Lennar’s announcement that it was acquiring WCI Communities in a 50/50 cash and stock deal valued at $809 million drew reviews from a number of Wall Street analysts Thursday.
“The transaction includes a portfolio of roughly 14,200 owned and controlled lots in coastal Florida markets and will be structured in the form of a merger of WCI and a newly formed Lennar subsidiary; we estimate WCIC will deliver 1,186 closings in 2016 at an average sales price of $440,000 to generate home building revenue of $522 million at an EBIT margin of 10.5,” wrote J.P. Morgan’s Michael Rehaut.
KBW’s Jade J. Rahmani estimated that WCI's results represent approximately 4.3% of LEN's closings and 5.3% of Lennar’s revenue. “After incorporating expected amortization, we estimate the transaction could be accretive in the range of 2 to 3% or slightly less than WCI's revenues as a percent of Lennar’s,” he wrote. Additionally, the transaction increases Lennar’s market share and scale in Florida. It's possible accretion increases with synergies or if Lennar were to increase leverage.”
Overall, he consensus is that the marriage of two of Florida’s biggest builders makes a lot of sense.
“With [approximately] 7,000 closings in Florida in 2015, accounting for [approximately] 30% of its total, Lennar is the largest builder in the state,” UBS’s Susan Maklari wrote in a research report. “With its already established presence, we expect the company will realize synergies from this purchase over time, including: reducing overhead costs, leveraging Lennar's scale to drive greater construction and purchasing efficiencies, and further realizing the benefits of Lennar's efforts around digital marketing and lowering SG&A.”
Rehaut notes that WCI, which builds primarily in the Naples/Ft. Myers, Sarasota, and Bradenton markets, adds higher-end, amenitized communities to Lennar’s Florida offerings. “Specifically, Lennar, which is headquartered in Miami, maintains top market shares across Southeast Florida as well as Orlando and Tampa, along with leading shares in other key markets including Sarasota and Jacksonville,” he wrote. “Hence, we believe WCI represents a natural, complementary fit for Lennar, and as such, offers cost and branding synergies as well as Lennar being able to further leverage its infrastructure and resources across its home state.”
Maklari also like WCI’s assets. “Although demand has slowed in this area more recently—especially within the high-rise condo market—we note this is more reflective of movements in FX and related constraints as opposed to underlying buyer interest,” she wrote. “Given demographics and second home demand here, we look for this state to remain key in terms of housing starts.”
Maklari believes Lennar is among the best positioned builders for the housing recovery because of its ability to handle complex transactions, efforts to cut costs and simplify its business, and its interest in investments outside core home building.
“Further, its strong balance sheet provides financial flexibility to support growth, both internally as well as through strategic acquisitions, such as this,” she wrote.