NVR: Building Homes, Building Shareholder Value
Mar. 6, 2018
Summary
NVR is probably the best run homebuilder.
The company has a great track record of creating value for shareholders, as more investors have realised this over the recent decade and especially last year.
NVR (NVR) is one of the best run homebuilders, with a great track record in creating value for its shareholders. The company has long been sort of a hidden growth giant, and while I have looked at the business before, I was always put off by the idiosyncratic risks related to the sector, despite the great financial track record of NVR and its conservative practices.
The Business
Headquartered in Virginia, NVR is a homebuilder in 14 states in the Eastern part of the country. The company is most active in the so-called mid-Atlantic, comprised out of states like Maryland, Virginia, West Virginia, Delaware and Washington D.C. The company operates under the name Ryan Homes, NVHomes and Heartland Homes. Besides building and selling homes, NVR has a lucrative mortgage business as well.
In the year of 2017, the company sold nearly 16,000 homes. The business is quite risk averse as it does not engage in land speculation/development, but simply buys finished lots available. To ensure that it has enough supply of these lots, it does make upfront "option" payments to secure control over some lots if it fits within the companys development plans. This is essentially the same as buying call options, limiting the risk to the overall business.
Other risk mitigation policies include construction only on a pre-sold basis as a strong market position in the immediate surroundings in which the company operates gives it key scale advantages versus its peers.
On top of the building activities, NVR has a mortgage business with $4.2 billion in loans produced last year of which the vast majority is made up of fixed rate mortgages. The company earned $130 million in fees on these operations on which it reported earnings of $70 million. While this is a lucrative business, the earnings contribution is small in relation to the $776 million in operating earnings recorded on the homebuilding activities in 2017 on sales of $6.18 billion that year. The resulting double-digit margins would make many peers jealous.
Not only do these margins make peers jealous, they result in handsome returns to investors as well. The fact that the company is not paying out dividends should not concern investors. NVR was a $5 stock in 1995 and had risen to a recent peak of $3,700 before settling around $2,900, resulting in returns in excess of 30% per annum!
Steady Eddy
Like most of its peers, NVR has seen falling revenues as well during the crisis, although the declines were less pronounced, given the risk-averse nature of the business. Revenues fell from $3.7 billion in 2008 to a low of $2.7 billion in 2011, as the company fared better than most peers in terms of revenues. While margins fell to 5% during 2008, NVR did not have to incur huge expenses related to speculative developments, allowing the company to earn operating margins between 8% and 12% of sales during the rough years, very high margins indeed, given the state of the industry.
Ever since, the company has seen steady revenue gains as it now posts revenues of $6.3 billion for 2017, marking 70% cumulative growth versus 2008. While many peers incurred a lot of dilution during the crisis, this was not the case for NVR; in fact, the opposite was the case. The company ended 2016 with 4.1 million shares on a diluted base, a 30% reduction from the 5.9 million shares outstanding by 2008. Adjusted for the massive buyback, revenues per share have more than doubled over the past decade.
2017 Results, Solid Year, Soft End
At the end of January, the company released its results for the year of 2017. The company recorded an 8% increase in homebuilding revenues to $6.18 billion as mortgage banking fees were up around 15% for the year to $130 million. The issue was that the fourth quarter was a bit softer, which did not go well, given the huge momentum seen by the stock during last year and early 2018. Fourth quarter revenue growth slowed down to less than 4% amidst flattish fees in the mortgage banking business.
While the fourth quarter saw a slowdown in terms of homebuilding sales, actual orders were pretty solid. Orders were up 18% in unit terms to 4,036, in part offset by a 4% decline in prices. The number of orders and strong backlog should outweigh concerns about a potential slowdown in the growth path of the business.
The company was very profitable in terms of its homebuilding activities last year. Homebuilding operating margins advanced to 12.9% of sales, up 2 full points compared to 2016. Mortgage operating earnings improved by $10 million following a $17 million increase in revenues to $130 million.
The company reported a relative clean net profit number of $537 million, for earnings of $127 per share on the back of 4.2 million shares which are outstanding. Trading at $2,900, that translates into a 22-23 times multiple, still marking a healthy premium to the overall market and peers.
Financial State Of The Business
Despite the fact that the company bought back 30% of its shares over the past decade, NVR remains conservative in terms of its finances, even as it runs a "complicated" balance sheet. The homebuilding activities of the company hold $645 million in cash, offset by $747 million in loans, for a very modest net debt load. Note that the asset side of the balance sheet furthermore consists out of more than a billion in lots and housing units covered under sales agreements which still have to close, and $370 million in contract land deposits. The mortgage business furthermore holds $22 million in cash and has $352 million in loans held for sale, not offset by any financial debt at all.
It goes without saying that the business continues to be financed in a very conservative matter which is a big plus, as a continued strong balance sheet and lack of dividends allow for further growth and continued share buybacks. Remarkable are the continued pace and the lack of timing of buybacks as the company seems to indiscriminately buy shares, without much respect for the higher levels seen throughout 2017.
NVR: Building Homes, Building Shareholder Value - NVR, Inc. (NYSE:NVR) | Seeking Alpha
