Land

Why An Undersupply Of Land Looms As Builders' '24-'25 Hurdle

Here are 10 public homebuilding enterprise CFOs on their firms' current cash troves, adding up to more than $15 billion in resources ready to accelerate earnings growth in the year ahead.

Land

Why An Undersupply Of Land Looms As Builders' '24-'25 Hurdle

Here are 10 public homebuilding enterprise CFOs on their firms' current cash troves, adding up to more than $15 billion in resources ready to accelerate earnings growth in the year ahead.

July 31st, 2023
Why An Undersupply Of Land Looms As Builders' '24-'25 Hurdle
SHARE:
SHARE:

It's the rare business story whose strategic stakeholders report, on looking back, that "the goal posts moved closer to us" as a reason for their success.

That happened in homebuilding in 2022 and 2023. And it will be a tough act to follow with a period flowing into 2024, as builders start redeploying heaps of stored up "dry powder" to accelerate earnings opportunity into and beyond next calendar year.

Let's look at why [today, Part 1, and tomorrow Part 2].

Last year at this time, the specter of a cascade of negative effects of the Federal Reserve's higher-interest-rate regime hovered over most organizations' and operators' business forecast horizons.

Few if any strategists imagined back then, "oh, shockingly higher mortgage interest rates, great! That will be just the catalyst our business needs to 1) secure our 2022-23 backlog orders, and 2) to stabilize our speculative inventory pace, and 3) to kick-start absorptions of newly started homes to rebuild out the value of the '23-'24 backlog, giving us greater visibility into a higher-growth near-future."

Which is more or less what happened.

Builders braced for trouble – and they set up the mechanics to navigate it in the form of incentives, rate buy-downs,  and price cuts – and trouble they got, right through November of 2022.

Then the goal posts moved ... closer. Builders' turn of fortune, starting in December and carrying through mid-year this year – it has to be said – was equal parts skill and luck. The skills part involved years of rigorous preparation, taking pressure off their balance sheets, pivoting from owned to controlled land inventory, and optimizing margins, the ultimate "shock absorbers" for nimbleness and agility in the response to demand turbulence.

Another aspect of the skills builders large and small brought to bear was the array of tools – sharpened and specialized for use across a continuum of buyer needs, preferences, and catalysts right down to the community, home, and would-be buyer level – to price in the willing-but-marginally-able, and to lock-in those with greater discretionary wherewithal but a higher level of hesitancy due to their reluctance to "catch a falling knife" should home prices be about to implode.

Turns out — as luck would have it – builders had enough of what it took to price-in buyers, many of them price-sensitive first-time buyers, into the market, and discretionary homebuyers were undeterred enough to realize they were "dating the rate and marrying the home," meaning they felt confident enough to go ahead and buy.

So, the BTE – better than expected – period of homebuilding enterprise strategy, complete with goal posts that have moved favorably forward for what looks from here like an indefinite but sustained period of resale home scarcity, has led to an entirely new set of scenarios for what's ahead.

Most of them feature shortages of what "they're not making more of," land, given that expectations have dialed back up for ongoing new-home demand in a residential for-sale marketplace where new is practically the "only game in town."

Here, what follows is a verbatim reading that can give you a good sense of just how large the appetite for land has become – given that many companies had pretty much ceased de nova acquisition activity, even walked away from some of their latter vintage land positions, and kept essentially to a playbook of taking down lots from already-established winning positions that were mostly already controlled.

What that means is that, based on current bets that the conditions that "moved up the goal posts" – suppressed existing home sales, household and family formation-driven structural demand, and a resilient jobs and consumer spending economy – will hold steady, they're going to push harder to produce more, sooner than later.

The following statements come from transcripts from the latest earnings reporting cycle of publicly-traded homebuilding enterprises.

In the sense of the term we're exploring here, appetite gets expressed in two modes, one as a dollar quantification, and the other as a statement of strategic intention. We'll start with the two earlier [June] bellwethers among the peers, Lennar and KB, and follow through the cohort that reported last week.

Cash & Liquidity

Diane Bessette, CFO, Lennar (June 15)

There's a constant drum beat at Lennar to be laser focused on returns on invested capital and cash flow. This quarter, we were unwavering in our determination to turn our inventory and generate cash by increasing production as we've priced homes to market to deliver as many homes as possible. The drum beat continued with our determination to preserve cash and increase asset efficiency with a judicious eye towards land spend.
As we noted, we spent approximately $1.2 billion on land purchases this quarter of which approximately 90% of the initial sites where vertical construction will soon begin. The results of these strategies was that we ended the quarter with $4 billion of cash and no borrowing on our $2.6 billion revolving credit facility. This provided a total of $6.6 billion of home building liquidity."

Jeff Kaminski, Executive VP-CFO, KB Home (June 21)

In the 2023 first half we invested a total of $763 million in land and land development, of which approximately 83% with the land development. At quarter end, our total liquidity was over $1.6 billion, including nearly $1.1 billion of available capacity under our unsecured revolving credit facility with no cash borrowings outstanding and $557 million of cash."

Bill Wheat - Executive VP and CFO, D.R. Horton (July 20)

During the first nine months of the year, our cash provided by homebuilding operations was $2.1 billion and our consolidated cash provided by operations was $2.3 billion.
At June 30, we had $4.6 billion of homebuilding liquidity, consisting of $2.6 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility."

Pablo Shaughnessy - EVP and CFO, PulteGroup (July 25)

We ... ended the second quarter with $1.8 billion of cash and a gross debt-to-capital ratio of 17.3%. Given our large cash position, our net debt to capital ratio is now below 3%."

Dave Messenger - CFO, Century Communities (July 26)

We maintained our quarterly cash dividend at $0.23 per share and ended the quarter with a strong financial position, including $2.2 billion in stockholders' equity, $1.2 billion in total liquidity, and $374 million in cash."

Curt VanHyfte - West Area President & Interim CFO, Taylor Morrison (July 26)

We generated $260 million of cash flow from operations during the quarter and ended with a record total liquidity position of approximately $2.3 billion. This included $1.2 billion of unrestricted cash and $1.1 billion of available capacity on our revolving credit facilities, which remain undrawn outside of normal course letters of credit."

Phillip Creek - EVP and CFO, M/I Homes (July 26)

As for the balance sheet, we ended the second quarter with a cash balance of $668 million and no borrowings under our unsecured revolving credit facility."

David Goldberg - Senior VP and CFO, Beazer Homes, (July 27)

Total liquidity at the end of the quarter was $541 million, comprised of $276 million of unrestricted cash and $265 million available on our fully undrawn revolver."

Bob Martin - CFO, M.D.C. Holdings (July 27)

We ended the quarter with over $1.8 billion of cash and short-term investments, total liquidity of over $2.9 billion and no senior note maturities until January 2030. Our debt- to-capital ratio at the end of the quarter was 31.7% and our cash and short-term investments continue to exceed our homebuilding debt as of quarter end."

Glenn Keeler, CFO, Tri Pointe Homes (July 27)

We ended the quarter with approximately $1.7 billion of liquidity and consisting of $982 million of cash on hand and $695 million available under our unsecured revolving credit facility."

So, with half the cohort of 10 public homebuilders reporting so far, that adds up to upwards of $15 billion in cash – or dry powder. Add in available funds in the builders' revolvers, and you're over $20 billion.

Tomorrow, we'll continue this analysis with a flavor of just how active some of these organizations say they are, given that new communities, a deeper pipeline of ready lots, and an accelerated ramp-way to earnings is the contest these firms will measure themselves by when they stand up this same time next year to account for performance.

ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

MORE IN Land

Purchase Of Biscayne Lands Sumitomo A Florida For-Sale Beachhead

A deal completed this week will add Tampa Bay, FL-based Biscayne Homes, extending DRB Group's multi-regional footprint from the Mid-Atlantic through the Southeast coast.


TBD Case: Here Is A Build-To- Rent Wellness Community Model

A look at how Zeal for Living aims to boost the health and well-being of renters.


Strong Private Builders Can Write Their Ticket In M&A Sweeps

A select group of sellers – whose backs may be viewed as against the wall purely financially, given their reliance on personally guaranteed bank lending for AD&C – have tremendous leverage on both options and terms.


ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

MORE IN Land

Purchase Of Biscayne Lands Sumitomo A Florida For-Sale Beachhead

A deal completed this week will add Tampa Bay, FL-based Biscayne Homes, extending DRB Group's multi-regional footprint from the Mid-Atlantic through the Southeast coast.


TBD Case: Here Is A Build-To- Rent Wellness Community Model

A look at how Zeal for Living aims to boost the health and well-being of renters.


Strong Private Builders Can Write Their Ticket In M&A Sweeps

A select group of sellers – whose backs may be viewed as against the wall purely financially, given their reliance on personally guaranteed bank lending for AD&C – have tremendous leverage on both options and terms.