Terry Russell, chief executive officer of FrontDoor Communities.

Atlanta homebuilder sells out: Deeper pockets may mean faster growth

An aggressive Atlanta homebuilder is selling itself to a Japanese-based company, seeing deeper pockets as the only sure way to grow.

FrontDoor Communities, is being acquired by Virginia-based Stanley Martin Communities in a deal whose financial details have not been announced. But Stanley Martin itself sold a controlling interest a year ago to Daiwa House USA, a subsidiary of the leading housing and construction company in Japan.

For Daiwa House, the deal is part of its long-term plan to expand operations internationally – including China, Southeast Asia, Australia and especially in the United States. Buying FrontDoor gives them local expertise, particularly since the owners of FrontDoor plan to stay with the company after the acquisition.

“Being a local guy who has been in the market 32 years now, we know the market very well,” said Terry Russell, chief executive and partner in FrontDoor.

On the other hand, for FrontDoor, it is all about access to more investment money, he said. “It is hard to beat the low cost and capital from Japan.”

The company has been successful and wants to keep expanding in a housing market that is ripe for exploitation, but the game is not as easy as it once was, he said. “We have seen lots of opportunities to grow the business and in most of those cases, the opportunity to grow the business exceeds the capital we have.”

FrontDoor this year will build about 300 homes in Atlanta and Charleston. In metro Atlanta, its output likely makes it one of the top 15 builders.

The FrontDoor-Stanley Martin deal confirms a larger trend: Atlanta homebuilding is increasingly a game for bigger companies.

Atlanta-area Builders are squeezed from opposite directions, said John Hunt, principal of MarketNsight and president of ViaSearch, a real estate analysis firm.

During the boom years of the late 1990s and early 2000s, Atlanta was dominated by small builders who were often funded by local community banks. Smaller builders also had some built-in advantages. They were more nimble, quicker to act and they knew the local market better than the big national players.

But their size also came with some disadvantages: They lived close to the line, needing constant cash flow, so they had to keep building.

So if they ran into trouble selling homes, it wasn’t just a temporary problem – it was potentially a matter of survival. And so when the housing crash came, the ranks of both builders and banks were decimated.

“It is an absolutely different world now, for sure,” Hunt said. “Banks now are very hesitant to take a risk, which I don’t think is a bad thing, really.”

But it does mean that builders either have to surrender some equity to get the money or go elsewhere for it, he said. “You have to look for less expensive capital.”

At the same time, the economy has been strong and land prices have been rising steadily – especially in the more attractive areas close to the city of Atlanta or in the popular suburbs to the north, Hunt said. “We ran out of cheap lots a while back.”

The combination — capital that’s tougher to come by and land that is more costly – has made for consolidation. Metro Atlanta is now dominated by big national builders, most of whom – like D.R. Horton or Century Communities – have bought up local companies.

“They are just absorbing each other,” Hunt said.

Size now confers advantage. A big company can pick and choose which cities to build in, can buy labor and materials in bulk for less and it has the reserves to handle slow periods. Because they are more calculating, they don’t build as much as they can in Atlanta — one reason that the pace homebuilding has not kept up with growth and the demand for homes.

The result has been higher prices and a scarcity of homes for sale.

The largest locally-based builders are Smith Douglas, which is fourth-largest overall, followed by Rocklyn Homes and Kerley Family Homes, he said.

Financial terms between FrontDoor and Stanley Martin have not been revealed. The deal is to be finalized later this month.

The companies will merge operations and FrontDoor’s name will morph into its parent companies, while they look for ways to make use of their more powerful financial position, Russell said.

“This year we will build about 300 homes,” he said. “We think it is quite possible to double the size of the company over the next three or four years.

X