Phil Ammann
February could bode well for Lennar Corp., Florida’s largest homebuilder.
Lennar, the nation’s second-largest homebuilder, is close to completing its strategic buyout of Arlington, Virginia’s CalAtlantic Group, expected to happen as early as next month.
This acquisition will make the Miami-based Lennar — which builds over 6,000 homes in Florida every year, with 8,000 homes built in 2016 alone — the largest home construction company in the U.S., giving it a principal role in America’s leading industry.
Upon its conclusion, the merger — first announced in late October 2017 — will grow Lennar, founded in 1954, to more than $17 billion in annual reserves, and $18 billion in equity.
The joint company will also have a vast footprint nationwide, controlling 240,000 homesites with a presence in 1,300 communities across 49 markets in 21 states.
The acquisition of CalAtlantic, a 50-year old homebuilder whose latest configuration came in 2015 through a merger of The Ryland Group and Standard Pacific Corp, will put Lennar among the top three homebuilders in 24 of the country’s top 30 markets, covering nearly half the U.S. population.
In a statement, Lennar officials explained that the CalAtlantic merger made sense for both companies, by allowing them to tackle a range of issues facing homebuilders: rising land and material costs, labor shortages and increased regulation. A larger Lennar will now re-enter the marketplace armed with a stronger market presence, providing better products at competitive prices.
After completing the corporate marriage, the new firm will be in a better position to buy materials, with greater access to land, labor, overhead and more. Lennar’s land holdings, combined with a robust homebuilding market, will result in not only higher profits for stakeholders but also job and wage growth.
Beyond becoming a purchasing powerhouse, the move is also expected to offer significant cost savings to Lennar’s bottom line, starting with about $75 million for the fiscal year 2018 and estimated to reach $250 million annually.
“This combination is first and foremost to enhance shareholder value,” Lennar CEO Stuart Miller said in a statement. “The combined company will have a strong balance sheet and generate significant cash flow available to pay down debt and repurchase shares, which will improve returns on capital and equity.”
As part of the deal, set to conclude in the first quarter of 2018, each share of CalAtlantic stock will be worth 0.885 shares of Lennar Class A common stock — an exchange valued at about $9.3 billion, including Lennar, which holds nearly $6.8 billion in long-term debt, taking on another $3.6 billion in CalAtlantic debt.
The day the merger was first announced, on Oct. 27, 2017, Lennar’s Class A common stock traded at $51.34 per share in the New York Stock Exchange; CalAtlantic stockholders will have the choice to exchange shares for cash at $48.26 per share, up to about $1.2 billion. Those not cashing out will receive Lennar stock.
Ultimately, remaining investors holding shares of CalAtlantic will own as much as 26 percent of the joint company.
The CalAtlantic acquisition is having a positive effect on Lennar’s already solid financials.
Earlier this month, Lennar’s newly announced earnings report showed home sale revenues increasing 14 percent in the fourth quarter of 2017 to $3.3 billion from $2.9 billion the year before. Helping to boost revenues was a 5 percent increase in home deliveries, as well as an 8 percent jump in the price of a Lennar-constructed home.
Miller added that the Lennar/CalAtlantic merger will increase the “scale in the markets that we already know and in the products we already offer to entry-level, move up and active adult customers.”
A stronger Lennar — able to offer more competitive wages — comes at a crucial time in the housing sector, which has struggled with increasing regulation and filling job openings in a growing homebuilding industry.
“The regulatory environment and overall cost structure within the industry has generally been rising, and creating operating efficiencies under a combined operation may have been an attractive attribute,” Brian Gordon of Applied Analysis said about the proposed merger last year.
According to a recent survey of homebuilders, most see “persistent and severe” labor shortages in trades and that this scarcity will persist or worsen in the future.
The survey also found the acutest labor shortages nationwide are in trades such as framing, drywall, plumbing, roofing and painters.
One area of improvement in the labor industry is an overall quality of the workforce, where the average entry-level worker is age 25 or older. Another industry study also found that homebuilders are only moderately or somewhat satisfied with their skill levels, the same level of satisfaction employers have with hires without any formal training.
Nearly all provide some form of on-the-job training, with a third offering apprenticeship.
