BY CHRIS KIRKHAM AND LAURA KUSISTO
Lennar Corp. agreed to buy CalAtlantic Group Inc. for $5.7 billion, creating the country’s largest home builder by revenue in the latest affirmation of a U.S. economic expansion now in its ninth year.
The proposal marks the largest merger of home builders since the financial crisis, a milestone for the recovery of an industry that was hard hit by the housing collapse last decade but has contributed significantly to U.S. growth in recent years.
The deal would create a combined company with revenues of more than $17 billion as of last year and a market cap of roughly $18 billion, based on Friday’s closing share prices.
Major home builders are looking to control rising costs for land, labor and materials as the U.S. housing market expansion continues. Builders increasingly are focusing on first-time home buyers purchasing less-expensive homes, which has put pressure on profit margins.
Lennar Chief Executive Stuart Miller said the combination would increase Lennar’s presence in markets it already operates in and allow it to be one of the top three home builders in 24 of the top 30 markets in the country.
On a conference call Monday, Lennar executives pointed out that the two companies compete in many of the same markets. With more scale, they said they can lower costs by negotiating better deals with construction crews and suppliers.
“It should be no surprise that the more you buy, the less you pay,” said Lennar President Rick Beckwitt.
The companies expect the deal to generate $250 million in annual cost savings by the 2019 fiscal year and roughly $75 million in fiscal 2018.
In acquiring CalAtlantic, Lennar will have access to a new supply of developable land that can be built on quickly, which is less risky than buying large tracts of undeveloped land that could take years to get permits. Analysts agree that a larger company will better be able to navigate increasing construction costs, which have outpaced price increases of new homes every quarter over the past three years, according to data from John Burns Real Estate Consulting, which tracks the industry.
Facing construction-labor shortages in many markets, builders have to compete for the best crews. More scale means steadier work for construction crews, which analysts said would give the combined company an advantage in negotiations.
Builders increasingly are focusing on first-time home buyers purchasing less-expensive homes. A Lennar construction site in Florida.
“The bigger you are, certainly the better-positioned you are in that market,” said Credit Suisse home building analyst Susan Maklari. “You can say ‘It’s not worth leaving me and going to another builder’s site.’”
Home builders struggled through the 2007-09 recession and the early economic recovery as millions of Americans faced foreclosures and unemployment. Single-family home construction has only recently begun to surpass the prior 30year average, but home builders over the past year have reported a return of first-time buyers to the market as economic conditions improve.
The homeownership rate hit 63.7% in the second quarter, a jump of nearly a full percentage point from a year earlier, according to the Census Bureau. Younger households helped drive that improvement: The homeownership rate for households headed by someone under 35 years old jumped to 35.3% from 34.1% a year earlier.
Still, these households are particularly price-sensitive, placing additional pressure on builders to control costs and keep the price of these homes at a level first-time buyers can afford. More home buyers means more sales for home builders, but it is difficult to maintain the same kind of profit margins generated by high-end luxury-home sales that dominated the early years of the economic recovery.
The deal is subject to approval by shareholders.