2004 Housing GIANTS Rising Tide

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If you're searching for melancholy, look up one of the Giant 400 home builders who sold his company two or three years ago. Unquestionably, he'll tell you he had reason to believe the market was at its peak — the very best time to cash out. But now he's looking at the recent performance of his peers and realizing, if he stayed in the business, he'd have the same money and he'd...

April 01, 2005

Sidebars:
More Mergers Coming?
Debate Rages over Wisdom of Urban Infill Ventures
Elevators Up!
IPO Window Opening?

If you're searching for melancholy, look up one of the Giant 400 home builders who sold his company two or three years ago. Unquestionably, he'll tell you he had reason to believe the market was at its peak — the very best time to cash out. But now he's looking at the recent performance of his peers and realizing, if he stayed in the business, he'd have the same money and he'd still have his company.

Housing is in uncharted waters. The current boom began in 1993 and has only ebbed here and there, now and then, for short periods before rocketing off into the stratosphere again. Denver is one of the few markets struggling today. California had a recession in the 1990s, but look at it now. Florida is the same way — double digit, year-over-year price increase percentages are the norm. Build it and they will come.

Wall Street housing stock analyst Ivy Zelman of Credit Suisse First Boston puts the robust industry you'll find profiled in the next 12 pages in perspective:

"It's really hard to tell a good company from a bad one when there's such a tailwind," she says. "In Florida or California, Phoenix or Las Vegas, how can you tell who's smart? It has never been this euphoric in real estate — ever."

Shooting Stars

The top five builders burst into brilliance as Supernovas, dominating the housing universe with combined revenues nearly equal to those of the next 20 builders.

Two years ago, we started dividing our GIANT 400 rankings into revenue categories, along fault lines where we see distinctions in the way builders above and below do business. For instance, we believe the 125 companies at the bottom of the rankings — we call them Strivers — have a lot more in common with non-GIANTS than with the publicly-traded Goliaths at the top.

Last year's top 20, all with revenues of more than $1 billion, were Masters of the Universe — above the merely Rich and Famous (GIANTS 21-125). This year, we have to add a new group at the top — let's call them Supernovas — to identify just how different these top five home builders have become from even the billion-dollar Masters of the Universe (now No. 6 to 25).

What makes the Supernovas different? First, consistency. For all of this decade, the same five firms have been at the top, even though the pecking order has changed. Pulte is back in the top spot this year, closely followed by D.R. Horton, Lennar, Centex and KB Home. Horton was top dog a year ago, and Lennar in 2001 and 2002. But no other builder has cracked the top five since 1998. Secondly, their incredible rates of growth and scale of operations separate these companies from even the Masters of the Universe. Take a look at what the Supernovas have accomplished in four years. Our 2001 GIANTS showed Lennar in the top spot with $4.90 billion in housing revenues (on 22,560 closings in calendar 2000). This year, Lennar has $9.56 billion in 2004 revenues from 36,204 closings — good for just third place! (Pulte is #1 with $11.09 billion.)

Widening Gap

Finally, the gap between No. 5 and No. 6 is widening. In 2001, D.R. Horton at No. 5 ($3.57 billion) had a $1.30 billion lead in revenues over NVR ($2.27 billion) at No. 6. Today, KB Home ($6.96 billion) has a $2.76 billion lead over NVR ($4.20 billion). Looking at it another way, KB Home leads by more than NVR had in revenues four years ago.

The McLean, Va.-based firm is the most profitable of the publicly-traded builders, with a tightly disciplined business model that keeps land investment low by relying on developers to feed lots to divisions concentrated in the eastern U.S. But all of the Supernovas have national operations and a proclivity to add new markets via acquisition. NVR won't play that game.

Supernovas are different. These growth junkies convinced Wall Street years ago that housing industry consolidation will eventually leave only a few large companies standing — so they are all in that race to survive, by growing the top line, although all are certainly aware that Wall Street's interest is in the bottom line.

The only threat to breaking into the Supernovas may come from No. 7 rather than No. 6. In the past year, Red Bank, N.J.-based Hovnanian Enterprises ($4.01 billion on 14,586 closings in 2004) has become the most active acquisitor. This spring's deals for Chicago's Town & Country Homes (No. 57, $440 million in revenue) and Orlando's Cambridge Homes (No. 123, $203 million) pop Ara Hovnanian's nationally-focused public firm into two more top ten housing markets, and will probably move Hovnanian ahead of NVR in next year's rankings, when 2005 revenues are counted.

Still, Hovnanian has a long way to go to threaten KB Home. The Los Angeles-based GIANT had the fewest 2004 closings in the Supernova ranks — 31,646 — but that's still more than double Hovnanian's 14,586.

Finding New Roles

Largest builders are searching for new products and other revenue streams to keep growing.

It's easy to see from the chart on this page that most GIANTS still build predominantly single-family detached homes, but you also see other products showing up in the mix in a bigger way than in past years. The reasons are complex, involving issues that affect both housing supply and demand.

Red-hot housing markets in many parts of the country are driving up land costs and that, of course, drives up housing prices. In many places detached homes are now priced out of reach for many entry-level buyers. Condos and townhouses are becoming the new mainstay of the entry-level market.

Location is also a factor. As cities grow, the lower-cost land builders seek for entry-level detached houses is farther out, long commutes from jobs. The far-out land parcels are a worrisome risk to builders because, when demand slows, markets contract physically as well as figuratively. So cost and risk factors both make higher density housing, on sites closer to jobs, an appealing alternative.

On the demand side, singles, young professionals and empty-nesters are attracted to higher density housing forms. They may get more square footage for less money, in a better location, and with no maintenance worries. Infill is white-hot because locations are often walking distance to the attractions of urban living. Getting buyers out of rush-hour traffic jams is a key element to the sales success of infill projects.

The red flag is this: if high density housing is the product of the future, the largest builders — the Supernovas — are missing the boat. They are the least diversified in product mix. Their big production machines lack the flexibility to move into location-specific products.

The Supernovas made the move into townhouses and other attached, low-rise housing forms long ago, but those products are still concentrated mostly in the green field, suburban subdivisions that keep their production machines humming. Only in the last few years have these massive companies begun to see the demand for (and profitability of) infill sites and urban housing forms. Builders in the Masters of the Universe and Rich & Famous categories have the lead in learning what to build, and how to build it, to meet burgeoning demand for city living .

"The difficulty that national builders face in the urban infill sector is that this market is anything but formulaic," says Charlotte, N.C.-based management consultant Chuck Graham. "Private builders in the Masters of the Universe and Rich & Famous ranks are more appreciative of a unique piece of infill ground. They understand that the price the site demands can't be confirmed by competitive evaluation. They see easier the requirements for a unique product. They know how to market the product based on local understanding of the attributes of the site. Their superior local knowledge really helps."

Private Builders Ascending?

Fast-growing public builders grab all the headlines, but private companies may be better positioned for challenges and opportunities ahead.

If you still have your 2004 GIANTS poster on the wall, put this year's up next to it and spend some time comparing the two. Then glance at the charts on the next several pages, showing how the five categories of GIANTS rank the various challenges they face in today's housing industry, and the opportunities they see ahead. When we do that, it puts the growth of the Supernovas and big public builders in the Masters of the Universe into better focus in relation to the large private companies that dominate the Rich and Famous group.

In hot housing markets, with land supplies under pressure, big builders — public or private — have a clear advantage over smaller competitors by applying their financial muscle to the challenge of acquiring the best building sites. If 2005 is another boom year, it's safe to bet the challenges builders face this year will look very much like those of the last four years, and the availability and cost of land will continue to be No.1, with labor issues and problems associated with managing growth also troublesome.

If the economy should slide into recession, of course, beating competitors to the next land parcel will certainly slip down your list of priorities. But while most housing economists seem to believe the industry will see some cooling of demand this year, rationality requires preparing for the possibility that the beat will continue the rest of this year and next, much as it has throughout the Roaring 2000s.

However, even if the economy continues to roar, we see some signs in the GIANTS data that lead us to believe the big private builders may, in fact, be better positioned than even those rocketing Supernovas to take advantage of opportunities now emerging. In that case, it makes sense to look at who has done well over the last four years, and what strategies and strengths contribute to their success.

Machines At Work

The last four years unquestionably offers a ringing endorsement of the wonder and glory of big public builders. The run the Supernovas have made is hard to believe. This chart illustrates a few of the numbers they've put up just since today's college seniors were freshmen:

In just the last year, Pulte's revenue jumped $2.35 billion; Horton's $2.00 billion; Lennar's $1.52 billion; Centex's $1.44 billion and KB's $1.31 billion. No.10 builder Toll Brothers pulled in $1.11 billion more in 2004 than in 2003.

When you see numbers of this magnitude, it can make your eyes glaze over — enough to miss the solid, if not mind-boggling, results the big private builders are posting in the ranks of the Masters of the Universe and Rich and Famous. Some of these firms are now larger than many of the public builders were four years ago. For example, the largest private builder — No. 13, Shea Homes — now has revenues of $2.59 billion. In our 2001 rankings (on 2000 financial data), that would have placed California-based Shea ahead of Toll, Beazer, Hovnanian and even NVR.

This past year was not just good, it was great for builders in most areas of the country, and it came as a crescendo behind a dozen other good ones. As a result, to move up in PB's GIANT 400 rankings, you not only have to grow revenues, you have to grow them faster than some of the others. Among the 365 GIANTS from the 2004 rankings that made the list again this year, 283 gained revenue and only 82 were down. Many who advanced in revenue lost ground in the rankings. Among those are some prominent names.

Houston-based David Weekley Homes added $82 million in revenue, crashed the $1 billion club and made it into the newly expanded ranks of the Masters of the Universe. Yet the firm lost ground from No. 22 to 25. Four years ago, Weekley was No. 19, but the faster growth of public companies like WCI, Technical Olympic and Morrison made holding that rank impossible.

Chicago-based Kimble Hill Homes is up $109 million to $935.5 million, but fell from No. 24 to 29. Kentucky-based The Drees Co., which was two spots behind Kimball Hill last year, at No. 26, is now one ahead, after dropping to No. 28, even though the firm added $109 million in revenue, to $954.7 million. Florida-based Mercedes Homes rode that hot state to a $190 million increase in revenues, to $932 million, but still dropped from No. 28 to 30.

In all, 186 companies decreased in rank, 162 increased, 17 stayed exactly the same and 35 new GIANTS cracked the list for the first time.

Among the advancers, some were spectacular, none more than MCZ Development, a Chicago-based practitioner of the now highly valued art of high-rise condo development.

You can see from all these examples that some of the private builders are now getting very large, with many of the advantages of bigness the public builders brag about to Wall Street — but without some of the baggage.

Private Advantages

Take a look at the chart below and you'll see evidence of one of the clear advantages big privates have over public builders — especially the Supernovas. Wall Street analysts hate to see land carried on the public builders' balance sheets. And they also hate spec inventory. Supernovas turn land fast, and keep spec building to a minimum. But that works against them in the hot markets of California and Florida, where land values are appreciating 25% a year or more and relocation or second-home buyers demand product now, not nine months from now.

Big private builders can and do take long land positions to maximize the appreciation rate on the lot in the prices of the houses they sell. In California, builders like Shea and WL (Laing Homes) often release lots in phases, five or 10 at a time, raising prices on each phase. Moreover, since they can start more houses as specs, they price the product closer to closing. As Shea president Bert Selva puts it, "In hot markets, buyers want inventory right now. If we don't have it, we miss out on the price appreciation that occurs between the sale and the closing, while the house is under construction. You leave a lot of money on the table when you sell way out in front of delivery."

Private builders often start 50% of houses or more as specs when the market heats up. It's risky, of course. If the market suddenly turned, they'd be caught with unsold inventory. But they're willing and able to take that risk. The big publics don't have that luxury. Wall Street won't let them. On the land side, the publics even have to add an extra cost of carry to keep those significant quantities of land they control off the balance sheet

Diversifying Demand

The chart at right shows another weakness of the Supernovas — the inflexibility of their operations. Demand is still strong for detached homes in suburban subdivisions, but it's also growing for a host of other housing options, stretching from downtown lofts to rural scattered lots. While Supernova management teams see this diversifying demand and are moving to meet it, they are steering an aircraft carrier, not a destroyer, and certainly not a speedboat. The smallest GIANTS are the most nimble at changing direction, adapting to meet demand for multiple housing products in different types of locations.

Over the next several years, we'll see how well the Supernovas do with their attempts to diversify their product mix to meet housing demand now splintering in a dozen different directions.

The chart on page 94 shows another interesting twist to Supernovas' myopic fixation on the efficiency of their mass production machines. "Operational efficiencies" are seen as an opportunity equal to market expansion. But the Supernova group is the only one that did not even list "niche market opportunities" — which the smaller Strivers actually move into the second position, ahead of operational efficiencies. Of course, we know the Supernovas are now well aware of niche markets. Their interest in infill high-rises proves that. But it's a big ship turning slowly.

Large private builders are even stealing the thunder (and copying the methods) of public builders in the arena of market expansion. Private GIANTS began doing acquisitions of smaller, local builders to penetrate new markets some years ago. Drees pioneered this method, beginning with its deal for Encore Homes in Cleveland in 1995. The firm has made five acquisitions, the largest being Zaring National Corp. in Cincinnati, Indianapolis and Nashville. And this year, Chicago-based Neumann Homes acquired Tadian Homes to penetrate the Detroit market.

"Privates are more active," says Michael Kahn, a Jacksonville, Fla.-based acquisitions specialist. "Drees, Matamy (a Canadian builder) and Woodside have all done acquisitions."

Buyers are more aggressive today, Kahn says, both public and private companies. "In the past, 70% of our business was representing small to mid-cap sellers and only 20% was buyers. Today, about 35% of what we do involves representing buyers."

Kahn expects the pace of acquisitions to tick up again this year. "We've closed two deals already this year, and we have three more under letter of intent. The focus on Florida is incredible. Everyone seems to want to get in there."

Atlanta-based Ashton Woods Homes, a subsidiary of a Canadian development company, disdained acquisitions in favor of old-fashioned green fields start-ups to advance six positions in the GIANTS rankings to No. 33. The firm added $196 million in revenue in 2004, even though its two most recent start-ups (Denver and Tampa) are not yet producing closings. "Over the long run, we believe we're further ahead by putting together teams and processes that fit our company," says president Tom Krobot. "Companies we might buy are overpriced, and by the end of year three, we're humming."

Customization of production-built homes (chart at right) is another area where the largest builders seem to lag behind a clear market trend, even though the Supernovas spend lavishly to provide buyers with design centers that smooth out the option and upgrade process. Could it be that the real goal is to enhance production efficiency rather than meet emerging consumer demand for true custom changes?

Supernova Growth In Revenues, Closings
Rank Firm 2000 Revenues/Closings 2004 Revenues/Closings Change In Revenues
1 Pulte $4.201 billion/27,781 $11.094 billion/38,612 164.08%
2 D.R. Horton $3.570 billion/18,942 $10.806 billion/44,005 202.68%
3 Lennar $4.900 billion/22,560 $9.559 billion/36,204 95.08%
4 Centex $4.081 billion/21,767 $8.923 billion/34,396 118.65%
5 KB Home $3.769 billion/22,847 $6.958 billion/31,646 84.61%


Publics Set Profit Benchmarks

Many private builders dispute that public companies have an advantage in profitability, but (for now) the numbers are hard to dismiss.

The cost and profit data PB collects for the GIANTS Report each year provide an interesting overview of the general characteristics of the 400 builders that we divide into revenue groups. The first thing that jumps out at you is, there seems to be a direct correlation between size and profitability. Our take: it does seem to be there, but be careful before you set your sights on growth as the most important contributor to profitability — there are top profit performers, and some not so hot, in every category. And be aware that the public companies play some games with the numbers that enhance their perceived profitability.

Supernovas Opt Out

Aggregated data on average costs and profit from sale of a typical house come from a section of the four-page GIANTS questionnaire that most ranked builders complete to the best of their ability. Unfortunately, public companies can be a different breed of cat. In the Supernova group, only two of the five — Centex and D.R. Horton — completed that section. "It's against corporate policy to reveal that information" is what the others told us.

We won't publish data from the Supernovas unless we have all five participating — because we promise to protect the secrecy of individual responses, and this is a small group already. But there's more than one way to skin a cat.

The public Supernovas' Earnings Before Interest and Taxes (EBIT) are in the public realm as part of their 10-K filings with the federal Securities and Exchange Commission. That's what we present here, along with aggregated data from all four of the other builder classifications.

"The publics can be very secretive about costs," comments PB contributing editor Chuck Shinn, "and you're asking them for cost breakdowns they don't usually share with anyone, especially those about land. Most public builders never break out land costs or the contribution land appreciation makes to profit from the sale of a house. A big part of the profits of those public companies is land appreciation, but they aren't required to reveal how much, so they don't. They don't want investors to know about it."

Supernovas' EBIT margins average 12.76%

The Supernovas' EBIT margins are not quite the same thing as profit from the sale of an average home, as reported in aggregate for the other groups, but the number is certainly in the same ballpark. The five Supernovas, with an EBIT average of 12.76%, come in just a shade under the home sale profit average for the Masters of the Universe at 12.90%. The Rich and Famous come in at 11.20%, Achievers at 11.10% and Strivers average 8.50%.

The 20 Masters of the Universe are the next smallest group to the Supernovas in number of companies. The others all contain 100 builders or more, and especially within those large groups, there are huge variations in profitability. Some of the builders in the Strivers are enviably profitable, including current PB Builder of the Year Bigelow Homes of Aurora, Ill., No. 338, which we reported in December with a bottom line tracking at 14.6%.

The cost breakdowns also do not necessarily conform to contributing editor Chuck Shinn's regularly published cost targets. But many of the private builders use those targets and give us their data as it relates to those measures. "Many of the private builders are treating land as a separate profit center, and taking 30% to 35% profit from the land before they transfer it to their home building operations," Shinn says. "The target ratios we advocate are strictly for home building. They don't relate to land, and many of the private builders don't have land appreciation in their profit margins. Land development is a separate business. But the publics don't see it that way."

Shinn points out that land is not the only area where public builders' accounting methods differ from those of most private companies. "When they do joint ventures (and they are doing a lot of them), they transfer the earnings from those ventures directly onto their books as both revenue and profit, without transferring any of the costs. The costs all stay in the joint venture," Shinn says.

UBS Investment Bank housing stock analyst Margaret Whelan confirms it: "They are moving the joint venture income onto their books without the costs, it's true," she says. "And we estimate the public companies' profits are about one third land appreciation. The public builders as a group now have an EBIT average of about 14%," Whelan says. "We think that will move toward 17% this year as they tighten operations and clamp down on costs. In an expansive market, they raise prices. In a tough one, they cut costs. They've had a good run lately and it's made them kind of lazy. But we think demand and price appreciation will slow this year — so they'll be more focused on costs."

Purchasing Power At Work

One thing that's interesting to note is the way materials costs run in inverse proportion to size: the Strivers report materials costs averaging 29.5% of the sale price of an average house. For Achievers, it's 27.6%, Rich and Famous 27.0% and Masters of the Universe 26.2%. It seems that purchasing power does pay off, and the largest builders are doing better with each passing day at maximizing the impact of their size on the purchasing side.

Construction labor costs seem less impacted by size. The spread between the Masters of the Universe and Strivers in the lowest echelons of the rankings is just 2.8%, and the Achievers category actually shows a lower average construction labor cost (22.1%) than the Rich and Famous group (22.8%).

Supernova Profits
Rank Company EBIT Margin 2004E
1 Pulte 13.7%
2 D.R. Horton 14.0%
3 Lennar 13.5%
4 Centex 11.8%
5 KB Home 10.8%
Source: UBS Investment Bank, New York, NY


 

More Mergers Coming?

It will be difficult for Supernovas to meet their growth targets without acquisitions. But no one will sell cheap, and the largest private builders are so profitable they have no interest in selling. Public companies also face the wrath of stock analysts if they book goodwill (the amount by which the price paid for a company exceeds tangible book value of its assets) on their balance sheets.

To break the logjam, Wall Street insiders are speculating about more mergers of public companies along the lines of past Pulte/Del Webb and Lennar/U.S. Home deals. UBS Investment Bank stock analyst Margaret Whelan says goodwill is not a barrier: "They can look past that," she says, "but they won't do a deal unless it adds new markets or a segment or product type they don't have, in addition to making a much larger company."

Shea Homes president Bert Selva says Supernovas will never reach their nirvana of a fully consolidated industry without mergers. "The big five throw around that number of 100,000 homes, but a lot has to happen for them to reach it. The lead time for bringing projects on-line is significantly longer today than in past years. I've already seen a slowdown in the pace of growth. They got to 30,000 pretty fast, but nobody's made it to 50,000 yet. To do it, one of them will have to buy two of the others in the top five."

"I think they need to do it," says Credit Suisse First Boston's Ivy Zelman. "They can't grow management talent fast enough to keep up with their production machines," she says. "Making the numbers work will be a challenge, but eventually they will look toward what's best over time. Pulte was diluted by the Del Webb deal. There was a big hit in goodwill. But now look at Pulte. I'd push them to go for it. There's never going to be a good time."

Don Horton is not so bullish. "I understand what Ivy's saying, but I don't think it makes sense right now," Horton says. "The purchase price for a company of that size, and the goodwill we'd have to take on, doesn't compute. Most public companies we'd consider, we would be looking at $2 billion to $3 billion in goodwill. With the returns we're making, we can find better places to put $2 billion."

Debate Rages over Wisdom of Urban Infill Ventures

Some view the public GIANTS' entry into urban infill and high-rise products as risky ventures beyond their area of expertise. Others applaud them as innovators that meet housing demand where it is emerging. Urban condos in a 15-story high-rise are certainly riskier than suburban subdivisions, but big builders defend their moves: "We're expanding into townhouses, multifamily and high-rise," says Toll Brothers chairman Bob Toll, "but all within our luxury niche.

"There's more risk in high-rises, it's true. Once you start construction, you have to complete it, even if the market goes south," Toll warns. "You can't carry the land and wait for the market to come back. We've also got to worry more about speculators in high-rises. They can dump your own product back on the market and it becomes your biggest competition.

"But this really has nothing to do with political constraints and land prices. We're moving into density because there's opportunity there, in addition to the opportunity that still exists on half-acre lots in the suburbs. We have capital available. We see opportunity and take what comes down the pike.

"The demand for high-rises in the city has nothing to do with what's happening in the suburbs," Toll contends. "Cities have become vibrant and exciting. It's nowhere near the majority of our buyers that want to live in the city, but it's a growing segment."

Lennar Corp. chairman Bob Strudler and vice president Marshall Ames point out that Lennar has been building townhouses and multifamily product for 25 years, so it has the expertise to do density. The firm mitigates the dangers of high-rise by bringing in joint venture partners who specialize in it. "High-rise is not a significant part of big public builders' businesses, but it is growing," Strudler says. "We're doing them in Miami, Chicago, New Jersey and California."

Ames says many former military bases that public builders are vying to redevelop are in urban locations that dictate high-density. "In San Francisco, we are building on 550 acres that used to be a Navy base within the city limits," Ames says. "El Toro, in Orange County, Calif., is totally infill and will have 3,000 housing units. In the 1980s, when mortgage rates were in the high teens, we learned to do multifamily as a way to address affordability. When we need to do high-rise, we do joint ventures to acquire expertise."

Strudler says the risks are greater, but so are the rewards. "In today's world, we can have $50 million invested in a single-family project in the suburbs before we start selling homes. Going vertical is riskier, but the rewards are greater as well. The lowest risk product we have is detached homes in Texas on lots taken down on rolling options. But that product also has the lowest returns.

Elevators Up!

Chicago developer Michael Lerner knows high-rise.

His quietly proficient firm, MCZ Development may have been virtually unknown across the housing industry two years ago, but not now. After jumping 139 places in the GIANT 400 last year, MCZ leapfrogged another 57 builders this year, landing firmly in the ranks of the Masters of the Universe at No.21 — on revenues of $1.26 billion from 4,361 closings, all high-rise condos.

"The high-rise trend is real, not just a fad," Lerner says now. "When they start building high-rise condos in Las Vegas, that has to tell you something. Land has gotten expensive. People are willing to live in high-rises now. And location is more important to people than ever, because of traffic problems."

MCZ has been on a roll in Chicago for a decade, he says, but now has projects going in Boston, Kansas City and Florida. "We're opportunistic," he says. "We go where we find a deal. Chicago is tough now. It's overbuilt, land is expensive and the zoning environment is becoming hostile.

"We're now doing a high-rise in Orlando. We are infill specialists, but the critical factor for success is a growth market. In Orlando or South Florida, it's hard to go wrong because the market is moving in the right direction. Orlando has never had a high-rise market, but people in any city will live in a high-rise if it puts them where they want to be."

Mark this company down as a prime target for acquisition by public builders seeking high-rise expertise. Asked if he'd been approached yet, Lerner replied, "We've had a few conversations, but we're rolling our inventory so quickly that we haven't given it much thought. We look to do 5,000 units this year, and we're going to do projects in Texas and Alabama."

IPO Window Opening?

When Comstock Homebuilding Companies launched an initial public offering last December, it raised more than a few eyebrows on Wall Street, and across the housing industry. Conventional wisdom had it the company was too small for an IPO. Christopher Clemente's Reston, Va.-based firm closed 328 units in 2004 in and around Washington, D.C., and Raleigh, N.C., for $105.2 million in revenue.

Surprise, surprise. Comstock's first-day closing price was $16.75 a share and by late March this year, it was trading above $20 a share. The reason for this buoyancy seems to be that Comstock has a solid position in the red-hot D.C. market—and much of its product is townhouses and low-rise and high-rise condos in suburban infill locations. Does this mean the window is now open for other small-cap IPOs?

"It's open, but it's contingent on what rates do," says Credit Suisse First Boston stock analyst Ivy Zelman. "If another builder who does urban infill came to market today, I think it would over-subscribe. That's a hot niche. But if rates are going up, the window may be open, but it's pretty cold outside."

Merger and acquisition guru Michael Kahn warns that Comstock is not a good example from which to draw conclusions about IPO viability. "You have to ask, who's going to follow the stock, write about and create buzz? Institutional investors are not likely to invest in such a small company, and mutual funds and pension funds are the big investors in housing stocks."

However, some investors obviously like Comstock. "The window is wide open," says JMP Securities managing director Tony Avila, a specialist in mergers and acquisitions who put together Hovnanian's recent deals for Town & Country Homes in Chicago and Cambridge Homes in Orlando. "We're working on an IPO right now. We think you need $400 million in annual revenue to make it work. Comstock did it smaller, but you really need to have $75 million in book equity. Comstock should have waited."

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