Politics & MoneyReal Estate

Lennar merger will create nation’s largest homebuilder

Deal with CalAtlantic makes company top 3 builder in 24 of 30 largest markets

It’s turning out to be a year of significant growth for Lennar.

Earlier this year, the homebuilder closed on a $643 million acquisition of WCI Communities, a luxury homebuilder headquartered in Florida. The deal included a portfolio of “well-located, owned and controlled land” totaling approximately 13,700 home sites, located in “most of the highest growth and largest coastal Florida markets.”

But that deal pales in comparison to Lennar’s latest deal.

Lennar announced Monday morning that it reached a definitive merger agreement with CalAtlantic Group, which will see Lennar acquire CalAtlantic in a deal valued at approximately $9.3 billion.

CalAtlantic was formed in 2015 when Standard Pacific Group and The Ryland Group merged.

The particulars of the deal are this: The definitive merger agreement stipulates that each share of CalAtlantic stock will be exchanged for 0.885 shares of Lennar Class A common stock in a transaction valued at approximately $9.3 billion, including $3.6 billion of net debt assumed.

According to a release, the combined company will be the “nation's largest homebuilder,” with revenues of more than $17 billion over the last 12 months and combined equity market capitalization of approximately $18 billion.

Lennar is paying quite the premium for CalAtlantic.

Under the terms of the merger agreement, each share of CalAtlantic stock will be converted into the right to receive 0.885 shares of Lennar Class A common stock.

Based on the closing price of Lennar’s Class A common stock on the NYSE on Oct. 27, 2017, the implied value of the stock consideration is $51.34 per share, representing a 27% premium to CalAtlantic's closing price that day.

According to the companies, CalAtlantic’s stockholders will also have the option to elect to exchange all or a portion of their shares for cash in the amount of $48.26 per share, subject to a maximum cash amount of approximately $1.2 billion.

CalAtlantic’s stock exploded on the news of the day, opening at $48.96 after closing Friday’s trading at $40.45.

The market hasn’t responded as positively to Lennar’s involvement in the deal, at least so far.

Lennar’s stock is down nearly 4% at midday, but perhaps Lennar can look to its fellow homebuilder D.R. Horton for how the market might react to this deal.

It’s been a year of acquisition for D.R. Horton as well. Earlier this month, D.R. Horton bought residential and mixed-use real estate developer Forestar Group in a $560 million deal.

Investors loved that deal, with D.R. Horton’s stock rising from in the $33 range when the deal was first announced in June to more than $44 in today’s trading.

Given those numbers, perhaps Lennar’s board is looking directly at the D.R. Horton deal as a driving factor in this deal with CalAtlantic.

In the release announcing the deal, the companies cite cost savings as one of the benefits.

The companies say that it is currently expected that the deal will generate annual cost savings and synergies of approximately $250 million, with approximately $75 million achieved in fiscal year 2018. 

According to the companies, these “synergies” will be achieved through direct cost savings, reduced overhead costs and the elimination of duplicate public company expenses.

Additionally, the companies said that additional savings are expected to come from production efficiencies, technology initiatives, and the roll out of Lennar’s digital marketing and dynamic pricing programs.

The deal will have big impact in the mortgage space as well, as both homebuilders have sizable mortgage lending operations.

According to the 2016 HMDA scorecard, which is based on the 2016 HMDA data and is prepared by iEmergent, an Iowa-based market research firm, Lennar’s mortgage arm was among the top 50 mortgage lenders last year.

Per the HMDA data, Universal American Mortgage, doing business as Eagle Home Mortgage ranked 41st in total origination dollar amount last year, originating $7.18 billion in mortgages in 2016.

Earlier this fall, Eagle Home Mortgage rolled out a new mortgage program that will help homebuyers pay off their student debt. The program offers borrowers as much as $13,000 that can be used to pay off student loan debt, but only if they buy a new home from Lennar.

CalAtlantic’s mortgage company, CalAtlantic Mortgage, ranked 141st in total origination dollar amount, originating $2.28 billion in mortgages last year.

Neither company’s mortgage operation gets a mention in the release announcing the deal though.

The release focuses on the homebuilding aspects of the deal only.

According to the companies, the combined company will control approximately 240,000 home sites and will have approximately 1,300 active communities in 49 markets across 21 states.

In the release, Stuart Miller, the CEO of Lennar, said that the deal will significantly increase Lennar’s market share in the nation’s largest markets.

“This combination increases our scale in the markets that we already know and in the products we already offer to entry level, move up and active adult customers. As a result, the combined company will have a top 3 ranking in 24 of the top 30 markets in the country,” Miller said.

“Accordingly, our overall company size and local critical mass will yield significant benefits through efficiencies in purchasing, access to land, labor and overhead allocation to a greater number of deliveries,” Miller said. “The combined land portfolio will position the company for strong profitability for years to come, as we continue to benefit from a solid homebuilding market, supported by job and wage growth, consumer confidence, low levels of inventory, and a production deficit.”

Larry Nicholson, the president and CEO of CalAtlantic, said that the deal makes sense for all sides.

“Our combination with Lennar underscores the quality and attractiveness of the CalAtlantic brand and people, and the business our talented team has worked hard to build,” Nicholson said. “Lennar is a well-respected name in the homebuilding industry and their team shares a deep commitment to innovation, quality, integrity and a focus on a superior customer experience.”

Rick Beckwitt, the president of Lennar, said that the companies share many commonalities that will serve the combined company moving forward.

“We have great respect for what Scott Stowell, Larry Nicholson and the CalAtlantic team have accomplished, building upon the rich legacies of Standard Pacific and Ryland. Our discussions over the last several months have only reinforced our conviction that by joining forces, we will achieve new heights in our industry and create significant value for all of our shareholders,” Beckwitt said.

We share common cultures and deep traditions of delivering quality and value, doing the right thing and exceeding the expectations of our customers,” Beckwitt added. “We look forward to executing our strategy as a larger and even stronger company and welcoming a very talented group of CalAtlantic associates to the Lennar family.”

The companies expect the deal to close in the first quarter of 2018.

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