Builder Consolidation: When Will Public Builders Begin Taking Market Share?Jonathan Smoke, Hanley Wood Market Intelligence

October 2010

Will There Be Consolidation?

A long argued outcome of the evolution of the industry—consolidation as evidenced in the share captured by the largest builders

Now the argument has taken a decidedly public angle Advantages for the large public builders

– Access to inexpensive long-term capital

– Economies of scale• National

• Local

– Cost advantage

– Land pipeline

– Brand

A matter of when, not if

2

Is the Reverse Happening?Is the Reverse Happening?The BUILDER 100 Share RetreatedThe BUILDER 100 Share RetreatedBUILDER 100 SHARE OF SINGLE-FAMILY HOME CLOSINGS(includes condos)

32.64% 33.26% 34.43% 35.74% 36.57%

43.58%41.17%

38.71%36.69%

2001 2002 2003 2004 2005 2006 2007 2008 2009

More Contrary Evidence:More Contrary Evidence:Public Builder Market Share Declines Public Builder Market Share Declines in Totalin Total

0%

5%

10%

15%

20%

25%

30%

35%

2006 2007 2008 2009Public builder percentage of all single-family housing sales

Source: Builder 100, builder reported closings as % of Census reported new home sales

National Numbers Are a Red Herring– As It Relates to Scale, Only the Largest Markets Matter

The largest 100 markets in the country, represent 67% of new construction (20 year average of total permits)

The largest 50 markets represent 54%

The next 100 markets only add 14% more permits

There are only 38 markets outside of the largest 100 with 1,000+ permits forecasted in 2010

5

New Home Demand Is Concentrated in Major Markets—Where Jobs and Growth Are Most Prevalent

6Source: Hanley Wood Market Intelligence

Not Much of a Retreat in the Largest 100 Metropolitan Statistical Areas

7Source: Housing Intelligence Pro

Looking at the Largest 100 MSAs,The Most Concentrated Markets Are Already Getting More Concentrated

Tucson, AZ

Riverside, CA

Public Builder % of New Home Market, 2010 YTD thru July

Ch

ang

e in

Pu

bli

c B

uil

der

% 2

005-

2010

Bradenton-Sarasota-Venice, FL

Colorado Springs, CO

Source: Housing Intelligence Pro

Austin, TX

13 Major MSAs Already Have Publics Dominating and Positions Growing

Akron, OH Albuquerque, NM Baltimore-Towson, MD Bradenton-Sarasota-Venice, FL Charleston-North Charleston-Summerville, SC Las Vegas-Paradise, NV Orlando-Kissimmee, FL Phoenix-Mesa-Scottsdale, AZ Riverside-San Bernardino-Ontario, CA Sacramento--Arden-Arcade--Roseville, CA Stockton, CA Tampa-St. Petersburg-Clearwater, FL Tucson, AZ

9

Albuquerque

So far in 2010, DR Horton and Pulte-Del Webb-Centex control just shy of half of the new home market in Albuquerque

DR Horton has grown from 10% of the market in 2005 to over 30% in 2010 (YTD through September)

Pulte-Del Webb-Centex has grown from 13% in 2005 to over 15% in 2010

10

Charleston, SC

Top 6 Builders in 2010:– PULTE-DEL WEBB-CENTEX

– RYLAND HOMES

– BEAZER HOMES

– DR HORTON

– LENNAR

– KB HOME

All of the top publics have grown share over 2005 except for Beazer

11

Baltimore, MD

Publics command almost two-thirds of the new home market in Baltimore in 2010

NVR owns over half of that– In terms of closings, NVR is 33 times larger than the average builder

in Baltimore

NVR’s market share has grown from under 20% in 2005 to over 33% so far in 2010

12

Orlando, FL

Seven publics constitute almost half of the new home market in Orlando by themselves in 2010:– DR HORTON

– PULTE-DEL WEBB-CENTEX

– LENNAR

– KB HOME

– MERITAGE HOMES

– RYLAND HOMES

– MI HOMES

DR Horton, Lennar, Meritage and MI Homes have each at least doubled their share since 2005

13

Phoenix, AZ

In Phoenix there are still a few large privates with sizable market share– Fulton Homes – 6%

– Blandford Homes – 5%

– Shea – 4%

But 11 of the top 17 builders are publics and they now control over half of the market

And the publics are more actively buying lots and land in 2010

14

Riverside-San Bernardino, CA

Publics now have over two-thirds of the new home market in Riverside-San Bernardino

5 publics are the largest builders in the market and control almost half of the market by themselves:– DR HORTON

– KB HOME

– PULTE-DEL WEBB-CENTEX

– LENNAR

– STANDARD PACIFIC HOMES

Of these 5, only Lennar hasn’t grown share since 2005 Riverside-San Bernardino was one of the most active lot and

land purchase scenes earlier in 2010– The most active builders: Pulte-Del Webb-Centex, KB Home,

Standard Pacific, and DR Horton

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What Makes for an Ideal “Publics’ Market”

Size– In the absence of proximity to other large markets, it makes it

difficult to run an efficient operation that leverages scale—there is an absolute size that a market must be to justify a public’s presence

Growth opportunity– Without continued growth expectations, a public can only grow by

taking market share– there is a limit to how far that can go

Constraints– The strongest advantage comes from significant land constraints,

tight restrictions on development, and expensive land development environments

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The Remaining Large Markets

Candidates for eventual public dominance (not dominated yet, but moving most rapidly in that direction):– Indianapolis

– Richmond

– San Jose

– Charlotte

– Baltimore

– Atlanta

– San Diego

Markets that may never fit the scenario:– Colorado Springs, Seattle, Dallas, Columbia (SC), Detroit

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Implications

Big Builders– The public builders will emphasize the markets they have chosen

strategically

– They all can’t be #1 with 20-30% market share

– A few markets that are on the bubble may be influenced to become more constrained

Smaller Builders– Emergence of dominant local/regional builders like Mungo

Companies in markets like Columbia, SC, that offer some size but are too small for most publics

– In markets where Publics dominate, smaller builders will have to follow a niche strategy

Suppliers– If business depends on volume, publics can’t be ignored

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