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Housing's GIANTS are different. Different from last year. Different from the rank and file of small builders that still produce most of America's housing. And different from each other in ways that allow us to separate them into categories - nearly as different from each other as from the small-builder segment that makes up the bulk of the industry. Check the rankings and the differences as we describe them among the four categories we now call Masters of the Universe (GIANTS 1-20), Rich and Famous (GIANTS 21-125), Achievers (GIANTS 126-275) and Strivers (GIANTS 276-400).
Different From Last Year
Professional Builder's 2003 ranking of the top 400 builders, by housing revenue, shows surprising changes from a year ago, not the least of which is a new leader. Bloomfield Hills, Mich.-based Pulte Homes Inc. is back on top after dropping behind Miami-based Lennar Corp. for two years. Lennar drops to No. 3 behind surging, Arlington, Texas-based D.R. Horton Inc., up from No. 4, setting up another interesting duel for No. 1 next year.
Who's leading right now? It's hard to even guess. PB ranks on revenue from housing production in the previous calendar year or most recent fiscal year. Mergers and acquisitions muddy the water. Acquired firms are still ranked independently for revenue they generate, on their own, in a portion of the year when the transaction takes place. For instance, the No. 5 GIANT, Los Angeles-based KB Home, recently acquired No. 70 Colony Homes to enter the Atlanta market. But KB's 2004 ranking will benefit from Colony's 2003 revenue chalked up only after that deal closed in March.
There have been lots of deals. The pace of housing industry consolidation seems to quicken every year. A year ago, the largest builder had just less than $5.5 billion in housing revenue. This year, $7.2 billion claimed the top spot.
Most of the growth came via mergers and acquisitions by the top 20 builders. Pulte regained No. 1 mostly on the strength of finally getting the full benefit of its merger with Del Webb (No. 11 last year). D.R. Horton's meteoric rise owes much to finally including all of California-based Schuler Homes' revenue (No. 14 last year) and Emerald Builders in Houston (No. 138 last year, after rising to No. 65 in 2001). Atlanta-based No. 7 Beazer Homes USA now benefits from full inclusion of Crossmann Communities (No. 22 a year ago) in Indianapolis.
KB also acquired American Heritage Homes (No. 132) in Kissimmee, Fla., and New World Homes in Tucson, Ariz. Lennar acquired California-based Pacific Century Homes (No. 117) and Concord Development (No. 121) near Chicago, among nine acquisitions in 2002. No. 12 Standard Pacific Corp., in Irvine, Calif., rose from No. 16 by adding some of the revenue of Westfield Homes USA in Tampa, Fla. (No. 159 this year but previously No. 75) along with two others. Dallas-based Centex Corp. will not gain until next year from the January deal adding No. 88 The Jones Co. near St. Louis.
There's another subtle difference from a year ago, less obvious than the way all this reshuffling of the deck affects the rankings, but perhaps just as important. For the first time in eight years, the market share of housing completions accounted for by the GIANT 400 actually dropped. Non-Giants accounted for 67.8% of 2002's total housing pie (1,649,100 completions, as tallied by the U.S. Commerce Department), compared with 67.4% of 1,570,400 in 2001.
What this indicates is that small builders aren't dead yet. Of the 78,700 housing completions added in 2002, 60,183 (76.5%) were built by companies smaller than Norstar Building Corp., the Irving, Texas-based firm that squeezed onto the GIANTS list at No. 400, with $12 million in revenue from 216 rental units. The higher percentage of non-Giant activity in the added completions also implies that barriers to entry into the housing business remain relatively low.
And while PB's survey data from housing's GIANTS indicate that the largest builders are making better margins than builders near the bottom of the rankings, there's no reason to believe that non-Giants cannot match margins with the best of them. "The public GIANTS are making much better margins today than five years ago," Denver-based consultant Chuck Shinn says, "but the deceptive factor is that the public companies don't separate land development from home building as an independent profit center, which they should. Most of their margin is in the land. Many small builders are making double-digit margins on home building and even higher margins on land."
Why Size Matters
What the rankings reflect is not the growth of GIANTS at the expense of non-Giants, but the frenzied growth of top-tier GIANTS, which are gobbling up those in the second tier of the rankings - the Pac-Man phenomenon, as PB senior editor Patrick O'Toole described it last year. Their appetite does not extend beyond the GIANTS rankings. Inject truth serum, and many will admit they use this issue of PB as a shopping list.
Take a close look at the bar chart on this page showing the five-year history of housing revenue among the GIANT 400. The top 20 firms had 53.55% of the $109.8 billion in 2002 housing revenue recorded by the whole 400. In 1998, their share was 43.83%. No wonder we call them Masters of the Universe!
By contrast, the Rich and Famous segment lost ground, going from 35.19% of GIANTS' housing revenue in 1998 to 28.87% in 2002. Achievers also lost ground, going from 15.43% in 1998 to 12.75% in 2002. And the revenue of the Strivers also declined, from 5.55% in 1998 to 4.83% in 2002.
Why are the public companies among the top 20 engaged in such a breathless race to gobble up competitors among smaller GIANTS and grow to gargantuan size? Why is it important to be No. 1?
When we put that question to the builders involved, every one said it is not important to be No. 1. "Size and scale are not part of our strategy; results are," Pulte president and CEO Mark O'Brien said. "We want to advance shareholder value in return on equity, return on invested capital and earnings per share."
However, when we asked Beazer president Ian McCarthy what the revenue of the No. 1 builder would be five years from now, he said, "I see no reason why it can't be $15 billion. It is a real possibility. Why not? We've doubled our size twice in the last eight years."
Wall Street housing analysts say who is No. 1 doesn't matter to them, but most acknowledge that increases in market capitalization and geographic diversity carry benefits in the public sector. "The big public builders think size is important because it's part of the story they tell," Credit Suisse/First Boston analyst Ivy Zelman says. "They talk about advantages with trade contractors and purchasing power in buying the materials and component parts of the houses. They build the case for advantages in operating efficiency based on volume."
And so all the public builders pursue acquisitions, and the closer they get to No. 1, the more aggressive they are likely to be. If their share prices are high, as they were a year ago, deals are easier to make. As long as mortgage rates remain low and sales don't hit a war-induced wall, the race will remain a sprint.
It looks to us that who's No. 1 is very important - not necessarily for what it says about Pulte today, but perhaps as a halftime score on the way to $15 billion.
