Professional Builder Giant 400: Publics' Profits at Peak

The public home builders' filings with the federal Securities and Exchange Commission show these companies made their best margins ever in 2005, even though they don't separate land profits from those made by building and selling houses. It will be a tou

March 31, 2006

This article first appeared in the PB April 2006 issue of Pro Builder.

"The publics are secretive about costs," says management consultant and PB columnist Chuck Shinn. "They don't break out land costs or the contribution land appreciation makes to profits. They don't want investors to think about it, but land appreciation is a big part of what they make from selling a home."

The survey questionnaire upon which PB's Annual Report of Housing's Giants is based includes a section on how costs and profit break down for the average house the builder sells. Most private builders fill it out completely. Unfortunately, we can't present that data for the Supernovas, since only two of the five — Centex and D.R. Horton — complete that section each year. The others refuse, and that makes an already small sample unusable, since we promise to protect the secrecy of every individual response and use our survey results only in aggregate.

But the public Supernovas' Earnings Before Interest and Taxes (EBIT) margins are in the public realm, so at least we can report their overall profitability. The five juggernauts in the Supernova category averaged EBIT margins of 15.58 percent in 2005, up from 12.76 percent a year ago. The leader among the Supernovas is Lennar with an EBIT margin of 17.1 percent, as reported by Wall Street stock analyst Margaret Whelan of UBS Investment Bank. But the real EBIT margin benchmarks among the public builders are in the Masters of the Universe category: No.8 NVR at 21.0 percent and, best of all, No.6 Toll Brothers at 24.8 percent.

Supernovas Expanding

Residential Building Acitvity	Supernova Giants 2005 activity as % of Total Giant 400 bldg. activity	Supernova Giants 2000 activity as % of Total Giant 400 bldg. activity
Single Family Detached Revenues	33.3%	25.8%
Single Family Detached Closings	34.9%	28.5%
Condo/Townhouse Revenues	36.0%	28.7%
Condo/Townhouse Closings	35.1%	37.4%
High-rise Sale Revs.	0.0%	0.0%
High-rise Sale Closings*	7.1%	0.0%
Low-rise Rental Revs.	0.0%	0.0%
Low-rise Rental Closings	0.0%	0.0%
High-rise Rental Revs.	0.0%	0.0%
High-rise Rental Closings	0.0%	0.0%
Total Housing Revenues	31.3%	23.2%
Total Closings	30.8%	23.0%
Total Gross Revenues	30.5%	23.5%
Other Revenues	23.8%	26.3%
Supernovas' Avg. Gross Profit Margin	26.6%	-
395 Giants (#6–400) Avg. Gross Profit Margin	24.4%	-
Supernovas' Avg. Price per Closing (all units)	$286,837	$180,703
395 Giants (#6–400) Avg. Price per Closing (all units)	$280,403	$178,708
2005 data includes units related to unconsolidated joint ventures whose revenues are not included in totals Source: Professional Builder, 2006 SUPERNOVA MARKET SHARE*, as a percent of total Giant 400 production, is rising in virtually every product category where the firms are active. Shown here are the percentages for 2005, compared with those for the first year of this decade, 2000.

NVR: A Breed Apart

Of the public builders, one is treated differently by Wall Street— Reston, Va..-based NVR Inc, which is headed by chairman Dwight Schar. Wall Street rewards NVR with higher share prices for a reason. The reason also gives NVR an edge if the current housing slump continues.

NVR disdains geographic growth to concentrate on only its share of 20 existing mature markets in the East. Maximizing inventory turns and return on capital cuts risk. NVR buys only finished lots, controls land with lot options, through developers. As a result NVR hits these milestones, as reported by Credit Suisse stock analyst Ivy Zelman: Turns inventory more than four times a year (industry average, 1.3). Return on equity is 82 percent (industry average, 30 percent).

"Toll Bothers' return on invested capital is the best of the growth-oriented builders at 22 percent," says Zelman, "but NVR is off the charts at 69 percent."

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