Land, Homebuilders Back in Sharp Demand by Investors
Investors see a lot of runway in front of homebuilders as they prepare for the takeoff of the residential markets recovery.
As home price appreciation has climbed over the last 12 months after the bottom fell out of the business in 2006 and ’07, many homebuilders have been expanding their land and lot holdings in the past year — in some cases by as much as 50%.
Housing fundamentals also look better. New home inventory is tight, with limited entitled and developed land in the best locations and affordability remains high despite recent upticks in interest rates from historic lows.
The turnaround and the outlook have grabbed the attention of major private equity players with Barry Sternlicht’s Starwood Capital Group being the latest to jump in.
Last week, a subsidiary of Starwood’s TRI Pointe Homes Inc. agreed to acquire Weyerhaeuser’s homebuilding subsidiary, Weyerhaeuser Real Estate Co. in a transaction valued at $2.7 billion.
“We’re building in a one fell swoop, the ninth largest homebuilder by market cap, and it will eliminate, we hope, a discount we have with the small floats that we had prior in this merger,” Sternlicht said in discussing the merger with investment bankers. “With almost 20,000 or two-thirds of lots located in the California market, we expect that we will enjoy the benefits of this merger for several years.”
“This isn’t a broken company,” Sternlicht added. “Weyerhaeuser’s decision to exit the business was really a matter of focusing their shareholder on their larger business, which is their forest products business and not the homebuilding sector.”
In another homebuilder acquisition this past week, Toll Brothers Inc. agreed to acquire Shapell Industries Inc., a private California builder, for $1.6 billion in cash.
Shapell is one of California’s largest land development and home building companies in the affluent coastal markets of Northern and Southern California. Toll Brothers is acquiring, 5,200 home sites in many of the state’s most affluent and high-growth markets: the San Francisco Bay area, metro Los Angeles, Orange County and the Carlsbad market.
The lots Toll Brothers expects to acquire from Shapell would bring Toll Brothers’ total lots owned and controlled in California to 9,200.
This past summer, The Ryland Group Inc. acquired the operations and assets of Cornell Homes, one of the Philadelphia market’s largest private homebuilders. The Cornell acquisition gave Ryland a successful ongoing operation with 1,716 additional lots for future sales. It was Ryland’s fourth acquisition in the last 13 months.
These purchases were made with an eye towards the future.
“Inventories of new and existing homes remain at low levels in most of our markets and we expect the demographic drivers of household formation to result in the need for new homes for years to come,” Larry Nicholson, CEO of Ryland told analysts last week. “For several years now, we are focused on rebuilding our company to take advantage of the upturn in housing and we continue this trend in the third quarter ending the period with a 49% more lots under than we had in the same period a year ago.”
The acquisitions follow on strong fundraising activity homebuilders launched in 2012 and have continued through this year.
Robert L. Salomon, CFO of Beazer Homes, said his firm waited to start buying land until it saw two things happened: it was able to demonstrate that it could operate its existing communities profitably and then attract growth capital.
“As part of that fundraising, we told investors it would take some time to intelligently deploy the capital, and then, additional time before we had sales and closings to show for it,” Salomon said.
That is now starting to occur. Beazer has ramped up land spending this year to $475 million, up about $300 million from the prior year. It also has contracts to purchase land parcels totaling in excess of $120 million. It expects to spend between $500 million and $600 million on land and land development in fiscal ’14.
While homebuilders see a multi-year recovery period, there could be hiccups along the way.
“Rapid home price appreciation, increased interest rates, and economic and political uncertainty have all… impacted consumer confidence and tempered the robust demand we experienced during the first half of the year,” said Scott D. Stowell, CEO and president of Standard Pacific. “We have always maintained that the housing market recovery would likely be an uneven one, and that there would be bumps along the road to recovery. While we are certainly experiencing a few of those bumps now, when looking longer-term, we continue to maintain a cautious but positive outlook.”
Standard Pacific is targeting a total 2013 land spend in the $700 million to $850 million range.