By adding the volume, operational strengths, and growth momentum of the 16th largest private U.S. home building operator--Wade Jurney Homes--fully into its own operations and balance sheet, Century Communities, by some measures would leapfrog TRI Pointe Group, M/I Homes, Beazer, M.D.C. Holdings, and LGI Homes to become the Builder 100's No. 10-ranked builder.
On the surface of it, the transaction continues the consolidation of home building's biggest players, as data, operational tools and processes, capital investment, supply chain logistics, and labor capacity combine with local economic jobs, household formation, and housing demand to both allow and require that builders do more with less. This latest consolidation trend--at the epic level--kicked into high gear with the October 2015 combination of Ryland Homes and Standard Pacific into CalAtlantic.
Lennar upped the ante exponentially with the $9.3 billion purchase of CalAtlantic [and WCI, by the way, for $643 million in late 2016] last year, even as active m&a pros Century and Taylor Morrison set themselves on a fast-track of their own.
Like last week's home building mergers and acquisitions news--a deal that would jettison Taylor Morrison into the ranks of the top 5 U.S. home builders, with the purchase of publicly-held AV Homes--movement up the ladder in heft, breadth, and depth in market footprint, exposure to lower price tier home buyers, and, ultimately, national standing all amount to meaningful advantages, competitively and operationally, at this point in housing's business cycle.
Size, in other words, matters, as long as it's not sheerly about geographical dispersion or volume of starts. Size, understood as geographical, customer segmentation, operational, selling mechanism, and lot-pipeline cohesion is not only a gateway to better operating margins, but a more easily understood narrative for institutional investors who may be getting queasy about the future of residential real estate commitments in a rising-interest rate environment. Those investors want to be able to pick winners and loser from among peers whose business models, operating arenas, and product sets bear relatively strong resemblance to one another. They want ways to tell one apart from another, and market share primacy in local markets is one way to do that.
Many of the motivations, conditions, and proficiencies noted in the Taylor Morrison-AV Homes combination--a deal whose total value is around $963 million including cash, stock, and debt--apply similarly to those fueling Century's decision to move forward with its investment in fast-growing Wade Jurney Homes. In Wade Jurney, Century has acquired a Southeastern super-regional juggernaut, with nearly 6,000 owned and controlled lots to add to Century's 30,000 owned and controlled pipeline, with nearly 1,200 homes on order worth nearly $190 million, and a last-12-month pro forma volume of 1,937 home deliveries.
By completing that initial investment--the purchase of 50% equity in the WJH entity in November 2016 for $18 million--Century locks in four key near-term and longer-term strategic objectives.
- One, and perhaps most significant, is immediate, powerful exposure to entry-level, lower-price-range buyers in some of the nation's hottest, most economically-robust Southeastern marketplaces, stretching from Florida, north into the Carolinas and Tennessee. Wade Jurney average selling prices of $150,000 may even belie the operational and selling engine that enables this firm to deliver homes at this price profitably.
- Two, the Jurney acquisition is a text-book case in the profit-margin benefits of applying rigorous submarket operational excellence for "deep scale" advantages--start-to-completion build times of 120 days maximum, evenflow lot take-downs and starts timed to completions of work in process, cluster-based project supervision and community selling, reduced windshield times, greater visibility and forward-commitment to trade base, and strong local relationships with developers and other land sellers.
- Three, the acquisition is both real estate and a talent-operational model DNA that demonstrably works in a post-distressed asset land positioning environment. In other words, the Wade Jurney model of acquiring profitably-penciling lots as an asset-light entity among competing bidders, has proven itself out even as competition has stiffened.
- Four, the Wade Jurney operational model and disciplines, as well as product line, value-engineering, customer segmentation, and marketing and sales models are portable--at least in part--to Century's other markets, which are more land-constrained, higher-cost, and higher-risk geographical markets, Denver to the West Coast, on up to the Pacific Northwest.
So, Century Communities' narrative is that it has leveraged meteoric growth, primarily through proven skills in acquisitions of both private and public entities, to skyrocket from an IPO in 2013 to a No. 10-ranked builder in 2018. Being a top 10 builder matters. Being able to continue to "make hay while the sun shines," better, faster, and more profitably than the rest, with a sustainable, iterative land acquisition, building model, and selling and marketing process also matters. That's what Century has acquired in Wade Jurney Homes.
As tariff risk, interest rate risk, post-tax reform risk, labor cost and availability risk, local regulatory risk, and political risk pronounce themselves in volatility and uncertainty, a home building enterprise's ability to set itself apart, by any means it can, from peers, will gain relative favor in the capital markets in the months and perhaps years ahead.
Amid all these named risks, the offsets are clear. A strong economy, an improving jobs and wages market, demographic traction on household and family formation, and the continued value of America's Dream of homeownership suggest that the tide of housing's recovery is flowing rather than ebbing.
Is it a tide that will raise all ships, or only those whose size and clout and heft and operational strength work well above average at doing more with less?
Exciting times.
