News in the home building sector in mid-January was dominated by Sekisui House’s $4.9 billion blockbuster acquisition of M.D.C. Holdings, the No. 11 company on the 2023 BUILDER 100 list.
With the deal, Sekisui House significantly expanded its U.S. portfolio, which includes the Woodside Homes, Holt Homes, Chesmar Homes, and Hubble Homes brands. The acquisition accelerated the Japanese company’s presence to 15,067 combined home closings in 2022, helping Sekisui House achieve its target of supplying 10,000 homes outside of Japan by 2025 much sooner than anticipated.
In addition to representing the largest deal undertaken in the home building sector, the acquisition represents a larger theme of consolidation in the home building sector. Industry analysts estimate the 20 largest home building companies control approximately 40% of the market.
“Consolidation could mean more supply, cheaper homes, and, in theory, more opportunities for young adults to strike out on their own—they currently cite the unaffordable cost as one of the main reasons for living with their parents. Japan looks more and more critical to driving this,” Leo Lewis wrote for the Financial Times.
In a LinkedIn post, Margaret Whelan, founder and CEO of Whelan Advisory, wrote that demand, supply, and the structure of deals are several factors driving increased foreign interest in the U.S. housing market.
“I think [Japanese activity in the U.S. housing market] is going to accelerate,” Whelan told BUILDER. “It seems that because of the uncertainty of the last several years, a lot of buyers have been on the sidelines. The Japanese companies have decided they are going to get ahead of what they believe will be a recovery in the U.S.”
Whelan says Asian buyers have acquired more than 30 builder or construction service companies since 2013.
“The U.S. residential housing market is attractive given the strong underlying growth fundamentals, especially when compared to the declining population in Japan,” Whelan wrote on LinkedIn. “These buyers are deliberate, serious, competitive on valuation, and do not require financing contingencies.”
Alan Ratner, managing director for Zelman & Associates, told BUILDER the interest in the U.S. market by Japanese buyers is driven in part by the desire to diversify their portfolio due to a cloudier demographic outlook within Japan. Additionally, Whelan says oftentimes foreign buyers acquire a controlling position less than 100%, allowing the seller to participate in accelerated growth and profit sharing.
However, prior to the M.D.C. Holdings acquisition, the purchases by Japanese buyers were largely of smaller, regional private home builders.
“I don’t think there are a lot of willing public sellers out there,” Ratner says. “M.D.C. was a bit of a unique situation in that it still has a pretty high level of inside ownership by the company founders. When you look up and down the public universe, there are not a lot of other [public] companies like that today. Most are run by second-, third-, [and] fourth-generation CEOs, and the inside ownership is much lower, so the founders don’t really control the vote as they did here with M.D.C.”
Ratner says, as a result, the M.D.C.-Sekisui deal is “somewhat unique” and is not likely indicative as a sign that Japanese companies will begin acquiring public builders or that other public builders will be looking to sell.
“Japanese builders have been a little more cautious in terms of how large they are willing to go, and some of these acquisitions they are viewing as a way to learn the business and markets. For, the most part, they have been letting companies continue on a standalone basis and run autonomously,” Ratner says.
For M.D.C. Holdings, the deal had an immediate effect on its stock price. After trading between $53 and $56 per share since late December, the home builder’s stock price jumped 18.4% the day following the announcement, and the builder’s stock price has been above $62 per share for the past week. The company’s stock price has nearly doubled since the end of October, when it was $36.88 per share.
“The company’s earnings for 2024 has moved upward to $5.38 per share from $5.30 over the past 30 days, implying 4% year-over-year growth. Its revenue estimate also indicates 7.1% year-over-year growth,” Zacks Investment Research wrote in its analysis of the deal. “This positive trend signifies bullish analysts’ sentiments, suggesting robust fundamentals, and the expectations of outperformance in the near term.”
Rich Smith of the Motley Fool says the jump in M.D.C.’s stock price—to less than $0.50 below Sekisui’s offer price of $63 per share—suggests there is “little worry that the deal will not pass regulatory muster.” S&P Global Ratings placed all of its ratings on the home builder on CreditWatch with positive implications, reflecting the view “that the transaction may enhance M.D.C.’s credit position given its acquisition by a higher-rated entity.”
Trends Moving Forward
Ratner says further consolidation can be expected in the industry, either via public builders acquiring private builders or foreign buyers, such as Japanese companies, acquiring private builders.
“In the current environment, public builders have a pretty strong competitive advantage in many aspects of the business, the biggest being capital availability,” Ratner says. “The balance sheets of public builders are in fantastic shape, they are sitting on a ton of cash. I think there will continue to be industry consolidation, [I’m] just not necessarily expecting to see a wave of public builders selling.”
“I think private builders selling is very consistent with what we expect to continue [to occur],” continues Ratner. “There’s definitely a big appetite on the acquisition side among the publics and larger players. The environment for M&A is pretty attractive [in] that regard.”
