Orange County’s stable of publicly traded homebuilders is nearly $6 billion lighter in market value now compared to a month ago.
But don’t blame a downturn in the fortunes of the housing market or economy, or even last month’s market correction.
While Wall Street’s fortunes have in the past had an outsize effect on the area’s housing market—its two-largest public builders lost about $4 billion in market value during the Great Recession—that’s not the case in the latest losses.
This time, the biggest U.S. homebuilder transaction of the past decade has caused the local upheaval.
Last month, Miami-based Lennar Corp. completed its blockbuster acquisition of Irvine-based CalAtlantic Group Inc.
The $9.3 billion deal, involving nearly $1.2 billion in cash, plus Lennar stock, in addition to the assumption of nearly $4 billion in debt, makes Lennar the country’s largest builder by sales, with a market cap of about $18 billion.
Before the buy, Lennar was No. 2 in sales behind D.R. Horton of Fort Worth, Texas. Cal-
Atlantic, which was formed less than three years ago through the merger of locally based Standard Pacific Corp. and Ryland Homes of Westlake Village, was No. 5.
Lennar sold nearly 30,000 homes during the 12-month period ending in November, while CalAtlantic sold about 14,600, about a quarter of them in California and other West Coast markets.
The deal brings “together two leading homebuilders in familiar markets with compatible product lines,” Lennar Chief Executive Stuart Miller said at the deal’s closing on Feb. 12.
TRI Pointe Tops
The companies announced the deal in October. Only one CalAtlantic executive, Chairman Scott Stowell, was pointed out as having a position with Lennar following the deal. He’s now on its board.
One more area executive can be added to the list. CalAtlantic Chief Financial Officer Jeff McCall is now Lennar’s senior vice president focusing on corporate services, the company said last month.
The transaction is the latest notable departure of a big OC-based public company, following the likes of Allergan, Broadcom, and Western Digital, which moved their headquarters elsewhere after completing mergers or being bought.
CalAtlantic, and Standard Pacific before it, were long the area’s largest public builders. That distinction now falls to Irvine-based TRI Pointe Group Inc., whose stock has risen about 40% in the past year to a market value of about $2.5 billion now. The company was formed in 2009.
TRI Pointe has been benefitting from a “steadily improving domestic economy, increased consumer confidence and strong housing fundamentals” in the company’s core markets, Chief Executive Doug Bauer said last month. Next in line is Newport Beach-based William Lyon Homes, which is valued at just under $1 billion. The company, about six years out of a short stint in bankruptcy, recently announced a notable acquisition of its own, a $460 million deal to buy Ron Simon’s RSI Communities, a Newport Beach-based builder of entry-level homes.
Third by market value is Aliso Viejo-based New Home Co., a builder that, like TRI Pointe, was formed in 2009, went public a few years ago, and is now valued at about $250 million.
Peak Pricing?
New Home’s executive team, many of whom hail from John Laing Homes, previously based in Irvine, was part of one of the largest homebuilder deals of the last market cycle, when the then-private company was acquired for a reported $1.05 billion by Emaar Properties, a large builder in the United Arab Emirates seeking to make inroads in the U.S.
John Laing was the second-largest privately held U.S. homebuilder at the time of the 2006 deal, which proved to be a winner for its former owners, but ended up a disastrous investment for Emaar, which completed the deal just before the market crash. Within three years, John Laing was out of business.
The Lennar-CalAtlantic transaction shouldn’t be considered a warning sign that the next housing downturn is coming, said officials with the Miami-based company at the time the deal was completed, citing favorable market conditions.
“This combination benefits from overall economic strength, driven by low unemployment, rising wages, favorable tax reform, higher consumer confidence and strong housing demand,” Miller said.
Other area builders also remain positive about the industry’s short-term prospects.
New Home Chief Executive Larry Webb, who ran John Laing at the time of its sale, said he’s “very optimistic about the fundamental drivers of our business.”
He said on a Feb. 14 call with analysts that, “Prices have risen substantially in many markets, particularly in California,” where New Home does most of its business.
“These increases have been driven by job growth, improving local economies and increased consumer confidence. The demand that we see for new homes in our markets is real and the current trend suggests that this demand will continue.”
“Favorable industry fundamentals” should continue, TRI Pointe’s Bauer echoed during his company’s latest call with analysts late last month.
OC Hub
In addition to Lennar having a larger presence across most of the country’s largest homebuilding markets, its executives say they think it can eliminate operating inefficiencies between itself and CalAtlantic now that the sale is complete.
Lennar plans “to remove the duplication of two public companies,” said Chief Operating Officer Jon Jaffe, the builder’s top West Coast executive, at the time of the deal.
The builder’s West Coast hub is in Aliso Viejo but will soon shift to new offices at Irvine’s Great Park Neighborhoods.
Executives say they think they can shave off $85 million in sales, general and administrative expenses—which can include anything from executive salaries to advertising costs and sales commissions—by streamlining corporate overhead and similar public company-related costs follow.
An additional $165 million in direct cost savings could be achieved through the combined companies’ improved competitive purchasing power, Lennar said.
Those efforts are “well underway and our integration team has made tremendous progress on the roadmap to begin achieving direct cost savings, production efficiencies, technology improvement, consistent underwriting of land acquisitions and overhead reduction,” Miller said last month.
CalAtlantic reported in state employment filings that it will cut 15 jobs this month as a result of the merger. It employs about 250 in OC, according to the latest Business Journal data.
Don’t expect OC to become an afterthought following the acquisition, though. In many respects, the region was already the most important in the country for the builder, not even factoring in CalAtlantic’s local presence, based on a reading of Lennar’s latest annual report.
The company’s three largest joint ventures, with assets of $4.5 billion, are based in OC, and the builder has a direct investment of $585 million in the ventures.
It’s the largest investor in Aliso Viejo-based Five Point Holdings, the $2.5 billion-valued master developer of Great Park Neighborhoods in Irvine, with a nearly $360 million stake. FivePoint has been Lennar’s largest joint venture project for several years.
It’s also a direct investor in the Great Park Neighborhoods development itself, and has been the largest builder in each of the first three phases of residential development there.
Lennar has a separate venture with Horsham, Pa.-based Toll Brothers Inc. for the high-end Altair development in Irvine, an 840-home project on land carved off from the Great Park Neighborhoods site.
Last month, it invested in the area’s other big former military base that’s now being converted into a residential development. Days before completing the sale to Lennar, CalAtlantic paid the city of Tustin $34.2 million to buy a 14.5-acre site at the Tustin Legacy development. The site will hold 218 homes at project Levity, where construction should start this year.
