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 Acquisition positions manufactured-homes builder for growth By Betty Beard The Arizona Republic 09.05.09 

Cavco Industries Inc., the state's largest manufactured-homes builder, has proven that even in a severe recession it's possible to double in size.

The Phoenix company last month scooped up part of one of its largest rivals, Fleetwood Enterprises Inc., out of bankruptcy court and elevated itself from the nation's seventh-largest manufactured-home builder to second place.

After three years of shrinking sales and two quarters of losses, the purchase puts Cavco in a position to come out of the recession stronger at a time when other manufactured-home builders have been shutting down.

In a deal that closed Aug. 19, Cavco bought Fleetwood's manufactured-housing division, brand name and seven manufacturing plants for $26.6 million. It was able to make the purchase without incurring debt, by putting up half the cash itself and getting the rest from a New York investment company.

Fleetwood, a 59-year-old firm out of Riverside , Calif. , had become one of the best-known brands in the recreational-vehicle and manufactured-housing industry. But after struggling for three years in "worsening market conditions" and tightened credit, Fleetwood filed for Chapter 11 bankruptcy in March. It's now being liquidated as it has sold or closed its manufacturing plants.

In July, it sold its RV assets, which accounted for the bulk of its business, for $33 million to American Industrial Partners Capital Fund IV L.P.

The acquisition doubles Cavco's employees to about 1,400 and more than triples its manufacturing plants from three to 10 and its distribution from 10 to 35 states, said Joseph Stegmayer, Cavco's chairman, president and chief executive officer. The former Fleetwood housing division is now a subsidiary of Cavco.

Cavco also makes smaller versions of manufactured homes, known as park models, as well as vacation cabins.

"We are all pretty excited about this," Segmayer said of the acquisition. "We watched and looked at a lot of opportunities over the years and waited for the right one. You have one of the most powerful, strongest names (Fleetwood)."

Stegmayer is also excited that the purchase raises the company's national profile.

"We are No. 2 only behind the very strong and powerful Berkshire Hathaway and Warren Buffett-owned Clayton Homes ," he said. "So it's good company to be in"

Georgia Lacy, a spokeswoman for the Arizona Housing Association that represents manufactured-housing companies, said the fact that both Cavco and Clayton Homes have attracted major investments is a strong vote of confidence in an industry that has seen a severe drop in sales, especially over the past two years.

"You've got a lot of big players all of a sudden looking at this industry thinking there is still a bright future here as soon as the economy picks up" she said.

Cavco partnered with Third Avenue Management, a New York company that invests and manages about $13 billion in assets. Third Avenue 's Third Avenue Trust Fund, a mutual fund that invests in distressed properties, and Cavco created a corporation called FH Holding to successfully bid on and purchase Fleetwood.

Knoxville, Tenn.-based Clayton was sold in 2003 to Berkshire Hathaway Inc. for $1.7 billion.

Industry hurting

Cavco was able to pull off the sale even though its own financial condition has been slipping.

Sales slid for the past four years and in July it reported its second consecutive quarterly loss. It had a net $1.5 million loss for the quarter that ended June 30, compared with a net income of $853,000 a year earlier.

The acquisition gives Cavco an opportunity to at least triple its revenues.

Stegmayer said that while he cannot forecast sales, the purchase gives Cavco the capacity to do up to $500 million in sales a year. In the 2007-08 fiscal year, Fleetwood's housing division had $497 million in sales, compared with Cavco's $142 million in that time.

The manufactured-housing industry is seeing its lowest sales in at least 50 years, according to the Manufactured Housing Institute of Arlington, Va. The number of manufactured and mobile homes built peaked in 1973 at 579,960, then fell. Sales stabilized in the 300,000 range for most of the 1990s.

But during the past decade, the industry has been in what Thayer Long, a spokesman for the institute, called a protracted decline. Annual sales fell to 95,769 in 2007 and to about 83,000 in 2008, he said. The biggest problems are tight credit and competition with cheaper "site built" homes, he said.

"Financing is difficult to get even for buyers with excellent credit," Long said.

About 68 percent of all the manufactured-home retail locations in the country have closed in the past decade, according to Cavco. Arizona sales have fallen about 76 percent in that time.

On the old Apache Trail, which was once lined with about three dozen manufactured and mobile-home dealers, the numbers have dwindled to about 10, said Rex Beall, owner of America 's Best Homes. He once had seven employees and now has three, including himself. He sells only Cavco and Fleetwood homes because just those two brands offer a variety of prices and models.

Beall was glad to hear of Cavco's purchase, saying, "I think it's going to position them (Cavco) to be a stronger force nationally. They are already the highest producer in the state."

Manufactured homes have come a long way from their original boxy appearances. They can come with asphalt-covered slanted roofs, six-inch insulated walls, vaulted ceilings, skylights, cherry cabinets and granite countertops, just about every option a site-built house has, Beall said.

The median price of a manufactured home in 2007 was $65,100 in 2007, excluding the cost of the land. That compared with a 2007 median price of $229,332 for a site-built home, according to the Manufactured Housing Institute.

Lacy said the manufactured-home industry has been doing better in Arizona than nationally. Sales were holding steady in Arizona until they began to fall two years ago. Still, the industry was expected to do about $1 billion in business last year in Arizona .

Most buyers put their homes on rural lots, and Arizona still has a lot of rural land, she said. The homes also appeal to retirees and first-time home buyers because they are affordable.

" Arizona has a strong population of (age) 55-plus and that and first-time home buyers who don't want to live with a HOA are very much our customers," Lacy said.

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