Home Building Industry Sector : Real Estate Senior Analyst : Kento Okamoto

Industry Summary Case-Shiller Index 20-city composite Rating Neutral/Overweight Upside Potential Indication of modest recovery Potentially undervalued due to skepticism Downside Risk Possibility of another economic disaster High elasticity due to uncertainty Industry Revenue ($MM) Action Statement Housing market seems to be on its path for recovery with mixed factors that can potentially shift the market outcome in different directions. Some major factors are:  Signs of recovery in residential home price  Housing price increased for the first time since Sep Some concrete signs of modest recovery.  30 year mortgage interest rate at all time low  Golden opportunity for financing real estate purchases. Increase in prime mortgage to support future growth of the market.  Subliminal risk of high demand elasticity  Still concerned market may over-react to negative market news.

Industry Definition – House Construction Firms in this industry are primarily engaged in construction and remodeling of single-family houses and residential buildings. These firms may also hold their own financial services arm to provide clients with customized financial solution. Firms in this industry operate in multiple states, yet tend to hold strong position in their indigenous states.Firms in this industry are primarily engaged in construction and remodeling of single-family houses and residential buildings. These firms may also hold their own financial services arm to provide clients with customized financial solution. Firms in this industry operate in multiple states, yet tend to hold strong position in their indigenous states. NYSE: PHM NYSE: DHI NYSE: LEN NYSE: KBH NYSE: RYL NYSE: TOL

Industry Breakdowns Industry breakdown by region Industry breakdown by market cap ($MM)

General Business Model Home Building Supplier Base Material Material Cost Construction Customer Mortgage Loans Payments + Interest + (Collateral) Mortgage Banking Home Builders Land Purchase

Economic Landscape Home Builders Financial Entities New Residences Foreclosed Properties Housing Market Demand Consumers Financing Collateral “Supply Side”“Demand Side”

Absorption of Existing Inventory Existing Home Sales and Remaining Inventory What does this trend tell us? Steady decrease in existing house inventory Government support to prevent foreclosure Recovering consumer appetite for real estate purchase Projected demand surplus, leading to opportunity for new home building Foreclosure rate down 2.99% in June v.PY

30-yr Mortgage rate and New Home Sales Mortgage rate movement and New home sales With low home price, what matters to potential purchaser is the interest payment Current 30-yr mortgage rate down to approx. 3.5% v. 8.3% pre – 2008 crash Significant decrease in total interest payment for property purchases Signs of increasing demand in second home purchase by retired population Projected increase in prime mortgage, which could support the recovery of the real estate market as a whole Golden opportunity to purchase a superior property in minimum sunk-cost and interest payment

Future Outlook Industry to experience organic recovery/growth Strong projected growth in total industry revenue and company ordersStrong projected growth in total industry revenue and company orders Profitability to recover with less loss from depreciated property/options valueProfitability to recover with less loss from depreciated property/options value Risks to Consider Sizable negative market news As the market begins its process to recovery, a sizable negative news on the market could scare out potential demand. Loss of federal support or/and continuous over- regulation in lending standard Loss of federal lending support or overly strict lending policy could take away the golden opportunity for financing real estate purchase. General Outlook $MM Time-series analysis on total revenue, orders, and profitability

Recommendation Reiterate a Neutral/Overweight rating: Promising signs of modest market recovery seen in various key statistics and indicatorsPromising signs of modest market recovery seen in various key statistics and indicators Possibility of significantly outperforming the total real estate market as shortage in supply may become more imminentPossibility of significantly outperforming the total real estate market as shortage in supply may become more imminent Contains subliminal risk of high demand elasticity as market confidence is still under repairContains subliminal risk of high demand elasticity as market confidence is still under repair Good potential for outstanding performance, yet with recognizable risk of disappointing outcome

Appendix

Company Comparable Scale1,000,000 CurrencyUSD Key Financials & Effectiveness NameTicker Sales TTM Sales Year/Year Net Margin TTM Net Margin FY1 EPS TTM EPS Year/Ye ar ROIC TTM PULTEGROUP, INC.PHM4, (1.95%)3.98%(0.22)0.07(3.93%) KB HOMEKBH1, (4.68%)(5.25%)(0.85) % LENNAR CORPORATIONLEN3, %16.12% % D.R. HORTON, INC.DHI4, %22.26% % THE RYLAND GROUP, INC.RYL1, (1.93%)2.30%(0.43)0.24(2.77%) TOLL BROTHERS, INC.TOL1, %5.92% % Median 1, (1.93%)3.37%(0.36) % High 7, %22.26% % Low (13.38%)(5.25%)(1.67)(0.57)(3.93%) EV Multiples & Credit Ratios Market Data & Price Multiples NameTicker EV/Sales TTM Net Debt/ EVNameTickerPrice 52 Week High Price/ Book Value Price/ BV Tangible PULTEGROUP, INC.PHM PULTEGROUP, INC.PHM KB HOMEKBH KB HOMEKBH LENNAR CORPORATIONLEN LENNAR CORPORATIONLEN D.R. HORTON, INC.DHI D.R. HORTON, INC.DHI THE RYLAND GROUP, INC.RYL THE RYLAND GROUP, INC.RYL TOLL BROTHERS, INC.TOL TOLL BROTHERS, INC.TOL Median Median High High Low Low