Home Builder “Named Executive Officer” Compensation Rankings–Round One
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 Plans to Announce a Move into the Carolinas
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.
Comp Time: Public Home Builder CEO Compensation Rankings
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.
Measure Improvement, Not Externals
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?
Former Ryland Trio Puts a Virginia Home Building Start-Up on the Map
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.
Russell and Langella Resurface as FrontDoor Communities
Just like that, Terry Russell and Michael Langella are back in the saddle with a new company that will take the rampway through real estate advisory services right back into home building.
The two came of note as two of the executive-rank breakaways from the John Wieland Homes team in 2007, as the Southeast’s home building boom quickly busted. For the past three-plus years, they’ve been toiling under the Reynolds Signature Communites aegis, and now they’re hanging up a shingle of their own in this most opportunistic of moments before recovery actually takes hold.
Their new corporate aegis is FrontDoor Communities, and although they’re both currently based in Atlanta, the footprint of their eventual activities is the greater Southeast, with an emphasis on Florida and South Carolina.
Terry Russell--FrontDoor Communities
Russell and Langella, you see, had been the nucleus of the go-vertical team at Reynolds Signature Properties’ Linger Longer Homes. When they joined on with the Reynolds Plantation team, they’d brought with them a strong tie with a rather vaunted financial services client with considerable interests in the high-end residential resort types of properties that Reynolds planned to develop in two northern Georgia golf-course retirement/resort communities, Achasta and Reynolds Plantation.
According to a series of reports about three weeks ago, developers of Reynolds Plantation were under duress to make a $45 million payment to impatient lenders in the weeks ahead.
The World Property Channel, a real estate information source, reported on Feb. 16.
According to the letter, signed by Reynolds Plantation Chairman Mercer Reynolds III, a group of banks is demanding a hasty payment of $45 million by April. The payment was requested while the development company was negotiating renewal of a line of credit.
In the letter, Reynolds says he and his cousin, Jamie Reynolds, had “pledged a number of additional assets (totaling approximately $60 million) to the banks,” but the banks still want the large payment in two months. The cost of construction of the amenities being sold is about $136 million, the letter says.
The Reynolds empire at Lake Oconee spans more than 14,000 acres and 90 miles of shoreline, comprised of three gated communities–Reynolds Plantation, The Landing and Great Waters– a golf academy, and six golf courses, with a seventh on the drawing board. There are around 2,000 residences between the three communities.
The letter says the line of credit was used by Reynolds Plantation, Linger Longer Development Co., and its affiliates to buy land for further development of the ritzy subdivisions and golf courses that are near the Ritz Carlton Lodge, a popular destination for Atlantans.
Mike Langella
Langella, who was chief financial officer at Linger Longer, says that Reynolds successfully recapitalized since the emergency, but that the recapitalization would “suck cash for an extended period of time, leaving no cash to move ahead with vertical.”
Hence, Russell and Langella’s exit from Reynolds, but the departure only opened the FrontDoor to new opportunities with some familiar backing.
Says Langella, “Terry and I had existing clients for real estate advisory services when we started at Reynolds, and built the home building operations from scratch starting three years ago. Now, we’re continuing to do work for this client [a well-known real estate fund that happens to be 80% owners of a highly visible portfolio of upscale vacation-and-or-retirement oriented masterplanned communities in the Southeast that Langella requested not be mentioned at the moment].
“Each of these communities has a unique set of challenges that Terry and I represent a fair amount of value to address–ranging from a need to change the business model, to operations management, to finding ways to take costs out to reflect business realities today,” Langella tells Housing Crisis.
What’s more, there are thousands of home building lots across these masterplans, and chances are pretty strong that Russell and Langella can make some sense of ways their client could “maximize the return” on those lots by building some homes.
That’s when FrontDoor Communities busts wide open for the next stretch of these two home builders’ careers.