Berkshire's big builder bet

Today’s housing market is a mess, with continuously high mortgage rates and other affordability issues sidelining most would-be buyers.

You know it. Your neighbor knows it. Bob at the water cooler knows it. And so does Berkshire Hathaway (BRK-A)(BRK-B).

Only Berkshire believes it can make money from the mess regardless.

That’s the only logical conclusion from its big move over the weekend to acquire Taylor Morrison Home Corporation (TMHC). Berkshire has agreed to pay $72.50 per share for the homebuilder and developer – a 24% premium to its May 29 closing price.

Once you further factor in assumed debt, the deal comes to around $8.5 billion.

This is Greg Abel’s first big move since taking over as CEO on January 1. And for those who want to know, his predecessor, Warren Buffett, approves.

It should also be noted that $8.5 billion is nothing compared to the $400 billion Berkshire has sitting on the sidelines. However, this isn’t a company that buys up other businesses of any size for no good reason.

If only purchases what it can profit on. That’s why it’s still holding onto:

These companies are then complimented by brickmaker Acme Brick, premium paint producer Benjamin Moore, insulation and commercial roofing specialist Johns Manville, and flooring expert Shaw Industries.

All of these housing market plays… yet Berkshire Hathaway just had to have one more.

I understand why it selected what it selected, however. As I’m about to show you, Taylor Morrison is quite the catch in most any economy, much less the one we might be about to enter.

While Berkshire Hathaway has been known to buy up distressed assets before, Taylor Morrison is not one of them. This is a solid business inside and out.

The company went public in 2013 and has been steadily growing ever since, including through strategic acquisitions. There was its purchase of JEH Homes and Acadia Homes in Atlanta, Georgia…

Orleans Homes in Charlotte and Raleigh, North Carolina…

AV Homes in Arizona and Texas…

And William Lyon Homes in California, Arizona, Nevada, Colorado, Washington, Oregon, and Texas.

Today, it works across 20 markets in 12 states, including Florida and Indiana, where it controls over 75,600 lots that are ready to be built on. This portfolio amounts to a 6.2-year supply that also gives it hard-to-beat visibility and flexibility.

So suffice it to say that Taylor Morrison has a pretty good reach.

Moreover, that reach has been recognized. In 2021, it made it to the Fortune 500 list (where it still sits). Last year, it made it onto both Forbes’ Most Trusted Companies in America and its Best Companies in America categories. And this year, it was included in Fortune’s World’s Most Admired Companies report.

Oh, and it’s also been America’s Most Trusted Builder for 11 years running.

Those titles matter quite a bit since homebuilding is a very reputation-based business. Houses are enormous expenses – often the biggest single purchase a family will make in their lifetime. In which case, they want to know they’re in good hands.

Taylor’s clients specifically can afford to be selective. The company’s average closing price is near $578,000 for homes that average 2,400 square feet. (The national median home size, for comparison’s sake, is 1,818 square feet.)

In short, Taylor tends to work with wealthier customers… the kind with an average FICO score around 750. That “kind” isn’t hurting nearly so badly in this economy, so buying up the business is a safe bet right now.

And it should turn into an outright smart bet just as soon as the economy picks up again.

There’s another side still to the Taylor Morrison story, and that’s its Esplanade platform, which creates “resort style” housing communities. Think traditional homebuilding with hospitality and master-planned community perks.

Esplanade naturally operates in high-income markets, most of them in Florida. Though it does do work in Charlotte as well as Sacramento, California. And it’s recently announced expansion projects in both Indianapolis and Las Vegas, Nevada… with exploration efforts elsewhere even as I write this.

Since it’s largely sticking to the Sunbelt, where millionaire after billionaire are moving, it makes sense that Esplanade will continue to do very well for years to come.

That platform is a definite perk. However, I’m sure the main reason Berkshire wants Taylor Morrison is its disciplined approach to doing business.

The company is very selective in how it utilizes seller financing, joint ventures, and land banking. And it’s just as careful about maintaining healthy leverage levels.

This means it’s never desperate for new properties or projects. It can pick and choose as its research calls for no matter what interest rates or the larger housing market are doing.

If I had to sum Taylor Morrison up, it would be to call it a well-managed, sophisticated yet straightforward asset-backed business that’s well-placed to grow in both good economies and bad – even in as cyclical a sector as housing.

That’s the exact kind of company Warren Buffett would have backed. Charlie Munger, too (who I just wrote about on Wednesday).

Now, it appears that Greg Abel is walking in their same sets of shoes.

Interestingly, fellow billionaire Bill Ackman, founder and CEO of hedge fund manager Pershing Square Capital Management, is also making moves into the housing market – though from a very different angle.

He’s taken to X recently to reignite the debate about taking Fannie Mae and Freddie Mac public. Both mortgage giants have been under government conservatorship since the Great Financial Crisis hit in 2008. But Ackman believes releasing them from that arrangement could unlock hundreds of billions of dollars in value for everyone involved.

This comes right as Kevin Warsh takes over at the Federal Reserve – President Trump’s pick who’s expected to get interest rates lowered before long. So I have to imagine that, like Ackman, Abel is making a play on that same probability..

Again, Taylor Morrison should be a strong addition to Berkshire’s portfolio regardless. But when the economy really gets going again after interest rates fall, it could take off intensely.

This acquisition validates a theme we've been pursuing in Wide Moat Confidential. Despite the negative headlines surrounding housing, select builders continue to generate impressive returns by focusing on balance-sheet strength, disciplined land acquisition, and higher-quality buyers.

Subscribers already own one such company in our small-cap portfolio. While it operates on a more modest scale than Taylor Morrison, it shares many of the same characteristics that no doubt attracted Berkshire Hathaway's attention.

Click here to learn more about this small-cap service and the fascinating finds it uncovers.

Happy SWAN investing,

Brad Thomas
Editor, The Wide Moat Daily

Here’s an abbreviation that might be new for you: HALO.

In the investing world, it now stands for businesses with “Heavy Assets” and “Low Obsolescence.”

Attributed to Ritholtz Wealth Management CEO Josh Brown, HALO investments are assets that AI just can’t disrupt, from major oil companies to major food companies to major retailers.

Ritholtz has his list, of course. And Wide Moat Research has ours… including some with compelling valuations that I discuss in this week’s Wide Moat Show.

Catch the full episode right here.