Professional Builder Giant 400: Public v. Private Debate Continues

Ask America's top private home builders if going public is a good idea and you're likely to get a smile and a cryptic, "Not for us." Still, the debate rages — public v. private — and each side has plenty of arguing points. The public companies are on a 13-year run of unprecedented growth.

By Bill Lurz, Senior Editor, Business | March 31, 2006


Toll Jumps Four Giants — To No.6



Skyrocket in Flight

Ask America's top private home builders if going public is a good idea and you're likely to get a smile and a cryptic, "Not for us." Still, the debate rages — public v. private — and each side has plenty of arguing points.

The public companies are on a 13-year run of unprecedented growth. Fueled by public capital and driven by Wall Street's unrelenting demand for double-digit growth, five Supernovas atop our rankings are poster boys for the publics. In the first six years of 2006, Pulte has grown from 27,781 closings and revenue of $4.26 billion in 2000 to 45,630 closings for $14.37 billion in 2005. No.2-ranked D.R. Horton's growth is even more impressive, from 18,942 closings and $3.57 billion in 2000 to 51,383 closings for $13.72 billion in 2005. That's a 284.3 percent bump in revenues. The first builder to top 50,000 closings in a single year, Horton is now operating in 77 markets in 26 states.

But even facing competition from these massive Supernovas, most large, private builders have lost interest in an IPO. Wall Street is too tough a task master, they say, and they're doing fine without the aggravation — and risk — of dealing with stock analysts and the market's short-sighted focus on quarterly earnings.

Masters on the Move

Glance down the rankings to what's happening in the ranks of the Masters of the Universe. It sheds light on the public versus private debate. The Masters is our billion-dollar club and last year 20 builders made it. This year, the club has 26 members, 16 of them public, and some interesting movement in the ranks.

The most impressive is Toll Brothers' jump from No.10 to No.6 (see below). The Horsham, Pa.-based public company, a specialist in luxury homes, has the highest average sale price among all the publics ($660,000), and held that average despite a big move into attached and higher-density urban products carrying lower price tags.

Near the top of the rankings, it takes big growth just to stay on the ladder. For example, Red Bank, N.J.-based Hovnanian Enterprises grabbed leadership in acquisitions during 2005 by buying four builders, three of them Giants (Town & Country Homes in Chicago, ranked No. 57 last year; First Home Builders of Florida, ranked No. 85; and Cambridge Homes in Orlando, ranked No. 123). The firm went from 14,586 closings for $4.08 billion in 2004 to 17,783 closings for $5.71 billion in 2005. Hovnanian seemed a cinch to jump NVR to No. 6. It didn't happen. Because of Toll's astounding move, Hovnanian stays at No.7 even though it leapfrogged NVR, which dropped two spots despite adding 1,038 units and $98 million in revenue.

In all, eight public companies in the Masters of the Universe dropped in the rankings this year, even though all grew significantly. For example, Atlanta-based Morrison Homes grew from 4,422 units and $1.29 billion to 4,921 closings for $1.54 billion. Yet Morrison lost a spot—from No.20 to No.21.

It's this conundrum that leads many Wall Streeters to look for more mergers of public companies, like Pulte's 2001 Del Webb deal, even though stock analysts rue the impact of massive amounts of goodwill (the amount by which purchase price exceeds book value) such a deal would bring to the acquirer's balance sheet. The possibility of mergers may be rising due to slim pickings among large private builders on the acquisition front.

In the past, these firms sold because of the private builder's urge to retire, and need for a liquidity event to fund retirement. Today, sellers are not seeing the price they want because the housing market is softening, and publics fear the wrath of stock analysts on goodwill.

Private Poster Boys

Walnut, Calif.-based Shea Homes is a model many large, private builders are now following. The largest private builder, Shea is also a major land developer, employing land strategies that take time to reach fruition but result in greater gain. Shea even shows an inclination to form strategic alliances with publics to do what they can't — like carrying land, which public builders avoid to keep those costs off their balance sheets.

Shea is a fixture at No.13 in our rankings this year with $3.06 billion in 2005 housing revenues (and $176.4 million in "other income," including land sales). While Shea remains the largest private, it's not the biggest mover in the Masters of the Universe.

The biggest jump to the highest new rank was made by Newport Beach, Calif.-based WL Homes, moving from No. 26 to 20, on a gain from 2,045 to 2,891 units — for 2005 revenues of $1.63 billion, up from $976.8 million in 2004. WL follows a similar, long-range strategy as Shea, but adds a focus on infill and urban redevelopment.

Another major mover is Melbourne, Fla.-based Mercedes Homes, which jumped from No.30 to 23 on a 24.8 percent increase in closings, mostly in Florida.

What many large, private builders now see is that wherever the big publics go, there's a niche for big private builders to form strategic alliances and joint ventures with them to take on roles Wall Street wants publics to shun.

That's why they smile when they say they don't want to go public.

Top 10 Public Builders

2006 Rank Top 10 Publicly-Owned Giants 2000 Closings 2005 Closings % Change
1 Pulte Homes, Inc. 27,781 45,630 64.2%
2 D.R. Horton, Inc. 18,942 51,383 171.3%
3 Lennar Corporation 22,560 42,359 87.8%
4 Centex Corporation 21,767 37,876 74.0%
5 KB Home 22,847 37,140 62.6%
6 Toll Brothers, Inc. 3,945 8,769 122.3%
7 Hovnanian Enterprises, Inc. 4,367 17,783 307.2%
8 NVR, Inc. 10,055 13,787 37.1%
9 Beazer Homes USA, Inc. 8,088 18,401 127.5%
10 M.D.C. Holdings, Inc. 7,484 15,307 104.5%
Source: Professional Builder, 2006

Top 10 Largest Private Builders

2006 Rank Top 10 Privately-Owned Giants 2000 Closings 2005 Closings % Change
13 Shea Homes 4,927 6,901 40.1%
20 WL Homes LLC aka John Laing Homes 2,368 2,891 22.1%
22 MCZ Development 198 4,020 1930.3%
23 Mercedes Homes, Inc. 1,927 5,714 196.5%
24 Woodside Group Inc. 1,721 3,676 113.6%
25 Trammell Crow Residential 7,012 9,784 39.5%
27 David Weekley Homes 3,245 4,612 42.1%
28 Kimball Hill Homes 3,017 3,881 28.6%
30 JPI 13,000 7,425 -42.9%
31 The Drees Company 2,391 2,968 24.1%
Source: Professional Builder, 2006
AS TOP 10 PUBLIC BUILDERS (above) ride Wall Street capital to unheard of heights, many large privates (below) find growth, profits—and less risk—away from that limelight.

View Additional 2006 Giant 400 Report Articles:
Topping Out or Just A Pause?
Publics Diversify Products
High-Rise Fraught with Risk
Public v. Private Debate Continues
Publics' Profits at Peak
Even Small Private Builders Can Compete
What Happens Next?


Toll Jumps Four Giants — To No.6

It's easy to think price appreciation accounts for the bulk of Toll Brothers' rapid rise from No.10 in last year's Professional Builder Giant 400 to No.6 this year. After all, this specialist in move-up homes has the highest average sale price of all the public builders—$660,000 in fiscal 2005 (ending October 31). But that's not the whole story.

Toll's average sale price actually advanced only marginally from 2004 to 2005, but closings grew from 6,627 in 2004 to 8,769 in 2005. Toll leaped M.D.C., Beazer, NVR and acquisitive Hovnanian, even though this firm mostly disdains growing via acquisition. (A deal closed in June for Landstar Homes' central Florida division added less than $100 million to Toll's 2005 housing revenues of $5.75 billion.)

Toll's growth is more about product diversification than anything else. The firm is committed to meeting demand for luxury homes for affluent Americans wherever it leads. That means adding upscale empty nester attached and detached homes to the existing arsenal of estate move-up product. And developing active-adult, age-qualified communities as well as resort country clubs, marinas and urban low-, mid-, and high-rise condo projects.

"We'll grow our product lines and our geographic coverage," says chairman Bob Toll. "We just expanded into the Twin Cities in Minnesota, and we're looking at Houston since we're already in Dallas, San Antonio and Austin."

Toll acknowledges that urban, high-density is key to his strategy, meeting burgeoning demand from affluent Americans to live where the action is.

"It's remarkable that Wall Street has decided home builders today are worth half of what we were worth last year," Toll says, "just because some overheated markets are suffering a little pain. The market seems to believe we're heading back to the revenues and profits we had in '03. I don't see it, not just because of the aging population and increase in the numbers of affluent buyers — the ones we target — but because there are more buyers at every price.

"The people predicting a serious contraction of housing are going to be wrong," Toll says. "Even if mortgage rates go to seven and a half percent, we'll still do plenty of business."

Skyrocket in Flight

What's got into Martin Ginsburg? He's acting more like Donald Trump. But he's proving you don't have to be a Supernova to put up impressive numbers.

Valhalla, N.Y.-based Ginsburg Development, for years a small production builder of impeccably planned luxury communities (detached homes and townhouses), mostly in suburban Westchester County, N.Y., has suddenly taken off—rising 103 positions in the Giants rankings, moving into multi-market operations and new, high-density products that will even include a high-rise condo building.

Ginsburg is now Giant No.122, with $217.3 million in 2005 housing revenues.

"We closed 19 single-family houses last year ($28 million) and 349 attached homes ($189.3 million)," Ginsburg says, "mostly townhouses, but we started delivering some mid-rise condos toward the end of the year...four stories over parking. We're in 10 locations now, and we are growing. We're in Connecticut, as well as the two counties north of Westchester. We're doing a small high-rise condo building in New York City."

He sees a trend toward fighting sprawl, and intends to be part of the solution rather than the problem, but acknowledges approvals for higher densities are tough in the Northeast: "Our reputation and the quality of our past communities helps," he says. "Much of what we're doing now is mixed-use. Our Haverstraw (N.Y.) project is 850 units with a mile and a half of frontage on the Hudson River. The density there is about 20 units to the acre."

And if you think this isn't an empire in the making, take a look at Ginsburg's "other revenues" entry: $358.5 million. "We're not a typical home builder," Martin Ginsburg understates drolly. "We have a lot of property management people. We've made some changes in portfolio — sold apartments to go into shopping centers instead."








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