Anyone needing a reminder that land--predictable, well-located, visible, measurable, and ultimately profitable access to it--is every home builder's first-order priority gets it this morning.
Sumitomo Forestry America and Crescent Communities agreed to a deal that aligns Sumitomo's strategic goal to be a 5,000 home-a-year home building operator in the United States with a leading developer of residential, commercial/mixed use communities in 9 U.S. states. Sumitomo's acquisition of Crescent, expected to close in the coming second quarter of 2018, pairs Sumitomo's growing home building and distribution operations with a developer whose sprawling footprint includes multifamily, single family, and commercial and mixed use businesses. Crescent Communities’ multifamily business, operating under the “NOVEL by Crescent Communities” brand, includes 20 communities in development and/or operations, totaling approximately 6,400 units.
The company’s Fielding Homes single family home building business includes over 1,700 single family lots across 6 communities in Charlotte and Raleigh-Durham, North Carolina. The commercial and mixed use business development portfolio includes nearly 1.5 million square feet of assets, including the recently announced 742,000 square foot Ally Charlotte Center project in Charlotte, North Carolina. In addition, Sumitomo Forestry America, Inc. is also acquiring Crescent Communities’ development pipeline of nearly $2.0 billion of real estate projects, including 5,500 multifamily units, 2,200 single family units, and 2.5 million square feet of office and industrial assets.
The marriage of home building operator and multiregional, multi-disciplinary land developer--creating synergy opportunity in land acquisition strategy, economic cycle hedge options, and the ability to profit off the sale of lots at the same time as controling the costs of lots one buys--follows a pattern we're seeing play out among players with the deepest access to capital resources.
North American Sekisui House has created a similar blend, with its Newland masterplanned communities group, its home building operator Woodside Homes, and a diverse range of multifamily and mixed-use projects in the U.S. And last year, D.R. Horton closed on a deal to take 75% control of land and lot giant Forestar, which we described in this space as follows:
For Horton, a win-win would be that, if it can team up with Forestar as it designs to, it gets super-powered binoculars that allows it to see and access a smoothed-out finished-lot pipeline in to the 2020s, as it nears and ultimately exceeds 45,000 home deliveries annually. Meanwhile, Horton could also avail of its "ownership" of land and lots that would sell, both to itself and others.
Of material importance to Sumitomo is Crescent's well-matched fit with a geographical footprint Sumitomo has already created with its home building operator acquisitions to date. Crescent's land development holdings are concentrated in the Southeast, aligning with the Japanese firm's interests in Dan Ryan Builders, and the Southwest, where Bloomfield and Gehan operate in Texas, and where Edge Homes operates in Utah.
Needless to say, Crescent's new access to capital through the deal, would enable it to even further expand its development footprint, both in the markets it's currently operating in, and perhaps into the Northwest, where Sumitomo owns Henley-USA/MainVue homes in the state of Washington.
Underscoring the rationale of the combination of Sumitomo and Crescent is the growing importance to home builders of "local scale," which broadly refers to the ability of a builder to command enough marketshare in its operating arenas to achieve efficiencies in distribution, secure predictable access to labor crews, become subject-matter-experts on local customers and their preferences, and to not have to fret over where the next tract of land might come from.
In this way, the Sumitomo acquisition of Crescent plays out a strategy similar to yet another highly diversified North American single-family real estate giant: Lennar, which is currently still ingesting and integrating with its new crown jewel acquisition, CalAtlantic, even as it looks to spin off its Rialto real estate venture as it did its Five Point Communities California venture last year.
Here are the statements from the respective key stakeholders at Crescent and Sumitomo:
“We are excited to partner with Sumitomo as their investment will continue Crescent Communities’ growth strategy and enhance our capital structure,” said Todd Mansfield, Chief Executive Officer of Crescent Communities. “This acquisition is evidence of Sumitomo’s favorable view of our multi-product platform and geographic footprint in high growth markets. We look forward to leveraging their extensive real estate expertise, financial strength and global network to support our ongoing commitment to unleash value for all stakeholders.”
“Crescent Communities has successfully established itself as an integrated platform of diverse real estate assets with a significant development pipeline that provides a long runway for future growth,” said Atsushi Iwasaki, President of Sumitomo Forestry America, Inc. “We have been pursuing further expansion of our U.S. real estate business and the acquisition of Crescent Communities is a perfect fit with our investment philosophy. With favorable demographics, including outsized employment growth, Crescent Communities’ markets are well positioned to support healthy long-term real estate fundamentals. The Crescent Communities team brings a wealth of real estate development experience to our organization, and we look forward to our new partnership with Crescent Communities.”
Especially given the profit margin pressures on private home builders amid materials price inflation, increasing labor capacity stress, and, most importantly, an ever more ferocious competition for lots in any given arena where deep-pocketed publics are scrambling to amass local share, we see continued motivation among private builders to align, venture, or sell to acquirers in the months ahead.
