M&A Lessons Learned for Private Builders and Developers

Strategic acquisition can be a lucrative tool for builders big and small

By CHRIS JASINSKI

Essex Homes completed the sale of its homebuilding assets and operations to Stanley Martin Homes in late February.

Through this acquisition, Stanley Martin’s geographic footprint expanded into five mar- kets and a pipeline of over 8,000 controlled lots. It also combined two of the largest homebuilders in the Southeastern United States with homebuilding operations in Maryland, Virginia, North Carolina, South Carolina and Georgia.

Our firm, JTW Advisors LLC, served as the financial advisor to Essex Homes in its sale to Stanley Martin. As a mergers and acquisitions (M&A) advisory firm focused exclusively on the homebuilding industry, we are observing trends in the industry driving increased M&A activity. These trends played a role in the Essex Homes transaction, providing valuable lessons for private domestic homebuilders and developers seeking to optimize their enterprise value.

M&A momentum is supported by strong demand from buyers seeking to rapidly expand their geographic footprint, leverage internal scalability, and boost overall profitability. As consolidation trends continue in the U.S., market competitiveness for quality land, experienced staff and supply chain infrastructure will increase, adding pressure to smaller independent builders.

Increased Demand for Private Builders

There are two types of M&A deals: strategic and bolton. Strategic acquisitions provide value to buyers seeking new markets. Uncovering a seasoned management and operations team with local knowledge, trade and vendor relationships, as well as land positions can be quite valuable. Essex Homes and Stanley Martin had no geographic overlap, providing Stanley Martin a seamless, immediate revenue pipeline and creating a contiguous footprint from Maryland to Georgia.

Bolton transactions offer buyers additional land positions in current markets where a buyer already maintains operations. Land entitlement takes time, making a bolt-on acquisition attractive as it can provide immediate incremental revenue and profit to the buyer. Since the finished lot market is scarce, builders that completed the lengthy land entitlement process can demand a market premium. JTW also recently advised Level Homes in the sale of their Raleigh division to Lennar. This is a prototypical example of a bolt-on transaction. Lennar was already the largest homebuilder in Raleigh. By adding Level’s pipeline of 1,600+ lots, Lennar will continue to grow within Raleigh while increasing operational efficiencies that should lead to further margin expansion.

Expanded Universe of Buyers

Owners of private builders seeking liquidity have more choices than they did five years ago. In addition to the publics and large privates, there are numerous Japanese and Canadian builders that are actively purchasing U.S. builders. Each buyer offers their own value proposition and deal terms.

Private builders seeking release from personal loan guarantees and liquidity can choose to sell all, or only a portion of their company. As a result, owners of all ages and motivations can sell their business on terms that meet their specific goals.

For example, the Essex sale to Stanley Martin was driven by people and culture from the beginning. “Preserving values and culture for the Essex Homes team was of paramount importance as we sought a buyer,” said Essex Homes owner and CEO Karl Haslinger. In addition to wanting the best outcome for his family, Haslinger made it a priority from the outset that target buyers would maximize the opportunity for his employees, which Stanley Martin provided. In fact, JTW never formally held a structured sale or “auction” for Essex Homes. We identified a few buyers and held confidential, preliminary discussions prior to a formal sales process. Once Haslinger and his team met with Stanley Martin, it was clear that the values, ethics, and cultures aligned. Both companies moved quickly towards a deal and trust continued to build over time.

As a result, Stanley Martin grew through the addition of a seasoned team of over 200 former employees with local market knowledge and relationships. Meanwhile, Haslinger fulfilled one of his key goals. His former employees have the opportunity to grow professionally as members of a better capitalized company, both within their existing geographic location and the larger Stanley Martin operation.

Consolidation Trend Will Continue

The U.S. homebuilding industry has experienced significant consolidation over the past 10 years. From 2009 through the second half of 2019, the percent of new home revenue from public and foreign builders in Dallas increased from 29.2% to 45.7%. Atlanta grew from 16.9% to 46.3%. Orlando grew from 49.2% to 73.7%.

As a result, the remaining local and private builders are now competing against better capitalized companies for land, people, trade partners, and customers – which should lead to more private builders choosing to sell their company in the coming years.

Chris Jasinski is a managing partner and co-founder of JTW Advisors, a mergers and acquisitions advisory firm focused exclusively on the homebuilding industry. Chris can be reached at chris@jtwadvisors.com.

 

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