Canary in the mine, Homebuilders

Homebuilders continue tumble as Credit Suisse downgrades several in space

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Homebuilder shares tumble; Stockwinners

Many believe that housing market is the engine of the economy. If that is the case, we should expect a slow down in the economy. Housing prices have always been one of the first indicators of a slowdown or a coming out of a recession for the economy. We should brace ourselves for lower home prices!

Shares of homebuilders continued their decline after an analyst at Credit Suisse downgraded several companies in the space, saying that she expects more tempered demand and rising affordability concerns to weigh on homebuilding sentiment and broader group valuation, offsetting any near-term earnings beats.

A different analyst at the firm downgraded home improvement retailers Home Depot (HD) and Lowe’s (LOW) this morning, due to his concern that their recent results and stock prices have disconnected from housing.

HOMEBUILDERS DOWNGRADED

Credit Suisse analyst Susan Maklari told investors in a research note this morning that although she believes housing and macro fundamentals remain “intact,” including high consumer confidence and sustained low unemployment, unit gains are likely to moderate.

She sees any near-term earnings beats to be offset by even more tempered demand and rising affordability concerns. She sees average order growth for 2019 of 8%, compared to 11% in 2018 and 12% in 2017, and sees “relative” outperformance from builders who are able to capture above-trend gains due to product mix, like D.R. Horton (DHI), and geographic positioning, like PulteGroup (PHM). Maklari downgraded Lennar (LEN) and Meritage Homes (MTH) to Neutral from Outperform and lowered her respective price targets for the shares to $45 from $55 and to $36 from $50.

The analyst sees more limited upside to Lennar looking ahead as its strategic initiatives, as well as geographic exposure, are reflected in its current valuation.

While Meritage has benefited from efforts to drive improvements in operations in its East region as well as the rollout of its entry level targeted homes, Maklari believes much of the initial gains have been captured and she expects limited upside to the current valuation as comparisons become more difficult.

The analyst also downgraded KB Home (KBH) to Underperform from Neutral and lowered her price target to $18 from $27, saying that over the last several months her channel checks and Realtor Survey have pointed to slowing demand in higher cost MSAs, including California, which accounted for about 50% of the company’s 2017 revenues.

HOME DEPOT, LOWE’S ALSO DOWNGRADED

Another analyst at Credit Suisse, Seth Sigman, this morning downgraded Home Depot and Lowe’s, both to Neutral from Outperform, citing his concern that their recent results and stock prices have disconnected from housing. In a research note of his own, Sigman said his key concern is that home prices will continue to moderate, at least temporarily, as higher rates weigh on affordability.

Overall, Sigman still sees EPS growing, but sees less upside over the next 12 months relative to current estimates.

The analyst continues to view Home Depot as best-in-class in retail, but struggles to find multiple upside from its current premium level as housing sentiment shifts and some uncertainty arises. While he continues to expect meaningful improvement in sales and operating profit at Lowe’s under new CEO Marvin Ellison, Sigman thinks consensus estimates are baking that in. The analyst cut his price target on Home Depot to $204 from $222 and on Lowe’s to $111 from $115.

PRICE ACTION

Shares of Lennar dropped 3%, while Meritage Homes dropped 6.6% and KB Home declined 4.4%. Other homebuilders were dragged lower, including D.R. Horton, PulteGroup and Toll Brothers (TOL), which are all down over 3%.

Additionally, Home Depot and Lowe’s both declined over 4%. Further, XHB, the homebuilding ETF, is down nearly 3% today and about 10% month-to-date.


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CalAtlantic sold for $51.34 per share

Lennar, CalAtlantic to merge in deal valued at about $9.3B

CalAtlantic sold for $9.1 billion. See Stockwinners.com for details

Lennar (LEN) and CalAtlantic (CAA) announced that their respective boards of directors have unanimously approved a definitive merger agreement pursuant to which each share of CalAtlantic stock will be exchanged for 0.885 shares of Lennar Class A common stock in a transaction valued at approximately $9.3B, including $3.6B of net debt assumed.

The business combination will create the nation’s largest homebuilder with the last twelve months of revenues in excess of $17B and equity market capitalization, based on current market prices, of approximately $18B.

The combined company will control approximately 240,000 homesites and will have approximately 1,300 active communities in 49 markets across 21 states, where approximately 50% of the U.S. population currently lives.

It is currently anticipated that the transaction will generate annual cost savings and synergies of approximately $250M, with approximately $75M achieved in fiscal year 2018.

These synergies are expected to be achieved through direct cost savings, reduced overhead costs and the elimination of duplicate public company expenses.

Additional savings are also expected through production efficiencies, technology initiatives, and the roll out of Lennar’s digital marketing and dynamic pricing programs. 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 October 27, the implied value of the stock consideration is $51.34 per share, representing a 27% premium to CalAtlantic’s closing price that same day.

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 $1.2B.

CalAtlantic stockholders will receive Lennar stock unless they exercise an option to receive cash. On a pro forma basis, CalAtlantic stockholders are expected to own approximately 26% of the combined company.

The transaction is expected to close in the first calendar quarter of 2018. The transaction is subject to approval by Lennar and CalAtlantic stockholders. Stuart Miller and the Miller Family Trusts have agreed to vote their 41.4% voting interest in Lennar in favor of the merger. MP CA Homes LLC, an affiliate of MatlinPatterson Global Opportunities Partners III L.P., has agreed to vote its 25.4% voting interest in CalAtlantic in favor of the merger.

Additionally, MP CA Homes has agreed to exercise the cash election for at least the number of shares to cause the maximum cash consideration amount to be fully subscribed by electing stockholders.

Upon completion of the transaction, Stowell, CalAtlantic’s Executive Chairman, will join the Lennar board.


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PICO Holdings is for sale

PICO Holdings to pursue strategic alternatives, including possible sale

PICO Holdings is for sale. See Stockwinners.com Market Radar for details

PICO Holdings (PICO) announced that the company’s Board of Directors had engaged JMP Securities LLC as PICO’s exclusive financial advisor and Cooley LLP as PICO’s legal counsel to explore strategic alternatives to further enhance shareholder value.

The intention of the engagements is to evaluate potential alternatives such as business combinations, the sale of the company, a merger or a sale, license or disposition of assets of the company.

In announcing the process, Maxim Webb, Chairman of the Board, President and CEO of PICO said, “We believe the recent initiatives by our Board and management team have generated significant value and transparency. Furthermore, we believe now is the appropriate time to evaluate strategic alternatives as we seek to maximize value to shareholders.”

Mr. Webb continued, “For more than a year, the Company has made significant progress streamlining its focus of operations and cost structure by reducing overhead, and selling its agribusiness, real estate, and oil and gas operations. These actions have resulted in the Company’s primary remaining asset and operation being Vidler Water Company.”

PICO Holdings, Inc. engages in real estate operations, and water resource and water storage activities in the United States. It is involved constructing, marketing, and selling single-family homes in California, Washington, North Carolina, South Carolina, and Tennessee.

The company also acquires or develops water rights and water related assets in Arizona, Idaho, Nevada, Colorado, and New Mexico; develops and operates its water storage facility near Phoenix, Arizona; utilizes water storage capacity operated by third parties in Arizona; and banks or stores water with municipalities in Nevada and New Mexico. As of December 31, 2016, the company had 121 completed homes, including 61 model homes; and 400 under construction homes comprising 5 model homes.

PICO has a 52-weeks trading range of $10.51 – $17.95. Shares last traded at $16.70.


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KB Home CEO Punished

KB Home punishes CEO for rant at Griffin by cutting bonus

KB Home CEO Punished. See Stockwinners.com

Shares of KB Home (KBH) are in focus after the homebuilder said it would cut its chief executive officer’s bonus after a recording surfaced this week of Mezger berating his neighbor.

WHAT’S NEW

KB Home said in a regulatory filing that it will cut the annual bonus of President and CEO Jeffrey Mezger by 25% after he was caught on audio berating his neighbor, actress and comedian Kathy Griffin, and her boyfriend.

On a more than two-minute recording published by HuffPost, Mezger used sexist and homophobic slurs after Griffin and her boyfriend called the police with a noise complaint about the CEO, who went on a tirade when police officers arrived at the scene.

KB Home said its board decided to cut the bonus Mezger would have “otherwise been entitled to receive” because his “recent behavior in his personal dealings with a neighbor is unacceptable and a negative reflection on KB Home.”

The board also added that “If in the future there is any similar incident, he will be dismissed,” but noted that Mezger has been a “very effective CEO.”

WHAT’S NOTABLE

Mezger, who has been CEO of KB Home since 2006, received a salary of $1M in 2016 and nearly $8M in other compensation. He did not receive a cash bonus in 2016. The last time he received a bonus was 2014, according to filings.

UPCOMING EARNINGS

KB Home, which handily beat consensus estimates for its second quarter in June, is expected to report third quarter earnings on September 28.

The homebuilder previously forecast Q3 housing revenue of $1.08-$1.15B and raised its fiscal 2017 housing revenue view to $4.2B-$4.4B from $4B-$4.3B. However, hurricane activity ramped up doing Q3, with Harvey and Irma impacting areas of Texas and Florida in the past weeks, which could potentially impact KB Home’s results.

Yesterday, Mizuho analyst Haendel St. Juste told clients that builders’ margins could be hurt as labor and material costs rise following Harvey and Irma.

In a note to clients this morning, MKM Partners analyst Megan McGrath said that hurricane activity is likely to dominate the earnings conversations, and will likely focus on short-term topline impacts as well as medium-term impacts like labor shortages and commodity inflation.

McGrath noted that 35% of the homebuilder’s communities are in the Florida, Houston and San Antonio markets. She is also looking to see if the company’s order growth re-accelerated prior to the hurricanes.

OTHERS TO WATCH

Other publicly traded homebuilding companies include Lennar (LEN), Toll Brothers (TOL), Beazer Homes (BZH), D.R. Horton (DHI), Hovnanian (HOV) and PulteGroup (PHM).

PRICE ACTION

Shares of KB Home slid nearly 3% yesterday as the CEO’s rant was widely re-circulated on various media channels. In Thursday morning’s trading, the stock is up 0.5% to $20.81.


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Invitation Homes and Starwood Waypoint Merge!

Invitation Homes, Starwood Waypoint announce merger of equals transactionInvitation Homes and Starwood Waypoint Merge. See Stockwinners.com Market Radar to read more

Invitation Homes (INVH) and Starwood Waypoint Homes (SFR) announced the signing of a definitive agreement to combine in a 100% stock-for-stock merger-of-equals transaction.

The combined company, which will operate under the name “Invitation Homes,” will bring together the best practices, technology, and personnel from both firms to create the premier single-family rental company in the United States.

Under the terms of the agreement, each Starwood Waypoint Homes share will be converted into 1.614 Invitation Homes shares, based on a fixed exchange ratio.

The all-stock merger is intended to be a tax-free transaction.

Upon the closing of the transaction, Invitation Homes stockholders will own approximately 59 percent of the combined company’s stock, while Starwood Waypoint Homes stockholders will own approximately 41 percent of the combined company’s stock.

Based on the closing prices of Starwood Waypoint Homes common shares and Invitation Homes common stock on August 9, 2017, the equity market capitalization of the combined company would be approximately $11B and the total enterprise value would be approximately $20B.

The combined company’s shares are expected to continue trading on the New York Stock Exchange under the ticker symbol for Invitation Homes.

The combined company would own and manage an irreplaceable portfolio of approximately 82,000 single-family homes.

Upon completion of the transaction, Fred Tuomi, CEO of Starwood Waypoint Homes, will become CEO of Invitation Homes; Ernie Freedman, CFO of Invitation Homes, will remain CFO; Charles Young, COO of Starwood Waypoint Homes, will become COO; and Dallas Tanner, Chief Investment Officer of Invitation Homes, will remain CIO.

The combined company will be headquartered in Dallas, Texas, and will maintain a presence in Scottsdale, Arizona.

The combined company is expected to generate projected annual run-rate cost synergies of $45-50 million, with potential additional upside from the implementation of best practices to optimize revenue management and operating efficiency.

The transaction will also significantly increase the free float of Invitation Homes’ shares and reduce Blackstone’s (BX) ownership stake in the combined company to 41% from 70% in the current, stand-alone Invitation Homes.

The quarterly dividend is expected to be 11c per share post-close. The transaction has been unanimously approved by the boards of both Starwood Waypoint Homes and Invitation Homes.

Following the execution of the definitive merger agreement, Blackstone, the majority stockholder of Invitation Homes, delivered a written consent approving the issuance of Invitation Homes common stock in the merger and the other transactions contemplated by the merger agreement.

The transaction is expected to close by year-end, subject to approval by Starwood Waypoint Homes stockholders and other customary closing conditions.

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D.R. Horton to acquire 75% of Forestar Group

D.R. Horton to acquire 75% of Forestar Group for $16.25 per share cash

Forestar would remain a public company to ensure continued access to capital

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D.R. Horton (DHI) announced that the company has submitted a proposal to the Board of Directors of Forestar Group (FOR) to acquire 75% of the currently outstanding shares of Forestar for $16.25 per share in cash.

The $16.25 per share value represents a 14% premium over the purchase price to be paid to the Forestar stockholders pursuant to the existing merger agreement between Forestar and affiliates of Starwood Capital Group.

#Forestar Group Inc. operates as a real estate company. The company engages in the acquisition, entitlement, development, and sale of real estate, primarily residential and mixed-use communities. It also sells commercial tracts; residential lots primarily to homebuilders; undeveloped land through its retail sales programs, as well as operates commercial real estate and income producing properties, such as a hotel and multifamily properties.

Under the proposed transaction, Forestar would remain a public company to ensure continued access to capital to support the increasing scale of the business. D.R. Horton believes continuing Forestar stockholders will have the opportunity to participate in significant value creation through a strategic relationship with D.R. Horton that would help Forestar grow organically into the leading residential land development company in the United States, selling developed residential lots to #D.R.Horton and other #homebuilders.

Forestar would be led by new executive chairman Donald Tomnitz, who served as CEO of D.R. Horton for over 15 years, and a strong management team that is expected to include Forestar’s experienced professionals.

The transaction would be effected through a merger of a newly formed, wholly owned subsidiary of D.R. Horton with Forestar. The Merger would have a cash election feature in which Forestar stockholders would have the right to elect, for each share of common stock held, either to receive $16.25 per share in cash as merger consideration, or to retain such share of the surviving entity. Cash and stock elections will be prorated, as appropriate, such that 75% of the shares of Forestar common stock outstanding before the Merger are converted into the $16.25 per share cash consideration.

Following the Merger, D.R. Horton would own 75% of the outstanding Forestar Successor shares, and existing stockholders would own 25% of the outstanding Forestar Successor shares. Forestar would remain a public company, and its common stock will trade on the NYSE. D.R. Horton has the cash and other immediately available capital to fund the approximately $520M investment.

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