Understanding PulteGroup’s Land Acquisition Strategy

PulteGroup (PHM) mainly acquires land to complete sales of housing units within 24 to 36 months from the date of opening a community, except in Del Webb active adult developments, which require a longer time period. For PulteGroup, the overall supply of controlled land is in excess of its short-term needs in many markets. On the other hand, some of the controlled land consists of long-term positions that may not be converted to home sales in the near term. As of December 2014, the company controlled 130,793 lots, of which 96,220 were owned and 34,573 were option agreements.

Like Lennar (LEN) and D.R. Horton (DHI), PulteGroup also periodically sells select parcels of land to third parties if they do not fit into its strategic operating plans. The company earned land sales revenue of $34.5 million in fiscal 2014 compared to $114.3 million in the previous year, recording a drop of 70%. Land trading is not the company’s core business, so a drop in revenue will not hurt PulteGroup. Land trading contributed a meager 0.6% to total homebuilding revenue in 2014.

PulteGroup manages a portion of the risk of controlling land positions through the use of land option contracts, which enables it to defer acquiring portions of properties owned by land sellers until it decides to exercise its option. The use of land option agreements reduces financial risks associated with long-term land holdings.

At the end of fiscal 2014, PulteGroup had $127.3 million of deposits and pre-acquisition costs relating to option agreements to acquire 34,573 lots with a remaining purchase price of $1.9 billion. The company expects to acquire the majority of such land within the next two years.

Investors looking for diversification in the homebuilding sector can consider ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB).