Greenwich, Ct.-based Wheelock Street Capital–which has made headlines in the past 18 months by teaming with home builders as a private equity investor, and has gone solo as a land acquirer in the mode of Starwood Capital–has acquired a coveted 364-acre tract just north of hot Raleigh, N.C., expected to be the site of about 700 homes in the next five years or so.
Wheelock’s power play comes in a Raleigh market that has three things going for it: household formations, jobs growth, and not enough existing home stock. What’s working against home builders there is home builders–there are probably too many of them for everybody to get a piece. In the past 18 months, public Meritage and private Ashton Woods got operations in Raleigh up and running, and it’s said that Ryland Homes has tapped area land acquisitions pro Mitch Huff to establish a beachhead there as well.
The fierce competition may be a minus for the home building company operators, who face blistering rivalries not just for home buying customers but for prime lots, which are in short supply.
One long-time Raleigh-Cary-Durham operator characterizes the land positions in the Research Triangle area of North Carolina this way: “There are ‘A’ lots, and there are ‘D’ lots, and practically nothing in between.
All of this plays well into the hands of Wheelock, which purchased its Traditions at Heritage parcel from local masterplan meister Andy Ammons. Ammons’ family-run company had a hand in the area’s noteworthy communities for two generations. Wheelock’s local partner on the ground, John P. Myers’ JPM South, is a former L. M. Sandler & Sons operative with extensive masterplanned development and market knowledge.
The felicitous timing of plans for Traditions at Heritage is that its opening comes at the tail end of development of neighboring Heritage Wake Forest, a highly amenitized masterplan that has been one of the best selling areas in the Raleigh market through the downturn.
As opposed to picking up the lots through the pipelines of distress many home builders are pursuing right now, this transaction reflects a more normalized land-cost base–with lots in the mid-$50,000s at the lower end of the spectrum, and almost $70k for larger lots, and even higher prices for reservoir-side premium lots.
“This deal was more of a relationship-driven opportunity that we felt works very well for us,” says Wheelock principal and head of land acquisitions Dan Green. “John Myers fits very well into the Wheelock culture of partners and achievers on the ground, the same as we’ve been lucky enough to find in our Florida and Texas investments in the past 18 months. Andy Ammons was looking for somebody who was going to be willing and able to do a good job, leveraging off the great equity and name of the Heritage at Wake Forest community, and who’d be able to close on the deal.”
The land, to date, is entitled and fully designed, Green says, but the lots are undeveloped and groundbreaking will occur early next year, with the first lot deliveries–probably about 150 in the first phase–scheduled for late in 2012.
Here’s some material Myers has distributed to home builders:
Traditions will be a master-planned community of approximately 660 units and offering a mix of attached and detached products covering 5-6 price points. The zoning approvals in place offer flexibility in lot sizes and configurations. The timing of Traditions should coincide with the closeout of the immensely successful Heritage golf course community located across Hwy 98. Seller intends to capitalize on the positive image and momentum of Heritage in positioning Traditions as a logical “next phase” of Heritage. First lot deliveries at Traditions are expected in Q3 of 2012.
Property values will be protected at Traditions by a Master Homeowners Association, with additional sub-associations created where needed. Architectural guidelines will be created and enforced by Sellers.
Per Sellers agreement with the developers of Heritage, residents of Traditions shall have the same access to Heritage amenities as do residents of Heritage. In addition, Traditions will have amenities of its own including a series of manicured parks and an extensive trail system. The immediately adjacent reservoir with its 110 ac lake offers a wonderful amenity to be used by residents of Traditions for fishing, canoeing and hiking.
The Wake Forest submarket has been one of the most active submarkets in the Triangle over the past 5 years. Home to the Triangles top-selling community (Heritage at Wake Forest), the area has seen strong growth in home sales as well as supporting commercial and retail to support the new rooftops.
In addition to impressive unit counts, Wake Forest has one of the highest average prices for re-sales, ranking third in the Triangle (behind Cary and Chapel Hill) with an average of $291,000. Of further benefit to the area will be the opening of New Falls of Neuse Road slated for the end of 2011. This will greatly improve accessibility to I-540 thereby shortening the commute times to RDU airport and Research Triangle Park.
Seller anticipates the following programs to be available at Traditions……..
• 58’ wide single family detached homesites (allow up to 42’ wide product). Home prices expected to be $225-$275k. To be delivered as slab on grade homesites. Total homesites in phase 1 = 50; in project = 170.
• 66’ wide single family detached homesites (allow up to 50’ wide product). Home prices expected to be $275-$325k. To be delivered as crawl space homesites. Total homesites in phase 1 = 45; in project = 125.
• 72’ wide single family detached homesites (allow up to 56’ wide product). Home prices expected to be $325k-$400k. To be delivered as crawl space homesites. Total homesites in phase 1 = 35; in project = 125
• 100’ wide single family detached homesites (adjacent to the reservoir). Home prices expected to be $450k-$650k. Homesites to be delivered as is. Total homesites in phase 1 = 0; in project = 70
• Attached products…….can range from 20’-36’ in width and can be garage or non-garage product. Total homesites in phase 1 = 0; in project = 170
All unit counts are approximate.
PROJECTED BUILDER TERMS
Lot Pricing: For Single Family homesites…….$950 per ff for 58’, 66’ and 72’ homesites. The 95’ reservoir homesites will be priced individually.
For Attached products………$38,000-$48,000 depending on product width and configuration.
Lot Price Escalator: 5% per annum pro-rated daily.
Deposits: Useable cash equal to 10% of price of lot purchase commitment.
Takedowns: Initial takedown to be based on 50% of expected annual absorption; quarterly takedowns thereafter.
Marketing Fee: 1.25% of home sale price paid at home closing. Seller will conduct a communitywide marketing program. Buyers shall manage their own on-site sales programs with the exception of the 100’ lot section which will likely be handled thru centralized sales.
Justin Good with Cassidy-Turley will be helping us market the property and assemble a builder team. He and I will be reaching out to you to set up a meeting in the near future to discuss your interest and answer questions that you may have.
Private home builder David Weekley Homes, which entered the Indianapolis market in April by hooking up with a private home builder on the brink of extinction, has added Phoenix as its 16th market, taking over a company on more solid financial footing, but no less opportunistic.
Weekley, via a cash and options deal, has purchased most of the remaining home building lots of T.W. Lewis and will begin building in the Phoenix market within 90 days, under the name T.W. Lewis Collection of David Weekley Homes.
The deal fulfills two of Tempe, Ariz.-based T.W. Lewis Homes owner and CEO Tom Lewis’ near-term goals: 1) a leadership succession plan, and 2) a welcome new source of access to capital to accelerate opportunities as the dig out from the housing recession takes hold. To date, Lewis, 62, has been the sole source of his home building operation’s capital financing, and, especially in a protracted brutal market, capital options have become increasingly critical. Lewis notes that his company paid off its land and housing debt in 2008 and 2009, and asserts that he’s profitable on a run-rate basis now.
However, expecially in light of the opportunities that will be there for those with bigger treasure troves of cash, Lewis can now breathe a sigh of relief on behalf of his team of 35 employees that the company will tap into the deep pockets and deep leadership bench at Weekley, which is regarded as private home building’s preeminent business culture.
Lewis sent a note yesterday to friends, partners, and associates that says:
“Under the new agreement, T.W. Lewis will complete all of our homes started through 2011 and transition to ‘The T.W. Lewis Collection by David Weekley Homes’ during 2012. I will remain active in management and will be a partner in the new venture for five years. All current T.W. Lewis employees also will remain with the organization.”
In an interview this morning with Builder Pulse, Lewis explained some details of the structure of the deal:
- David Weekley Homes acquires for cash about 42 lots across T.W. Lewis’ 11 active communities in the Phoenix market.
- David Weekley Homes has assigned one of its executives to operate out of the Phoenix operation, serving as David Weekley Homes’ division president, reporting through to Austin, Texas-based area president Jim Rado. The assignment’s going to Jason Hill, up to now a project manager
- Weekley enters into an option deal to take down about 120 lots across three additional parcels T.W. Lewis owns, where Lewis will serve as developer and land banker.
- Tom Lewis says he’s closing today on yet another 30-lot deal in the master-planned community of Seville in Gilbert, and he plans to work as a land acquisition partner with Weekley and continue in an ongoing role as a land banker.
- Additionally, an office building that T.W. Lewis owns in Tempe and serves as the builder’s headquarters will be part of a lease agreement, and the offices will now be home to David Weekley Homes’ Phoenix operation.
T.W. Lewis, per Builder, ranked 165 in 2010 in Builder‘s Next 100, with revenues of about $52 million on closings of 111 homes.
Tom Lewis notes that his company will close about 100 homes in 2011, and “this deal will allow David Weekley to get a fast start, with about 100 closings in 2012.”
Weekley’s Rado confirmed that plans call for 10 to 15 home starts under the T.W. Lewis Collection by David Weekley Homes in 2011. “We plan to close about 100 homes in 2015, and our five-year plan is to close about 250 homes, because we believe that’s where this market is going,” said Rado.
Avila Advisors served as representative to Tom Lewis interests in seeking a capital partner.
This arrangement gives Weekley a presence in a market that it has coveted a position in earlier but failed to establish. Now it has a running start with a lot pipeline, a partner with a strong name as a land buyer and home builder in the market; a set of relationships with trade contractors that stretches back 20 years, and an alignment with a business culture that’s a good match with the Weekley ethic of quality.
Earlier, in April, Weekley joined Indianapolis-based Estridge Homes‘ operations into David Weekley Homes, with principal Paul Estridge, another regional private builder with a strong reputation for customer care and quality.
When Ken Campbell cleared security and got buzzed in by Standard Pacific’s lobby receptionist in Irvine, Calif., in the Fall of 2008, the company’s welcome for the Matlin Patterson operative had all the warmth of greetings to the grim reaper himself.
In an April, 2010 profile of Campbell, just shy of two years into his resuscitation efforts at Standard Pacific, we wrote:
His m.o. is simple. Come in. Listen. Do the obvious. Give others credit for success. Then, move on, making Matlin-Patterson’s $5 billion distressed market fund investors a little—or a lot of—money in the bargain. It’s become an iterative play because it’s his makeup—a good listener, a rapid learner, a dispassionate decision-maker, an impatient doer, and—what strikes many as an oxymoron but shouldn’t—a deeply caring pragmatist with little-to-zero need to prove anything to anybody … except maybe himself.
Home building, they say, is different. It’s local. It’s real estate. It’s manufacturing. It’s marketing and sales. It’s trade relationships. It’s logistics and distribution. It’s the business of dreams. It eats “outsiders” for lunch. You have to be there. You have to do it to know it. Public home building company CEOs are a club not looking for new members.
Campbell stepped into the StanPac arena with fluid three-part goal: 1). stop the bleeding, 2). prevent the venerable company from going into bankruptcy, and 3) establish a platform from which the company could grow.
Industry insiders, observers, and analysts may have their say about Campbell’s three-year tenure now that he’s chosen this moment–before the destiny of both the company and the home building industry itself is clear–to exit.
Whatever the subjective comment might be, the facts of Campbell’s Standard Pacific performance are pretty clear. Here’s some of what that tenure looks like:
- Overhead: reduced overhead by $145 million to $145 million … i.e. cut overhead by 50% from end of 2008 to present
- during that period sales went from 5,000 to 2,500
- Debt: Standard Pacific had a balance of $2.2 billion in May 2008, all of it due to mature before 2016; now, the debt balance is $1.3 billion, and less than $100 million of it is due before 2016
- JV debt went from $178 million to zero
- Operating Profit: EBIDTA is 12%, highest in the industry … actual dollars went from $44 million to $132 million
- Per unit margin: breakeven in terms of sales per month per community was 3.2 … now the breakeven on per sales per community is 1.1
- ASP: Average selling s price in 2008 was $300,000; now, in StanPac’s new communities, the ASP is close to $390,000 …. Opened 100 new communities in last 2 years… all new home designs…. Another 50 are scheduled to open in the next year
- JD Power noted in its final series of rankings of that Standard Pacific ranked No. 1 in customer satisfaction among public home builders in its markets
Not a bad report card to add to the resume of a “fixer.”
Thing is, Campbell lives up to another standard on all that one might consider an accomplishment, his own.
“The real measure of whether I’ve succeeded is does the company do better after I’ve left. Standard Pacific is in a position to do that.”
As was his plan practically from the get-go Campbell’s operational mantel goes now to Scott Stowell, who’s worked yeoman’s service at the company since 1986, in various division, region, and headquarters titles, most recently as president. In June, the team added an industry outsider, Jeffrey J. McCall, as chief financial officer and executive vice president, who’d worked in the past with Campbell, and who represents continuity in asking questions, raising challenges, and thinking outside prevailing industry conventional wisdom.
“I used to say in analyst calls that it was easy for me to think out of the box because I didn’t know where the box was,” says Campbell. “Now, that role goes to Jeff, who also doesn’t know where the box is. The issue is fatigue… people are tired but they get it… Sitting around and waiting for the market to recover is not a good operating strategy. Jeff is not tired. He’ll keep people focused on what’s going on as opposed to what they hope will go on.”
Campbell is a big believer in Stowell, McCall, and the team of 750 associates who currently work for a company founded and built by Ron Foell and Art Svendson, starting 45 years ago. Going from losing $1.2 billion to actually making money didn’t happen without a lot of inspired, committed, sweat equity.
“A turnaround as successful as this was only possible because of the solid “bones” the company had,” says Campbell.
The afternoon of the announcement of his forthcoming status as an expert in sand saves, Campbell was riding an exercycle at the gym.
“Exactly what I was doing the morning I finished at Railworks….was asked to run Ormet that afternoon….weird.”
Today, Ormet, the Hannibal, Ohio-based aluminum plant Campbell “fixed” before his StanPac term of service thrives, and is hiring.
That’s what he wants for Standard Pacific three years from now.
Two of last decade’s most vaunted dealmakers in the home building space, Art Falcone and Tony Avila are very much back, and they’re together again for the first time with former PIMCO managing director Bill Powers, with a $400 million private equity distressed residential investment vehicle called Encore Housing Opportunity Fund.
Falcone and Avila previously hatched a $500 million vulture fund in 2008, to be a feeder for Falcone’s Americrest Homes, a unit of Falcone’s extensive Falcon Group of real estate ventures. That earlier incarnation may have been too early. Encore, it seems has its timing down, and in Bill Powers, has a major league financial player on the team.
“We’ve got eight deals done, putting $60 million of capital to work so far, four deals in Florida, and four in California,” says Avila, who it must be said, more often than not has some involvement in nearly every home builder deal under serious discussion.
Avila says the capacity of the fund is about $400 million, and is designed for residential transactions across a gamut of statuses, ranging from unentitled lots, to partially developed tracts, to entitled lots, to partially built neighborhoods.
“We have the ability to partner with builders, with developers, with financial players, or even build out a community with our own home building operators,” Avila says. While the first batch of deals have been in the epicenter distressed markets of Florida and California, he says that Encore is looking hard at opportunities in Nevada, Arizona, Texas, the greater D.C. metro area, and the Carolinas as well.
The line-up of personnel in Encore is an assemblage of key players from Avila’s and Falcone’s respective pasts, with a number of players whose prior incarnations were in Avila’s group at JMP Securities until 2008, and other key executives hailing from Falcone’s various real estate enterprises, including Transeastern Homes, which sold to Technical Olympic USA (TOUSA) in 2005, at the top of the market.
What Avila and Falcone have typified, especially through the latter stages of the downturn, is a resilient focus on opportunism even as the end-demand for new residential construction lies in the clutches of uncertainty, a kind of limbo.
Lennar has its Rialto, and Toll Brothers has its Gibraltar, now Beazer Homes has gotten into the distressed residential real estate game with its plans to invest in the purchase of homes it can get for a song, fix up, put up for rent, and some day sell.
Encore, like some of the other well-heeled funds joined at the hip with home building operators and land acquisition expertise, has the advantage of starting with a balance sheet free and clear of paying too much for land. What it buys, it can insist on paying a low number because its decisions don’t need vetting by a land committee, and Encore can pull the trigger as quickly as it wants to if the deal pencils to its underwriting hurdle rates.
“Our investment models can range from a one-year earn-out to six years,” Avila says, which means the firm can try for some of the near-term opportunity with partially-built neighborhoods even as it banks on a longer-term, low pulse, “tepid” recovery scenario.
Home building operators of strong balance sheets and not-so are rabid in their obsession over the need for top line growth right now. They’re each in their different business model way capitulating to the fact that trying to make a healthy living in an environment that seems to be housing’s rock bottom, featuring a choppy, 300,000-or-so new-home sales per year is going to be tough.
What must be particularly irksome for some of the more established companies–especially the private ones who’ve struggled mightily to keep their lender syndicates somewhat contented even as the valuations on their owned properties have gone mushy and their ability to pump in more equity has drained their rainy day reserves bone dry–are “the resurrected.”
Companies that either took their medicine early on to get rid of “legacy land issues” (a euphemism for financially strangling building lot asset that have no chance of getting turned over, and instead simply mount up carrying costs as well as debt service), or ones who simply folded up their tent, are beginning to reconstitute with capital that is urgently looking for yield.
What’s still missing, and is likely to be for some time in the broad strokes that is the national market, is home buyer urgency.
Low prices, low interest rates, extra added features, and lower cost-of-ownership promises thanks to higher efficiency have not quite won the day as far as driving buyer urgency into the market.
Unfortunately, it’s likely going to take fear, fear of missing something later by not paying for it now, fear of a worse outcome than one can imagine as prices still soften, to draw people back into a sustainable universe of demand for new homes.
Until then, some familiar faces are working the deal landscape under the name of Encore.
Three-hundred-twenty-one thousand new homes sold in 2010, according to United States Census Bureau data. If Black Swans–geopolitical unrest, natural disasters, Euro debt crisis–don’t derail the putt-putt economic recovery we’ve seen signs of during the past several quarters, we’ll see a new-home sales rebound of round about 10%, up to 353,000 in 2011.
This dollop of glad tidings comes compliments of an outlook for housing from Jonathan Smoke, Hanley Wood Market Intelligence resident economist and analytics maven.
Here’s the way Jonathan’s outlook rounds out through to the midpoint of this decade, nowhere near the seven-figure starts figure until two years from now, with new-home sales not tipping the half-million balance until 2013 rings in 2014.
Still, one of the more astonishing facts underlying this plotline is this–and it took one of the smarter guys in the business to boil it down to its simplest, scariest essence. This fellow put it in the form of a question.
“How many of the 221,000 new homes sold in 2010 were profitable?”
By extension, he applies the question to the current year.
“How many of the 253,000 new-h0mes predicted to sell in 2011 will be profitable?”
This fellow’s questions premise themselves on reports from just over a dozen public home building companies, which showed that a mere handful of them operated cash-flow positive during the past year, and have already pre-indicated that doing so in 2011 is going to be an even tougher slog than last.
The point here is two-fold.
One is that externals, things you can’t control–like the severity of winter weather, or geopolitical dislocation affecting oil prices, or offshore oil spills, or nuclear energy risks, or Portugal, Ireland, Italy, Greece, and Spain nearing default on their nations’ debt, or even the United States’ struggle with the role of a tax-payer subsidized government hand in housing finance–will continue.
Black Swans are now practically as common as jack rabbits on the prairie. They’ve sped up, and there doesn’t seem to be any calming them down.
The other thing is, however, that every other thing that happens in your business needs to count. Knowing how far you can push trades on your labor costs… Learning how you can double, or triple, or quadruple up on a truck delivering materials or manufactured items to your site… Finding out how one home builders’ “legacy land” issue might be your opportunistic grab for the parcel that’s just perfect for your product line (for the right price).
As you’re well aware, there are a few markets that have shot out of recovery’s gate by virtue of a robust jobs showing. And there are, in almost every market however beleaguered, tales of a particular neighborhood that’s striking a chord with buyer prospects who want to buy new for reasons they know and everybody else can find out.
We’re also well aware that the 10% increase in new homes sold that Hanley Wood Market Intelligences’s Jonathan Smoke has in his 2011 outlook essentially reflects an industry-wide emphasis on introducing new communities for sale–incrementally adding to the ones that have been active by the end of 2010. If those pre-existing neighborhoods keep relatively stable and achieve flat sales, the new ones should account for the bump up.
The challenge for home builders — and not just ones who are selling entry-level, first-time buyer homes — comes down to down payments.
If you’re a paycheck-to-paycheck household, you don’t have 20%, and so you’ve got to have an otherwise impeccable credit rating. And after three years of jobs and income instability, lots of people might be able to boast progress but far from perfection.
The downpayment is the single most compelling issue in the food-chain of demand right now, and is likely to get even more compelling when policymakers get through pawing at regulation around risk protection for mortgage backed securitizations and effectively shrink the amount of liquidity in housing finance.
The questions for 2011 and beyond for those home builders who are going to be around scrapping for their 10% increase in new-home sales volume for the year, are how do you make more of those home sales more profitable, or more likely, profitable in the first place.
Our fellow with the smart question about this above notes that because we’re all just people, it’s natural that what we’re always gunning for when we do things is a secret of some sort that will help us, or our companies, or our stakeholders get more and give less.
As many times as you hear that there are no silver bullets, the thought of getting one, just once, could hardly be a more compelling desire.
We’re holding a conference in Chicago that’s all about recognizing the non-existence of silver bullets, and the nonetheless absolute imperative that home builders learn to do–even in a sub-500,000 new-home marketplace–what they do profitably, even if it’s not for the money alone.
It’s true that the program for our Housing Leadership Summit came to be a felicitous, high-level strategic forum, taking place at Chicago’s Drake Hotel, May 23-25. We’re again teamed up with J.P. Morgan’s Michael Rehaut, who’s hosting his 4th annual J.P. Morgan Homebuilding and Building Products Conference.
What this means is that it will be a two-day “doing-what-counts” fest, because the number of units you actually sell this year may work out to be less important than how profitable or un- they are.
As an added bonus, Hanley Wood Market Intelligence’s Jonathan Smoke will be there to tell you more about his outlook and the industry consolidation narrative that underpins his forecast.
We continue our analysis of the compensation packages of the public home building companies, nine of which have so far disclosed details of “named executive officer” compensation in their proxy statements.
Earlier, we posted a look at CEO compensation rankings for the nine companies–Beazer Homes, D.R. Horton, Hovnanian, KB Home, Lennar, M.D.C. Holdings, NVR Homes, Ryland Homes, and Toll Brothers.
Here, we compare each company’s 2009 “Named Executive Officer” compensation with the 2010 group. In some cases, companies added to the crop of “Named Executive Officers” and in others, such as M.D.C., NVR, Ryland, and Toll Brothers, executives who left their positions during the course of 2010 were succeeded by others during that 12-month period.
Now, sitting down?
The 43 “Named Executive Officers” in our grouping of nine companies who’ve posted their proxy statements with the Securities and Exchange Commission, earned a total of $182.6 million in 2010, conditioned, in some cases on what happens to stock prices across subsequent earn-out years.
That $182.6 million compares with $112.2 million in 2009 for the same companies’ groups of “Named Executive Officers,” an increase in 2010 of 62.8%. Of, course there are apples to oranges caveats in comparing year to year, especially since there are executives brand new to the roster in 2010, and some who served partial year’s service in each of the years.
However, when you look at it collectively, you’d assume from the 2009 to 2010 comparison that boards of directors, compensation committees, and shareholders–on the whole–agree that public home building executive managements did a significantly better job last year than the year earlier.
Cribbed from the D.R. Horton proxy, compensation plans generally hammer on the fact that executive pay is performance and merit-based; conditioned on both individual and company performance, and keyed to both short- and long-term stakeholder value generation and risk mitigation. Horton says its compensation objectives are:
- attract, motivate and retain highly qualified and experienced executives;
- award compensation that motivates and recognizes valuable, short and long-term individual and company performance;
- provide a compensation program that is competitive with our peer group; and
- implement a compensation plan that aligns the executive’s interests with those of our stockholders.
In the absence–mostly–of significant profitability achievements, compensation committees pegged bonus pay to other financial value creation metrics ranging from revenue and home building unit benchmarks, to cash generation, to debt reduction, all the way across the spectrum to mitigating value dilution and avoiding the worst of legal consequences.
Each of the management teams had its adversity management task cut out for it, and yardsticks for individual and company-wide gains certainly dwelled in the realm of the relative–one that will probably apply for 2011 compensation as well.
So, without more ado, here’s the roster of our basket of nine companies’ Named Executive Officer compensation, ranked in order of 2010 total comp for each group.
As more companies file their proxy statements with the SEC, we’ll make the list and ranking more complete, and add commentary to boot.
Meritage Homes, which–considering the fairly hostile conditions that continue to plague new-home building’s marketplace–has struck early-recovery lightening in a bottle with an affordable sustainability home building strategy, will extend its six-state operational footprint to a seventh and eighth state in the weeks and months ahead.
Although it’s not official and company executives won’t comment, word on the ground is that Meritage will bring its Meritage Green program to the Raleigh, N.C., market, a beachhead in a plan to run operations eventually in Charlotte and South Carolina as well, as The Carolinas are expected to lead an otherwise tepid new-home market place back toward recovery. An announcement on Meritage’s plans could come as early as the next couple of weeks.
Builder and Hanley Wood Market Intelligence this month named Raleigh the No. 1 Healthiest Market, citing stabilized employment, demand from a flow of retirees, and a modicum of normalcy as regards household formations. In his analysis, Builder editor Boyce Thompson noted:
Raleigh builders sense that their market may be in for something big–building permits increased 85% last year to 8,600, with much of the strength on the multifamily side. But single-family permits increased as well as builders took stock of improving market conditions.
The market was hot enough that existing home prices rose 4% in 2010, though they are expected to fall 10% this year due to a spreading foreclosure problem. But excess inventory may be absorbed quickly, because households are still moving in large numbers to Raleigh, drawn by its temperate climate and good employment prospects.
Raleigh continued to add jobs last year, especially in services, lowering its unemployment rate to 8.4%. This is an affordable place to live, and it recently ranked among the best places to retire.
Word is Meritage is finalizing strategic land position issues in what has become a ferociously competitive market for land jockeying.
An executive with familiarity of the market says that “A” positions there are highly constrained, and prices, by and large, stayed sticky right through the downturn, especially for finished lots. He said:
“There are only so many A lots in the market, and after the A lots go, the C lots will still be C lots. They’re not very desirable.”
Meritage’s foray into Raleigh comes via its Orlando outpost, where division president Fred Vandercook, who had Carolinas experience in an earlier incarnation as a division leader for KB Home. Another former KB Home operative–who’d had contact with Meritage COO Steve Davis when he was doing service with KB–is Clint Szubinski, who is laying the land and operational groundwork for the Meritage Raleigh incursion.
Among the other operational issues Meritage has been working to iron out in advance of its foray is the fact that the area’s trade base has been consolidated to a fair degree. An incoming public builder needs to secure entree among trades to ensure that it is paying fair price points for framing, drywall, foundation work etc., despite the fact that trades are already established working with incumbent builders.
In a sense, the Raleigh market emulates both the Phoenix and South Florida markets when they’re working more normally, in that they have a structural economic base overlayed by the new arrival of retirees.
Raleigh itself has become an important part of big builders’ footprint, both for the unit volume opportunity they can have there if they grab the share, and profitability, given the market’s nature as a growing East coast retirement Mecca.
We launch our series of analyses covering the public home building companies’ executive compensation with a ranking of nine companies who’ve posted their proxy materials with the Securities and Exchange Commission in advance of scheduled annual shareholder meetings.
As this is a first pass, and as yet, incomplete, we’re going to refrain from comments about the specifics of each executive’s compensation package in relation to company performance, individual achievement, and the nuances of stock equity and options and other incentive compensation and bonuses.
Instead we’ll offer some broad-brush observations regarding the environment in which each of these gentlemen toiled.
Among the key challenges each faced in their role to preserve and if possible increase shareholder value was to size their corporations’ balance sheets in the most adverse imaginable business conditions. Shedding costs, brutally recognizing opportunities to pare down non-performing operations, capturing efficiencies in the building process, dealing as ably as possible with legacy land issues, and taking out overhead structural layers one after another after another was part of the story of 2010.
Simultaneously, CEOs had to lead a charge to drive new opportunity against the last gasp flurry of purchasing during the federal home buyer tax credit period that ended April 30 of last year. This meant pushing new communities with reset land-base costs, trotting out “new normal” home designs, and building specs well beyond the level of visibility of demand.
CEOs were primarily adversity managers. They redefined focus. They retained, where possible, their most highly-regarded talent. They cut ferociously. They got into the re-stocking of their land pipelines, and some, like Lennar and Toll Brothers, introduced real estate finance plays that recognize that home building may not be quite the business a dozen or more public companies need it to be over the next couple of years.
Once we get the data in from the remaining proxy statements — missing are Avatar, M/I Homes, Meritage, PulteGroup, and Standard Pacific Homes — will take a dive into the whys and wherefores and WTFs of the comp packages.
Meanwhile, here’s a teaser. Enjoy:
Correction: Doug Yearley, Toll Brothers, became CEO effective June 16, 2010, having been elected to Toll’s board of directors in mid-May that year. His prior title was executive vice president, a promotion from an earlier role as regional president.
Never mind the numbers. They’re not going to look pretty, and you know that. Focus on something else, the harder challenge, which is to ignore the externals, find the buyers that are out their, and figure out your game to win them.
Some months ago, we observed that it would get ugly when the monthly residential construction benchmarks started to have to match up to the Disney-like metrics of a tax-credit driven marketplace a year earlier.
Mind you, this was not an entirely original thought. We been talking with some of you and some of the analyists and economists who follow the industry, and saw it as reasonable that comparables with the final months of the tax credits for home buyers would be tough. With home prices still stuck in the gravitational pull of a supply pool synthetically accelerated by home-borrower distress, default, and forfeited property rights, we couldn’t imagine demand simply kickstarting for no reason but Recession fatigue.
So, we imagined that without the federal and state housing programs to stimulate demand, that construction trends would probably revert roughly to where they were before the stimulus programs went into effect in the late Spring of 2009.
Here we are, partying like it’s early Spring 2009.
At the same time, we admit, we had started to clock into the fact that economic fundamentals–including a fairly dramatic positive trend on the four-week running initial unemployment claims data–as well as a number of other of important drivers like demand for manufactured goods and services, etc. had started to make recovery sound realistic. At least on the broader economic front.
We admit too that we’d begun to look at those positive drivers–along with low prices, low interest rates, and a rat’s nest of travails linked to trying to play in the distressed home lottery–and actually thought it possible that Spring 2011 would offer encouragement to executives at the larger home building companies based on signs of progress in the marketplace.
We believed that some amount of the to 1.5 million to 2.1 million in “pent-up households” that demographers see as the variance between household formation trends and actuals for the past five years would be looking to buy. We also figured that life-changes–kids, some jobs, marrriages, divorces, deaths, etc.–had continued during that time-period as well, so that too was bottling up demand while prices were falling and finance was in the throes of a freeze-out.
At any rate, as jobs data started to kick into a positive mode and the rest of the fundamental economy–a corporate profits-led rebound, which would trigger capital spending, hiring, consumer spending, more profitability, and a virtuous circle of purchasing behavior at lower leverage levels–we started to think that psychology had reason to start to change.
One of the ceos we talk to now and then said to us, “You could make a very good case for a bounce back starting sooner than later.” He then added, “you could make an equally strong case that things are still going to get worse and stay bad for at least this year.”
But the more wizened of home building executives that we’ve gotten to know over the years–and more than one of them has a variation on this truth–will tell you without hesitation: “When things are bad, they’re never as bad as they seem; and, when things are good, they’re never as good as they seem either.”
Fact is, externals–the European debt crisis, the Gulf oil spill of 2010, the unrest in North Africa and the Mideast, and now, the earthquake, tsunami, and nuclear threat in Japan–keep plunging psychology into a limbo of unknowing. Volatility indices are off the map.
Who, after all, is confident in the future of much of anywhere, let alone a place one is going to have to want to live for six to 10 years to ensure the value of the purchase?
Still, although externals–including the ugly metrics that keep reminding potential home buyers that their hard-earned, skin-in-the-game dollars are going to be subject to unknown forces–will continue to exert force on the minds of the consumer, what home builders need to remember is that they sell antidotes to some of those external worries.
The homes you produce–providing they’re accompanied by a positive buying and using experience that you must assume customers expect of you–offer solutions to what people worry about most these days. They worry about safety. They worry about the right place to live the life they want to live–raising a family, living an alternative existence, or enjoying the balance of a post-career lifetime.
They worry about their individuality and their place in a community. They worry about threats to their money, their families safety, their influence in a social circle etc.
Remember, the externals are soon going to be squawking about inflation, rising interest rates, and perhaps, most beneficial of all to new home builders, a scarcity of new homes where people want to buy them. So the externals part of the equation will come back into alignment with your interests eventually, but probably not before you cause a lot of good things to happen yourselves.
Your new homes are solutions with souls. That’s the need you fill, and so it should be relatively straightforward to manage yourselves and your staffs to leave the ugly year-on-year yardsticks to the analysts whose work is that, and focus on the internals of your business.
- lead your staff
- care for your potential customers and customers
- buy and sell imaginatively as well as competitively
- design solutions, understand your buyers’ painpoints, meet needs
- work hard but have fun doing it
- look to improve, not to perfect
The way the land-cost vs. directs vs. overheads equation seems to be headed, fluidity and flexibility, portability, and speed appear to be the 2011 tactical imperatives. Remember this too, while most people will be poring over the maps of “healthiest markets” and trying to jockey for positions in those few good ones, we know several builders who purposefully make it a point to zig when everybody’s zagging. You’ll find them as the number one share builder in a bunch of “tertiary” markets where they can command the margins that will contribute across their enterprise, as well as drive the volumes they want to rule the industry.
Lots to think about other than national single-family starts data, no?
Scott Gallivan, John Dec, and Rob Hutzel picked January 2008 to exercise their inaliable right to leave perfectly good jobs at one of the nation’s leading home building companies–Ryland–at a perfectly horrid time to start their own, Integrity Homes, when the sound in home building, commercial lending, residential real estate was perfectly “crickets.”
“We had to listen to people tell us we’d lost our minds,” Scott Gallivan says to us in a brief update on Integrity’s progress three years into its life as a fledgling in home building’s most inhospitable of times in memory. No surprise there. “We have been to the wall and back,” Gallivan adds. “For a while there we were thinking we’d need to go in and start finishing basements and re-doing kitchens.” But it didn’t come to that.
Partly, of course, their good fortune is that they didn’t pick South Florida, nor Atlanta, nor Vegas, as their Square One. They picked the D.C. metro area, which Builder just noted is the 11th Healthiest Market in the country, based on what new-home construction may be expected to occur there in 2011.
The surprise is that, here they are now, Gallivan, Dec, and Hutzel, along with the vaunted addition of a fourth principal just recently–Bruce Gould, former vice president of residential for the Peterson Co.–on their way from zero to $35 million in about four years time. But maybe it shouldn’t come as such a surprise. They’ve got the pedigree, the disciplines, the relationships, and the sense of scale from years as public home builder divisional stars.
“Here we were, a group of national home builders, and in a way, those companies created their own worst nightmare,” says Gallivan. “They put us in the markets where we built the contacts with people, the resources, and we knew how to develop deals, but we could do it all without the cost overhead structure of the corporation. ”
Gallivan, whose Chantilly, Va.-based company has grown from his two brave compadres in 2008 to 14 people, says Integrity will generate about 75 closings in 2011, and that the 2012 revenue figure of $35 million will be an increase of 75% over last year, which was double 2009′s $9 million.
Most of the volume growth this year will come on the back of a deal with Peterson to be the for-sale townhome and manor home builder at Peterson’s National Harbor mixed-use masterplanned development in the high $500s and $600s. Integrity already has work going there on four buildings, and will open its Potomac Overlook models in May, and has booked sales of 35 units so far of a pipeline of 220 lots.
Since Integrity can bring developers big builder operational discipline and scale with its labor and materials base–minus the overheads, it can structure lot deals to pay about a 20% premium to what publics would pay for land, and build in a profit-sharing component on the back end of the deal, Gallivan says. For many developers, soundly beat up and beat down by the publics during the downturn, this sounds like a win.
Gallivan and Integrity Homes grinded out an upstart’s humble existance through 2008 and 2009, with opportunistic deals, primarily with Peterson. After selling through a few smaller deals, Gallivan is focusing on the National Harbor projects to keep the company busy momentarily, but he’s also scoping out opportunities in Virginia’s Shenandoah Valley, an area he says Ryland once did pretty well competing in.
At the same time, through a relationship the principals had with another company they share offices with in Chantilly, The Evergreene Cos., Gallivan became receiver on the high-profile 2,000-acre Harbor Station development in South Prince William County.
Gallivan expects that deals to conclude the restructuring of ownership and a monitization plan will come to light over the next several weeks. What’s more, he says that this type of real estate role–as a receiver who can put value back on partially developed land that languished after deals failed, and then activate a home building operations component–may soon take Integrity to Southeast Florida, where Gallivan had been head of a Pulte division for years before he joined Ryland.
“With Bruce [Gould], we now have the land, housing, sales, and mortgage parts of the company in place,” says Gallivan. He sees a near-term future–say 2012 or so–of reaching a 150-home a year plateau, which he envisions somewhat as an annuity program.
A $70 million to $100 million home building company that started in the blackest, deadest, most inauspicious of moments in the Winter of 2008 and made it there in about five years time is no mean feat, even in one of this tough environment’s healthiest of markets.