Left to right: Matt Orosz, Co-president, Steve Orosz, Co-president, Andrew Orosz, VP/General Counsel, Hanover Family Builders

The mantra's pretty simple. Entry level homes in high-growth geographies.

Plug those two factors into your strategic growth algorithm, and it's pretty plain to see where you land if you're an acquisitive, growing builder with a ready pocketbook. Florida, Florida, Florida ... and yes, a half-dozen or so states sitting directly north of Florida on the U.S. map.

The News:

Landsea, one of the nation's two most-recently listed public homebuilding enterprises, the other being Dream Finders Homes – which has been on a tear lately in Florida community acquisitions – announced this morning it has acquired a top-200 ranking Florida juggernaut, Hanover Family Builders. Here's the framework of the deal in the statement:

Landsea Homes Corporation (Nasdaq: LSEA) ("Landsea Homes" or the "Company"), a publicly traded residential homebuilder, announced today the completion of its acquisition of Hanover Family Builders (HFB), an Orlando-based homebuilder for a purchase price of $179.3 million, subject to certain post-closing adjustments plus the assumption of debt of approximately $69.3 million, which was refinanced with the Company's unsecured revolving credit facility.

One of the year's first materially large mergers and acquisitions event telescopes through a richly-tiered stack of take-aways, at the macro new residential real estate and construction level, the public-to-private M&A and regional economics dimension, and the private homebuilding entrepreneurial level.

Will take each, one at a time, and explore a bit.

What Builders Need to Know About This Deal

For an outlay of about $250 million, Landsea accomplishes the following, most importantly in showing its Wall Street and global institutional investment stakeholders it can execute on its stated strategic focus, or mantra, which is to acquire capability and assets to deliver entry level homes in high-growth geographies.

• The purchase of Hanover, which it reports, built and delivered 632 homes in 2021 for total revenue upwards of $208 million across 18 active communities that encircle Orlando's urban downtown center, represents a face-value step-change in total unit volume for Landsea of nearly 40%, year-on-year, based on Q3 earnings guidance.
• Factoring in Hanover's backlog of orders – 469 homes valued at more than $200 million – and its ready access to 4,100 controlled homesites in that full-circle Orlando beltway, Landsea's outlook reasonably projects to 1,000 homes in 2022 from the Hanover operations group.
• Further, the strategic land intel chops of the three Hanover Family Builders principals – Steve, Matt, and Andrew – and their full-cycle operational excellence formula now gives Landsea's other Florida community and lot acquisitions both to the north and to the south of Orlando an operational hub of support, purchasing clout, local policy intel, and capability. Landsea's original stake in the ground in the Florida market came with its purchase last year of Vintage Estate Homes, also serving the Orlando market. Like that, Landsea's grown up to be a player in the big leagues with the top 20 builders in its state of Florida operating areas.
• What's more, as we note in an analysis yesterday on "de-risking" strategies of public homebuilders, Landsea's access to a greater number of controlled lots and new neighborhood counts – 12,800 controlled lots and almost 20 new active communities, with the addition of Hanover's 4,100 and 18 respectively – shifts its balance and its direct exposure to about a 50% controlled versus owned lot pipeline.
• One more obvious but less explicitly noted plus to acquiring the latest Orosz-family enterprise. They've proven in the past that their "lightning-in-a-bottle" success formula can plays well in the Carolinas, Georgia, Tennessee, and the Gulf Panhandle into Alabama. Given Landsea's current net debt-to-capital ratio of below 33%, one could expect further expansion in the months ahead, using the Orosz-brothers' proven canny capability as a growth hub.

These four key accomplishments for Landsea as a young, hungry, extremely well-capitalized up-and-comer among its public peers – with less legacy, hairy land-holdings and a strong land-lightish inventory-turn and operations model – come in a context of heightened competitive jockeying for capability on the one side, defined by access to lots, supplies and skilled workers, and working capital, and for an entry-level demand pool that's about to get squeezed by rising interest rates and housing inflation.

In the run-up to that squeeze, however, expect the race – to sell, to produce, and to box out competition -- to be a take-no-prisoners mad dash.

What Private Homebuilders Should Know

First, let's take a look at the serial achievement of a third generation family of builders, who with the sale of Hanover Family Builders, show they're capable of striking lightning in a bottle over and over and over again, when it comes to creating value around smart land acquisition, strong relationships with construction teams, and supply chains, and managing day-to-day details that roll up as operational excellence.

Co-presidents Matt and Steve Orosz and their brother Andrew, senior VP and general counsel at Hanover Homes, kick-started Hanover Homes less than eight years ago, shortly after the 2014 sale – with their father Bill Orosz – of Royal Oak Homes to then-AV Homes [now operating under Taylor Morrison] for $65 million.

At the time of that deal – where the buyer was represented by the late Michael P. Kahn and the Orosz family were represented by Builder Advisor Group [BAG] – we wrote:

The deal can be said to model as a classic "win-win." In Royal Oak, AV Homes acquires a vibrant, well-operated, well-disciplined operator in a hot market, with talent and pedigree to boot. At the same time, the combination gives the Orosz brothers, Stephen and Matthew, a much-needed infusion of growth capital as the the battle for access to more lots, more development resources, and more expansion opportunity, gets more ferocious.

Looking back even farther, to 2005, BAG advised Bill Orosz on the sale then of a company he'd started in 1991, Cambridge Homes, to K. Hovnanian.

Clearly, the brothers Orosz' success owes to more than their generational pedigree, and what becomes even clearer is their uncanny sense of timing the marketplace. This pivot now removes their debt and personal guarantees against it, and fuels their ability to strike at new opportunity in Central Florida and beyond, just as others may feel rattled as the ground shifts beneath their feet in early 2022.

Many believe that for private homebuilding enterprises who've distinguished themselves in an operating arena for capability in a competitive, active marketplace and strong exposure and value creation versus the entry level and first-time buyer segment now is a moment of truth – a cresting of the valuation of the entities they've built.

For all the reasons the notion to sell would draw on motivation:

• Age demographic of principal-founder seeking a top valuation and a succession plan
• Established land asset value in a competitive new-home market that would be accretive to a larger company
• Opportunity to "de-risk" personal financial exposure and either keep operating or phase out
• Tap into an equally-motivated buyer pool seeking increased local scale, more predictable closings in 2022, greater owned-vs.-controlled lot balances, or greater access to particular customer segments, entry level or 55+, in their portfolios.

According to BAG, which once again served as the Orosz's exclusive representatives, the Hanover-Landsea deal is the 13th builder sale it has worked on in the past 12 months:

This is the third builder sale transaction in which members of BAG have worked with the Orosz family, a client relationship that has lasted for 17 years. Hanover Family Builders will rank as a top 100 builder in the United States in 2021.

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