D.R. Horton's acquisition announcement this week of Indianapolis and Fort Wayne, Indiana, and Columbus, Ohio home building operator Westport Homes for $190 million is telling, for both a firm culturally drawn to being known as America's No. 1 home builder, and for the home building, new residential development, and investment community as a whole.
Four reasons why the move matters, strategically, competitively, and from a secular perspective right now include:
- Horton heavies up on its Rust Belt exposure. Proficient and profitable in second- and third-tier markets where other big builders have trouble thriving, Horton's dial-in of midwestern markets signals prospects that these economies may show more resilient, more jobs-fueled household and home formation behavior, and may have more sustainable new housing opportunity than land-constrained, more heavily regulated coastal markets over the next couple of years. This focus on "flyover" America may represent an inflection away from areas that have seen the fastest price growth toward new home communities more in balance with jobs and slow wage and income growth.
- Affordability reigns: Horton's exposure--through acquisition of the Builder 100's No. 62-ranked operator nationwide, based on 2017 revenue totaling $203 million on closings of 843 homes--to affordably priced, reliably produced, high quality homes gives it incremental volume in units and communities where fundamental demand and attainability levels still run the strongest.
- Rights to the Throne: Adding 900 or so deliveries to its organic growth this year and next could puts Horton right back in the ballpark where it's contending for the top spot--above post-CalAtlantic merged Lennar--for unit volume primacy among home builders, a galvanizing cultural rallying point for Fort Worth, Tex.-based Horton.
- Finally, a Market Disruptor in the Making: Clayton Homes, which made its mark and built an empire around manufactured homes, has put together a full-fledged cross-over threat to traditional site-build players, especially in affordable secondary and tertiary markets.
As for the first point, this motivation--entirely consistent with Horton's focus on markets it applies best-of-breed operational skills at creating scale and profit opportunity in markets that offer other builders only razor-thin or negligible margin strength--may be one other builders will want to take a close look at. Many high-volume competitors achieve their volume and profitability in more expensive, more heavily regulated, and more choppy coastal regions, whereas Horton's operational excellence disciplines enable it to play in the heartland, where jobs growth, economic balance, and home prices don't get as bubbly. The Midwest may prove to be more boom-and-bust resistant than "hot market" arenas getting all the attention up to now.
On point, two, as well, Horton's outlying proficiency at undercutting other builders' price points as a differentiator gives it a strong narrative pitch to younger buyers who'd rather move into homeownership with new construction than not. Westport's product and community-line segmentation aligns well with Horton's value-to-price edge in other markets.
As for point three, Lennar's momentary seizure of Horton's long-time claim to be "America's No. 1 builder" is a sore spot for a company that marketed itself to both prospective buyers and to the investment community--not to mention the internalized sense of pride its associates rally around by wearing the mantle of No. 1--as such. It's understandable and likely that Horton will flex whatever mergers and acquisition clout and organic growth muscle it can to regain the crown, in 2019, if not this year.
The fourth issue is one of the most interesting. Clayton's escalating incursion into turf dominated by traditional stick-building mega companies like Horton, Lennar, Pulte, and company, has been no secret, nor has the Berkshire Hathaway unit's basic strategic mission been hidden.
It wants to, is committed to, and has been investing in serving a potential market universe single-family market players find it difficult to bend their cost structures to serve: the missing middle housing market of households making median or average or par household wages, but are shut out of the new-home market.
In this way, Clayton sees a migration up from the average selling prices of its factory-manufactured home business and a migration down from its growing 7-company portfolio of site-build oriented operators, eyeing price ranges from the low $100s to the mid-$200s as a price spectrum where the opportunity remains enormous, and mostly untapped.
The company--now with a heartland-centric footprint of site-build operators--added Arbor Homes, the Indianapolis-market's No. 1 builder in July--with a stated intent to iterate Arbor's remarkable operational model and price-point nimbleness into other parts of the growing Clayton empire.
So, we view it as no accident that D.R. Horton's latest acquisition--of Westport--puts it squarely in Clayton and Arbor's backyard, where these two heavyweights will keep a wether eye on one another's every strategic move.
Clayton--whose DNA centers on offsite manufacturing workflows and value streams that many stick- and site-build operators can only dream of--has been leveraging its site-build strategists' land acquisition, operational models, and design chops to explore how to achieve the best of both construction methods, and do it in a way that drives down costs.
Meanwhile, Horton has signaled it won't stand down as insurgents--whether it's endemic strategic competitors like Lennar or outside-the-box disruptors like Clayton, or even Amazon--come in and undercut its present and future ability to prosper. It invested in 3-D home printer ICON, and like most of the other high-volume players, is earnestly looking into offsite factory capability for its construction processes.
Westport Homes checks every strategic box Horton could want for incremental volume opportunity, strong cultural and operational alignment, exposure to affordable markets, etc. But importantly, the move gives Horton the ability to check out, on the ground, the machinations of one of the biggest competitive risks to its primacy among affordably-priced homes of any type: Clayton.
