Homebuilder M&A plunges from 2022’s record levels, but some see brighter days ahead

20 July

Homebuilder M&A plunges from 2022’s record levels, but some see brighter days ahead

Deals involving North America’s homebuilders surged to the highest volume ever in 2022.

A total of 15 transactions worth a disclosed USD 15.2bn were agreed last year, according to Mergermarket. Dominated by Blackstone’s USD 13bn deal for student housing developer, American Campus Communities, and the USD 809m blank check merger for Great Southern Homes, 2022’s other acquirors included homebuilding giant Lennar [NYSE:LEN], Landsea Homes [NASDAQ:LSEA] and overseas buyers, such as Japan’s Sekisui House.

The surge of activity in 2022 sustained levels seen in the prior two years. In 2020 and 2021, as low interest rates inflated property markets, 13 and 16 deals were signed, respectively. This year, however, activity has slowed down markedly, with only four deals in the year to date. A big part of that comes after interest rates began shooting up in 2Q22, which led to house sales plunging and many homebuilders scaling back construction.

A millennial moment

But homebuilders in North America are having a moment again. After hemorrhaging sales throughout 2022, many saw a surge in the first few months of 2023, touching levels seen in early 2022.

A big driver of that is the US’s 72 million millennials, who have been entering their peak home-buying years since before the Covid pandemic. Because high rates have dissuaded people from selling existing homes, buying a new home is often their only option. Between 30% and 40% of home sales nationally are now of new builds, says Rick Costello, CFO of Green Brick Partners [NYSE:GRBK]. Historically, it is closer to 10%.

Many homebuilders – including America’s biggest three, DR Horton [NYSE:DHI], Lennar [NYSE:LEN] and PulteGroup [NYSE:PHM] – have recently seen shares surge to all-time highs as a result.

Much consolidation has already happened but there is room for more, points out John Ho, CEO of Landsea Homes. The 18 publicly traded homebuilders that exist today construct 45% of new housing stock; 30 years ago, several more existed and built just 8%, he says. “People think there could be even more room [for consolidation],” said Ho.

Doing so would help with the challenges many homebuilders have faced in recent years: finding land, labor shortages and supply chain snafus. Gaining scale also helps offset administrative costs.

Land and expand

The divergent strategies of Landsea and Green Brick – which both operate in overlapping Sunbelt markets – provide a telling snapshot of what lies ahead.

Green Brick – which focuses on building in infill locations in Dallas, Atlanta and Florida’s Treasure Coast – has made opportunistic acquisitions, including GHO Homes in Florida in 2018. But it sees few opportunities ahead. Costello, the CFO, said many private builders are over-leveraged and few have built up sufficient lot inventory to be attractive targets.

Landsea – which started in California but is focused on expanding in Dallas, Houston and Austin as well as Florida – has made four acquisitions in four years ranging from USD 20m to USD 200m. It plans on more. Ho, Landsea’s CEO, believes the tightening credit markets will push several private builders into play as they struggle to raise construction financing from weakened regional banks.  Landsea likes to enter a market with a small acquisition, which it uses to build a team, an office and to buy more land. Then it finds a larger bolt-on acquisition to penetrate the market further. Landsea used that playbook in Phoenix and Orlando. It likely will rinse and repeat it for Texas too.

Analytics by Izaz Ansari

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