3 Homebuilder Stocks That You Must Buy

Includes: KBH, LEN, TOL
by: StockRiters

Findings of a survey conducted by the Urban Land Institute and Ernst & Young (ULI/E&Y) in March 2013 to gauge sentiments among economists and analysts reflect strong growth in the U.S. housing sector and a rally in real estate capital markets through 2015. Other related news refers to a high-value but low profile $3.7 billion acquisition by Japan's Mitsubishi UFJ Financial Group Inc. of PB Capital's U.S. commercial-real-estate lending portfolio and platform from Deutsche Bank AG.

Apart from direct investment in U.S. real estate, investors wanting to benefit from the anticipated growth in the housing sector may consider investing in real estate exchange traded funds such as ProShares Ultra Real Estate and iShares Dow Jones US Real Estate. One may also consider a variety of commercial, healthcare and industrial real estate investment trust (REIT) ETFs such as Vanguard REIT ETF.

While ETFs allow you to invest in the broader real estate market, I find investing in homebuilder companies like Lennar Corporation (NYSE: LEN) or its competitors like KB Home (NYSE: KBH) or Toll Brothers (NYSE: TOL) a better option. This allows you to focus on the housing market, and it is also easier to access housing information than the overall real estate market. Keeps it clean and lean, if you know what I mean - you know exactly where you are putting your money.

Lennar Corporation

Lennar Corporation is engaged in the business of home construction and financial services and other real estate businesses. The home construction operations of the company are handled by its homebuilding segments: Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida and Homebuilding Houston. The other two segments are Financial Services and Rialto Investments, which is an investor and manger of funds that invest in real estate assets.

Enterprise value of Lennar is $11.34 billion as against market cap of $7.51 billion. Revenue from home sales increased 40% in Q1 2013 to $855.10 million from $610.70 million in same quarter prior year. This was primarily due to a 28% increase in home deliveries and 9% rise in average sale price of homes. Gross margins on home sales were 22%, up from 20.9% reported in Q1 2012, mostly due to 57% of deliveries being made from higher margin communities where land was purchased after November 30, 2008.

Hunters Point Shipyard and Treasure Island

Recently, Lennar announced that it was going ahead and starting the first phase of home construction at Hunters Point Shipyard this summer. The project was the subject matter of a $1.7 billion financing deal with China Development Corp. While the deal did not fructify, the company stated that lenders had shown significant interest in financing the Shipyard and Treasure Island project.

The company has been involved with the project for more than a decade now after having shelled out more than $100 million for the entitlement process. Despite recession and lawsuits with environmentalists and collapse of the U.S. housing market the company has stuck to building on what is considered to be the poorest and the most challenging part of San Francisco.

This will be the third time in three years that the company has announced starting the project. In the past it was only to drop it later. This time round the major reason, if the project is postponed again at all, may be the collapse of the deal with the Chinese company. However, the project stands a good chance this time seeing the company's statement regarding show of interest by lenders.

The importance of this project can be gauged from the fact that new home deliveries in first-quarter 2013 were 3,174 and the first phase of Hunters Shipyard is for 1,400. The total project is expected to give more than 12,500 units of badly needed housing.

KB Home

KB Home is a homebuilding and financial services company that constructs and sells single family homes, townhomes and condominiums. The financial services business provides insurance and title services. Headquartered in Los Angeles, California, the company operates in Arizona, California, Colorado, Florida, Maryland, Nevada, New Mexico, North Carolina, Texas, and Virginia.

The company reported total revenue of $405.22 million for the quarter ended February 2013, which was 60% more than the comparable figure for the same quarter prior year. During Q1 2013, the company delivered 1,485 homes at a gross profit of $59.55 million, against 1,150 homes sold at a gross profit of $19.76 million in the same quarter the prior year.

KB Homes commissioned its fifth new home community in Stapleton, called Stapleton Conservatory Green, outside of Denver, Colorado. It is a modern built-to-order residential scheme that offers six two-storey floor plans and construction with energy efficient and sustainable design principles.

Recently, the company joined Lewis Operating Corporation in closure of escrow on 63 finished lots within the master-planned community of The Preserve at Chino, California. Model homes are expected to go up in May and in June, the company plans to open model homes in the Arietta and Cantata communities of The Preserve.

Toll Brothers

Toll Brothers is a slightly different homebuilder inasmuch as it builds and sells and arranges finance for detached and attached homes in luxury residential communities. The company also undertakes projects for converting existing rental apartment buildings into high-rise, mid-rise or low-rise luxury homes. Through its joint ventures, Toll Brothers is developing a high-rise luxury condominium/hotel and a luxury apartment complex for rent. It also runs golf courses and country clubs attached to planned communities.

For the quarter ended January 31, 2013, the company reported a net income of $4.4 million on total revenue of $424.6 million. In comparison, in the same quarter the prior year, the company had reported a net loss of $2.8 million on $322 million revenue.

Toll Brothers' request for a wetlands permit for development of Cedar Mountain was rejected by the Newington Conservation Commission for the second time. After the ruling, the company decided to go to the court and filed a suit against the Commission. Among other environmental issues, the commission was concerned over the controversial rock removal method's (blasting) negative impact on the wetlands and on the endangered species of Swamp Cottonwood tree. Toll Brothers has appealed against the commission's ruling.

In another significant development, Toll Brothers announced issuance of 4.375% coupon senior notes for $300 million. The proceeds are to be used for general corporate purposes and for retiring some of its debt.


The projection of growth in the real estate market is primarily based on a generally favorable outlook for economic growth and employment. Economists forecast a 2% rise in GDP in 2013 and 3% in 2014 and the unemployment rate to drop to 7.5%.

In addition, after the subprime crisis new single family homes touched their record lows between 2009 and 2011. The ULI/E&Y survey in March projects that housing starts are expected to reach 700,000 in 2013 against 535,000 in 2012. In subsequent years housing starts are expected to touch 900,000 in 2015 and 1.13 million in 2015.

Average home price is expected to increase 6% in 2013 and then drop to 5.3% and 5% in 2014 and 2015. As investors sense a turning point in real estate they will be more inclined to return to the market.

On the other hand, inflation and interest rates are expected to go up as the economy continues to improve. Economists predict a consumer price index to increase 2%, 2.5% and 2.9 in 2013, 2014 and 2015 respectively. The 10-year Treasury rates are expected to be at 2.3% by 2013 end and 3.5% by the end of 2015. Rising borrowing costs will impact borrowing costs for builders but is not likely to significantly impact real estate capitalization.

With total annual returns from institutional-quality real estate investment predicted to remain within long-term historical averages, the homebuilder stocks present an attractive opportunity for long-term appreciation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.