What builders are doing with all that money.

By Roberta Maynard

The question keeps coming up," said Lennar CEO Stuart Miller, surveying the group of investors and analysts from the podium. "Here we sit with all of this money. What's our next move?" What followed was the sound of people leaning forward in anticipation of the next sentence. "We're going to add absolutely no clarity to that issue today," he concluded, producing more than a few sighs.

With those unenlightening words, Miller succeeded in disappointing a room full of industry watchers who know that Lennar has the cash on hand to make a major acquisition--perhaps even the rumored mother of all home building mergers.

Lennar is flush with an unprecedented amount of available capital, and for that matter so are several of the biggest builders. Chad Dreier, Ryland's CEO, noted the anomaly of the company's $100-plus million in available funds last fall, saying, "We have excess cash, which I never had in 25 years of doing business."

The significance isn't lost on Wall Street. "The liquidity we're seeing today, particularly among top builders, is much higher than it has ever been," says analyst Scott Campbell with Raymond James & Associates. "Lennar and others haven't had to tap their credit facility." In its outlook for 2002, the firm anticipates that the surplus would fuel growth, particularly merger growth. "We expect the coffers of many public builders to be bursting with cash, which could lead to a slew of acquisition activity," says Campbell. "Many management teams will undoubtedly be faced with excess capital allocation decisions as the year progresses."

With the top 10 builders taking an aggressive stance toward gaining market share, that capital will surely be put to use expanding operations, one way or another. Centex, D.R. Horton, and Lennar--and lately Beazer--have tended toward merger activity, while Ryland, M.D.C., and Pulte CEOs have pledged to focus on increasing share organically, though not entirely ruling out acquisitions, either.

The cash surplus has also made possible a step-up in share repurchases and repurchase authorizations, particularly by Toll, NVR, and Ryland, all of which have demonstrated ongoing buy-back strategies over the years. Ryland repurchased 1,002,500 shares in 2001 and is authorized to buy another 1,621,200. NVR's board has handed the builder authorization to repurchase up to $300 million in stock this year.

"Some companies feel that buying back stock is shrinking the company over the long term," says Campbell. "Others look at it as playing the market." In making the choice, you weigh the ultimate return on investment, he says.

Dealing Debt a Blow

Contributing to their liquidity is the reduction in debt the top builders have achieved over the past decade. The top 10 (In Deutsche Bank Securities' universe, that comprises BZH, CTX, DHI, KBH, LEN, MDC, PHM, RYL, SPF, and TOL.), the debt to total capitalization in 2000 was 49 percent, down from 56 percent in 1990.

Deutsche Bank Securities analyst Greg Nejmeh notes that many public builders' liquidity and extended debt maturities offer management "far greater flexibility than was true in the early 1990s."

The top builders' transition from commercial banking to the longer term debt capital market--made possible by their size--has enabled them to re-deploy operating cash flow. The lower leverage in the current cycle, coupled with the longer duration of balance sheet debt, has reduced the liquidity risk, says Merrill Lynch analyst Joseph Sroka.

This is another piece of evidence supporting the mega builders' growing marketplace advantage. Some say it represents another nail in the coffin of the mid-size companies that are competing for the same land but without the benefit of less expensive capital and lacking the wherewithal to wait out the lengthening approval cycles.

"This level of financial flexibility," says Sroka, "sets them apart from the smaller, local, private home builders with respect to buying land, making acquisitions, and deploying capital across markets opportunistically."

Adding to the mystery of how the biggest builders will spend their money, Bruce Gross, Lennar's CFO, thumbs his nose a bit at the idea that a Lennar deal is imminent. "We like smart growth that drops to the bottom line," he says, noting the company's 17-year average of 37.5 percent net debt to capitalization. "We grow when we're well positioned. We don't need to do the next deal."

Money, Money, Money: With its lines of credit totaling $1 billion, Lennar leads the industry in availability of cash, creating speculation about its next move.

Cash on Hand

(in millions)

Company Bank Cash Lines of Credit Total Liquidity Net Debt/ Total Capitalization
LEN $484 $1,000 $1,484 37.0%
DHI $32 $775 $807 58.0%
KBH $196 $600 $796 45.0%
RYL $295 $400 $695 25.8%
TOL $274 $403 $676 48.8%
PHM $72 $450 $522 49.0%
MDC $37 $450 $487 26.6%
CTX $62 $220 $282 45.5%
BZH $2 $185 $187 53.5%

Note: As of most recent quarter end.

Source: Company Reports and Merrill Lynch Estimates