The D.R. Horton mergers and acquisitions team reporting through to chief operating officer Michael Murray must have been putting in some wicked hours lately.

This morning, fruits of their productive labor, a third private home builder purchase within one month's time will be announced, that of Raleigh-Durham based Terramor Homes, for $62 million cash.

There are intriguing and different aspects of this deal, which we'll touch on--such as D.R. Horton's agreement to co-operate its own brand and division in the Raleigh market along with an "independently run" Terramor brand and operation.

First, though, a quick review of the immediate flurry of Horton's M&A.

Since Nov. 15, when it announced its deal to acquire Indiana-Ohio powerhouse operator Westport Homes, Horton has agreed to lay out about $312 million for builders whose total last-12-months volume adds up to about 1,400 homes with revenues for that period of very nearly $400 million, the equivalent of adding a top-40 Builder 100 enterprise to its portfolio.

Meanwhile, in this latest batch of purchases--Westport, Des Moines-based Classic, and now Terramor--Horton not only picks up land assets and execution, but adds a crop of fresh, entrepreneurial leadership to its ranks of division and regional management, at a time talent is one of home building's hottest commodities.

Importantly, with the Terramor buy, D.R. Horton basically more than doubles-down deepening its local scale in the active Raleigh-Durham market, , which ranks No. 18 for new-home activity in the U.S., here the combination will slingshot Horton to a top-5 market share in the RDU market, according to BUILDER sibling analytics firm Metrostudy.

M Eric Honeycutt

Terramor, offering a spectrum of home models to varying customer segments, has average selling prices of $314,000 in a market whose ASP as a whole is $60,000 higher than that. Two entrepreneurs--husband-wife principals Pablo Reiter and Michelle Simms--have built an agile, smart, well-positioned, home building operation that has managed to become the market's No. 12 builder in unit volume (possibly No. 11 by year-end), an achievement for a young, hungry, privately-capitalized operator in a fiercely competitive big builder-dominated market.

Metrostudy regional director for the Triangle market, Amanda Hoyle recently briefed market players on current dynamics and an outlook on Raleigh-Durham here. Among the highlights of her commentary:

The average base price for a single family home under construction in the Triangle has been increasing and is up 6.4% year-over-year. In 3Q18, the average single family home measured 2,758 square feet and cost $387,425, or $140.14 a square foot. The year prior, the average home was larger at 2,767 square feet with a base price of $361,538, or $135.62 a square foot. Production of affordable homes in the Triangle with a base price below $250,000 continues to decline as the costs of land, construction materials and labor increases. As of the third quarter, new homes priced under $250,000 encompassed about 25% of the total region’s market share, which compares to about 32 percent of the total market share a year ago. Homes with a base price between $400,000 and $499,000 led in market share growth accounting for about 14% of all closings, compared to a 12% market share the year prior.

The number of finished vacant units, or homes built speculatively without a pre-sale contract, represented about 24 percent of the construction inventory. That signals that the Triangle remains a supply-constrained market as homes are being sold as soon as construction is completed. Market share for all attached, for-sale housing product in the Triangle has been on a bit of a roller-coaster in the last year after dropping to a low 18.9% share of all new home starts in second quarter 2017 and rising back up to 21.2% market share in third quarter 2018. New attached unit starts grew to 2,662 units, a 17% year-over-year increase. Annual closings for Triangle-wide townhouses and condos year-over-year increased 26.5% as builders work to refill the pipeline of townhouse products.

Challenges facing the local housing market include growing pains among some understaffed municipalities that have created a bottleneck at the plan approval and inspections phases, forcing many builders to extend their timelines for completion. As available inventory of existing homes for sale has remained at an anemic 2-3 months of supply or less for the past four years, builders in the Triangle region have been boosting production of new homes to benefit from the increased demand.

Having essentially written the "deep local scale" playbook starting in 2014 with the purchase in Atlanta of Crown Communities, followed by Wilson Parker Homes in 2016, Horton continues to evolve what that means for its business performance, and why it matters looking ahead.

Scale's opportunity--in procurement, operational execution, trade relationships, developer deals, management discipline, marketing clout, etc.--is just that, opportunity, for many home building enterprises. For Horton, it's more than opportunity. It's necessity. It's how the company models selling new homes--a premium durable item--for more than the cost, by a comfortable margin, of producing them.

Few, if any, do it better than Horton.

With the Terramor deal added into the trifecta, Horton has also secured ownership of nearly 4,500 new lot assets and control of about 4,300 lots. The land acquisition of assets alone makes a great deal of strategic sense for D.R. Horton, on several levels.

  • One, it reflects lot pricing that may be beginning to discount from peak land costs, as private builders--sensing uncertainty and possible trouble on the horizon--try to reduce their risk profiles (many of them personally guaranteed) to debt, even as they work to grow through the next couple of years.
  • Two, the lot acquisition aligns with Horton's need to evenflow its finished lot development, for which it has ventured with national developer Forestar in a strategic alliance that could come into play to manage lot options, timing, etc.
  • Three, the deal also runs consistent with a point of pride we've noted in other recent D.R. Horton M&A stories, which is that it really, really matters to Don Horton and his team that Horton is "America's No. 1 Home Builder."

The reference is not solely a coveted idea, but more nearly a business imperative. Horton manages internal operations, external partnerships, and consumer reputation in a cohesive, unifying way around that exclusive position in the competitive landscape. Whenever, over the past decade or more that position has been challenged, as it has by 2017's Lennar-CalAtlantic combination, Horton has fought ferociously to regain its crown.

In the mean time, Horton has also become more comfortable with the notion that its brand portfolio--in terms of what it means and why that matters to potential home buying customers--may have more flexibility than it once may have believed. Its Express Homes entry-level lines, its Freedom 55+ brand, and its Emerald high-end move-up and second-time move-up communities speak to this growing flexibiltiy and nimbleness under the D.R. Horton umbrella.

It's agreement with Terramor principals to continue the brand in Raleigh reflects a perhaps widening range of local business models under the Horton tent, and may be a way to infuse the Horton leadership ranks with fresh, dynamic energy and approaches to market opportunity.

"We made it a requirement of our conversations with any potential funders or acquirers that Terramor would remain independent, and continue operating and growing in the Raleigh market separate from any pre-existing divisional presence," says Terramor principal Pablo Reiter, who was advised in the transaction by Michael P. Kahn & Assoc., LLC. "D.R. Horton said to us that they'd be willing to do everything we ask for in terms of preserving the brand, and operating independently. Of course, now we have scale opportunities in purchasing, and land buying, and access to construction trades that we did not have. We're looking forward to delivering on 300 homes in 2018, and, given that some of our new land deals come online in 2019, growing even more in the year ahead."