Trumark Companies co-CEO Michael Maples surveys Wallis Ranch, East Dublin, Calif., circa 2014.
Trumark Companies co-CEO Michael Maples surveys Wallis Ranch, East Dublin, Calif., circa 2014.

It's "game on" for home builder mergers and acquisitions in 2020 and beyond.

Let's level-set on the timing and context.

  • A lean-in to meet an earlier-than-typical, steadily-surfacing, steadily building demand--especially at the smaller, denser, more-simply-finished, lower-cost end of the new home pricing spectrum.

We're now ready to call the onset of 2020 the angel twin of 2019's Doubting Thomas New Year sentiment. Here we are (and sentiment at last week's International Builders Show in Las Vegas proved it), free of last year's demoralizing Federal government shutdown, buoyed by a few interest rate step-backs, adrenalized by a resilient domestic economy and stock market, and fueled further by demographic and household formation macro forces--has sparked a good deal of pep in home builders' step.

And this worries them. Why?

Land.

Arguably home building's most oft-used and important four-letter word, without that single, finite, precious resource, there's little else to be anxious about. Without a lot pipeline, there's no need to stress about labor constraints, about building materials price fluctuations, nor about access to capital finance in the form of equity investments, or project lending.

Why even fret customer demand? No land, no problem. It's always and inevitably at least one answer to the question, "what keeps you up at night?" whether it's good times, bad, or indifferent.

Right now, it's good times, just about the 180-degree inverse of expectations this time last year.

So, people who can secure land, people who can get it permitted, and people who can get its lots entitled without risk to financial assumptions and calculations--and ones who can do so in constrained, developer-adverse, highly regulated, intensely competitive markets and market conditions--and, here's the kicker, do it repeatedly, are a rarity.

These characteristics essentially describe and distinguish Trumark Companies co-CEOs Michael Maples and Gregg Nelson, who just finalized an agreement to sell a majority share of their company to Osaka, Japan-based Daiwa House. They've more or less done so for their 30 years together as Trumark co-founders and principals in California coastal residential real estate's unmatched proving ground.

These same traits, ones that Maples and Nelson mastered and made their signature as competitors and partners, also add up, at their core, as a reason to believe that mergers and acquisitions in all of their configurations and combinations--public to public, public-private, Clayton, Japanese, Chinese, Canadian, and private to private--will continue apace, even as macro market signals remain mixed about what's in store for 2020, 2021, and 2022.

For acquirers--who are acquiring not just incremental volume and the ability to do it more profitably by applying operational integration, technology tools, sourcing, marketing, and new management and workflow templates to their processes, but also the capacity to predict and manage those resources and returns across business and housing cycles--structural, fundamental demand is a decades-long signal with periods of noise to contend with.

For sellers, would-be sellers, or even un-intending sellers, an array of factors and motivations ebb and flow as nearer-term influences play out--the age(ing) of principals, owners, or operators, being an important X-factor in why we'll see more privately-held firms go on the block in the next 12 to 24 months.

Importantly, however, one of the single most-critical forces driving expectations around deal-flow right now is the time- and talent-suck that constant capital-raising, stewardship, management, and care-and-feeding takes these days, which can siphon off bandwidth for finding, planning, optimizing, zoning, entitling, and permitting lots that buyers will want as their homes. And that doesn't even account for the night sweats, the constant pit in the stomach, the perpetual jitters that those loans, personal guarantees, lines of credit, syndicated financing arrangements, and equity deals, friends-and-family investments, and country club deals are all in good stead with every month's performance, community counts, absorption rates, margins, and cadence.

In particular, the constant ache and potentially life-altering pain of personal loan guarantees--especially at a moment with strong cross-currents of risk, volatility, and uncertainty around, amount to a primal source of motivation to secure capital stability. Time may be of the essence here.

"The combination with Daiwa House excites us, and puts us in a far better competitive posture relative to our peers," co-CEO Gregg Nelson tells us. "We've been doing what we've done over the years, battling private equity deals and complex financing around every project, whether it was single-family residential, multifamily, commercial, masterplan development, etc. Now, because Daiwa House is balance sheet-oriented, we have an opportunity like we've never had before to expand what we do with a partner whose business model and areas of expertise align perfectly with the diverse lines of our activities."

Margaret Whelan, whose eponymous firm Whelan Advisory, LLC., worked as advisor to Maples and Nelson in the Trumark pairing with Daiwa House, notes that a strong cultural match and the synchronized real estate and construction repertoire works to form a solid basis for a win-win combination between the two.

"Due diligence on both sides revealed to each the importance and track records around principles and values of integrity and trust that go along with the talent and skills," Whelan says. "Daiwa House wants to be a much bigger player in North America and the United States market, and this should be a wonderful marriage. It allows Mike and Gregg to move decisively forward in their planning without financing contingency. Despite the distance, time difference and language barrier, the Daiwa House team couldn’t have been more professional and easier to work with over the last 12 months. This established the trust required to seal the alliance."

Financing contingency--it's a sobriquet for the head-aches, the time, and the unrelenting demand of capital raising and management that privately held home building firms face. And, in times like these, where volume and demand seem to be accelerating even as risk indicators have begun to flash "wait-just-a-minute" warnings, private operator principals face an ever more intensive and thankless prospect managing financing contingency.

This is partly because of the relative shortage--in some markets, anyway--of vacant, developed, lot pipelines. Now, as early signs of market momentum elevate builder optimism and kick community opens and construction operations into a higher gear, the great awakening to how restricted lot pipelines are in some markets has taken place.

So, who's trolling for strategic acquisition to secure not just an expanded lot supply in specific markets and submarkets, but for the kinds of pros--like Maples and Nelson--who've proven they can do it through up-cycles, down-cycles, and mid-cycles?

  • Certainly, the larger-cap publics, who're constantly revising, refining, and expanding their customer segment, pricing, and geographic portfolios even as they seek depth of local scale in the markets with economies on the up.
  • The folks at Clayton Properties Group, who've set out on a mission to meld real estate, advanced on- and offsite construction methods, and unmatchable heft in distribution infrastructure, to democratize homeownership, especially in hole-in-the-donut heartland markets ignored by many of the other enterprise-level builders. They've acquired 10 private, stick-build companies to date. Our bet is that as Clayton parent company Berkshire Hathaway's ceo Warren Buffett has promised in the past, "more will come."
  • The Japan-based and China-based companies, like Daiwa House, Misawa, Sekisui House, Sumitomo, and Landsea, who've each established beachhead operations and footprints in the U.S., but must be regarded as only in the preliminary stages of executing very long-term strategies to become major players in home and community development in North America. This owes, in part, to the current delta that makes the cost of capital lower in Asia, as well as to the fact that population stagnancy in Japan means new-home development has already peaked and begun to flat-line.
  • Private-to-private combos, fueled in some cases by personal relationships among principals, and in others by a recognition of opportunity for a greater ability to compete by adding size and clout, will also be likely.

Again, although private home building local and regional brands may still retain a reputational edge and an ability to be nimble in response to local and regional design and product trends, and although they may be the kinds of workplaces many home building personalities feel better suit an entrepreneurial, people-oriented, personally-invested company culture, the "financing contingency" factor, and the time, energy, and management skills that dimension commands can itself trigger a desire do sell. And the timing may not ever be better than it is now.

At their core, builders--for what they are in their heart-of-hearts in the United States--like to design, build, acquire land, and make happy home buying customers. They'd really like to let others to worry about and deal with the money part.

As opportunity surges in the current environment, those who're in the know realize that so too does risk.

This is why we'll see more big, little, and medium-sized M&A deals in the months ahead.

We hope that bodes well for those who are so valued for what they do in their heart of hearts.

Game on!