AV Homes expands and deepens its strategic footprint in the Southeast with the acquisition of 12-year-old Raleigh, N.C.-based Savvy Homes.
The purchase, for about $50 million, will be announced this morning through AV Homes' investor relations channels, and is set to close April 1. It's AV's fourth key private home builder acquisition since it began evolving from a long-time land developer with roots back to 1970 into a process-driven home builder with the acquisition of Phoenix-based Joseph Carl Homes in 2010. Since turaround whiz Roger Cregg stepped in as CEO in late 2012, AV has diversified the builder's product and community offerings, strengthened the balance sheet, and positioned the company as a growing regional public, with operations in fast-growing markets.
In Savvy, AV picks up an operator whose 20-plus communities sell homes ranging from the high $100,000s to the mid-$500s, in an operating zone that complements its June 2015 buy of Bonterra Builders. In last year's Builder 100 rankings, which counted 2015 performance among America's top 200 home building organizations, Savvy ranked on 2015 closings of 280 homes, and revenues of $80 million, an average selling price of $285,000 or so.
"They've got about 20 communities open and own-and-control about 1,900 lots in the market, and they own about 230 lots, so they do a pretty good job of disciplines around inventory turns, take-downs, and managing their lot supply," said AV Homes ceo Roger Cregg, reached early Friday morning. "The Raleigh market's got a lot of constraint on the entry-level front, and Savvy is an excellent partner to work with to go after very strong fundamentals in that marketplace," Cregg added.
Cregg notes that Savvy's 40-or-so employees and management team under ceo Darrell Daigre will remain in place as AV capital enables the operator to pursue opportunity to grow in the Raleigh, Fayettville, Sanford, and Pinehurst markets.
Michael P. Kahn & Associates represented the seller on the transaction.
"Darrell has built a strong reputation and a great team over the past 12 years, and we look forward to working with them to enable them to grow as we carry on with our strategic plan," said Cregg. Cregg's focus on the strength of the local operator reflects a growing interest among acquiring organizations in retaining cohesion and local credibility and knowledge, as opposed to an exclusive focus on the seller's land assets.
Cregg's track record with acquisitions so far shows mastery at unleashing local growth while improving overheads and pushing better margins into the AV business model. At the same time Cregg has made it a core strategic goal to expand strength beyond its 55+ wheelhouse.
A profile BUILDER editor-in-chief Les Shaver wrote in May 2016 on Cregg the "Turnaround Artist" illustrated both points here:
In Florida, closings jumped from 755 in 2014 to 1,124 in 2015, while they increased from five to 328 in North Carolina during the same period. The acquisitions helped AV grow its sales and allowed it to diversify geographically.
“He has reduced the geographic risk from being in just Florida and Arizona to a larger presence in Florida, a larger presence in Arizona, and moving into North Carolina,” McCanless says.
Cregg was also concerned with the kind of homes AV was selling, which was another factor that drove the Bonterra and Royal Oak deals. “When we looked at these companies, they gave us a great platform to expand in active adult but also to add more diversity to our product group segmentation,” Cregg says.
Now, a majority of AV’s homes (60%) are non-age restricted, while the balance is active adult. “At one time we were going to be an active adult company,” he says. “I changed that in 2012 to mitigate the risk of too much concentration associated with one consumer segment.”
The Savvy Homes purchase will further tip the balance to reduce total exposure to the 55+ market--at the same time strengthening a play for an emerging young adult, first-time-buyer entry level segment--thanks to Savvy's platform mix. What's more, by picking up an operator whose footprint goes hand-in-hand with Bonterra, AV has a greater likelihood of becoming a more important player in both the 7th ranked Charlotte, N.C. market and the 19th ranked Raleigh-Durham, N.C.-market, where AV capital could help Savvy break into the top 10 Local Leaders list. Together, the Savvy and Bonterra operations in Raleigh and Charlotte give AV about 450 homes based on current production, with headroom to grow.
Local share, notes BTIG analyst Carl Reichardt, yields access to better deals with trades, improved local intel for land acquisition opportunity, and improved absorption of divisional fixed costs into AV's overhead performance. Local share is also one of AV's stated core strategic objectives:
Maintain core focus on operational improvements to drive profitability while managing construction and labor costs. We utilize proven technologies and processes to drive profitability as well as strategies and procedures designed to streamline our homebuilding operations. With keen insight into our customers’ buying habits, we are simplifying processes and employing value-engineering practices to help us deliver high-quality, well-built homes with the value our customers expect and the margins that enhance our profitability. Additionally, as we gain scale in our markets, we work to unbundle the building materials to achieve further cost savings by bidding out individual cost components, with the goal of improving our profitability over time.
The AV-Savvy combination represents one of four types of mergers and acquisitions activity we're seeing in the early part of 2017, a year that may go down as one of the more robust 12-month stretches for acquisitions in a long time.
