2018 Homebuilder CFO Roundtable. Wynn Las Vegas 7 May 2018

Transcription

1 2018 Homebuilder CFO Roundtable Wynn Las Vegas 7 May

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2018 Ernst & Young LLP. All Rights Reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice Homebuilder CFO Roundtable 7 May 2018

3 Capital markets update Mike Straneva Ernst & Young LLP (Moderator) Tony McGill Zelman & Associates Elena Bennett Wells Fargo & Company Tony Avila Builder Advisor Group Bob Crowley Moelis & Company Don Marleau S&P Global Ratings Homebuilder CFO Roundtable 7 May 2018

4 Agenda Self-Introductions Panel Discussion Q & A Homebuilder CFO Roundtable 7 May 2018

5 Homebuilder CFO Roundtable 7 May 2018

6 Homebuilder CFO Roundtable 7 May 2018

7 Homebuilder Stock Price Performance Despite general market volatility, homebuilder stock prices have recently trended up due to strong earnings and a promising start to the spring selling season Homebuilder stocks have outperformed the broader market over the past 24 months as demand for homes outweighs rising interest rates HOMEBUILDER STOCK PRICE PERFORMANCE (APRIL 2016 APRIL 2018) % % % 3.0% % % 20 - April-16 July-16 October-16 January-17 April-17 July-17 October-17 January-18 April Year Treasury Yield Homebuilder Index S&P 500 Index Source: Capital IQ Notes: Market data as of 4/26/18 1. Index includes: AV Homes, Beazer, Century Communities, DR Horton, Green Brick Partners, Hovnanian, KB Home, Lennar, LGI Homes, MDC Holdings, M/I Homes, Meritage, NVR, New Home Company, Pulte, Taylor Morrison, Toll Brothers, TRI Pointe and William Lyon [ 7 ]

8 Return-on-Equity vs. Valuation Multiples Analysis The ability to efficiently deploy capital and generate earnings currently drives valuations more than the underlying value of a homebuilder s land position PRICE-TO-BOOK VALUE MULTIPLE (x) VS. LTM RETURN-ON-EQUITY 1 (%): PUBLIC HOMEBUILDERS, EXCLUDING NVR 2,3 Source: Company filings, Capital IQ Notes: Trading data as of 4/26/18. Size of bubble is proportionate to market capitalization 1. Calculated as NOPAT (net operating profit after tax) divided by average invested capital 2. R 2 correlation ranges from 0 to 1, with a maximum correlation of 1 3. R 2 calculation does not include NVR figures [ 8 ]

9 Homebuilder M&A Update U.S. homebuilder M&A activity has increased in recent years as a result of the following: Desire to capitalize on strong demand from the improving housing market through growth in existing and new markets Difficulty growing organically in a land-constrained market Focus on improving profitability through enhanced scale and deal synergies Favorable capital markets environment with high homebuilder valuations, broad access to capital and the general acceptance of large-scale M&A (e.g. Lennar / CalAtlantic) and other strategic transactions (e.g. DR Horton / Forestar) Significant activity by Japanese buyers and other, less conventional, buyers (Clayton Homes, Chinese interest, etc.) HOMEBUILDER M&A ACTIVITY BY BUYER TYPE: 2014 YTD Although the number of transactions has decreased since 2014, larger public-to-public combinations and Japanese acquisitions have occurred in more recent years YTD Public Private Japanese Other SELECT RECENT HOMEBUILDER TRANSACTIONS / / / / / / / / Source: Company filings, Capital IQ Note: 1. Includes: Brookfield Asset Management / Brookfield Residential (2014) and Brookfield Residential / Grand Haven Homes (2015), as well as all six of Clayton Homes acquisitions throughout the 2014 YTD 2018 period [ 9 ]

10 M&A Overview As with other industries, consolidation is heating up among builders and land developers There are more investors now than in previous cycles Foreign investment Private equity/venture capital Clayton Buyers are looking for growth in revenue and earnings Significant demand for land, lots, and qualified labor Expand geographies and product lines Lower leverage and higher cash flow fuel the drive to acquire Sellers are looking for liquidity Eliminate personal guarantees Diversify net worth Builder Advisor Group expects to close on 5 M&A transactions in 2018 Valuations are improving particularly for higher margin, higher growth builders Return on capital/return on equity

11 M&A Rationale Sustained growth tends to give way to slow organic growth Growth is difficult to deliver strictly from existing operations with labor and supply shortages and a lack of finished lots Margin compression is plaguing builders Land is becoming more expensive (no more distressed buying) Costs have been increasing Home buyers weary of price increases and rising interest rates makes affordability an issue Builders augment slower than expected internal earnings growth with acquisitions Several public builders have recently hired corporate acquisition managers to support their efforts Motivations for Buyers New market entry to enter new markets or to re-enter the markets left during the housing downturn Market share to increase their position in a current market, via control over lots and local talent Expertise to bring special expertise in-house and to increase product line offering Motivations for Sellers Liquidity gives owners / investors an exit strategy Capital access access to affordable capital to compete more effectively and grow their businesses, as debt continues to be hard to procure and private equity remains expensive Retirement interest in retiring with no succession plan Personal liability eliminate future warranty risk

12 Foreign Investment Asian firms have been investing heavily overseas, particularly in America Japanese real estate firms have increased their US presence by investing in homebuilding and land companies Sumitomo Forestry Bloomfield Homes, Dan Ryan Builders, Edge Homes, Gehan Homes, MainVue, Crescent Daiwa House Group Stanley Martin, FrontDoor Sekisui House Newland Communities, Miller & Smith, Woodside Rate of Chinese real estate investment slowing as China places more restrictions on outbound capital flow More than ever, foreign individuals are purchasing US residential real estate properties as a means to store value overseas ($bn s) $180.0 $160.0 $ Volume of Foreign Buyers Residential Property $153.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $103.9 $102.6 $92.2 $78.1 $82.4 $66.4 $68.2 $49.4 $45.5 $59.1 $41.2 $33.2 $33.4 $74.9 $33.2 $41.2 $34.8 $46.7 $54.5 $ Non resident Resident Total Source: National Association of Realtors

13 Private Equity Investment Although several private equity firms have liquidated their positions: Varde/Mountain sold Oakwood to Clayton Anchorage and others sold WCI to Lennar MatlinPatterson sold CalAtlantic to Lennar Oaktree, TPG, and Intracorp exited their Taylor Morrison position via secondary equity offerings Oaktree and others sold Woodside to Sekisui Blackrock and Fidelity sold Stanley Martin to Daiwa House Many private equity firms are investing heavily in the residential sector, such as Encore Housing Opportunity Funds GTIS Tricon Varde PIMCO Clayton/Berkshire Hathaway

14 M&A Activity 25 In 2018 we expect at least one M&A transaction to be completed or announced each month (15 for the year) Twelve private company acquisitions completed in 2017*, one public merger completed (1), and one public merger announced D.R. Horton acquired a 75% stake in land developer Forestar Group The BAG team is currently engaged in assignments in some of the most active markets in the country including Atlanta, Texas, Mid-Atlantic Region, Midwest Region, Northern California, and Southern California Acquirers will look to increase their geographic footprint in new markets in addition to strengthening their presence in markets where they already operate, but desire growth Homebuilder M&A, IPOs and US New Home Sales 1,400, ,200, ,000,000 Number of IPOs and M&As Source: John Burns Real Estate Consulting and Builder Advisor Group * 2017 acquisition count excludes the D.R. Horton / Forestar Group transaction Note: (1) Completed merger between Century Communities and UCP. BAG advised on this deal IPOs M&As IPOs Announced Projected M&As New Home Sales , , , ,000 0 New Homes Sold

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20 Q&A Homebuilder CFO Roundtable 7 May 2018

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