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NVR Deep Dive, From Chapter 11 to a 1,000 Bagger
How a failed business became one of the best compounders ever
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Welcome to the 112th Pari Passu newsletter.
While this publication strongly focuses on restructuring, sometimes, it is worth diving into stories and lessons from the healthy side of things. Today, we are exploring the amazing story of NVR.
While this company has a Chapter 11 under its belt (we will never get too far from our favorite topic), this is the unique story of a 1,000-bagger that features possibly the greatest pitch ever in the history of the Value Investor Club (VIC).
Let’s get to it.
Table of Contents
Founding
The origins of NVR began 76 years ago in 1948 with a Pittsburgh-native man named Edward Ryan. Ryan was a discharged Army Air Corps lieutenant from World War II that also enjoyed the work of carpentry and house building. One day, Ryan was approached by a buyer after he built a house meant originally for him and his wife. This interaction inspired him to start his own business called Edward M. Ryan, Inc. Builders in 1948, which eventually turned into the incorporated Ryan Homes in 1961 [1].
Within the management of Ryan Homes, an executive named Dwight Schar was on the rise to become one of Ryan Homes’ most important assets. Between 1969 and 1973, Schar was at the front of the company’s land acquisitions and developments in Ohio, Kentucky, and Indiana. Schar then became Vice President and Group Manager of the Washington D.C. operations during 1973 to 1977.
In 1980, Dwight Schar made the most of his expertise and started his own home building business called NVHomes in the North Virginian area. NVHomes proved to be very successful and were already making $1 million in earnings by 1983. By 1986, NVHomes strongly compounded (practically doubling every year) their earnings to $14 million, which lead to the limited partnership of NVH L.P. and its initial public offering at $289 per share. Right after in 1987, Dwight Schar made the pinnacle decision to acquire his former employer Ryan Homes through a leveraged buyout for a total valuation of $312 million [2]. It was at this point that the company was renamed to NVRyan L.P.
In the meantime, the 1980s served to have fantastic fundamentals for the homebuilders business as the American economy was very strong. Under Reagan’s presidency, LPs in real estate also highly benefited from favorable tax laws which allowed these businesses to write off losses that were incurred from real estate investments. This enabled a period for NVR to tap into ‘easy’ capital, where Schar turned to leverage and bought a lot of land for future use. By 1988, earnings for the company reached an impressive $33.5 million. The company was then renamed again to NVR L.P. in 1989 [3].
The end of the 1980s and turn of the decade did not prove to be fruitful times for NVR as compared to before. As a result of the Tax Reform of 1986, the tax benefits NVR thrived under were being slowly reduced over time, which made it harder for NVR to gain access to capital. As many similar companies experienced the same problem, there was essentially an oversupply of houses in many US regions. This, in addition to a slumping economic recession towards 1990 where interest rates rose sharply into double digits, led to a considerable decrease in the demand for homes all the way through 1991, with industry-wide completions falling by more than 50%.
This period was very difficult for NVR’s finances as sales and earnings were harshly impacted; the company experienced an earnings loss of $260 million in 1990. Sales went from $1.15 billion in 1988 to $600 million in 1991, roughly a 50% decrease. NVR’s assets lost a lot of market value as well, going from a valuation of $2.4 billion in 1988 to $1.6 billion in 1990, a 33% decrease. To finally put it into picture in terms of houses, NVR built just 3831 housing units in 1991 compared to 5240 in 1990, a 27% decrease. After realizing these numbers, NVR was severely distressed and was heading towards an unavoidable bankruptcy in the early 90s [3].
Reorganization
In 1990 and 1991, a large reorganization made way as Schar took a step back from the typical homebuilding business model and noticed the many flaws that came with it as seen during the hardships from the early 1990s recession. The main issue at hand was that during these periods of financial distress, the land values were locked in with homebuilders and served essentially as a ‘speculative’ investment. Management reflected from this dire situation and decided it was time for a critical strategy change at NVR. Not only did NVR previously succumb to a lot of debt from the leveraged buy-out of Ryan Homes in 1987, but it was also in a dangerous financial state after the years of ‘easy capital’ it pursued during the 1980s.
First, a financial subsidiary of the company (NVR Finance) was established to take on the role as both a mortgage and savings bank. This allowed the company to finance about 75% of NVR home sales by assuming the mortgage origination and servicing. NVR Finance proved to be a clever strategy to allow the company to realize more earnings from its main homebuilding operations. In addition, NVR started to adopt a ‘preorder’ method in which its operations only began building homes as they were ordered. This was performed as NVR would develop a model home in the center of a neighborhood that was basically the sales center, which contrasted with the prior homebuilder business model that relied on speculative home development.
Lastly, the revolutionary idea that indefinitely changed NVR was the decision to switch to an options-based business model, where NVR would write options on land rather than spending capital on it. At only 5-7% of the land capital cost, NVR’s options were only exercised after home buyers were qualified for their mortgages. This allowed NVR to be extremely capital efficient and even boosted development timelines, as premanufactured segments of homes were already handled in off-site facilities. As a result, NVR boasted an average 86 day home completion rate in 1992 [3]. As we will dive later into this article, this methodical dynamic between NVR’s sales and working capital requirements was a key part of Norbert Lou’s famous VIC thesis in 2001.
Despite all of the efforts management took within this period, NVR declared Chapter 11 bankruptcy in 1992. For starters, the Chapter 11 bankruptcy (aka ‘reorganization’ bankruptcy) allowed NVR to restructure its debts and operations while continuing its core functions. The bondholders agreed to trade their debt claims for equity in the reorganized company in order to improve the balance sheet and avoid absolute financial collapse. By converting debt into equity, creditors then also avoided the potential massive losses if the company liquidated under Chapter 7. Fortunately, this plan allowed NVR to continue its operations, workforce, customer relationships, and market presence as it was still the 6th largest developer of single-family homes by 1993.
Fresh Growth
NVR started their strong comeback once the American economy was back in the upswing again. Due to the new capital light strategy, NVR had a competitive advantage that allowed the company to grow efficiently through its dominant margins and outstanding ROIC. At the same time, it seemed Schar made sure to never rely on heavy leverage again alongside owning empty lots of land on the balance sheet. Over the 5 year period from 1993 to 1997, NVR was able to bring earnings from a loss of $24 million to a positive $29 million [4]. At the same time, NVR’s stock hit its historical bottom at $5.5 per share in late 1994, or an implied market cap of $94 million. NVR’s listing on the exchange had a significant impact on Wall Street’s views on homebuilders, as the industry was seen to be very speculative for a long term investment. However, over time, NVR inspired a broader confidence in the industry as the company was seen to be ranked amongst other strong performers in the Forbes magazine [3].
A core part of NVR’s strategy that emerged from this new phase was to focus on being one of the largest homebuilders in their locations. NVR eventually became a very prevalent home builder across 16 cities and 10 states, mostly from the East Coast and Midwest like New York, South Carolina, and Ohio. NVR also was Washington D.C.’s largest builder, which took up a considerable amount of NVR’s total sales. As a response, NVR looked to geographically diversify and acquired Fox Ridge Homes in 1997, which was the second-biggest homebuilder in Nashville, Tennessee [5]. In 1999, NVR then acquired First Republic Mortgage as an addition to its mortgage business. In the same year, the company then reorganized itself as NVR Inc., a holding company for NVR Homes and NVR Financial Services [3].
It was also in this period of the late 90s that NVR incorporated their heavy buyback strategy. In 1994, NVR had a total number of 16 million outstanding shares; this was reduced 50% to 8 million shares just 5 years later by 2001 [6]. In addition, NVR’s earnings compounded at a robust CAGR of 68% from $29 million in 1997 to $237 million in 2001 due to the unique business model, acquisitions, and strong market positions (#1 or #2) in their strategic locations [7]. As a result, NVR’s share price experienced a 20-bagger from being just $9 in 1996 to roughly $180 in late 2001. NVR was then one of the several companies that participated in the housing construction’s outperformance of every other sector in the Dow Jones and S&P groupings in 2001 [3]. Notably on June 20, 2001, a user going by charlie479 posted a write-up on Value Investors Club pitching his long idea in NVR’s equity.
Fortunately for NVR, its meteoric rise did not come close to ending any time soon (or so everyone may have believed). NVR still saw to enjoy the ranking of the 6th largest builder in the nation during the early 2000s. The company’s earnings continued to compound to a steady level at a 15% CAGR from $330 million in 2002 to $587 million in 2006 [8]. Over this time, Schar’s legendary run as a CEO at NVR came to an end in 2005, where he transitioned to the board and passed the torch to the company’s CFO Paul Saville. It was truly an exciting time to become the CEO of one of the strongest performing companies in the market, as NVR’s stock reached an outstanding $900 per share in July, 2005. Unfortunately for NVR however, the company’s earnings did peak in 2005 with a global financial collapse on the brim, as the $697 million mark was not surpassed until 2018.
Modern NVR
The Great Financial Crisis that emerged from 2007 through early 2009 was one of the hardest times in modern American history for businesses. Out of all the industries, businesses involved in real estate, especially homebuilders, were impacted the most in a crippling manner during that timeframe. Unfortunately, many companies incurred a lot of debt leading to the crisis while they were buying a lot of land, which led to disastrous results [9]. NVR, unsurprisingly, was not able to escape from the grim environment of the overall industry and economy. As earnings peaked at $697 million in 2005, by 2008 the company’s earnings decreased 85% to $100 million, a level not seen since 1999. At the same time, NVR broke away from its heavy buyback tradition and issued 900 million shares from 2008 through 2010 (5.2 million total shares to 6.1 million) [6]. NVR’s share price subsequently fell to $340 per share (a relative bottom) by February, 2009, a decline of more than 60% from its previous all-time high.
As catastrophic that sounds for NVR, the company’s survival was a testament to how strong the reorganized business model truly was, as well as the shrewdness of NVR’s management. For instance, as Saville experienced the near collapse of the company back in the 1992 bankruptcy alongside Schar, management learned from its past and NVR strategically used its resources to pay off its debt. In 2006, NVR had $350 million in notes and loans payable [10]; this was decreased down to $90 million by 2010 [11]. NVR also posited a really impressive feat throughout the Great Financial Crisis – out of its subgroup of companies including Toll Brothers, Dr. Horton, Lennar, and PulteGroup, NVR was the only homebuilder that remained profitable over the period. This could be attributed to its options-based business model as it helped maintain higher margins and keep the balance sheet relatively cleaner [9]. Lastly, throughout the crisis, NVR still expanded into Florida, Indiana, and Illinois for a total of 9 cities. It was by the end of the crisis that the market realized there was something truly unique about NVR. NVR’s P/E would float around the mid-to-high single digits before the crisis; this changed to near 20 and even higher after, which reflects a well-earned multiple expansion for the company [12].
Similar to that of the late 1990s to early 2000s, the 2010s was a fundamentally very strong period for the homebuilding industry and NVR as the economy was supported by the Fed’s reign of quantitative easing and low interest rates. NVR’s business was on the rise again by 2012 and Saville decided to just stick with the same winning formula. Over the years, the company’s reach continued to build market presence throughout the Mid-Atlantic, Northeast, Mid-East, and Southeast. In 2012, NVR completed the acquisition of the 2nd largest homebuilder in Pittsburgh called Heartland Homes, which also operated in a very similar asset-light business model [13]. Management also recontinued its buybacks and shares outstanding reached 4 million by 2015, a 50% reduction since the 8 million mark from 2001 [6]. By the end of 2015, shares reached $1600.
NVRs earnings compounded at an average rate of 24% through the decade of the 2010s, with their earnings reaching a new all-time high at $797 million in 2018 [14]. In 2019, at a market cap of $14.5 billion, NVR officially joined the S&P 500 for the first time in its history, which is a huge milestone for the company and its management considering the fascinating history it went through [15]. By the end of the decade, NVR’s share price reached $3800, a double since 2015 which was a continuous factor of management’s successful EPS expansion and increased ownership for shareholders. NVR also experienced a significant growth of backlog orders towards the end of the decade to 2020 as a side effect of the concurring housing boom. This was a positive catalyst for NVR as the COVID-19 pandemic rattled the economy, and the business was still on pace for a speedy recovery.
NVR reached another milestone with surpassing the $1 billion earnings mark by the end of 2021 with $1.2 billion in earnings [16]. This trend did not stop up to 2022 as assets and the housing market experienced significant price appreciation during the post-COVID economic recovery, and NVR continued its same strategy by remaining market leaders in their strategic locations. In 2022, Paul Saville stepped down as the company’s CEO and the President of NVR Mortgage Eugene Bredow took the helm while Schar retired from the board at 80 years old [17]. As Saville transitioned to the board, the leadership strategy clearly emphasized mentoring the incoming CEO. By having the outgoing CEO remain on the board, NVR ensured the preservation of institutional knowledge and continuity in its strategic direction. Today, NVR serves homebuyers in 36 cities across 16 states, with its core market still being Washington D.C. with an estimated 26% market share [18] [19]. Out of the 36 cities, NVR is the market leader in 8 of them, most prevalently in Philadelphia, Washington D.C., and Baltimore [19]. Earnings for 2023 came in at roughly $1.6 billion, down nearly 8% from $1.7 billion in 2022 [20]. There are about 3 million shares left outstanding as of the end of 2024, with the share price hitting a staggering all-time high at $9800 in September, 2024.
Business Overview
NVR is one of the largest homebuilders in the United States competing with other large businesses such as Toll Brothers, Dr. Horton, Lennar, and PulteGroup. As NVR is mostly prominent in the East Coast, the main business is centered around the building and sale of single-family detached homes, townhomes and condominium. The average price of a unit settled by NVR in 2023 was $450,700 [20]. NVR’s style of homes tends to be simple and cheap which is targeted best for first-time buyers, where there may be just about 5 to 6 different interior offerings from its main trade name Ryan Homes that directly represents NVR. Ryan Homes is assumed to be a large majority of NVR’s revenue (we estimate 80% to 90%). The other two trade names that directly represent NVR are NVHomes and Heartland Homes which settle properties for ‘move-up’ and luxury buyers, but only operate in Washington, Baltimore, Pittsburgh, and Philadelphia.
NVR also operates a mortgage financing business that complements its homebuilding operations, called NVR Mortgage Finance or NVRM. NVRM makes revenue from origination fees, gains on sales of loans, and title fees, in which make up just 2% of total sales as of 2023. For the purposes of the deep dive, we will focus our attention on the homebuilding business model and what makes it truly unique, as we saw during NVR’s history, and then our further study of the famous VIC write-up next.
To provide some final context to the business model, there are important industry characteristics to consider. For one, there is a minimal capital requirement to start a homebuilding business, which means there is a low barrier to entry. Homebuilders across the United States is an extremely fragmented industry, with plenty of small players in every state. However, achieving 'successful scalability' in this business presents a high barrier, as maintaining sustainable profitability becomes hard when competing against industry giants with concentrated market dominance in specific cities. While there is an estimated 400k+ homebuilders in the United States today, the largest 100 single-family homebuilders account for about 50% of home sales, which has increased over a third from two decades ago [21] [22]. What can explain this facet of the industry is that many small homebuilders went out of business during the Great Financial Crisis, which allowed for market share to be grabbed by the larger companies. As a result of this change, many cities have become a lot more concentrated over time. In Washington D.C. for instance, the top 10 builders had almost 42% market share in 2005 but an 80% market share in 2023 [19]. The reason this matters is that we can consider how large homebuilders benefit from regional economies of scale. Rather than directly taking share from each other, they have been able to take advantage of cost structures that work well for them against struggling small businesses. Next, we will explore how this dynamic impacts NVR, particularly the challenges of entering a new city and capturing market share from established competitors. The large-scale nature of homebuilding can often be seen as commoditized, offering little differentiation to homebuyers.
Business Model
A typical homebuilder business model first goes through direct land acquisition before an actual purchase from a buyer, where finding the right land at the right price is crucial. From there, they subcontract the construction of the residential properties, which is the biggest expense, to be then marketed, showcased, and sold to an eventual homebuyer. In between all of that process, they also provide the short-term financing needed to bridge the time between lot acquisition and the home’s closing. As a result, these businesses operate with very little PP&E and incur little capital expenditures while subcontracting falls under cost of sales. This has been the usual business model for homebuilders for many decades. However, through the direct acquisitions of land and further development, this operating model essentially serves as an investment on the balance sheet that is subject to boom-and-bust cycles. Notably, following the Great Financial Crisis, many surviving public homebuilders had to adapt to the NVR-style operating model. So, what makes the NVR model special?
First, NVR does not actually own land like the typical homebuilder. Instead, they negotiate for an option contract on the completed piece of land with developers that is exercised only once the homebuyer’s mortgage is qualified. This is done by initially offering upfront deposits on the lot purchase agreements (or LPAs) which usually can cost up to 10% of the total price of the land. In terms of developing relationships with developers, NVR’s strategy serves as a double edged sword. Some developers turn away from dealing with this kind of model because they do not want to assume more risk, but rather share the risk and partake in a mutual relationship. Some developers do tend to find NVR as a preferred partner as NVR agrees to purchase the finished lots (that are developed and have set infrastructure like roads, sewers, and utilities) at a premium, which allows the developers to also take advantage of NVR’s credit rating for better financing terms with lenders too. In turn, NVR takes on much less risk on the property and gets to decide if it wants to commit to the construction. NVR then still maintains ‘control’ of the land within its markets while employing much less capital. Subsequently, NVR’s balance sheet risk from inventory is lessened and returns on capital are stronger.
Second, NVR only begins real construction of a residential unit once an order is placed with a deposit. This is essentially a ‘pre-order’ operation that also reduces working capital requirements and risk, while strengthening returns on capital too. NVR is also known for performing extensive due diligence on potential land purchases. Once construction has the green light, NVR is supplied by its own nearby factories that deliver pre-made components of housing units, which tightens costs. The company’s assembly line approach in this manner makes NVR the “In-N-Out Burger of homebuilders”. This integrated model fully allows NVR to focus on its leading market positions in every geographic area it competes in [20]. Considering this whole model, a way to think about NVR’s strategy is that it is able to make $1 of earnings with much less capital than what other homebuilders would need to use to make $1 of earnings, all the while including NVR’s faster inventory turnover.
Because NVR does deep research on potential communities before purchasing while focusing more on simple designs that are easy to follow within schedule, NVR has the ability to exercise options on a consistent basis. Over the decades, NVR has built a solid reputation within the industry to execute most of their option contracts with a strict expiration date on a large scale. These facets serve to demonstrate NVR’s moat as the company has made the most of this strategy for decades before any other large competitors have tried emulating it too. Therefore, NVR’s size, scalability, and experience makes it hard for smaller homebuilders to enter as well. On a small scale, there is a fundamental disadvantage to compete against NVR’s extensive grasp of its developer relationships, construction network, and brand reputability amongst buyers. Over the long term, NVR has been able to generate ROE of 20-40% (2x to 3x more than most large competitors) due to this strategy that removes the need to invest in a land development process that can take multiple years. This strategy also allows NVR to be protected in housing market downturns as it is able to renegotiate and even withdraw from land options. Therefore, as we can reflect back from NVR’s history, survivorship over many years is key to becoming one of the titans in the industry.
Key Business Metrics
The homebuilding industry is at the mercy of a lot of macroeconomic drivers, such as central bank policies and interest rates, population growth, employment and income levels, and the balance between housing supply and demand. First, we will focus specifically on the demand with single-family housing units completed and how its historical data is relevant to the present day [23]. On first observation, we can see this market is cyclical over the long run; notably, the gradual recovery in completions post Great Financial Crisis points towards a thesis that there has been an underbuilding for the past decade, while there is still room for full recovery since the peak of early 2006. New construction has not fully matched demand drivers that come from continuing (yet decelerating) population growth, replacement of aging housing, and growth in seasonal units. An important consideration from this FRED data is considering whether the industry is currently operating near peak capacity or not, based on recent stagnation.
As of May 2024, Freddie Mac estimated there is a 1.5 million deficit in housing units [24]. As long as the United States can sustain population growth, higher occupied housing units will follow which is a required driver of further completions. The current issue with United States population growth is seeing how much deceleration it will have due to lower expected fertility rates. Therefore, the trend of natural population change (births minus deaths) will pose a very critical metric for the industry’s outlook. Other important factors to include are the rate of adults per household and vacancy rates.
NVR has a major market presence in a handful of cities, which we can see in the figure below, where NVR has gained considerable share in certain cities while losing some share in others over the past 5 years. More specifically, the region that NVR has recently grown further presence is the South East, while the Mid Atlantic took a noticeable hit. It is estimated that NVR’s overall market share in the United States in roughly 2.5%, though we can observe that a lot of NVR’s business activity is still concentrated in the Mid Atlantic region [19] [20].
NVR’s approach to maintaining very competitive positionings in a select few of cities rather than some presence in many cities explains the stronger margins and returns which we will delve into next. NVR is then able to maintain its wide moat in select areas where NVR has established its streamlined network for construction, however this does have some implications for NVR’s organic growth. Many of these cities that NVR has large market presence in are already very concentrated with other large homebuilders too, leaving not as much room for further growth in the future. We can then see how NVR’s business strategy is largely based on this dynamic trade-off between returns and growth. After all, a lot of NVR’s market share gains were in result of the Great Financial Crisis and the company picking up the leftovers after many other businesses failed to survive.
Financials
Over the past 5 years, NVR has seen over a double in EPS. Sales did peak in 2022 as a result of the higher interest rate environment which drove slower housing demand and overall affordability of homebuyers after the robust rise in real estate prices. The same trend followed suit for NVR’s total settlements. Interestingly, the large increase in the average selling price from the past 5 years demonstrates how NVR has successfully been able to sell higher-value homes and even pass on cost increases to the homebuyers. At the same time, NVR’s improving gross margin can point to a favorable mix of higher-margin homes and its operational efficiency. As a part of COGS, NVR also reports an “allowance for losses on contract land deposits”, which is the running reserve that attempts to anticipate the forfeiture of the land options. Another important side note is NVR’s contract land deposits are one of the bigger assets on the balance sheet. NVR has also been able to keep SG&A as a percentage of revenue low as management has exhibited a characteristic interest in strong cost discipline. NVR’s increasing net profit margin reflects its efficient cost structure, even in times during sales declines. All of these factors play in part with NVR’s systematic aggressive buyback program that impact the sharp rise in EPS from $221 in 2019 to $463 in 2023.
As NVR is the prime example of the lot option strategy that differentiates from most business models, NVR’s returns stand out from the top 10 largest publicly traded peer group as well. Looking at a specific metric of returns though ROE, we can see how NVR has never seen a negative number, even during the Great Financial Crisis. This is particularly impressive when you compare this to the peer group during that time period. As of the past decade, NVR’s ROE has risen from the 20% up to near 40% today. During the peak of the housing market a couple years ago, NVR had reached 50%+ ROE, double that of the peer group’s rough 25%. Today, NVR has still managed to maintain this large outperformance, with Q3 2024 ROE being 38.7% vs the peer median’s 16.4%.
When we look at historical margins, we can derive unique insights compared to historical returns. NVR’s business model is proven to demonstrate its shrewdness in times of financial trouble, as seen with the larger gaps of outperformance during the Great Financial Crisis. Most of the other larger business experienced much faster rates of declining margins during the troubling period, in which NVR was not entirely able to escape declining margins but still declined at a slower rate. In 2011, NVR’s largest outperformance in gross and EBIT margins were seen with +14% and +18.7% respectively. Interestingly, the peer group had a really strong bounce back to high margins, which makes sense due to the higher amount of capital tied to actual land, which exposes to greater upside. Today, NVR still manages to outperform with higher margins, but the gap is much smaller compared to the end of the Great Financial Crisis.
NVR’s management has historically approached leverage with a lot of conservatism, especially when Schar realized using debt can be particularly dangerous after the near financial collapse of the company in 1992. We learned in NVR’s history that the company managed to pay off a significant amount of liabilities during the Great Financial Crisis, which allowed it to come off as a very strong player subsequently. Today, NVR's net debt is negative, which exemplifies how the company’s balance sheet is very healthy with a good amount of cash on the sidelines.
We also learned in NVR’s history that much of the capital allocation strategy has been centered on the repurchase of its own stock. This has proved to be a strong catalyst to its equity over the long run as NVR has reduced its shares outstanding by roughly 50% over the past 20 years, while Lennar and D.R. Horton have increased their share count by 80% and 10% respectively [6]. This capital allocation strategy has been strongly upheld by NVR’s incentive system within management that is shareholder friendly. Incentives include compensation tied to performance and periodic stock option grants, where Named Executive Officers (NEOs, or top-rank executives such as the CEO, CFO, and the next highest paid executives) are required to hold 4x to 8x of their salary in NVR stock. More specifically, NEOs receive options that vest equally over four years that are tied directly to ROC performance. To fully vest, the company must rank among the top three public homebuilders in ROC. NEO tenure is also relatively long, so insider ownership is significant with NEOs owning 7% of shares as of March 2024. The previous CEO Paul Saville owns 5.1%. [20] [25].
VIC Pitch
Within the value investing community, there is a very famous Value Investors Club (VIC) write-up that has served as the golden standard for writing an investment thesis by a user named charlie479, or Norbert Lou. If you have not run into the short piece yet, you can check it out here. As of today, this investment idea has yielded over 5,500% since it was pitched in June of 2001, and even Joel Greenblatt would pass it out in his lectures at Columbia Business School to go through why it was such a worthwhile write-up to study. We will take a closer look behind the story of Norbert’s investment idea into NVR, and what we can learn from his realizations during the investment journey.
Norbert Lou was a naturally inquisitive and bright individual since his younger years, which allowed him to be very academically successful. He attended Cornell University and majored in agricultural and biological engineering, but his investing journey started in 1994 after he picked up a copy of Peter Lynch’s One Up on Wall Street from his father’s bookshelf. From there, he became very interested in the world of finance and began taking all the business and economics classes he could at university. At the same time, he started practicing real investing when his mother allowed him to manage her $60,000 retirement account. After graduation, he wanted to pursue a career in finance and ended up working in investment banking at Brown Brothers Harriman. Fun fact – while he was recruiting for finance jobs out of graduation, he turned down a job offer for a small and unknown Connecticut-based hedge fund called Bridgewater Associates.
By 1997, a year after working at Brown Brothers, Norbert was looking for a company to add to his mother’s portfolio that was specifically buying back stock, as he reasoned that it would be a good indication of a business that generates a solid amount of cash and returns it back to shareholders. During this search, Norbert ran into NVR, which declared that it was going to initiate a $100 million buyback over 4 years, while its market cap was only $275 million. Another positive sign was that NVR’s return on tangible capital at the time was 55%. Norbert realized why this was a good thing to see as an investor due to the DuPont analysis that he learned from school; it shows how NVR could make more earnings with less capital.
Norbert realized that NVR did not have any analyst coverage at the time and hit the books to read many of NVR’s annual reports. What he learned was that most homebuilders were essentially ‘land speculators’, and there were two big problems with that. First, capital was tied to land inventory for years, which imposes declines to returns on capital. Second, homebuilders that relied on debt to finance land purchases were highly vulnerable during market downturns, as declining demand left them burdened with significant obligations and limited revenue to cover their heavy debt.
Because the market realized by that time that the homebuilder business was subjected to a boom-and-bust cycle, these companies were generally placed in a low multiple. However, NVR was still placed with a low earnings multiple as well even though NVR’s business model was completely different from most at the time. As we now know from the last sections of this deep dive, Schar’s idea was very powerful – in a market downturn, NVR could just let the lot options expire.
Norbert then realized NVR’s return were out of the norm because of its great reputation in exclusive markets like Washington D.C. and Baltimore. Within these concentrated areas, NVR took advantage of its large scale for cost advantages in manufacturing, advertising, and hiring subcontractors. Norbert was beginning to put the pieces together to understand NVR’s wide moat within these cities. He was also able to gauge the immediate future of NVR because the company would report its backlog as well. Despite all of this, the company traded only at 7x earnings at the time. To put it simply, Norbert decided to allocate 35% of his mother’s portfolio in 1997 at $23 per share because NVR had little debt, it was a low cost provider for a basic necessity, it has been around for decades, it was growing rapidly, and it was aggressively buying back stock, while still being relatively cheap.
In 1998, Norbert then began to work at a hedge fund called Elliot Management. During his first year of holding NVR, the stock had already nearly doubled and became almost half of his mother’s portfolio. Though it may have been tempting at times, Norbert decided to not sell his position because he still could not find anything necessarily more attractive than NVR, and nothing materially has changed within the business and valuation. By 1999, he decided to buy even more at $40. When March of 2000 came around, the stock had reached $54. Norbert’s work at Elliot Management at the time very was fast paced with trades on a shorter term time frame, but this NVR position taught him that by holding onto a great stock for a long time, he could outperform many other investing strategies. He then began to read a lot of Buffett and Munger’s writing, in which would echo the same lessons he was learning himself with NVR. They would emphasize the importance of high returns on capital, which made him appreciate NVR’s investment opportunity even more.
After adopting and learning more from Buffett and Munger’s principles, Norbert realized too that a great company is one that not only earns high returns on capital, but also reinvests the cash at similarly high returns. In this case with NVR, management did not only allocate a lot of capital to share buybacks but to new and equally profitable projects as well at around 30%. NVR’s operating profit exceeded as a result from $70 million in 1997 to $270 million by 2000. Another interesting perspective from Norbert about the approach to capital allocation is that companies are actually more attractive when they have so many reinvestment opportunities available that they choose not to buy back their own stock. Ultimately, Norbert still decided to hold onto the NVR holding because of Buffett’s analogy to punch cards. Buffett suggests that an investor should approach investing with prudence, and every time an investment is made in their life, a hole in a punch card is made. Since a punch card can contain about 20 holes, Buffett is suggesting only a few investments can materialize into considerable returns over a lifetime. With this inspiration, Norbert felt NVR was one of those holes in his investment punch card and did not sell his position, even with a large unrealized gain.
Norbert then attended his first Berkshire Hathaway conference in 2001. While at the event, he saw a promotion for Value Investors Club, a forum where exclusive members can post their investment ideas. Norbert decided to apply to VIC with the idea of no other than NVR. At the time, NVR was $143 per share. It still traded at just 7x earnings (while NVR’s P/E averaged 6.3x in the 90s) even though it was still much more profitable than competitors, was gaining more market share, and was riding an early rise of a housing boom. Alongside the thesis on the VIC page, a lot of interesting insights can be pulled from the comment section of the write-up.
A user by the name of elan19 expressed he was not yet convinced that NVR’s model would be superior during terrible times. Norbert responded by explaining a scenario in which housing prices were falling, where NVR would have originally bought a $5k option on a $100k valued land compared to another company “RVN” that bought the land outright for $100k. If the land’s value fell to $90k, RVN would have lost $10k while NVR’s loss would be limited to $5k. All NVR needs to do at that point is not exercise the option, and NVR could then buy the land outright at the $90k value. RVN, on the other hand, would still have $90k of capital tied to it and may not have the ability to purchase more land at a cheaper price. This is a feature Norbert found very important to his investment thesis in NVR, and now looking back from many years later, we can see how this feature allowed NVR to pick up a lot of market share during troubling economic periods where many businesses go bust. To add on, Norbert also commented to elan19 that NVR’s option strategy allows them to be much more responsive to demand changes as well, because again NVR does not have so much capital tied up to individual pieces of property. A last notable insight we can find from the comment section is Norbert’s dissatisfaction with the options program at NVR. He highlights the "main negative of the stock" as NVR significantly reducing its reported earnings by frequently issuing a substantial number of stock options to executives every few years.
By 2002, in only 5 years since his original buy, NVR had become a 15 bagger for his mother’s portfolio. He learned some critical yet simple investing lessons during this holding, which is to be patient, pick great businesses, and have the mental strength to hold on for a long period of time to allow the compounding. Norbert sold off some shares in 2005 near its relative all-time high at $900, and finally exited the rest of the shares in 2007 at $700, just right before the Great Financial Crisis. Reflecting back on the success of the thesis, Joel Greenblatt would describe in his lecture, “The thesis was straightforward. They're not laying out money anymore, and high returns on capital… low P/E. You can possibly understand why you had this opportunity." Had Norbert still held the NVR investment to this date, it would have compounded nearly 19% annually since his 816 word VIC thesis in 2001. If you are intrigued to learn more about Norbert Lou and the rest of his incredible investing journey, check out the interview with Santangel’s Review here.
Business Fundamentals
NVR’s reliance on lot option contracts has shaped its operating model, prompting questions about whether the approach can last. Minimizing raw land ownership preserves capital efficiency and supports high returns on invested capital. Because NVR often commands a large market share and is typically a key customer for many developers, premiums remain modest. Over time, that leverage has helped protect margins, and NVR’s broad developer relationships have spared it from taking on more inventory risk for nearly two decades. Nevertheless, NVR’s lot option strategy slows its entry into new markets, helping explain its steady share outside of recessions. Although it gained ground in 2006–2010 using strong liquidity and low inventory risk, NVR has hesitated to pursue hot-growth states like Utah, Nevada, Arizona, Texas, and Colorado, where lots often carry more stringent terms or are controlled by entrenched builders. This highlights the trade-off: NVR prioritizes preserving best-in-class returns over chasing faster expansion through heavier land commitments.
There’s still room for NVR to gain share if another housing downturn hits, but healthier balance sheets and more consolidated markets make it tougher to replicate the post-crash bargains of years past. Still, the DC–Baltimore region remains steady due to government-related jobs, and NVR has also built a strong footprint across the Northeast and Mid-Atlantic. Meanwhile, its expansion into faster-growing states like North Carolina, Tennessee, Florida, and Georgia adds more potential upside over time. From 2019 to 2023, NVR’s regional new order unit growth varied: the Mid Atlantic declined by about –1.1% annually, while the Northeast jumped 8.6%. The Mid East dipped –0.6%, and the Southeast stood out at 9.7%. Although the lot option model doesn’t block expansion (evident from the Southeast and Northeast gains) it enforces a disciplined approach shaped by finished lot availability.
If finished lots become scarce or pricier, NVR’s margins and community openings could suffer. Still, the company’s track record shows it can handle such shifts. On the upside, ample finished lots in regions with strong job and population growth would enable profitable expansion while preserving NVR’s optionality. Paired with ongoing efforts to deepen its southeastern footprint, NVR’s disciplined model and developer relationships offer meaningful long-term potential.
Macroeconomics
Unemployment remains low, and as long as it stays that way, households should maintain the capacity and willingness to buy, which in turn supports healthy housing demand. Consumer confidence can swing meaningfully if job losses rise or if inflation begins to erode disposable income, but at the moment, neither concern appears severe enough to derail the market. Financing also remains central: the daily direction of interest rates, especially the benchmark 10-year Treasury yield that mortgage rates loosely track, can greatly influence affordability. Any additional rate hikes from the Federal Reserve or hawkish commentary could throttle homebuying activity, whereas a shift toward dovish monetary policy or a noticeable retreat in rates would stimulate incremental demand.
For downside risks, a material jump in unemployment combined with still-elevated home prices and high mortgage rates could create a negative feedback loop, depressing both new home demand and pricing. Persistent increases in the cost of land, labor, or materials would further challenge margins, particularly if supply chain disruptions linger and economic growth slows. Alternatively, an upside scenario could emerge from moderating interest rates, a softening of input costs, or stronger-than-anticipated core market demand, any of which would help ease affordability concerns and pave the way for renewed momentum in homebuilding.
Demographics
One of the most important structural tailwinds for housing is the alignment of population and household formation with the total housing stock, a trend that has remained remarkably consistent over the last two decades with only a brief period of deviation between 2010 and 2013. By and large, the country has managed to keep pace with the growth in adult population, which implies a steady underlying baseline of housing demand. This pattern provides a favorable backdrop for NVR, especially as the company continues to focus on suburban and exurban markets that are attracting buyers who place a premium on space and affordability.
Central to this demographic momentum is the Millennial generation, which is now forming households at a more accelerated pace, after initially postponing marriage, children, and homeownership. Many Millennials bore witness to the housing crash during the global financial crisis, and that experience, combined with a cultural inclination toward urban lifestyles, delayed their entry into the homeowner market. With more financial stability, job security, and the simple reality of growing families, this generation is gravitating toward the larger houses and yards that suburbia can offer. The resilience of work-from-home arrangements further supports this move, as buyers can increasingly live where they prefer rather than where their workplace is located. That shift is especially helpful to NVR, given its predominant focus on building in regions with ample exurban expansion potential.
At the same time, suburban and even rural areas have become more appealing to buyers who still want a taste of city life but at a friendlier price point. These “urbanesque” suburban developments offer a mix of walkable amenities that resemble the density and vibrancy of downtown neighborhoods. By combining that social appeal with the space and affordability of peripheral markets, these communities have become a magnet for many Millennial families. While some regions continue to see robust price appreciation, the ability to relocate outside of major urban cores has opened up new pockets of growth, benefiting builders like NVR that operate where these demographic shifts are most pronounced.
Lessons Learned
Thank you for reaching to the end of this deep dive on NVR. We were able to cover a lot of ground around this company, from its history and business model to the famous VIC pitch and what’s more to come. Though each section had its own learning points specific to its topic, here are the biggest five overarching lessons we came across while learning over the entire course of this deep dive.
The Power of a Unique Business Model
NVR’s lot option framework serves as a reminder that sometimes the real competitive edge lies in rejecting industry norms rather than refining them. After NVR went through Chapter 11 bankruptcy, Dwight Schar realized that using leverage in the homebuilders business is very dangerous, and adopted a playstyle that allowed NVR to build more homes with less capital exposure and more strategic flexibility. Surprisingly, it took many years for other large homebuilders to adopt this unique strategy as well even though it assumed less risk, generated better returns and margins, and left the company in an arguably much healthier state. Today, NVR’s scale is unmatched with this kind of model, as they have been ahead of the competition for decades. At times, big ideas in business don’t just arise from complex financial engineering but often from daring to think fundamentally differently about risk, leverage, and how to balance short-term pressures with long-term staying power. A good way to sum up this lesson is an insight by business magnate Peter Thiel, where he says, “The most contrarian thing of all is not to oppose the crowd but to think for yourself”.
The Power of Discipline Management
Another lesson we can learn directly from the business is the success of NVR’s methodological management. From its prudent use of leverage and capital allocation to its extensive focus on preserving returns on capital, allocators and investors alike can pull disciplines from NVR’s decisions from over the years. By maintaining a protective cushion of cash, NVR minimized the financial whiplash that afflicts more leveraged operators and safeguarded its ability to reinvest into the business at high rates and repurchase shares on favorable terms. Though the decision to buy back stock is entirely independent from company to company, we can see how well it worked out for NVR. The consistency of these buybacks, coupled with the firm’s relentless emphasis on preserving high returns on capital, pushed its EPS upward year after year. What truly stands out is NVR’s selective market entry: rather than chasing every hotspot, management systematically targeted only those areas where they believed NVR could develop a commanding position. This restraint did more than prevent costly missteps—it also solidified the company’s reputation as one that prizes quality growth over speed, further strengthening its long-term staying power.
The Multibagger Formula
Over the past 30 years, NVR’s equity has surpassed a not-so-usual achievement: reaching the 1000 bagger status. NVR’s 1000x return offers a clear blueprint for how a combination of multiple expansion, robust earnings growth, and share buybacks can multiply an initial investment to remarkable levels. After the Great Financial Crisis, the company also benefitted from a 2x in a rough double P/E re-rating. At the same time, earnings exploded from about $10 million in the mid-1990s to nearly $1.2 billion by 2021, an astounding 100x increase. Further propelling shareholder value was an 80%+ reduction in share count over the time frame, which effectively multiplied each shareholder’s stake by 5x. Taken together, these forces compounded into NVR’s 1000 bagger success story, illustrating how a well-executed strategy can harness both market perception and operational excellence to generate exponential wealth creation.
Great Thesis
Norbert Lou’s NVR thesis became legendary among value investors for its clarity, foresight, and contrarian grasp of the homebuilding industry’s core risks. By zeroing in on NVR’s lot-option model and the firm’s commitment to high returns on capital, he recognized why this homebuilder truly differed from others saddled with land-heavy balance sheets. Joel Greenblatt, who often uses Norbert’s write-up as a teaching example, summed it up best by calling it both simple and powerful: “They’re not laying out money anymore, and high returns on capital… low P/E.” That mix of prudent leverage, buyback-fueled EPS growth, and the market’s misunderstanding of NVR’s risk profile helped Norbert carve out an extraordinary gain while demonstrating that the finest investment ideas are often the most straightforward, as long as one has the patience and discipline to see them through.
The Intelligent Investor
The single greatest edge an investor can have is a long-term orientation, as Seth Klarman famously put it. NVR’s history underscores the point: while holding the stock through multiple 50% drawdowns might feel agonizing in the moment, those who endured were ultimately rewarded many times over. Even a strong thesis can leave value on the table if impatience intervenes, as evidenced by Norbert Lou missing out on another 10x gain after selling in 2007. Over time, NVR’s intrinsic value has continued to climb, and the occasional steep declines, in 2007 through 2009, 2018, or early 2020, were actually powerful entry points for disciplined investors. This cyclical turbulence is simply part of owning equities; the key is to remember that the price’s ups and downs revolve around a steadily rising core intrinsic value.