Special Report: Homebuilding
Florida Homebuilders
- Ripe for Consolidation
January 12, 2005
PCE predicts
a continued and accelerated trend of consolidation for Florida homebuilders
very much akin to what we have seen in the banking industry. The
large national homebuilders are changing the competitive landscape
of the industry and, by the end the decade, will control a dramatically
increased market share of the single-family permits in Florida.
Consolidation
Trends
Market share
of home closings by today's top ten national companies almost tripled
from 4.75% to 13.9% in the span of ten years from 1993 to 2003.
Yet with this extraordinary accumulation, the homebuilding industry
remains highly fragmented and poised for continued consolidation.
The largest homebuilder, DR Horton, represents less than 2.25% of
the entire market.
The larger
firms enjoy economies of scale, greater purchasing power and access
to the capital markets. These advantages are particularly powerful
to homebuilders as land prices continue to climb and land sellers
negotiate less generous terms with developers. Consolidation is
being driven by factors such as arbitrage opportunities between
private and public trading multiples, market share gains to influence
pricing, and compelling demographics in particular geographic markets,
like Florida.
Florida Market
In Florida,
we have these seen national consolidation trends play out in our
own backyard for three primary reasons - our size, growth and customer
diversity.
Florida is
now the number one home building state in the union - bigger than
Texas, bigger than California. In fact, Florida is on track to exceed
PCE's estimated 180,000+ single-family permits for 2004, shattering
California's previous record of 163,000 in 1989.
Big
Three Homebuilding States - Figure 2
Source:
U.S. Census Bureau, except last 2004 date point, PCE estimated.
To put this
into perspective, Florida represented more than 11% of the entire
U.S. homebuilding market in 2004. By itself, Florida issued more
single-family permits than 23 states and the District of Columbia
combined.
Florida presents
an impressive geographic sweep of development range from large tract
developments, to high-rise condo projects. For single-family
detached homes, as in presidential politics, the I-4 corridor is
dominant with Orlando and Tampa representing the top two metropolitan
markets in the state. Tampa and Orlando account for more than 25%
of the entire state's single-family permits.
Florida
Major Submarkets - Figure 3
Source:
NAHB Report 1997-2003 & U.S. Census Bureau
Growth.
Nationwide in 2004, new permits pulled grew an impressive 10% over
the prior year. Florida is poised to double that growth rate, even
with the significant constraints of four named hurricanes and building
material shortages.
Remarkably, Florida ranks among the fastest growing states for single-family
permits in America. The shear volume of additional new homes required
to match small state growth patterns typically excludes large states
from the fastest growing category. Over the four year period ending
2003, Florida's 10%+ compound annual growth rate for permits ranks
as fourth in America, surpassed only by the burgeoning "population
centers" of Hawaii, North Dakota and Wyoming.
Wyoming needed
an additional 800 housing starts to rank in the top three; Florida
required an additional 50,000 to its based of 106,000 starts in
1999. Hawaii added 2,852 new housing permits between 1999 and 2003
to capture the highest growth rate, while Florida added nearly 18
times as many permits over the same time period to fill its top
four status.
Figure
4
Source:
U.S. Census Bureau
Even though
November home sales were down nationwide and for Florida from October,
it is hardly noteworthy because November has historically trended
as a slow housing month. When comparing November 2003 to November
2004 home sales for both the nation and Florida, we see a solid
increase of 15% and 23% respectively.
Florida
Permit Growth 2003-2004 - Figure 5
Source:
U.S. Census Bureau (all data actual except December 2004, PCE estimated)
PCE believes
that many of the perceived constraints of 2004 did nothing more
than push closings forward into 2005. With many builders holding
record backlogs, we expect a robust 2005 with solid demand driving
additional growth across the state, but particularly across the
I-4 corridor.
Diversity.
A competitive advantage for Florida is its customer and housing
product diversity. Florida boasts the trifecta of homebuyers: primary,
retirement, and foreign. While home buying is driven by interest
rates, these Florida home buying sectors have independent drivers
creating the demand.
Figure
6
The graying
of America will continue to fuel the active adult homebuyer market
in Florida. The Baby Boomers heading into their 60's will add to
Florida's already booming retirement housing market.
A weak and
weakening dollar abroad fueled strong demand from international
buyers. With the dollar heading for all time lows against the Euro,
we have seen an increase in foreign buyers, particularly from Britain,
purchasing second homes or retirement homes in Florida. We
expect this trend to continue.
This diversified
customer portfolio mitigates Florida's exposure to national or regional
economic downturns. (See Figure 2, which compares Florida's
low trajectory decline in 1990 compared to the steep fall off Texas
in 1983 and California in 1989.)
Home Building Valuations
Enterprise
values of the publicly listed homebuilders suffered from the much
anticipated spike in interest rates during March and April 2004
and then again from an earnings warning for the third quarter. The
steep incline for the 15-year and 30 year fixed rates during this
time frame turned out to be a spike rather than a trajectory, and
long term rates have settled back down towards their previous lows.
Interest
Rates 1999-2004 - Figure 7
Source:
Federal Reserve Bank
During
March and April of 2003, the national homebuilders lost 20-25% of
their market value. Builders have gained most of that loss back
over the duration of 2004, ending up or at near record values.
Homebuilder
Values May 2002 - August 2004 - Figure 8
Source:
Yahoo Finance
Across the
board, homebuilders are trading at attractive multiples, averaging
more than 7.5 times EBITDA and two times book. While record backlogs
of orders going into next year would suggest a strong performance
for Florida builders in 2005, high rates may diminish the growth
rates of housing starts in more rate sensitive geographies away
from Florida.
Banks and
homebuilders are similar in their consolidation objectives.
In both markets, the larger firms are acquiring mid-sized firms
to increase market share within their fragmented market. We
expect the top homebuilders to target profitable operations with
sizable backlogs, especially in geographic markets like Florida.
PCE
Investment Bankers is a member of the PCE family of companies that
provide investment banking, valuations, advisory services, research
and Indexes.
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