Tuesday, Oct. 8, 2002 | 11:16 a.m.
In a deal highlighting consolidation in the home-building industry and tight local land supplies, mid-sized Las Vegas builder Perma-Bilt Homes has been acquired by an Arizona company.
Meritage Corp., a publicly traded builder that closed on 3,300 homes in the Southwest United States last year, said Monday it has purchased Perma-Bilt for $46.6 million.
The deal includes $29.9 million in cash and $16.7 million in the assumption of debt, the Scottsdale-based Meritage said.
It's the conclusion to a half-decade search for a foothold into the Las Vegas market.
"I've been looking for a way to enter the Las Vegas market for about five years," said Steve Hilton, co-chair and co-chief executive of Meritage, which builds in Texas, Arizona and California. "It's a growth market. I like the demographics, and I think it's a great place to be building homes."
Representatives of privately held Perma-Bilt, which builds exclusively in Nevada and closed on 413 homes in Las Vegas last year, were not available for comment this morning.
Perma-Bilt posted revenue of $83.5 million last year, and earnings before interest, taxes, depreciation and amortization of $13.7 million.
Meritage's revenues were $744 million last year, up from $189 million five years ago.
Dan Schwartz, who founded Perma-Bilt in 1993, joined Meritage as president of its Las Vegas division upon the deal's completion yesterday.
The companies appear well-matched in product lines: Perma-Bilt posts an average selling price of about $202,000, while Meritage's homes average $227,000.
Meritage's brands in other states include Legacy Homes in Texas and Monterey Homes in Arizona.
While a number of mid-sized and smaller builders in the valley might make attractive acquisition targets, Meritage chose Perma-Bilt for a variety of reasons, Hilton said.
"I think they're one of the best -- they have great products, great locations and a fantastic management team. Danny Schwartz has done a great job building that organization. We like the people. We don't just buy assets, we buy an organization. We think Perma-Bilt is a great organization that we're going to be able to grow into one of the top five builders in the market."
Meritage will face some tough competition in reaching the Las Vegas market's top five.
KB Home closes on more than 3,000 homes in the valley annually -- roughly eight times as many homes as Perma-Bilt closed in the market last year. Pulte-Del Webb closes on more than 2,000 homes a year, and Pulte officials are eyeing 4,000-unit years by 2005.
Other big public builders, like Richmond American, are also acquiring smaller targets and aggressively boosting their positioning among the top five valley builders.
In addition, a perceived land shortage and the resulting increase in land prices is squeezing local builders large and small.
But Hilton said Meritage is accustomed to difficult markets, and the company has a strategy for growth in Las Vegas.
"We're building in some of the toughest markets in the country. Phoenix and Tucson are very competitive, and Austin, Dallas and Houston are extremely competitive. If you want to talk about getting land in front of you, San Francisco is a really challenging market. That's not going to dissuade us from competing."
Hilton said Meritage will tap into Schwartz's knowledge of the local market and contacts in the land-brokerage and development communities.
Hilton said Meritage would also "establish relationships with land sellers and master-planned community developers, and use our capital as a public company to expand our land position."
Hilton estimated its acquisition of Perma-Bilt gives it 2,000 to 3,000 lots for development in Southern Nevada.
Those lots include homesites at four communities -- Autumn Hills, Monterey, Ridgemont and Somerset -- in the Southern Terrace masterplan at Tropicana Avenue and Fort Apache Road. Perma-Bilt was also developing Sequoia at Blue Diamond Road and Decatur Boulevard near Southern Highlands.
In addition, the builder was set to unveil Valley Crest in January at Centennial Parkway and Grand Canyon Drive in the northwest valley.
Hilton said Meritage plans to change nothing in Perma-Bilt's product lineup or community development.
He said Meritage will not lay off any employees, and will add staff as the company grows.
Steve Bottfeld, executive vice president and senior analyst with the real estate research firm of Marketing Solutions, said while the acquisition signals the ongoing appeal the valley's home-building market holds for regional and national builders, it also reveals how difficult it's become for builders to start local operations from scratch.
"Almost the only way you can get into this market right now is to pick up somebody else's division," Bottfeld said. "The trend in the industry has been consolidation on a national, regional and local level. To try to start an operation from scratch is a lot more difficult because of the subcontractor situation."
The situation Bottfeld refers to involves the vendor relations big, entrenched builders such as Pulte and KB Home have been able to establish.
Subcontractors prefer to work with builders who can guarantee them large amounts of work, giving companies like Pulte, which has about 8,000 lots available for development, a significant advantage over smaller upstarts.
In addition, Bottfeld said, construction-defect litigation has led some subcontractors to abandon the market or the industry, leaving fewer subcontractors available to build the more than 20,000 homes the market continues to bring online annually.
A lack of land holdings and a good understanding of the local market are also difficult hurdles for builders to overcome, unless they buy existing builders with solid land positions -- which makes the acquisition an effective decision for Meritage, Bottfeld said.
"Perma-Bilt is an excellent company, so I think anybody who bought Perma-Bilt bought a good deal. It's been well-run for some time.
"If they're smart, (Meritage) will depend on local management. The fact that they've installed Mr. Schwartz as president of the division indicates that's the direction they're going. Anybody who comes in and has no familiarity with the market and clean sweeps (the management) is making a mistake. Meritage is a company that is obviously going to depend on the Perma-Bilt management for a while."
It's likely not the end of the acquisition trend in the local market.
Bottfeld said he believes at least four other national builders are "looking at this market and licking their lips," and he said at least two big builders have attempted negotiations with smaller local builders, or mid-sized companies that already operate here.
"They want to be here," Bottfeld said. "This is a market that does not seem to have a negative in its future. While the rest of the country is mired in recession, and when the low interest rates end, a lot of markets are going to tank. Las Vegas will not."
Meritage's stock was trading at $31.47 a share early today, a 23-cent drop from its Monday close of $31.70.
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