The housing market is on its yellow brick road to recovery, and transactions that will finance growth for builders and single-family rental operations are blossoming like the field of poppies in The Wizard of Oz. For the first time in many years, acquisitions, initial public offerings (IPOs), and private placements are simultaneously available to the housing industry.
Forecasting an acquisition blizzard
As a long-term merger/acquisition specialist, with over 85 transactions for homebuilders completed prior to joining John Burns Real Estate Consulting, I’ve been watching for the return of acquisitions. We have arrived at the point in the housing recovery when Wall Street expects the public homebuilders to produce both profits and growth. This growth will be difficult to deliver strictly from existing operations, as builders address labor shortages and construction delays and scramble to secure finished lots in the right places. The builders will augment internal growth with acquisitions of other builders, and in fact, several publics hired acquisition managers in 1Q13 to support their efforts. Faster than Dorothy clicked her ruby slipper heels, numerous preliminary acquisition agreements have been inked, and more are under discussion. If all of these transactions close, you can expect a flurry of M&A headlines in 2013.
Many motivations drive M&A
Bigger builders typically acquire local or regional builders for several reasons, and we can see the first two of these motivations in the crop of deals in process:
- New markets. To re-enter markets they left in the housing correction or to enter markets they didn’t get into in the last boom
- Market share. To increase their position in a current market, via control over lots and local talent
- Expertise. To bring special expertise in-house, such as Pulte’s acquisition of Del Webb’s active adult prowess
For their part, builders who are selling recognize that they can guarantee today a significant portion of the money they hope to make in the future by selling homes through the next housing boom. In addition, they are motivated by:
- Capital access. Access to affordable capital to compete more effectively and grow their businesses, as loans continue to be hard to secure and expensive
- Incentives. Desire to reward and keep their management team together to accomplish that growth
- Retirement. Interest in retiring with no succession plan, or possibly some are discouraging their family from a career in a cyclical and risky business
- Investor exits. Need for an exit strategy for investors
- Personal liability. Eliminate personal liability and never signing a personal guarantee to the bank again!
IPO window is an alternative for some builders
Some builders who are great acquisition targets are instead tapping into the public markets directly. This is an unusual situation that has only happened once before in my 18 years of M&A, and it was at the same point in the housing recovery. In 1993, as the trajectory of the housing recovery off a bottom in 1991/1992 became clear, a couple of IPOs of smaller, single market builders launched at the same time that the first builder acquisitions occurred.
Wall Street has largely bought into the housing recovery, and many investors are seeking affordable alternatives with upside potential versus the public homebuilder stocks. Successful IPOs by homebuilders TriPointe Homes and Taylor Morrison and single-family rental operator Silver Bay Realty Trust have ignited interest. Since investors could suddenly turn to other opportunities outside of housing, numerous builders are scrambling to pursue this window of opportunity. The commonalities are the housing focus and interest in tapping low cost equity and debt while Wall Street is beckoning.
Private placements fuel growth and future exits
Historically, Wall Street has favored larger builders with a regionally diverse footprint, and we expect the same criteria to apply to the newer single-family rental operators. Armed with new capital, several great operators will expand their geography and increase revenues with an eye to an IPO or acquisition down the road.
Timing is everything
Wall Street’s attitude towards the housing sector can be capricious, and the opportunity for builders and single-family rental operators to launch IPOs can abruptly disappear. Private placements for builders typically have a longer season than IPOs, and merger/acquisition activity will likely continue through the next housing boom. Access to public equity and debt was a huge benefit to the public homebuilders through the housing correction and has also allowed them to buy lots and land to fuel their growth in the recovery. As national housing market experts, our team is supporting the wave of builders and single-family rental operators who want to level the playing field.
Learn more about our support services for mergers/acquisitions, IPOs or private placement.
If you have any questions, please contact Jody Kahn at (603) 235-5760or by email.