Informed guesstimates are that a $60-billion treasure trove of capital has lined up in hot pursuit of a chunk of the action in residential real estate's sizzling single-family built-to-rent space.

Among more seasoned players in market-rate community-making's ever fascinating game of homes, skepticism has brewed up big time. Simplistically framed, the dynamic pits quant-style fund managers focused on rent-power models versus real estate pros who know that investments put in place are not so simple as a smart algorithm. Few would contest that $60 billion of freshly minted capital investment would be misplaced in serving the nation's unmet need for more shelter, more neighborhoods, more social fabric to hold people together.

Gnawing doubts focus not on the magnitude of the dollars, nor the pervasiveness of the need for more, especially attainable homes, but on the two qualifying dimensions that have made or broken real estate deals eternally, place and time.

For the next 12 to 36 months, even considering the strong favoring winds of age- and household demographics as structural bulwarks for growth, read our lips, it's the schedule that matters.

It will be an organization's deftness at securing a schedule – not just a start-to-completion construction cycle, although that's a critical building block, but an investment-to-internal rate of return on inventory cadence that achieves at least a modicum of dependability – that will filter out winners and losers over that 12 to 36 month stretch.

For context, read this piece, When Everything Is a Growth Stock And All Money Is Venture Funds. What's your take when you read this?

Having spent years chasing shrinking returns in the booming institutional loan market, yield-hungry lenders are taking a leaf out of the venture capitalist playbook and extending cash to companies that aren’t yet profitable but which might be expected to become so in the future.

Last month, Medallia Inc. capped a growing trend towards ‘recurring revenue’ loans after the software company tapped a host of private lenders including Blackstone Group Inc., Apollo Global Management Inc. and KKR & Co. for $1.8 billion — the biggest such deal on record.

Where once these lenders might have calculated the prudence of their credit exposure based on earnings before interest, taxes, depreciation and amortization, or Ebitda, recurring revenue loans mean that private equity firms can easily borrow billions to fund buyouts of unprofitable firms. The deals are based on annualized recurring revenue, or expected revenue from the companies’ service contracts or subscriptions due.

Further, the author quotes legendary "contrarian investor Jim Grant," with the kicker of the story:

“With recurring revenue, the creditor’s value proposition is the hope that the borrower will prosper. Borrowers don’t always prosper, or prosper on schedule.”

In that context, we want to spotlight high-level learnings from a homebuilding mergers and acquisition announcement yesterday, Ashton Woods' purchase of the land assets and the operational horsepower of Raleigh-based private homebuilder Capitol City Homes. This circles back to the importance of prospering on "schedule."

The News

Ashton Woods, one of the nation’s largest private homebuilders, today announced that it has acquired substantially all of the assets of Capitol City Homes, the fifth largest private homebuilder in Raleigh, North Carolina. The acquisition further expands the land positions of both Ashton Woods and its subsidiary Starlight Homes in the highly attractive Raleigh market, with over 1500 total lots and homes owned and controlled across approximately 40 communities.

What it Means for Ashton Woods

If we unpack the passage in the statement above, geography, scale, and timing jump out as key motivators for Ashton Woods, which introduced its Starlight Homes platform in 2017, as a way to extend the firm's access to newly forming households for whom homeownership was a big stretch.

An evolving household-formations market, skyrocketing barriers to entry level homeownership for owner-occupier buyers, and the sudden tsunami of opportunity that's spooled up around newly-constructed single-family homes for rent as a housing preference, either for financial reasons, increased flexibility, or reduced fuss and bother for downsizing 55-plus adults, positioned Ashton Woods' Starlight Homes platform as a product ideally-suited to "hit from both sides of the plate" – either the price-sensitive owner-occupier or as a high-production model for built-to-rent developer investors.

Having a platform capable of pivoting is a competitive advantage.

What many new homebuilders have discovered is that in the current environment big capital investment funds will pay full retail prices for newly-developed and built homes that will go into for-rent portfolios. Given that there's no wholesale discount margin compression, solid visibility of unit demand, and lower costs of sales for these bulk deals with investment companies, most high-volume homebuilders now contract with B2R players.

Ashton Woods' Starlight Homes brand platform – founded on a spec build, low variability, highly repeatable set of floorplans, elevations, and finishes – fits the bill for B2R.  The Raleigh, N.C. market, where Ashton Woods has now added a pipeline 1,500 owned and controlled lots, becomes an opportunity for deeper scale advantages among building trades, building products and materials distribution efficiencies, even-flow start-to-completion cycles, etc.

Greater local scale – in lots, clout on materials and products inventories, and operational discipline – all of which Ashton Woods aligned around Starlight Homes prior to the pandemic winds up being a resilient strategic position, whether or not the B2R goldrush continues. Add to that the ability to roll back-office and other overheads into Ashton Woods' already robust divisional presence in the market, and the sense of the deal comes clear.

What's more the acquisition is more than merely a land asset grab. Ashton Woods taps decades of homebuilding entrepreneurial chops of Jason Morrow and Trey McDonald, who founded Capitol City Homes in 2009 after each putting in time at NVR and other homebuilding operations. They'll both take leadership roles in the Starlight Homes business brand out of Ashton Woods' Raleigh offices.

Ashton Woods ceo Ken Balogh's statement is as follows:

We are excited to welcome the talented team from Capitol City Homes into the Ashton Woods / Starlight Homes family. Jason and Trey are both proven operators with deep market and land experience, and they will be a driving force behind the success of Starlight Homes in our Raleigh market.”

Why It Matters for Homebuilders

It's early December, and it's highly likely that we'll see a flurry of M&A deals hit the books prior to December 31. Motivating reasons have to do not only with longer range supply constraints – lots, labor, materials – that the pandemic as sharpened and intensified, but prospects that new tax laws – affecting both individual and corporate tax liability -- are likely to make their way into the enormous Build Back Better grand bargain nearing its moment of truth.

What Ashton Woods' purchase of Capitol City Homes signifies most of all is the embrace of local capability in the form of lot access, a simplified product platform that expands visibility on SKU inventories, subcontractor schedules, and construction cycles, proven operational excellence, and a cushioned margin protection that can weather economic turbulence in the 12 to 36 months ahead with deals that pencil either for owner-occupiers or bulk buyers.

M&A over the last several months and running through the end of 2021 draws attention to this as a decisive moment in the new residential real estate and construction marketplace.

The dollar amounts of the deals, often eye-popping because of the number of hunters in pursuit of the same targets, will wind up validating themselves or not based on Jim Grant's adage above.

Borrowers don’t always prosper, or prosper on schedule.”

Although you'd hardly guess that from seeing how the money has been flowing. An operator with a plan like that Ashton Woods is putting into effect – securing the capability, reducing variability, sharpening focus on where the need is clear and sustainable, and retaining hold of its options come what may, looks like an example to follow.

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