Home Builders Beef Up on Cash to Gird for Next Wave

The Wall Street Journal

12 July 2012

U.S. home builders, anticipating that a recovery in new-home sales is on the horizon, are raising cash on Wall Street to repair balance sheets and rebuild their depleted supply of land.

On Monday, Atlanta-based Beazer Homes USA Inc. said in a regulatory filing that it will raise about $75 million by selling shares of common stock. That filing followed an announcement on Monday by Meritage Homes Corp., a Scottsdale, Ariz., builder, saying that it had registered to sell 2.3 million new shares of common stock to raise about $75.7 million.

In 4 p.m. New York Stock Exchange composite trading on Tuesday, Beazer dropped 40 cents, or 12%, to $2.98. Meritage fell 47 cents, or 1.3%, to $34.91, after gaining 0.6% on Monday.

Stock analysts said the moves are coming at a good time because investors have been eager to purchase home-builder stocks. The Dow Jones U.S. Home Construction Index, which tracks the stocks of seven home builders, has gained nearly 50% this year.

Hovnanian Enterprises Inc. took advantage of the rising value of its common stock, which has nearly doubled in value since January, to reduce its debt load by issuing in the past two weeks 1.5 million class-A shares to bondholders in exchange for $6 million in debt.

By issuing stock now, builders are outrunning any potential weakness in the market that could result from rising unemployment, elections in November and problems in Europe.

“Things are lining up for home building right now,” said David Goldberg, a home-builder analyst with UBS. “If I’m a company and I say ‘I know I have to raise capital at some point,’ maybe this is an opportune time to do it.”

Much of the proceeds from the stock sales will be used to acquire land. Builders typically need to own thousands of home sites with infrastructure like sewer lines, sidewalks and power lines installed, known in the industry as finished lots, to be ready to respond to consumer demand and quickly erect houses.

With minimal new lots being delivered since the housing crisis, ready-to-build sites in prime locations with established school districts and short commute times to job centers have become scarcer and more pricey, sparking bidding wars for land.

Some builders have responded by buying raw land and paying to add infrastructure and amenities themselves, counting on consumer demand for new homes rising over the next few years. Since developing a single lot typically costs tens of thousands of dollars, buying raw land is an expensive gamble for builders.

“All of the lots in the best markets or the best submarkets…have pretty much been purchased,” said Brent Anderson, Meritage’s vice president of investor relations. “We’ve got to feed the machine…[Issuing stock] gives us the ability to add communities, which we’ve been trying to do for a while. It gives us some more dry powder.”

For other builders, land plays a role, but there are other factors involved. Beazer and Hovnanian, for example, are saddled with heavy debt loads and are working to repair their balance sheets. For Hovnanian, which issued $25 million in shares at $2 apiece in April, this latest transaction continues a strategy of buying “land at or near the bottom of this home-building cycle so that we can grow revenues and return to profitability while simultaneously reducing the amount of debt on our balance sheet,” said Larry Sorsby, the company’s chief financial officer.

Some market watchers think KB Home, a Los Angeles builder catering largely to first-time buyers, could be the next builder to issue stock. As of May 31, KB Home had $377 million in cash and cash equivalents, one of the sector’s lowest amounts. Industry watchers also are concerned about its weak orders for new homes.

A KB Home spokeswoman declined to comment. During a March conference call with analysts, KB’s chief financial officer, Jeff Kaminski, said the builder has “adequate liquidity to support [its] current business needs.”

But analysts aren’t so sure. “It’s thought that for them to fully participate in a housing recovery and generate strong growth, they might need to issue capital,” said Jade Rahmani, a builder analyst with Keefe, Bruyette & Woods Inc.

Analysts don’t expect bigger builders with large cash supplies, including D.R. Horton Inc. and Toll Brothers Inc., to issue additional stock in the near term. “The large-cap companies and the ones that have less leverage we would first expect to use their cash and credit facilities” to buy land, Mr. Rahmani said. Toll Brothers declined to comment. D.R. Horton didn’t immediately respond to a request for comment.