LEN Lennar Corp

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 will 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 are already competing 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 more steady work for construction crews, which analysts said would give the combined company an advantage in negotiations.

"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.'"

CalAtlantic itself was the product of a 2015 merger between two other major home builders, Standard Pacific Corp. and Ryland Group Inc.

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 30-year average, but home builders over the past year have reported a return of first-time buyers to the market as economic conditions improve.

"We are starting to see an enabled home buyer, a home buyer that is witnessing wage growth, and a mortgage market that is accepting of home buyers coming back to market," said Lennar Chief Executive Stuart Miller on a conference call about the deal on Monday.

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. Data in recent months has indicated a pull-back in first-time buyer activity as prices have rise and inventory remains tight. New home sales had their largest single-month increase since 1992 in September, a sign of forward momentum in the market.

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. Both Lennar and CalAtlantic have among the highest gross profit margins in the industry, and Lennar executives said they expect gross margins to remain above 22% following the acquisition.

CalAtlantic shareholders will also have the option to exchange all or a portion of their shares for cash, subject to a maximum cash amount of $1.2 billion, or about 27% of CalAtlantic's market value.

The deal is subject to approval by shareholders of both companies, and is expected to close early next year.

CalAtlantic shares, up 42% since the beginning of the year, closed Monday up 21%. Lennar shares were down 4% on the news.

--Cara Lombardo contributed to this article.

Write to Chris Kirkham at chris.kirkham@wsj.com and Laura Kusisto at laura.kusisto@wsj.com

(END) Dow Jones Newswires

October 30, 2017 17:48 ET (21:48 GMT)

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