Last week, NVR borrowed $600 million for 10 years at 3.95%, and Toll borrowed $250 million for 20 years at 0.5% with a bondholder option to convert the debt to equity at a price that is 50% above today’s stock value. To our knowledge, there are no restrictions on the use of this cash.
In the meantime, private equity requires a minimum 20% annual return for their equity investment, and debt costs most private builders 6% – 16%.
How in the world is a private builder supposed to compete with a builder whose cost of capital is that low? The answer – they can’t compete head-to-head.
Private builders have to be more entrepreneurial. They will need to use their local relationships to identify land that the better-capitalized builders do not identify. They will need to take entitlement risk (note that Toll and a few other public builders will take entitlement risk too). They often know the local markets much better, and can find niches that the public builder cannot find. It is not easy, but the private builders always seem to find a way. Just imagine if they had the same cost of capital!
