News Flash: Ashton Woods Puts $75 Million to Work for Home Builder Acquisition

Correction–An earlier version of this post contained two incorrect statements: One of Ashton Woods’ banks was misstated. The correct name is Regions Bank. Also, Cory Boydston’s title while serving at Beazer Homes was incorrect. The correct title was senior vice president and treasurer at Beazer. We regret the errors.

Ashton Woods, the Roswell, Ga.-based, No. 24-ranking home builder in the nation, completed a re-capitalization with investors 40 days ago that will provide the company with $50-to-$75 million over a five-year period, to target acquisition and set up or strengthen beachheads in five or more markets.

“We’ve been able to do a couple of things in a very tough market,” said Ashton Woods CEO Tom Krobot in an interview. “We extended our revolver with Wells Fargo and Regions Bank for two years, and we went to Wall Street and were able to get capital to expand our business. We really have a very good story,” Krobot added. “In our fiscal year–May to May–we made money.”

Krobot is under a confidentiality agreement with his new investors, and as a private company, doesn’t need to disclose them.

He said the adrenaline infusion of acquisition capital will go immediately toward beefing up Ashton Woods’ fledgling position in Raleigh, where it has a single subdivision open with a new model, and just closed on a second subdivision. Additionally, Ashton Woods recently hired a land acquisition person in Austin, and will look to quickly grow in that market, as well as San Antonio,  Charlestown, S.C., and Minneapolis.

“We’re also looking at opportunity in Charlotte and Denver,” Krobot said. Currently, Ashton Woods operates in seven cities in five states: Arizona, Florida, Georgia, North Carolina, and Texas, and reported $320 million in 2009 revenue on closings of 1,319 homes, according to Builder magazine.

Ashton Woods has hired San Francisco-based home building and developer mergers and acquisitions consultancy Avila Advisors to identify both home building company candidates and land position opportunities that could represent a fit within Ashton Woods.

“We’ve put together a list of 100 company targets with strength in these markets,” said Tony Avila, CEO of Avila Advisors. He and the firm’s president, Hector Calderon, will head up the match-making initiative, looking not only for operators, but for land and lot positions that suit Ashton Woods’ strategic aims.

“It’s a first- and second-move up emphasis, so purely entry-level players probably won’t be a strong fit,” said Avila.

If you want to contact Tony Avila, click on this link.

Krobot attributes the company’s acquisitive mode to four positives that position Ashton Woods for opportunism just as many of its peers are fighting for dear life.

• strong locations and a conservative land strategy during the run-up. “We never exceeded three-and-a-half years of land supply,” said Krobot, “and we’ve never followed the crowd when it came to land acquisition. Right now, we’ve got less than a three year supply, which is a bit of a concern, but we’ll work with that now.”
• Redesigned product: “We dropped more than 80 floor plans and now we’ve got about 210 to 220 houses that have been value engineered to open up living space and take out costs, and they look pretty darn good inside,” said Krobot.
• Unit pricing: Ashton Woods converted to this method of sourcing and purchasing to pay for materials based on the actual unit price of the material so that it can manage vendors’ mark-ups more precisely.
• Customer satisfaction: Krobot asserts that although the latest J.D. Power rankings haven’t come in, Ashton Woods has ranked as the first, second-, or third-best builder in home buyer customer satisfaction in its markets. “We’ve been able to maintain a strong service level through it all, and that’s helped,” said Krobot.

In early 2009, Ashton Woods negotiated a swap of all $125 million of its senior subordinated notes that carried a 9.5% interest rate and were due in 2015 for 11% senior subordinated notes due the same year, but that carry no interest charges for the first three years. The pot for the note holders was also sweetened by giving them Class B interest in the company equaling 19.728% of the company’s equity. In addition, Ashton Woods amended its senior credit facility to provide as much as $95 million in borrowing capacity. The restructuring also included the infusion of $20 million by the company’s original owners. By mid-2009, the company brought on finance heavyweight Cory Boydston, who signed on after serving as CFO of Starwood Land Ventures and senior VP/treasurer at Beazer.

Ashton Woods, which like Mattamy Homes, has a Canadian parent company, the Great Gulf Group, which builds both towers and single family residences in Canada. The Canadian residential real estate market has held up fairly solidly and may account for the fact that both Ashton Woods and Mattamy have acquisitive strategies in the U.S. market right now.

As for the U.S. market, Krobot sees continued headwinds in the near future. As the company’s fiscal first quarter drew to a close in August, Krobot said his firm’s closings decline about 6% year-on-year vs. 2009, which, he said, he’ll take.

“When you look at the overall market drops of 20% or 27% versus this period last year, 6% is pretty good,” he said.

Taylor Morrison’s Sheryl Palmer Unplugged

Earlier this week at our DC offices, we got elating tidings that our treasured and indispensable co-worker, Boise-based Christine Serlin, gave birth to her second child, Ella Jane. Like her mother, Ella Jane seems to like to do things a bit ahead of schedule, which Ella Jane’s older brother, 3-year-old Oliver, and her mother and father were all for. But when someone who’s “indispensable” goes out a week earlier than planned, it has a Charlie Chaplin-like domino effect that can be amusing to witness, but not if you’re the one who all the dominos fall on.

At any rate, we’ve been busier these past few days than we’d ever imagined, especially for the Dog Days of August. But that shouldn’t add up to punishing you, so we’re going to do something a little different—and hopefully compelling—to thank you for your continued loyalty and your inadvertent tolerance in light of our insanely overmatched bandwidth. We’re going to give you something extra today, just for being interested enough to open this post.

It’s this. On Monday, we wrote about Taylor Morrison president and CEO Sheryl Palmer’s No. 1 point of focus, getting her team in tact to Calendar 2011. We tipped you off as to why we are drawn to the Taylor Morrison story. It’s an entity and a set of land assets that are attracting interest among potential acquirers who can afford to take a longer ramp way to dominance in housing’s next “up” cycle. At the same time, Taylor Morrison’s UK-based parent company Taylor Wimpey LLC, may (or may not) find it advantageous to spin off or sell its North American unit if the bid price is right.

With the new-home business in such a state of limbo, and with share prices of home builders so undervalued right now, one would hardly think of now as the time either buyer or seller would find motivation. But that’s precisely when these dramas tend to occur—when few expect them. Witness flashes of mergers and acquisition appetite in other industries, witness painfully inconsequential returns on many conventional investments, witness historically favorable rates on borrowing costs for big deals, and witness home builders sitting-duck caches of “dry powder” that will vanish into dust eventually if time and a non-starter housing market drag on into 2011.

If a snap-back in pace, or at least a resurgence in consumer sentiment doesn’t enter the 2010 4^th Quarter zeitgeist, we’re betting on another round of shrinkage in the key cast of home builder characters in the drama.

Citibank home building analyst Josh Levin appears to agree. From a note he wrote earlier this week—following, of course an earlier blast we put out on the prospect of home builder m&a—Levin says:

“We think that the likelihood of consolidation has increased for five reasons: (1) new home sales have dropped to levels almost none of the management teams anticipated and have demonstrated no recovery so far (2) in sharp contrast to the 1Q10 earnings calls, on the 2Q10 calls managements sounded rather discouraged about the industry’s near-term growth prospects (3) most managements are now focusing more on gaining market share (4) the broader economic outlook, particularly the prospects for job creation, has deteriorated markedly and (5) as discussed below, size confers an advantage. Although it is difficult to quantify, our best assessment is that some consolidation is more likely than not if the outlook for job creation were to materially worsen or if the next spring selling season shapes up to be a bust.”

So, we think you’ll be interested in our extensive verbatim interview with Sheryl Palmer below, where you’ll get to know who she is, how she thinks, and what her take is on the drivers of operational success for both Taylor Morrison and home builders in general.

During the course of over an hour, we talked about Taylor Morrison’s working relationship with its UK parent, the company’s post-merger integration issues, strengths, and weaknesses, operational threats and opportunities of the moment, its geographical footprint, its land-buying strategy, its headquarters-to-field balances, and the constant rumor-mill that has them on the block, as well as more personal Palmer insights, motivations, and ambitions.

(Editor’s Note: this transcript is faithful to the conversational, stream-of-thought exchange that occurred and hasn’t been air-brushed for grammatical correctness.)

Enjoy.

BB: What brought you to Taylor Morrison in 2007, and what were your initial challenges?

SP: I was looking to the company because of the international presence. When I actually joined Morrison, I had kind of left home building business for a while. I wasn’t sure what the next chapter was going to be.

I went over and met with the team. First I interviewed with the management, and then I interviewed with the Chairman Norman Askew, and I was really intrigued.

Within my private and public prior lives, I’ve had some just remarkable experiences that I wouldn’t trade for a moment, between Blackhawk and Del Webb and Pulte… Vast experience and fabulous people I have gotten to work with and experience.

But there was something quite unique about the international presence. Even though I had worked with Pulte, which had international, I certainly was never involved in it. So with my eyes probably half open to it, two things happened for me.

One, I thought the company was at a fast rate of change in its maturation process. It really needed both help and sophistication to get to the next level, especially given the market dynamic. Two, I thought there was so much to be learned from a company that does the same thing we do differently.

So, I jumped in.

Six months later, the discussion started – now the discussion of the merger had started even earlier… years earlier according to the rumors.

So that was why I came in. It’s actually exceeded all my expectations.

BB: How does a North American home building operation with a UK parent work? Is it a comfortable set up? Does everybody get it on both sides of the oceans?

SP: It’s different, but different is good. We’ve had the opportunity on both sides of the pond–and looking at our UK, Canadian, and US business—to learn from each other.  In a perfect world, you wish the cycle was different in every market. Don’t you wish that you were hedged all over the place… isn’t that the diversification story?

If you go back decades, I don’t think we’re as counter cyclical as we might hope to be, but there is some difference. Certainly within our Canadian business it is. In the short term, there’s been differences within the UK and US businesses…. If you look at it over a span of time, maybe not too different, but still different.

BB: Tell us about your marching orders as you stepped into leadership here at Taylor Morrison.

SP: So when I first started and I had the opportunity to spend some time over there and look at structure … it’s just different… culture… it’s just different. But the opportunity was to look at those differences and ask, ‘what works there that we don’t even contemplate?’ If it’s the way that we handle mortgages, if it’s the way we handle the Realtor relationships (they don’t even exist)… they don’t even exist here… it’s just so different.

It’s kind of taking the pieces apart…that can make sense, that can actually be tweaked and then work within our business.

When the UK market really started changing, we had—at that point, depending on where you were in the country—two to three good years of difficult times under our belt. And what it did for the UK with Pete Redfern, who’s our Group CEO, was that it allowed him to really recognize – there were many markets here in the US where you were knee-deep before you really believed it was happening to you, even if it happened to you in other places, you still didn’t believe as an operating team that it was happening right here.

From a more global perspective, Pete could see that, and it allowed us to make very good decisions in the UK on our building, on our spec inventory, on our land acquisitions, … the same decisions we made in Canada, because we kind of planned for the worst and hoped for the best.

So from a macro standpoint, that’s why it’s been quite enjoyable. From a day-to-day, I’ve just loved it.

BB: You were talking about ‘doing the same thing, only differently.’ Is that a case you’d describe as knowing it when you see it, but can’t necessarily articulate the difference?

SP: Some of that. I’ll give you a more operational example. I remember when I was touring the UK and … walked into a sales office and talking with the sales consultant, and talking about their buyers, their traffic, where’s it coming from? The level of ownership the sales person had for the buyer walking in that door was almost 100%. Now that’s a very different experience.

She pulled out her map of literally the marketplace and the market’s divided differently because of the different concentration levels. She goes and she pulls out her map and it’s got hundreds of these little… and it might sound archaic, but candidly, it was just fabulous…. Hundreds of these little dots, colored dots… and she says, ‘well these are my buyers,’ and ‘these are my customers,’ and ‘this is the publication circulation,’ and it was almost like going back to the old days, and she says, ‘if I don’t get an ad this Sunday in the Christian News, I’m going to lose traffic, and I’m going to lose sales this week.’

Now how many sales people in the US could really tell you that.

That also carried through to the customer service relationship. It was and still is all managed at the local level with the sales person and the superintendent. You came in through the sales office…

In many instances, in the US, we try to keep the customers out of the sales office in case they’re upset. What they do is make sure that relationship never gets to a point where you don’t want your customer in your sales office. So basic and fundamental.

On the flip side, we have a program where we have internet sales consultants, who do a significant portion of our sales. That relationship is something the UK never would have contemplated that they’d been able to build into their system.

So it’s looking and wanting to find the gems that can make a difference.

BB: How does that ladder up to cultural differentiation, in terms of what you try to promulgate here that is part of the meta – this is who we are?

SP: Pride. Pride is as much as anything, as being part of this international organization. Proud to be different. Proud when we can do something unordinary.

We have this internship program…where there would be four interns that would come over from the UK… (we’re actually talking about executing it the other way)… and they would be in our division for 8 weeks 10 weeks. The company would have them live over here, and they would be part of that team.

So there’s this camaraderie… we do these divisional presidents meetings on an annual basis…and we swap countries…

So it’s about pride. These times have changed the way people desire and acknowledge help and support. In organization, I’m proud that it’s not about it has to be my idea, it has to be the right idea for the business. And when you actually get to experience that, … because three years ago, the UK was just kicking butt, and we’d go over there an our heads would be hanging pretty low.

We’re looking for every trick they can share. And the next year, they’re starting to feel it and what can we do to help our way through this and to prevent.

So the culture in the company is very different in every single location we do business. And that’s just perfect in my opinion.

It works under a core of pride and passion and enthusiasm for what we do and doing the right thing. That’s what we carry collectively.

BB: You’ve been glancing off this issue of integration… can you benchmark us as far as the integration…the merger? We’re three years into it—is it done? You’ve gotten to witness another more vaunted merger take place.

SP: You know I’ve been through a number of them, and I’m quite grateful for that. There’s a reason all the M&A books are written the way they are. They’re not easy.

I was with Del Webb, left Del Webb, was with Blackhawk, … and then resigned from Blackhawk to go to Pulte… and while I was in my two-month notice period to go to Pulte, put together the deal to buy the holdings of Blackhawk, so I was actually on both sides of that transaction.  

But then left the team because I moved to Arizona, so I kind of watched that one from a distance, but I’d built that team 10 years earlier… then, six months later, the Pulte-Del Webb merger happened. I think I was the only individual at the time that had actually been at both companies. Went to the Pulte corporate office–that was the old Del Webb corporate office… so yeah… you learn from the good and the bad…

We [Taylor Morrison] definitely, I believe, did it different. I think there were a couple of things that were absolutely critical. I don’t think the word merger is used in the company today….We’re Taylor Morrison… and really everybody’s a Taylor Morrison person today.

I think you have to stay true to the reason you made the business decision. The core honesty in that decision process and in that communication is fundamental to your success. What I mean by that is that if you’re buying the assets, then you’re going to approach the structure and the management differently. If you’re buying the company or merging two companies because of differences in skills and complement… for example, like Del Webb and Pulte did, then, in my opinion, you want to hold dearly the things that you want to protect in both those companies.

We brought these two companies together because they had two very different skill sets. There were certainly financial implications… But at the end of the day, the thing that made this complement is that you had a quick-turn production builder in Morrison and you had a master-plan developer in Taylor Woodrow.

We had skills that were quite different and quite complementary geographically. We had great overlay, but that didn’t mean that Company A all of a sudden – because they got these assets that they had that experience.

It didn’t mean that just because you had a Pulte subdivision, now you could go run a Sun City because it was in the same market.

You had to appreciate what the differences are.

When we started the integration process, we were going to hold ‘what is our go-forward strategy?’ and ‘what are we?’ and make sure that we had the skills to deliver on that.

So, first we created the structure, and recognized what these new divisions and businesses were going to look like. Once we did that, absent of any names, then we started filling in boxes, and interviewing for those positions.

We interviewed, from a management standpoint, for every single position. It was an incredibly onerous, rigorous process. We didn’t do it for optics. We did it to make sure… because Management Team A couldn’t have an appreciation of the skills of the others because they didn’t know them. So, we started at the top, at the division president. But even that division president, we had to make sure, within our process, it wasn’t about, ‘I’m comfortable with this team.’ That’s part of the equation, no doubt about it. ‘But I’m comfortable that I have the skills now amongst the team.’

We actually had a panel conducting interviews to make sure that that process was pure.

We were able to communicate that process very succinctly to the organization. It does make it easier when you understand what you have.

BB: Can you give me a sense of what the picture you had in mind when you populated the organization chart with the talent? You have a master plan developer expertise and you have the quick-turn production builder, so the new operation on the ground boil down to in that marriage of skill sets?

SP: We made sure we had the talent on the ground that could execute on the business that was there today, and had the strategic ability to see the business looking forward. So, for example, you might have had a division, where almost the whole management team, let’s say, was finance. Even though they were construction, sales … they’re all finance folks. They couldn’t view the business holistically the same way. There are certain things that they’re going to be 100% on target about, but there are pieces and parts missing. Now the market starts changing and you don’t understand the consumer, you don’t understand from a merchandising standpoint …your execution isn’t quite as important because it’s all about the dollar. Now that’s an extreme example, but we had to make sure we had the complement of skill sets.

There wasn’t one vision for the company. We actually had to do that market by market because the dynamics of that business was going to be different. If I looked at a market like Phoenix, we’re still continue to be a master planned developer with high-turn, very production oriented business. … but not high amenity… a more traditional community builder.

Where we’ll have other markets, say Austin or Southwest Florida where the make up was long term assets which were highly amenitized…. Planning and building… and that was a different skill-set that we needed to exist here.

So, truly, it was making sure we understood the one to five year plan and making sure we had the skills within the team and the camaraderie, the dynamic chemistry within the time to get us where we needed to go.

So it was a wearing process. People that had worked with folks for a long time…. And thought that “this was what they needed.” As they began to open their mind to “wow, there are other ways to do something that might give us a strength that we don’t have in the organization today.

That’s a very healthy process.

It was great for the folks that ended up in those seats. But, as important, it was great for the balance of the staff to appreciate… because some of those folks lost their mentors and their bosses, but they recognized and could actually—this was so transparent—see why we made the decisions we made.

What we did at the very same time, which was also key—our communications to understand at the employee base wanted in this new organization… through focus groups, through surveys, through outside resources coming in and interviewing people to understand what is the core value set in this new company that we’re creating, because we kind of have this blank sheet of paper.

Let’s together make sure that it’s consistent with our internal value system. It came from the bottom up and the top down, and kind of met in the middle. So people can own their decisions in the company because they feel they’ve helped shape them.

BB: Is your signature on that integration story?

SP: August 2007. Day One of me taking over was me creating the North American Leadership Team with that same process I described at the Division Level, I stayed pure to at the National Level. We might have had 6 regional presidents and I needed 3. I hate to say it was my stamp, because I think our team created it and executed it, and that’s where the success came from. It truly was the team.

I think my style and openness with people and my flexibility to seek to understand was probably – this is hard for me to say–was probably what we needed at that point, because it’s traumatic for folks. It doesn’t stop you from having to make the right decision. But you have to understand what people are feeling, because if I could say, the absolute signature value we brought to that process, all the way through the integration, for three years, has been honest communication.

You might like always like the message, but you know that if you’re getting the message, and that management’s transparent and honest with you, people can deal with that.

Nobody likes what’s happened to us. It’s no different than the process of having to downsize the company, and not be able to say that we put as much energy into the folks that we let go as the folks that were staying… And those communications equally had to feel okay.

BB: If all of the public builders had regarded their situation and challenge as a turnaround, they’d be in better shape.

SP: If they had been proactive instead of reactive, I think that’s very true. We were in a different place that actually created our ability to look at the business as a do over. Because we actually had to. As difficult as something like this is, I felt blessed that the market – this is a horrible thing to say – that the market wasn’t moving at 200 miles an hour. It gave us the chance to set the structure. It let the culture be created. To put the process in place, to plan for the future. When you’re running like that, you just kind of let it happen, and we didn’t, we planned for it. We planned for this day as the market was going to turn to be ready to be able to take advantage of that.

BB: Can you talk about what the company has been doing, strategic moves, land acquisitions, dealing with trying to find the right balance in geographies and footprint, etc.?

SP: It cracks me up when everyone has their predictions. Eventually, somebody’s going to be right. We are a different company, with being privately held U.S., publicly traded UK. It does put us in a little bit different space. We’re financed completely out of the UK. If I look at some of the challenges US private builders have… we might have those on a more macro level but it’s quite different. I don’t actually have to deal with that on a day to day basis. We finance Canada locally. We have a little bit of everything. So it’s allowed us to focus.

The message to the team is to control what you can control, and just do that as best as you can.

On the market: I’m an optimist at heart. But I’ve become quite the realist and pragmatic as well. This for me is well past the 6^th year anniversary of … starting in Las Vegas with Pulte… getting there 30 days before the market crashed. It seems like it’s become a way of life.

There are disciplines within the organization that have become a way of life. It’s not a matter of it’s a good market or a bad market. Getting away from those fundamentals is what got much of our sector in trouble. We didn’t have to understand the market and the consumer, because people just came and they bought.

At some point that just doesn’t work. At some point, location, location, location… what’s worked for us for 50 or 100 years is pure.

So our operating model is to make sure that the underlying data – there has to be some business acumen and overlay that goes into that decision process – supports our position on market on acquisitions.

Our approach over the last 6 to 12 months has been quite different than any of the other builders. We haven’t subscribed to the ‘I’m going to buy land to [kind of] bridge us to that promised day. I don’t know when that is. Things will be better in six months, so I’ll buy now and get some appreciation.’

We just haven’t subscribed to that. We’re in a different place and I understand that everyone is making different decisions in their board room on what’s right for them, given their company needs and dynamics and covering overheads can be the right approach.

It hasn’t been for us. Our approach has been, we’re going to right size the business no matter painful that’s been… Market by market, and every business is going to be profitable. You can’t have land burdening the balance sheet. We all had our share, but we’re not going to go there again. We can’t have land burdening the balance sheet that’s not going to deliver profitability to the business.

So our underwriting process / rigor and team ownership of – everybody wants to grow their business, but we want profitable growth – that task is fundamental to our success to date and to our go-forward strategy.

It has prevented us from participating in the finished lot run up through the 4^th quarter. We just didn’t play there, because fundamentally, we weren’t going to come to market in Summer ’10 with lots that had to be impaired. We just weren’t going to do it.

What we did was we took more of a mid-term approach because that was a space that actually we didn’t have to compete in.

As you’ve seen we’ve bought some good-sized partially developed/partial raw – about 1800 units here. We just bought 1,200 units in Austin. That’s working really really well. In the short term, store count isn’t what we want it to be, so we’re having to re-grow the business profitably. But we believe strategically that was the right thing to do…

I don’t personally, necessarily believe we’re going to see another leg down. But I personally don’t know for sure that’s true.

We can’t put ourselves in the position–there’s a lot of inventory that was bought that’s coming to market now and it just doesn’t work.

I’m real pleased with all of our acquisitions. I wish there was more of it over the last 12 months. But I’m pleased because that mix in our portfolio is absolutely our future.

We’re still working through some of our troubled assets. We have some of those that are at market, some of those that are in mothballed state,  … the ones that we didn’t believe were going to give us the value over the midterm, we divested of…we’ve had two years making sure we’ve right-sized that portfolio market by market and made some real tough decisions. Some of those decisions required us to lose people… because we didn’t have the store count.

But we couldn’t just sit there and hope. For three years, if you go back into all the forecasting, the next quarter was going to be much better. We couldn’t make that bet. And I’m an optimist at heart, don’t get me wrong.

Events, random issues, fundamentals all overlay one another ….

It’s the first time in my life I should be on the debate team. I feel like I can get on both sides of the debate and win. I say that to our board in the UK when I try to articulate where the market’s at… I can give you all the good reasons that we’re going to start to see improvement. But I can also give you all the reasons that this is going to stay with us for a while. I think they probably balance themselves out, but I will tell you, if debate teams across the country in high school are not using this as tool to understand how different the economic factors and what that does to people’s psyche…

That’s the piece that nobody can estimate, that nobody can plan for. It’s fascinating.

It’s not that we’re risk-averse. In fact we would never grow the business if we were. It’s ‘we’re going to get paid for that risk.’

BB: So there are two affirmations when you’re buying land… one is that is that it pencils and it gets you what you’re looking to do in terms of your own business plan and scope. And the other is that if you are competing with other builders, then you’re in that game of competing to buy versus competing to sell, so you’re not paying the price for that competitive bid up…

SP: We’re not in it to be the biggest. We don’t feel that’s necessary. You have to have size and some level of scale, obviously, to get ahead in the business, right. So, there’s the practical application. But, a lot of people have entered that mid-term space now out of need.

We kind of traveled alone there for a while. We’re okay to stay quiet and off the radar. I don’t normally or typically agree to interviews. We’re okay staying off the radar. Because it’s just about running the business, and doing the things we’re supposed to do and making it right for the shareholders.

BB:  In the markets you’re in, talk about where you’re at and what you’re responding to…

SP: Culturally, we have relentless view on cost control. Healthy… you have to spend money to make money. So it’s not just about saving money; it’s about spending money where it counts. That really runs through the entire organization. And everybody feels that responsibility. We do things, … we had a contest one year about the big idea. What are the things we can do that aren’t done out there? and how do we drive efficiency through the organization? I think culturally, the relentless approach on cost is one. The responsibility and empowerment of every individual in the organization to make the right decision and to have the support of the organization, even if that decision is not right.

It allows people the courage to go the extra mile, because they feel good about it. I think about, down to the community level, cost…. And it’s about living in the moment. And if the plan is 3 sales a month or 2 sales a month that divisional team… that community team has a responsibility and the power to go find those 2 sales a month. And they get the support on the divisional level.

And the next layer that’s so important…. I come from the field…and having been through the different environments and cultures… is it local decision-making? Is it command control? I’ve been involved in all of them. To me, none of them are right or wrong. Obviously, everybody’s got a different style.

It’s about finding a balance.

I think that’s what we’ve done very very well. We have a very flat organization. It was flat three years ago. It didn’t come out of need. It came out of… we believe the right way to run the business.

This is a local business and we believe that heartfelt. Having the opportunity to put the folks in every seat that wanted to do the right thing about the business allowed them to utilize resources in the organization and not have to have every single local lead approved… and feel okay, because that’s what makes the business better.

Finding that balance – decisions are made locally, and ‘there are things I just don’t have to worry about because those resources are there for me,’ and actually believe it… It sounds silly, but it’s age-old: Corporate vs. Field.  I think our environment’s really quite different, and I’m quite proud of that.

If our underwriting plan guy has found something in a deal that didn’t make sense, it wouldn’t be that this guy screwed up this deal, it would be he saved me from making a lot of decisions. That’s a really different attitude. It permeates through the organization and starts down at the field level. If the superintendent’s got issues, he’s gonna go find that resource. It just is a really healthy place.

BB: How do you manage the inflection point that occurs shifting emphasis from adversity management to the next set of challenges to grow…?

SP: That doesn’t worry me to be honest. It’s not one of the things that keeps me awake at night. The reason is, naturally this business attracts some very aggressive group of entrepreneurs. At the most senior level, that’s a very healthy part of our mix. So the instincts are there to want to grow the business, but the discipline to make sure we do it the right way. We’re actually planning for–we have an involved strategic planning process on an annual basis, reviewed on a quarterly basis – that time.

But we’re making sure that the controls and the processes are well established in place. As the market improves, we’ll have the best of both worlds, because there will be another cycle.

It scares me, to be honest, when I look and see what happened in the Fall. There was three years of pain, and builders beating land sellers and banks over the head, trying to convince them that market values weren’t there… and had to get to a psychological adjustment on what market values needed to because when you residual it back, their perspective on what the values were just didn’t work. And overnight we made that go away.

We just said, ‘poof!’ and it was gone. Because, now after the big Fall, everybody says, ‘those really are worth what I thought they were.’ But guess what, when it comes through the cycle, the house isn’t going to appraise there.

So the discipline and foundation of kind of building it from the ground up … but having the strategic ability to see the end is a good balance.

BB: How have you evolved the sales culture? Do you see tangible disciplines that are a level greater than you would have seen when you first started?

SP: Our national VP of sales is from the UK. He’s the one person on my leadership team who’s actually from the UK. He’s been with Taylor Wimpey 25 years or so. 20 plus years… his name’s Graham Hughes. He joined us over here… he actually came over on a stint to work with me when I was with Morrison about two months before this all started. He’s now here permanently.

He brings a different perspective. One of the things that we’ve done internally… we’ve had two in-house trainers. One could argue that that is a luxury in today’s environment. We don’t believe so, because, fundamentally, if we’re not selling houses, the machine stops. If we’re not buying land, the machine stops.

Everyone’s obviously got their input to the process, but fundamentally, the resources to make sure that our teams are properly motivated, properly educated, and they have the resources in these difficult times.

If you think about the success of the sales person, it does come down to the psyche of the sales person. It’s been critical. So we do a significant amount of group training, one-on-one, encounters, as well as, we’ve complemented that with things like the internet sales consultant…

BB: Just the knowledge base – the moving target on home finance has been hard to stay current with…

SP: That was one of the changes we did…as we had a number of different mortgage relationships around the organization… We consolidated it to one three years ago, and then last year, we brought it in as Taylor Morrison… it was a JV and we bought the rest of it…now it’s 100% wholly owned….

Her name is Tawn Kelley–Mortgage Funding Direct. She’s the largest table-sending mortgage broker in the country–for two or three years–she emulates everything that’s good about our culture. She makes sure that her builder and her customers are taken care of… and our capture is close to 90% company-wide. It’s remarkable.

Once, the sales force sees mortgage as a sales role, something ‘I have to do’ … it’s like ‘can you help me how to figure out how to sell this house?’ So we were the first to market with ‘dollar-down’ and go back a couple of years with forward commitments… Tawn’s actually at the helm of that.

JM: What’s happening with product? How has that evolved with respect to market demand?

SP: We’re a curious organization. We’re really seeking to understand what the future buyers’ needs are. The only thing we know for sure is they’re changing. How? I don’t think we can exactly appreciate. What are the trade-offs consumers are going to be willing to make? What is the meaning of homeownership and house, going forward? Some pretty basic, but spatial questions. We’re really trying to understand.

We’ve retooled. I’ve read where builders don’t understand the consumer, and that’s okay… we’ve certainly as an organization had our fair share of houses out there in the marketplace that weren’t properly targeted to the consumer need.

From an existing portfolio, we’ve gone through and made sure that the positioning of the product–we’ve shut down models where it made sense; we’ve restarted; we’ve retooled; we’ve done the same things everybody else has done to make sure that our product in the market is matched to the consumer need. Obviously, as we’ve seen across the country, affordability, value—an overused word, they’re different to everybody. We need to make sure to have an appreciation of the needs and wants of lifestyle choices that people need to make in every market.

So, one of the other things we’ve held very purely in the organization is our underlying market research function. Right now we’re going through a pretty significant national survey to try get a greater perspective on what the macro economy has done to consumers at different stages of life. Where they are today and how that’s changed their perceptions on homeownership and what’s going to be important.

It’s an important exercise, but it’s not everything, because with all the market research – I guess that’s where I started 25 years ago, in marketing–you have to take all of that as a tool to help us to guide us to make the right decisions. But I think fundamentally, it’s a bigger question than–it’s not just a flight to affordability… it’s a flight to understanding what people’s needs are. Once again, affordability to you and to me and to someone else is different. The tradeoff I’m willing to make … we’re seeing a lot of flight back to the basic needs. I don’t want the nice things in my house; I’m willing to give up square footage, but location and time with family … there are things that are becoming more important.

Locations are becoming different. How people use that product … you think about the new generation of folks who 50% of them seeing themselves traveling internationally to work… What does that mean in their homeownership decisions? Do we have to look at homeownership differently? Is there a different model for homeownership?

We’re exploring all of that… what about the boomerang kids? They’re all coming home! I’ve got two of them… Multigenerational is huge…

BB: Some of the limbo comes from the fact that we were stamped with things that were easy to get because the money was easy.

SP: There’s a lot of people who believe ‘this is just a phase we’re going through.’ And ‘Homeownership will continue to be the dream.’ I don’t subscribe to that. I think– without being overly dramatic–this recession is forever changing the mindset of people’s brains on what’s important in life. The way we spend. Our value system.

For decades, homeownership has been a way and place to plan for one’s retirement. Coming out of the Del Webb environment, where this is a safe harbor for my family, I trust Del Webb.

Then you think of people coming out of the Great Depression and how long it took for them–our parents and grand parents–to … my grandparents still hid money under the mattress. I don’t think we’ll do that…. but I think it’s going to forever change…

If I were to be honest… I’m not smart enough to know what those answers are…but we’re certainly trying to get ahead of them. I don’t also think we have a perspective yet on what actions will happen politically that will change people’s view on homeownership. Think of the impact of some of these tax changes and what that’s going to do to people’s discretionary dollars. One of the things that just fascinates me about working in the UK and Canada is that it’s a very different view. You make a commitment to a property, that commitment follows you, not the property.

How are we going to change? I don’t think we know all that yet. There’s a lot of maturing that we still have to do.

BB: Can you tell us more about you and your background… what influences you?

SP: I moved a lot. It’s hard for me to even say what I would have called home.Born in LA. Lived in Atlanta, New York, back to LA in high school, San Diego for college, … continued that pattern as an adult… lived in Arizona, Northern California, Nevada, …three tours of duty in Arizona…. so probably flexibility was something I grew up with, and when you’re a little kid, sometimes, it’s tough, sometimes when you’re a kid and you have a Southern drawl and you live in New York…and you come back to LA and you’ve got a Southern/New York accent, you learn to be flexible.

And you learn to look at some of the good in people because some of the bad comes out really fast.

I grew up in an environment where my parents traveled a lot. It was a very successful household. I probably grew up wanting to be different from my mom and not work and be a house mom… just like they say, I probably grew up just like her. She traveled internationally, was never home, … she was a designer/manufacturer of clothes.

I didn’t really understand why my parents weren’t really present. What was impressionable? I think there was a point where I was living in New York… where I had to do some assignment for school, and I was probably 12 or 13… and I had to do some news clippings, and I found this article on my mom.

It gave me a different appreciation of what she was doing in terms of impact, and how she wanted to make a difference in the world of design. It forever changed my perspective on, how do you find balance in your life and the mission she set out on…What they taught us–I don’t know if it was a conscious mission–was to be very caring and to be flexible. And there are no victims. We make those decisions and we carry that core responsibility. This served me very well. Because I think you have to be flexible.

Our organization is one that is incredibly flexible. I have a genuine appreciation for people, and a genuine tolerance for adversity. That whole victim thing comes from a sense of responsibility and wanting to make a difference.

Probably the last thing that my parents gave us as children growing up is that it’s okay to be me. It was okay that I had a Southern New York accent in LA and nobody could understand me. It allows you to establish relationships on a different level. It sounds kind of corny, but it’s what I really believe.

San Diego State University… Special Education… that came with the flexibility. When I was going to school, I was working for McDonald’s Corporation. I did a lot of work with less fortunate children with McDonald’s and that’s what I wanted to do, was to be a special-ed teacher… kind of grew through the marketing environment at McDonald’s …. Had aspirations of working at the big Golden Arches in the sky, so I needed agency experience. I ended up on the agency side, here in Phoenix with Phillips-Ramsey.

Then, lo and behold, through taking every moment, and living in the present moment, I ended up with Del Webb as my account…and eventually I was asked to come be the marketing manager for Del Webb. I left the agency world.

I was a pretty free spirit. You kind of took it as it came. The corporate environment just wasn’t me back then. I was in my early 20s and, when you work in the agency world, it’s pretty footloose and fancy free. And now I’m in this environment that it was hose seven days a week, it wasn’t me… I was thinking about going back to the agency side, but I loved the business.

It was somebody in the field here in Phoenix who said, ‘You know, it’s just so different here in the field. You just can’t appreciate it… and I loved the experience of working with the field… I didn’t like the corporate world. He said, “You got to come and be a sales manager.’  And I said, ‘A what?’ … 20 days later, I had my real estate license and I was the sales manager at Sun City West, and I had 25 agents who probably had an average of 10 or 15 years under their belt working for me. I could never know more than they did, I just knew different. Once you get into the field, it’s remarkable. The rest just happened.

I didn’t set out to run a home building company. I actually set out to be a special-ed teacher.

But I took it one day at a time. Just had incredible mentors along the way.

Rich Vandermeer, Sun City West… saw something in me… he said, ‘You’re meant to be in sales management… I can teach you sales… you do it every day, Sheryl, you just don’t realize that.’ He was remarkable… A year at Sun City is like five years somewhere else… you’re doing 1200 homes in a year in one community… a lifetime’s experiences…

He took some of my natural instincts around my care for people and properly focused them. It was like seek to understand, explore, investigate, take in all the information… cause I might have been just, pretty quick to just go do it, just get it done. He helped me to take a step back and understand, appreciate, and then execute on that. He always believed in me that my instincts and trust with people … where I was a kid coming in and a team of 25 people were wondering “how are you going to help us” and within the next three months we have a team of people who took things to the next level.

What he was masterful at was understanding my own personality traits and how to work those within a business environment.

Then when I went to Blackhawk in a private environment, I was able to round out the business side of it from the sales and marketing side. I’ve probably had confidence and fear rolled up in one little ball, so when I had the opportunity at Blackhawk to open and run these new active adult communities for them, I was just young and cocky enough to think that I could do it, but I really had no idea what I was getting myself into. But once again, I was surrounded by a group of really talented people and had the desire and curiosity… that’s probably what Rich gave me… I think the character and the creativity were attributes I brought, but the curiosity to go and seek more information to make the best decisions probably the gift Rich gave me.

It’s okay not to know. The humility comes pretty easy. Very early in my career, I surrounded myself with the best people, and it’s so okay that they are so much better than me. It’s perfect; it’s what I want. So I’m going to have the best finance talent around me, and the best land talent; because I’m going to look at it different. It’s that complement that makes us as a team better.

It’s the permission to be okay with that.

BB:… what do you like to read… cultural passions…?

SP: I love to travel.  Two weeks ago I was in Tenerife, which is in the Canary Islands… I was in Barcelona and Madrid for my 25^th Anniversary… it’s a big deal.

My husband says he’s a happy single married man… we only see each other on weekends. I leave Sunday night or Monday morning, and get home Friday night, … it’s different… we’ve been doing it for about four years.

I really do my best to protect my weekends with my husband and kids – I have three children… Diane is 30, and married (stepdaughter). Lindsay…22… and Randy will be 21… (boy)… they’re the support system … my kids moving like I did and being okay with it… has just been remarkable.

I love to golf, travel…

This week I’m in four time zones… I actually get a high on that. Four years running I still do. I do like… what the traveling does for me… people ask, ‘well, how do you go to the UK every month?’ I say, ‘well, that’s my 10 hours on that plane.’ That’s truly my personal time. If it’s reading junk… watching a movie…if it’s getting caught up on email, I get to choose that… when you run at the pace we do…

The last thing that I do personally that’s really important to me is working out. It gives me that hour, ideally, … gym… running, doing something… take the time to clear my mind… it’s a little bit of everything on the reading side…

I just read, The Big Short. It’s everything. I enjoy sometimes a good James Patterson murder mystery just to complete waste… I love motivational reading. It’s a blend…whatever my time allows. I don’t get to enough… it’s really my trips overseas or vacation is where I reserve my enjoyable reading…

JM : What makes you tick? What keeps you up?

SP: Getting to 2011. It’s making sure we continue to do the right thing. I think I have a great will to win and to make an impact, and that Taylor Morrison has the ability to make a footprint on our industry. That we can do things the right way. It’s not to suggest that others don’t, it’s just it’s a tough world out there right now.

Everyone’s got different definitions of good leadership. To create an environment where people can see themselves and their future moving forward together is what we’re about. If you think about the power of people all going in the same direction to accomplish the same thing and if they’ll do their piece of the pie it actually makes a difference is what we want to be and what we are. You can compare it to a football team charging down the field and they have to be in synch… My vision and dream is our whole organization charges collectively that way and has the passion to get there together.

That’s pretty powerful.

JM: what can you say about the company and or its assets being in play?

SP: It’s [supposedly] been in play since I got here… that’s what I’ve been told… I think I heard last week that we got bought by two different builders. It’s not true.

The way you worded it–staying for the long haul vs. an exit strategy–the board has a responsibility to continue to understand its options, as the management team has a responsibility looking at the options within a market and how you diversify. For some reason there’s a lot of … I’m sure there’s a good chunk of it because of the environment that we’re in… I don’t know if it’s the intrigue of the UK… I’m sure it’s somewhat the refinancing that we went through. But that rumor’s been out there a long time.

And at some point in our future, it will likely be true.

When that is I can’t tell you. What I can tell you right now is, nobody’s bought us; the company’s not on the market  today; and the rumors keep going.

Do we continue to explore all of our options? Absolutely. That’s our obligation.

The market has sure changed in the last couple of months, huh?

So when I tell you the speculation will be true … what I tell the team a lot … because I think there were rumors about Taylor Woodrow and Morrison for about three years… is eventually it happens. Eventually there will be a strategy that will make sense for this organization that could be different than what we are today. But it’s not something I can let myself get caught up with day to day… I’m on the board; I’m involved with the day-to-day decisions from a group perspective. We’re going to continue to operate our business.

BB: What does the balance of 2010 feel like to you?

SP: 2010: it’s been a tough first half and it’s been an emotionally challenged first half. People really kind of took an exhale at the end of the year. Because it’s like, finally… we’re an optimistic bunch and we’re always looking for that good news. Life was good. The first half was difficult because it was like a 2 by 4 over the head that people really didn’t anticipate.  That’s hard. That hurt. So when you look forward, I’m a real believer that some level of predictability and stability is actually great success for 2010.

I actually think it’s pretty good success for 2011. I think there’s a lot of indicators – I do believe the phrase that we’ve bumped along the bottom … I think we have. I think there’ll be some markets that will have some further challenges and there’ll be some that will fight back better than others. But there will be a control around that because I think there are some larger factors, and it might be the mortgage industry that will prevent us realizing too much of that benefit.

We have to be careful–and I said this to the team yesterday–not to let any piece of bad news make us think that the world’s falling apart, and any piece of good news make us think that we’re going to have 10% appreciation next year.

Because I think we’re going to operate in this flux. But actually the knife’s not falling anymore, and that’s success. I’m not one personally that subscribes to the V… I think as it comes back, it could come back good, but I don’t think it will be overnight.

So I think we have to plan for the worst and be ready for the best.

Making sure that the workforce has pride in what we’ve sustained… now, we’ve turned the corner. But have we rounded 2^nd or 3^rd yet? I’m not sure yet. But we’ve rounded the corner. I feel very comfortable with that.

What I said at the division presidents last meeting … ‘Our greatest success is We are Here, you guys and we are here in a big way!…’

We’ve gained market share in every market we do business in. We done more than hold our own in sales pace per community, our cancellations, areas from an accounting standpoint we shouldn’t have excelled in we excelled in. So be really proud of what we have accomplished… but now how do we get better and take advantage of what we can?

Thanks to Christine Serlin and her early-arriving, lovely 7-pounder Ella Jane, you heard it all here first.

Housing Data Tops the List of Economic Releases this Week

This week’s economic news calendar is chock full of housing data releases, some of which serve as important proxies for pre-sentiment around jobs stabilization and consumer confidence. At the same time, Week Two of earnings season features blue chip companies whose 2nd Quarter numbers may be strong, but whose visibility into 3rd and 4th Quarter visibility is opaque at best, menacing at worst.

Sound familiar for home building companies? They’d done just about all they can to shrink their balance sheets for the worst of the downturn periods, and now time is nigh to drive topline performance. Question is can they? As we listen to the earnings calls among home builders over the next two weeks, we’ll be keen to probe both the analysis and the plan each company puts in place to sustain their hard-won momentum.

Collectively, with a few exceptions, the public home builders behaved as if 2010 will ramp nicely into a fully-formed if modest demand cycle in 2011.

The economy, a little like the stubborn low-pressure weather system that has settled in for a petulant stay in the Atlantic off the Carolinas and has blanketed the mid-Atlantic coast with a several-week muggy heat-wave, seems to be challenged by inertial as well as dynamic forces.

The one manifest source of big demand for capacity globally is Asia, which is shifting from overheated to a more sustainable level of growth. Europe is day to day, given its debt and credit landmines, and the U.S. seems to be an equal mix of pluses and minuses, with the pluses losing steam even as the minuses seeming to find a more stable high ground.

Clearly too, debate over policy, action, or a decisive plan to cease interceding at the government level sharply, and antagonistically, devides those who are most outspoken about righting the what has gone off in the economy. The conversation in too many cases crosses the line of argument into ugly ideologue, unbecoming of the nation’s spirit of resilience, tolerance, and particular manner of blending disparate interests.

We’re with New York Times Op-Ed essayist Roger Altman in assessing the moment’s need for business and policy-makers to call a time-out on their dance of death, because together U.S. business and government have a few of the answers Main Street wants right now.

The tension between President Obama and the business community is hurting both sides and may hamper economic recovery. Closing that divide requires the business community to mute its criticism, and the administration to make personnel and policy adjustments. Neither should be hard.

The summer of 2010 may go down as the period–similar to many stock market crashes–that retests lowpoints of both consumer and business confidence that occurred as the financial system came unhinged in the Fall of 2008.

Robert Shiller, in the book “Animal Spirits” he co-wrote with George Akerlof, talks about a term that makes all the sense in the world right about now: “the confidence multiplier.”  At the center of the word confidence, Shiller notes, there’s a Latin word root “fido,” which means “I trust.”

It’s the Summer of 2010. No one can make the 2009 Obama $790 billion stimulus package bigger now than it was. No one can make the George W. Bush 2008 $200 billion tax and spending stimulus package bigger now than that was.

The question of yet another stimulus plan comes now amid heightened rancor, fear, and suspicion in the ramp-up to November’s mid-term elections. Whether more stimulus would instill or asphyxiate a confidence multiplier is likely to get lost in the heat-wave debate between “Austerians” vs. the “Stimulites.”

That’s why, in looking this week at the latest data for housing starts, permits, and existing home sales, it would be a good BS meter to put them into a trailing three-month bucket, and compare the latest three months to the same three-month period in 2009.

This way, one can filter out some of the artificial timing moves that show up in the single-month release, and perform analysis based on reality. (HT to a reader Marvin Chosky for this recommendation).

Here, from blogger Econ Grapher, is a line-up of key data releases expected this week in the U.S. and global markets. And don’t forget the parade of 2nd Quarter earnings we’ll also be attuned to.

Day	Time (GMT)	Code	Event/Release	Forecast	Previous
MON	8:00	EUR	Euro-Zone Current Account s.a. (euros) (MAY)		-5.1B
MON	14:00	USD	NAHB Housing Market Index (JUL)	16	17
TUE	1:30	AUD	Reserve Bank of Australia Meeting Minutes
TUE	5:00	JPY	Leading Index (MAY F)		98.7
TUE	6:15	CHF	Trade Balance (Swiss franc) (JUN)		0.82B
TUE	8:30	GBP	Major Banks Mortgage Approvals (JUN)	52K	51K
TUE	8:30	GBP	Public Finances (PSNCR) (Pounds) (JUN)	16.0B	12.0B
TUE	12:30	USD	Housing Starts (MoM) (JUN)	-2.8%	-10.0%
TUE	12:30	USD	Housing Starts (JUN)	577K	593K
TUE	12:30	USD	Building Permits (MoM) (JUN)	-0.7%	-5.9%
TUE	12:30	USD	Building Permits (JUN)	570K	574K
TUE	13:00	CAD	Bank of Canada Interest Rate Decision	0.75%	0.50%
TUE	22:45	NZD	New Zealand Net Migration s.a. (JUN)		250
WED	3:00	NZD	Credit Card Spending s.a. (MoM) (JUN)		1.9%
WED	8:30	GBP	Bank of England Meeting Minutes
WED	14:00	AUD	NAB Business Confidence (2Q)		17
WED	14:00	USD	Ben Bernanke Testifies to Senate Banking Panel
THU	3:00	NZD	ANZ Consumer Confidence Index (JUL)		122
THU	4:30	JPY	All Industry Activity Index (MoM) (MAY)	-0.4%	1.8%
THU	7:30	EUR	German PMI Manufacturing (JUL A)	58.0	58.4
THU	7:30	EUR	German PMI Services (JUL A)	54.5	54.8
THU	8:00	EUR	Euro-Zone PMI Manufacturing (JUL A)	55.2	55.6
THU	8:00	EUR	Euro-Zone PMI Services (JUL A)	55.0	55.5
THU	8:30	GBP	Retail Sales ex Auto Fuel (YoY) (JUN)	2.4%	3.4%
THU	9:00	EUR	Euro-Zone Industrial New Orders s.a. (MoM) (MAY)	-0.1%	0.9%
THU	12:30	CAD	Retail Sales (MoM) (MAY)	0.5%	-2.0%
THU	13:30	USD	Ben Bernanke Testifies to House Financial Committee
THU	14:00	USD	Existing Home Sales (MoM) (JUN)	-8.1%	-2.2%
THU	14:00	USD	Existing Home Sales (JUN)	5.20M	5.66M
THU	14:00	USD	House Price Index (MoM) (MAY)	-0.3%	0.8%
THU	14:00	USD	Leading Indicators (JUN)	-0.3%	0.4%
THU	14:00	EUR	Euro-Zone Consumer Confidence (JUL A)	-17	-17
FRI		EUR	EU European Bank Stress Test Results Due
FRI	1:30	AUD	Export Price Index (QoQ) (2Q)	12.0%	3.8%
FRI	8:00	EUR	German IFO – Business Climate (JUL)	101.5	101.8
FRI	8:00	EUR	German IFO – Expectations (JUL)	101.5	102.4
FRI	8:30	GBP	Gross Domestic Product (YoY) (2Q A)	1.1%	-0.2%
FRI	8:30	GBP	Gross Domestic Product (QoQ) (2Q A)	0.6%	0.3%
FRI	11:00	CAD	Consumer Price Index (YoY) (JUN)	0.9%	1.4%
FRI	11:00	CAD	Bank Canada CPI Core (YoY) (JUN)	1.9%	1.8%

Vultures Finally Flocking to Home Builders’ Turf

Now, here’s a good one for a home builder or residential real estate developer to hear. It’s a quotation from a piece in today’s financial newspaper of record, the Wall Street Journal. Are you sitting down?

The Fed has been encouraging banks to ensure that credit-worthy small businesses can get the credit they need. Reacting to complaints that its own bank examiners are contributing to overly tight standards, the central bank is also conducting training programs with examiners to drive home the message that encouraging loans to small businesses that can repay is positive for the banking system.

Fed Chairman Ben Bernanke has taken up a crusade to urge lenders to, um, lend. Those banks did $710 billion in loans with small businesses as the downturn deepened in Q2 2008, and after a big TARP bail-out and a solid year of record earnings, the banks lent $40 billion less in the same quarter in 2010.

So, Ben says:

“The challenge ahead for lenders will be to determine how to assess the credit quality of businesses in an uncertain and difficult economic environment.”

Which is why this note is about private equity and hedge funds, not about banks

We recall the private equity false alarm that occurred in 2007 and 2008, as word spread that dozens of multi-billion funds had been set in motion for a big vulture fest. Other than a few bold moves, the most important being Morgan Stanley and MatlinPatterson’s, the landing of the vultures was a non-event.

Now, however, conditions are ripe. Traditional capital isn’t working in the arena. The timing–if not the direction or trajectory–is such that the worst has come, which means that exit strategies and strike points now lie with in a three- to five-year comfort zone for this type of money.

The best news of all, if you’re a fund (not if you’re a builder or developer), is the need, which there’s plenty of and it’s plenty urgent. If builders and home building companies don’t build for long enough, their principals and brain trusts start into existential crises vs. curb cuts and dry wall calculations, which is not good for the universe.

So, we started hearing that private equity money was beginning to move in earnest on a project basis starting around six months ago, notably with the GoldenTree InSite folks, Wheelock, Starwood, Oak Tree, Angelo, Gordon, John Paulson, and a few others.

Now we’re hearing that private builders who are willing to muster up 35% to 40%  or so of their own skin in the game can get 60% to 65% financing from any number of private equity sources.

Word from the wise is that it’s less about the size of the investment required or conjecture on how fast a given market will come back, and more about “sponsorship,” i.e. Does the home builder operator have a good regional brand, a track record, and a strong history of repaying what’s owed?

Mitchell Hochberg, one-time president of WCI’s northeastern region and a longtime private builder in the New York metro, rates private equity activity and readiness to pounce as a 7 on a scale of 1 to 10.

“It can be a lifeline for strong, regional private builders,” says Hochberg, who’s a partner in Madden Real Estate Ventures, and has been working as an advisor to a number of funds.

Meanwhile, Ben Bernanke’s Fed is trying to demystify a complex issue for federal examiners and the banks they’re regulating. From the Journal:

Lending to creditworthy borrowers is in their interest, Bernanke said, since “that’s how they earn their profits.”

Go figure, or better yet, sit down with some one who’s got a private equity fund and talk business.

Another Texas Two-Step: MHI Inks $50 million Land Venture Deal with Wheelock Street Capital

Houston-based, McGuyer Homebuilders, aka MHI, notched the third in a recent series of private home builder-private equity joint ventures aimed at gaining control of homesite assets, this one clocking in at $50 million.

On the heels of last month’s LGI-GoldenTree InSite Partners agreement to venture on a lot acquisition initiative, and David Weekley Homes’ similar $25 million land venture fund with Midway Cos., MHI is teaming up with Wheelock Street Capital, and has closed on an initial $15 million purchase of 3,000 homesites in the Austin, Dallas, and Houston markets.

Per an MHI press announcement, “The diversified portfolio will include product for buyers ranging from first time buyers to second time move up buyers. MHI will manage the land development responsibilities. Both firms will work to market the homesites for sale to homebuilders.”

Frank McGuyer, CEO of MHI, is quoted in the press release, saying, “We are excited about the relationship with Wheelock. Their experienced team understands our business, and we’ve learned that we share similar acquisition and development philosophies. The formation of this venture will allow us to take advantage of some of the great opportunities we are seeing in our markets right now, leveraging our knowledge of the Texas markets with the capital backing of Wheelock.”

Lacking access to conventional bank lines to reload on lots that have market-corrected prices, private home builders are turning to investment funds that have got some urgency to deploy capital sooner than later, and which have begun to bet that the residential real estate market has bottomed.

This way, on a selective and more targeted basis, the remaining private builders with strong balance sheets and a visible track record of unit volume can position themselves to ramp up earlier in the recovery cycle and plan to grow faster.

MHI, which builds under the brand names Pioneer, Plantation, and Coventry Homes, and Carmel Builders, ranks in the top 30 of Builder magazine’s Builder 100.

Attempts to reach principals at MHI and Wheelock Street Capital by telephone were not answered as of our deadline.

Public Home Building Company CEO Pay Redux–Four Companies Added

We’re refreshing public home building company CEO compensation information, since four more companies–Meritage Homes, M/I Homes, PulteGroup, and Standard Pacific–have posted their proxy statements with the Securities and Exchange Commission.

With the added companies, the basket of publics under analysis now numbers 14. While there’s a change to the top of the rankings list–Standard Pacific CEO Ken Campbell’s total compensation package eclipses that of M.D.C. Holdings’ Larry Mizel–there’s no difference in who’s at the bottom. NVR CEO Paul Saville, who runs the company with the best financial performance in the business, is also the lowest paid of his industry peers.

The NVR proxy statement notes: “At Mr. Saville’s request, the Compensation Committee froze his base salary at its 2006 level for the third consecutive year as a cost savings measure, despite his leadership during a  period in which NVR has significantly outperformed the industry.”

There are two publicly traded home building companies whose proxies get filed later in the year as a rule, Avatar in late April, and Comstock during the late Summer or early Fall. Even counting the CEO compensation packages of those other two companies, only one CEO may actually earn less than Saville. Can you name him?

It’s important to note that although Standard Pacific CEO Ken Campbell’s compensation package jettisoned him to the top of the rankings, his base salary in 2009 was on or below par with many of his peers, at $703,833. Where his numbers balloon is in the $10 million options package, which, like many long-term incentive packages is earned out over a several year period, and is pegged to his driving SPF share values long-term.

It is also interesting to us that as executive compensation at public companies falls under greater and greater scrutiny, greater percentages of total compensation are getting lashed to longer term financial and operational performance metrics. So we see companies such as Standard Pacific, Brookfield, Hovnanian, Beazer, KB and Ryland design greater reward around increased alignment with shareholders’ longer term interests, vs. quarterly revenue and profit yardsticks.

When you factor in the large compensation package Campbell pulled down, it actually pulls up the average total compensation in 2009 from negativeland to positive, compared with 2008. Without the four we added, we observed that comp packages had slipped by 26% vs. a year earlier. When we add in StanPac, Pulte, M/I, and Meritage, we get a  positive reading, up by 6% compared with the year earlier.

For straight out “bonuses,” Ken Campbell’s $615,000 signing bonus led the pack, while Mezger’s $2.75 million, Mizel’s $2.5 million, and Tomnitz’s $2.34 million, were the highest non-equity annual incentive awards for driving the companies toward full-recovery.

Another increasingly important factor in measuring company leadership performance are designations from third parties such as J.D. Power home buyer satisfaction ratings, and Fortune magazine’s “100 Best Companies to Work For” list.

Right now, the Fortune list, which published in February, includes no home builders. Fortune has listed five home builders on its “Most Admired Companies,” list.  Alas, since the PulteGroup merged Centex into Pulte, only four of them stand alone. When you look at Fortune’s most admired scores, it’s conspicuous that home builders’ top score–KB Home’s 6.58–is the third lowest top score of any industry.

Most pure numbers folks would say that having no home builder among the 100 “best companies to work for” and the third lowest ranking of all industryies in the Fortune “most admired” list would represent opportunity.

Matter of fact, at least one of the CEOs of the below-ranked group of home building company leaders, regards being on Fortune’s “best companies to work for” list as tantamount to success.  There’s probably a high correlation, you’d think, between associate fulfillment, customer satisfaction, and sustainable profitability in home building.

It’s just that public home building companies–most of them anyway–grew too fast in the first part of the decade past to bother with tending to employee engagement, focus, and satisfaction. There was too much money to be made to ignite a culture of collaboration, trust, and transparency.

Well, if we look at the following list in a year, the comparisons of 2009 to 2010 in compensation will have a great deal of reliance on how shareholders respond to the way the company runs this year, rather than as a result of fixed annual incentives based on individual quarterly hurdles. That’s probably the way it should be.

Here’s the list. Click on it twice to view the large table.

Home Building CFO Pay By The Numbers

Even as public home building companies loosen their purse strings to invest in land they hope will turn into tomorrow’s cash flow, most of them are still cutting costs to their operations and overheads.

Where strategy focuses as much on cash preservation as it does on driving topline sales and revenue growth, the honcho who wields both the axe and the gift bag tends to be the chief financial officer.

CFOs as a group performed heroics in doing their part to retrieve a collective $2.3 billion in tax benefits traced to net operating losses in 2009.

Here’s a chart from SNL Financial that maps out how each builder did in its most recent financial reporting period:

In 2010, a big issue for public home builders will be retaining the services of talents who provide credibility and integrity behind fairly complex financial performance reporting. Trust is in short supply at the nexus of Wall Street and Main Street, and a good CFO is often the only thing between keeping the trains running and total chaos.

Still, most CFOs compensation in 2009 reflected red ink performance of their respective mother ships, with few bonuses (in cash, especially), and stock and option awards blistered by the performance of stock prices that have taken major hits.

Still, in all, they’re not doing too badly. All in all, CFOs across our 9-company universe earned an average of $1.9 million in total compensation, versus $2.6 million in 2008, a plummet of about 26%

Base pay in most cases, held at 2007 and 2008 levels, with D.R. Horton CFO Bill Wheat’s $250,000 representing the low, and Joel Rassman at Toll Brothers the high at $1 million.

Consistent with the fact that its CEO Paul Saville ranked lowest in his peer group, NVR principal financial officer Dennis Seremet had the most modest total comp package of the pack.

Here’s the way they rank (note: we only have nine due to the fact that other public company proxy statements with information on the compensation of their named executives are still forthcoming).

Click twice on the table for a larger view.

Private Home Builders’ Moment of Truth Approaches with 2nd Half of 2010

Arguably the most important story of the year for the big home builder community is where are many private home builders going to get money to keep their lights on.  

First an explanation of what we mean, then a take on why we’re saying it now.

If private home builders don’t get that money, many, many more of them will go dark. They need that money for two reasons. One is to build through houses they’ve either sold already or can sell if they’re ready. The other is to buy some of the lots with new price tags like the national, public builders are doing.

These two reasons are precisely the reasons banks are averse to handing it over right now. They’re averse doing anything that puts more exposure on their books. It’s the last thing many of these banks can tolerate.

Big banks are now profitable, but give it five minutes and the jig will show up as a jag. Small banks–many of them anyway–have so much exposure to the X factor that is real estate valuations that one can still only guess how widespread the damage is. One running count is that 644 banks are on the “Unofficial Problem Bank” list.

Private home builders are in a fix because most of them depend heavily on banks, and banks are in a fix. The recent increase in the Fed discount rate doesn’t mean a lot to most of us, but it certainly doesn’t bode well for businesses that draw on bank capital with the intensity that home builders do. If it’s more expensive for banks to borrow, it’s going to be more expensive for their commercial customers to do so, one way or another, and it will be in shorter supply.

Private home builders are already seeing reason to clump 2009 and this year, 2010, as the two worst years of the downturn. They’re already seeing the cost of the money they draw on go into the stratosphere. They’re already seeing that the hard-won ability they had to borrow money for their home building company without personal guarantees is rapidly going by the wayside. They’re already seeing capital sources developing virtually usurious interest rate tiers as reminders of what risk the banks are going to do any business at all with home builders.

This is short-sighted, no? The health of a bank lender ultimately will depend on its community of customers, including home builders, which pay back the money owed at interest, and hire people to build, who in turn stock the foodchain of consumer demand through the economy.

We see what has happened to construction spending. It’s down 61.4% since its peak this time in 2006.  We know ourselves that home builder business units are a 30% shadow of what they were this time in 2006. We know that many good, smart people are out of work. Some of them saved their personal pennies for rainy days. Many of them have been out so long they’ve just lost their unemployment benefits.

Fact is, as soon as you name one way that private home builders are superior to public home builders, you’ll get an argument–a valid one, too–from a public builder that contests that. Still, private home builders are better at some parts of this business. Why else would public companies have paid so highly for them in bygone years?

We feel that private home builders are where home building culture, home building design innovation, and home building real time supply-and-demand knowledge occur at a superior level. Private home builders, in fact, are the reason some of the public home builders are as good at what they do as they are.

Here’s what Tom Lewis, founder and owner of 20-something year-old regional home building power in Phoenix, T.W. Lewis, told us about losing his No. 2 man, Kevin Egan, this month:

“It got so that there were too many chiefs and not enough braves. Kevin created an incredible, cohesive, collaborative organization focused on excellance here. That’s what we will miss.”

The industry can ill afford to see private home builders fall into a state of credit-lock paralysis for the next year to 18 months. Just as public home builders meet a need for housing at an affordable level, using highly iterative manufacturing techniques, scaled purchase of products and labor, and negotiating muscle on land prices, private home builders meet that need on a more zeroed in basis, in smaller tracts, in trickier circumstances.

The way it’s going, though, we’re not going to see very many private home builders around to meet that need very much longer unless there’s a break in the impasse on lending to home builders.

The nation’s most afflicted local economies need jobs to jam the negative feedback loop that has jobs, home defaults, declining asset values, lower earnings, and more layoffs locked in a vicious cycle. If banks become part of the solution of loosening credit to small businesses, the negative loop will begin to flow the opposite way.

It’s an industry problem–for both public and private home builders–if private home builders play through this year with two arms tied behind their back. We’re not saying they’re not willing to try.

But smarter people might see that collaborative competition might be a notion that will speed an improved outlook for everybody.

HUD’s Donovan Addresses FHA, HAMP Challenges

Housing and Urban Development Secretary Shaun Donovan spoke yesterday with National Public Radio news anchor Liane Hansen.

The focus was FHA and HAMP.

On a scenario for tougher standards of qualification for borrowers, here’s Donovan’s now-familiar refrain:

[Borrowers] 

they would need to bring more cash to the closing table upfront. We’re looking at exactly the way to do that and, again, to try to ensure that we’re limiting the riskiest borrowers in our programs. So we’ll announce by the end of January exactly how we’re going to do that.But we’re looking at things like larger down payments, looking at, for example, we just lowered the percentage of what we call seller concessions. So, effectively, discounts to build into their loan upfront, which can make the loan somewhat riskier. So there’s a set of things that we’re looking at that combined together we think will help make FHA loans safer.

As for the oft-maligned Making Homes Affordable mortgage loan modification program, Donovan comes out swinging at the banks.

So those trial modifications, even though they’re not permanent, are lowering payments, are helping to avoid foreclosure. And the vast majority of those we didn’t expect to be permanent modifications at this point, because the end of the trial period hasn’t come up yet.

What we said, though, is that we are very concerned about the low number that have converted at this point. We are concerned that the servicers, frankly, aren’t doing a good enough job.

So, we need to watch closely and see what happens over the next month and beyond to see that banks are doing a better job. And if they’re not, there are going to be some serious consequences in terms of the way that we oversee the program. And we’re going to look at others ways to try to get these modifications to the permanent stage.

Futures Speak–Will Pin Stripes Rules Apply?

Futures look as if they’re going to open lower today amid anxiety among Wall Street players about how soon we’ll see the Fed start exiting its zero-bound interest rate policy.

Still, lots of analysts are calling for an okay December and a Santa Clause rally–though tepid.

You’d think the Yankees won the World Series, or  something.

We love that line “past performance is no guide to future returns.”

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  Welcome to HousingCrisis.com, a unique source for what you need to know about the real estate and construction economy--with helpful news, data, and conversation about your smartest options. We'll highlight exclusive articles, related stories, and linked resources real-time so that you'll have information you need, hopefully a step ahead of the moment you need it.

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