An acquisition spurt that so many industry watchers had anticipated during the housing recession might finally be coming to pass, as several public builders are opening their wallets again to buy market position.
The news on Wednesday that D.R. Horton, the industry’s largest builder in closings last year, would acquire Huntsville, Ala.-based Breland Homes, the 38th-largest builder in closings, is the latest move by big builders entering new markets and strengthening their toehold in existing ones.
“Our operations will solidify D.R. Horton's position as the largest builder in Mobile and Baldwin County and establish leading market share for D.R. Horton in Huntsville and coastal Mississippi, as well,” said Breland Homes’ founder Louis Breland in a prepared statement. This deal, whose terms were not disclosed, is Horton’s first acquisition in a decade.
Outside of the Pulte-Centex deal in 2009, acquisitions had been rare lately, as builders stockpiled cash and land while buyer demand and sales lagged. But now that business conditions—especially home values—finally seem to be stabilizing, some larger companies are expanding their hegemonies once more:
•Last November, Toll Brothers entered the Seattle market by acquiring Kirkland, Wash.-based CamWest Development for an undisclosed amount of cash. This was Toll’s first acquisition since 2005. In 2011, CamWest ranked 125th among builders, with 180 closings.
•One month later, Lennar made a splash in the Pacific Northwest when it bought 650 home sites in 20 Seattle-area neighborhoods from Premier Communities.
•In June, Ryland Homes acquired Timberstone Homes, with 870 homes and lots in the Charlotte and Raleigh, N.C., markets. Earlier this year, Ryland acquired 504 lots in Indianapolis from Timberstone’s sister company, Westport Homes.
These deals don’t exactly represent a land rush, but they do indicate that some builders are suddenly more receptive buyers and sellers. Why now is harder to gauge, as the companies involved in these deals have mostly declined to comment. But with permits hitting a four-year high nationally in July; with builders’ confidence the highest it’s been in five years; and with many analysts forecasting a robust housing recovery next year, it stands to reason that some builders might be trying to get a jump on events by picking up available companies in new markets.
The public builders are in enviable cash positions to capitalize on acquisition opportunities. A look at the top five builders alone finds Horton with $904.3 million in cash and cash equivalents as of June 30, a 23% increase over the cash it held on Sept. 30, 2011. Pulte reported $1.3 billion in cash as of June 30, 21% more than on Dec. 31. NVR’s cash position was up 23.6% on June 30 compared to December, to $587.6 million. Lennar (including Rialto Investments) reported $760.1 million in cash on May 31, down 31.4% from November 2011. KB Home’s cash on May 31 was down 24.3% to $314.3 million.
Public builders are also going back into capital markets to refinance their debt at lower rates and to raise cash. For example, in July Meritage Homes was looking to raise $76 million through a public offering of 2.3 million shares of its common stock, which sold at $34.75 per share. Later last month, Standard Pacific Homes put up 12.5 million shares and $150 million in notes for sale in separate offerings to raise cash for construction and land purchases.
Some builders might be more acquisition-minded now, too, because companies they want to purchase aren’t going to get any cheaper as the housing sector’s health improves.
Breland Homes is privately owned and doesn’t disclose its financials, so its profitability can’t be determined independently. However, in Breland, Horton acquires an established builder with more than 1,300 finished lots and inventory houses. Breland’s motto—“Less Money. Live Better”—and average selling price of around $200,000 are in sync with the business and marketing model of its new owner, whose average selling price in fiscal 2011 was $212,177.
In an interview with Builder on Thursday, company chairman Louis Breland said that he decided to sell his home building business, which he started in 1976 when he was 18 years old, after spending several days with D.R. Horton's chairman, Donald Horton, whom Breland said had cold-called him three or four months ago about Horton's interest in buying his company.
"It was a very tough decision to sell, and a lot of processes and back and forth," recalled Breland. "But Mr. Horton and I hit it off; I wouldn't have sold if I hadn't been comfortable with him." Breland added that he is also at ease with Horton's management team and the fact that Horton "is taking care of our people."
Breland said that his company, on a per-home basis, "is one of the most profitable builders in the United States." He says his company's profits are "three or four times" higher than most builders against which his company measures its performance. And while Breland Homes was "well capitalized" before this deal, Breland noted that Horton has the financial wherewithal to take his home building operation "to the next level."
Before acquiring Breland, Horton was already building homes in four Alabama markets—Mobile, Tuscaloosa, Birmingham, and Montgomery. Breland extends Horton’s reach into Huntsville-Madison, Ala. (where Breland is selling in 26 communities, according to its website), as well as eight communities along Mississippi’s Gulf Coast.
Breland's land development business, Breland Companies, will now provide finished lots "pretty much exclusively" for Horton's construction activities in Alabama and Mississippi. He said Breland Companies currently has at least 40 communities under development in those states that will include "several hundred" finished lots. Breland believes Horton liked the idea of having a developer in place as part of this deal, in light of the fact that "in certain parts of the country, there is a lot shortage looming."
This is the second time in 13 years that Breland Homes has changed hands. In April 1999, Louis Breland sold Breland Homes’ assets to Landover, Md.-based Washington Homes. That same year, Breland started a new Breland Homes with partners Wes Alford and Chad Pulliam, the new builder’s president and CFO, respectively.
Breland doesn't think history will repeat itself, as he has no current plans to start up a new home building business. He confirmed that Pulliam is moving over to Breland Companies, and Alford will continue to run the company's Huntsville operations. Breland Homes also has presidents overseeing its divisions in Mobile and Baldwin County, Ala., and in Mississippi. All of its presidents now report to Horton's regional president, David Auld, who works out of Orlando, Fla.
JohnCaulfield is senior editor for Builder magazine. Senior editor Teresa Burney contributed reporting for this article.