Home Builders Reluctant to Shrink Footprint

May 11, 2008

Hovnanian Enterprises (HOV) just issued 14M newly minted shares at $9.50. Toll Brothers (TOL) claims it’s financially strong, but studied with great interest another builder’s deal to sell land at a large discount to Wall Street: Lennar (LEN) sold $1.3B (book value) worth of land in 32 communities for $525M to a joint venture. Morgan Stanley (MS) holds 80% interest and Lennar the remaining 20%. Lennar gets a fee for “managing” the 11,000 lots and retains the option to repurchase the lots. A tax deduction for the loss is the kicker for Lennar.

Fine financial engineering, but why haven’t the national builders shrunk their footprint? True, they have consolidated regional operations, made jobs cuts, and started squeezing subcontractors and suppliers. I believe the nature of construction is that it is too locally tailored and once the local talent is lost, the national builder cannot easily return.

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