for updates in this space during the day today, as we explore:
1. What's motivating public home builder buyers?
2. Why are private companies selling now?
3. Where are financial players in the mix, and why are strategics so much more important right now?
4. Which markets are most ripe for M&A?
Let's take them, one at a time.
1. Buyer motivation: Public home builders exited a "low-hanging-fruit" growth period in the housing recovery's earliest stages as soon-to-step-down Fed chief Ben Bernanke announced that the Central Bank would taper back its monetary program, which suppressed the price of money and kept borrowing rates at all-time lows.
Now, evident in Hovnanian's recent third quarter earnings announcement and other new home sales reports, home builders will need to shift from "pacing" deliveries to accelerating orders as a way of sustaining growth and remaining attractive to investors. We've already seen in a number of deals, a hunger for lot inventory and human capital that will enable public builders to feed their machines to keep trajectories headed in the right direction.
Public builder buyers urgently want to:
* enter a new market
* scale up and build share in a market they're already in
* secure talent in a division or region who can gain access to land, operational excellence, and sales
The challenge is to seize on the free kickstart they got in momentum thanks to accommodative monetary policy, tax breaks, and other stimulants, and give the mojo a life of its own. Public builders need stores, particularly in lot-constrained markets that are trending well, such as Austin and San Antonio. Here's Inselmann's commentary on dynamics that make Austin so attractive to a builder like Century right now:
"Over the last twelve months, ending June 2013, Austin builders started 9,054 homes, a 38% increase from the same period a year ago. As a result, the local lot supply has dropped below the 20 months considered equilibrium. After starting just under 7,000 homes in 2012, we’re looking for roughly 9,200 annual starts in 2013. The ability to grow beyond that will be determined by new lot deliveries in the final six months of the year. As of June, Austin had +6,000 future lots undergoing development with more shovels entering the dirt in the last couple of months."
What's going to happen is that over the next couple of weeks through 2014, we'll see between a dozen and and 30 acquisitions by home builders who're looking to goose their stores and pace, looking to capture current operational overhead assumptions across higher unit volume.
2. Sellers' motivation: Many industry insiders start their list of reasons for a company to sell its assets to a public builder by focusing on the age of the principal(s). Fact is, there are a good number of companies inextricably attached to a founder or eponymous figure who's been around the block a time or three, and may want to monetize the assets, credibility, and reputation while there are multiple buyers on the make.
This is all true. Opportunity is a motivator. So is fear.
Fear comes into play in this way. A private home builder that has been able to make a go of it in a market among developers and land sellers leverages trust and relationships with those partners to do rolling lot take downs that barely, if ever, make an appearance on those home building companies' balance sheets.
Well, in this particular moment, you can say good-bye to most of that. Public home builders, with low-cost money galore, are combing the farms and the ranches, the banks and the land funds, the broken deals and pristine ones, the master plans and the infill tracts for anything that looks like a 2014 or 2015 home site. What they're doing, and what they're going to continue to do, is to plunk down cash for those deals.
Cash, especially the kind of cash that comes when multiple bidders crowd every deal, is mighty attractive.
Consequently, trust and relationships, and the way that private companies had been able to make a go of it for so long, are mostly a bygone memory. Publics can outspend and outmaneuver privates when it comes to acquiring these lots, and they're going to great lengths to do that.
This amounts to a moment of truth for at least a number of private home builders. Either they sell now, while their name and their game are hot, and their talent and intel into the market may be worth something to the big publics, or not. The risk is, the publics will crowd in, pay low-cost cash for all the land deals, and the privates won't be able to go there. Forced out.
3. Why strategics vs. financials in the current m&a rush? We're hearing that the game's gotten brutally rich for financials to make acquisitions work, which is why Toll, Standard Pacific, and Brookfield are the names we're hearing are making the most credible run for both Shappel Homes and the Weyerhaeuser portfolio. Even Starwood Capital, which could probably finance one of the acquisitions of those two prizes, has TRI Pointe Homes as a operational arm that would quickly monetize the deal.
4. Where will the deals be? Or where won't they be? We'll probably see a couple of interesting features to this M&A rush. One is, like the Century Communities deal, we'll see your calculation made as to what share of the market one gets by buying a firm, and an estimate of what that share may likely increase to based on the kinds of models and communities that are trending and forecast to do well.
What's more, we'll probably see new metros qualify as big public builder markets, likely because they're showing permit growth due to "new normal" economic fundamental drivers. Estimates of 5,000 permits per year over a 20-year average may be the tolerance level builders will find to be acceptable. The funky thing is that once a single builder paves the way by opening operations in a particular market--for instance, D.R. Horton in Birmingham, Ala.--a likely possibility is that more publics will look to follow them in.
It's an exciting story, because even as Fed tapering has dialed back Wall Street and global investor exuberance in the sector, the narrative is going to run fast and furious in the next few months as public home builders put their cash war chests--"dry powder"--to work in a sprint for incremental volume and revenue growth.
For the moment, we want to wish Century all the best of success in its Texas ventures, and we'll look forward to covering the movement into Phoenix soon as well.