February 27, 2017 Equity Research January Metro Permits Data This week, we analyzed the Census Permit data by market to ascertain how the public builders are performing versus the industry. Appreciating that the public builders do not have nationwide footprints, we have culled and aggregated the MSA level Permit data into a composite consisting of 31 cities ("Builder Composite") where the public builders have a meaningful presence. The purpose of this exercise is to evaluate whether Permitting activity in these markets differs from that of national level data and the Builders' overall Order levels. Additionally, we discuss which builders are best, and worst, positioned based on market performance. (See Tables below for detail.) Today (2/27), the Census released Not Seasonally Adjusted Permit data for Individual Metros. Here is our take on the data. In January, the 31 metros in our Builder Composite accounted for 45% of Total Not Seasonally Adjusted Single Family (SF) Permits. The Builder Composite data was positive as the 31 markets outperformed the broader data. o Net, YoY January Single Family Permits for markets important to the public builders outperformed the national Single Family Permits by 1.7 percentage points. o January SF Permits in our Builder Composite increased 19.7% to 24.1K, compared to a 17.9% increase for U.S. SF Permits. Builder Composite Total Permits (SF & MF) increased 9.4% YoY to 41.2K versus a 16.0% increase for U.S. Total Permits. o Netting the exposure to this Month's top and bottom markets, MTH, CAA and PHM are Best Positioned, while MDC, TOL and TPH are Worst Positioned. o MoM, the 31 metro Composite SF Permits increased 3.6% with Total Permits decreasing 3.2% sequentially. U.S. SF Permits decreased 2.7% with Total Permits moving 5.0% lower sequentially. Acknowledging that our data series only goes back to 2011, historically, the 31 metro Composite SF Permits typically increases 5.3% sequentially in January, while the U.S. SF permits typically increases 60 bps. o Interestingly, 6 of the bottom 7 performing markets are higher price-point markets, which may suggest that higher interest rates are creating affordability issues in those markets. On a market specific basis, January SF Permit growth in the Composite markets was greatest in Austin (+61% YoY) followed by Greensboro (+58% YoY). Conversely, the weakest SF Permits markets were San Francisco (-39% YoY) and San Jose (-21% YoY). 13 of the 31 Composite markets outperformed the 17.9% growth in national SF Permits. 7 markets in our Builder Composite experienced SF Permits declines YoY. Please see page 5 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 02/27/17 unless otherwise stated. 02/27/17 21:23:27 ET Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision. Housing Stephen East, CFA, Senior Analyst ( 636) 336-1463 stephen.east@wellsfargo.com Paul Przybylski, Associate Analyst ( 636) 336-1465 paul.przybylski@wellsfargo.com Truman Patterson, CFA, Associate Analyst ( 636) 336-1464 truman.patterson@well sfargo.com
Housing Exhibit 1: January Single Family Permits Austin Greensboro Sacramento Raleigh San Antonio Charlotte Orlando Dallas Durham Nashville Las Vegas Riverside Baltimore Composite Avg National Avg Columbia, SC Los Angeles Miami Houston Atlanta San Diego Chicago Albuquerque Phoenix Tampa Indianapolis Seattle Washington DC Denver Jacksonville Naples San Jose San Francisco -40% -20% 0% 20% 40% 60% 80% Source: Wells Fargo Securities, LLC, Census January 2017 SF-Permits YoY % With the Spring Selling Season underway, we ve visited 5 markets (Orlando, Charlotte, Raleigh, Denver, Tampa) so far this year. Generally, January s aggregate SF Permit data is consistent with what we have been seeing in the field. 3 of the 5 markets we visited landed among the top 10 markets with fastest SF Permit Growth--Raleigh +54%, Charlotte +44%, and Orlando +44%. The key takeaway from all 3 markets was that demand is strong, with pricing power flat to slightly up. However, we firmly do not believe any of the 3 markets is growing at a >40% pace. Tampa s Jan SF Permits grew a more modest 7%, substantiating our observation that demand is strong in the higher priced communities, but weaker in homes priced below $200K due, in part, to the recent increase in mortgage rates. On the other hand, Denver SF Permits fell 6% in January, which is in contrast with our field work. Denver was by far the healthiest market we visited, with both strong demand and solid pricing power. This said, Denver faced a tough comp in Jan 16 (+26%), giving us confidence that Jan 17 s decline is not an indication of a slowing market. Illustrated in the following tables, MTH has the greatest exposure to the 10 fastest growing Single Family Permit markets in January. CAA, KBH, DHI, and PHM follow MTH as the most levered to the faster growing markets. Conversely, MDC has the most exposure to the 5 MSAs with declining January Single Family Permits. KBH, TOL and LEN follow MDC in exposure to the declining Permit markets. Netting the exposure to this Month's top and bottom markets, MTH, CAA, and PHM are Best Positioned, while MDC, TOL, and TPH are Worst Positioned. CAA has consistently 2
January Metro Permits Data ranked near the top in net attractive markets, yet its order performance has lagged peers for the past year as integration issues likely curtailed order growth. To calculate our rankings, we employ individual market data from Builder Magazine based on 2015 MSA closing data. Additionally, Builder Magazine metrics are limited to the Top 10 builders in any particular market. Therefore, the data set is incomplete for builders holding a minor positon in any individual metro. Acknowledging the limited nature of Builder Magazine s data and the Metro Permits month to month volatility, we compared January s net market exposure to actual 4Q16 Order Units growth (with the exception of LGIH). Overall, 3 (MTH, CAA, LEN) of the top 5 best positioned companies had 4Q16 Order growth below the +13.1% average. Notably, despite MTH s net exposure to the best performing markets, 4Q16 Order growth lagged the group average by 18 percentage points, turning in the weakest Order growth in the group. Also notable, CAA 4Q16 Orders increased 5.5%, meaningfully trailing the group s +13.1%. Conversely, 4Q16 Order growth for companies with the worst net exposure was mixed. Despite TPH and TOL s having meaningful net exposure to the worst performing markets, 4Q16 Orders increased 20.7% and 21.8% respectively the two strongest Order growth rates in the group. MDC, levered heavily to Denver, had the greatest net exposure to the worst performing markets. Compared to 3Q16 Orders, 3 of the top 5 best positioned companies produced growth below the +10.4% average. Unlike 4Q, MTH s Order growth in 3Q outperformed the group by 40 bps. Similar to 4Q, the 3 companies with the highest net exposure to the worst performing metros were mixed. TOL and MDC turned in strong 3Q Order growth, while TPH had the weakest growth in the group. Exhibit 2: January Net Markets Exposure vs 4Q16 & 3Q16 Orders Growth Net Exposure to Top and 4Q16 3Q16 Bottom Markets Orders % Orders % MTH 31% -4.8% 10.8% CAA 27% 5.5% 9.0% PHM 21% 14.8% 16.7% DHI 20% 14.6% 3.1% LEN 16% 9.4% 8.5% TMHC 16% 18.1% 19.3% KBH 15% 19.8% 15.7% LGIH 8% 20.0% 3.7% NVR 8% 17.6% 6.7% TPH -5% 20.7% -6.4% TOL -10% 21.8% 20.3% MDC -27% -0.2% 16.9% Average 13.1% 10.4% Source: Wells Fargo Securities, LLC, Builder Magazine, Company Report, Census Note: LGIH 4Q16 Orders % is an estimate 3
Housing Exhibit 3: Homebuilder exposure Builder Exposure to Top Performing Markets % '15 Closings Total Austin Greensboro Sacramento Raleigh San Antonio Charlotte Orlando Dallas Durham Nashville MTH 35% 2297 334-207 167 430 292 713 - - 154 CAA 31% 3913 812-205 484 288 730 721 673 - - KBH 30% 2447 793-216 199 816-423 - - - DHI 25% 9263 1994-352 146 1551 866 725 3629 - - PHM 25% 4267 689-224 372 847 753 344 838-200 LEN 23% 5559 518-520 555 618 970 1262 1116 - - TMHC 19% 1182 337-412 - - - 433 - - - LGIH 8% 280 - - - - 280 - - - - - NVR 8% 1068 - - - - - 723 - - - 345 Builder Exposure to Bottom Performing Markets % '15 Closings Total San Francisco San Jose Naples Jacksonville Denver MDC 27% 1178 - - - 220 958 KBH 15% 1228 493 - - 320 415 TOL 10% 541 335 - - - 206 LEN 7% 1580 136-350 481 613 TPH 5% 221 221 - - - - DHI 5% 1931 117-97 1262 455 CAA 4% 561 133 - - - 428 PHM 4% 699 - - 321 378 - MTH 4% 243 - - - - 243 TMHC 3% 166 - - 166 - - Source: Wells Fargo Securities, LLC, Census, Builder Magazine For markets high on the investor radar at present, the data was mostly positive. Houston's January Single Family Permits performance was solid, increasing 13.9%, but underperformed the nationwide increase by 4.0 percentage points. Additionally, California results appeared split between the Southern and Northern markets. Southern California performed well, with Riverside and Los Angeles increasing 24.0% and 16.5% respectively. Conversely, San Francisco and San Jose were the 2 worst performing metros, declining 39.3% and 20.9% respectively. California January Pending Home Sales showed similar dynamics in Northern and Southern CA. However, Sacramento was an exception, increasing 54.3%. Florida continues to perform well, with Orlando, Miami, and Tampa increasing 44.1%, 16.2%, and 6.9% respectively. 4
January Metro Permits Data Required Disclosures Additional Information Available Upon Request I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. VOLATILITY RATING V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading. As of: February 27, 2017 42% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform. 56% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform. 3% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underperform. Wells Fargo Securities, LLC has provided investment banking services for 41% of its Equity Research Outperform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 29% of its Equity Research Market Perform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 17% of its Equity Research Underperform-rated companies. Important Disclosure for International Clients EEA The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ( WFSIL ). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 ( the Act ), the content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. 5
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