Meritage Homes CEO Steve Hilton Pulls Out the Stops as Company Nears Profitability
Steve Hilton says he can “almost taste it.” Call it Goldman envy if you like, but what Meritage Homes’ CEO can hardly repress excitement over is that his company is nudging nearer by the day to earnings.
Not just an earnings release, either, although Hilton is working with his folks on the final drafts of language for investors ahead of Meritage’s Q4 and full-year earnings call with Wall Street next Wednesday, Jan. 27. By this time next year, Hilton believes Meritage will already be trying to string quarters of positive earnings together.
We caught up with Steve in Las Vegas yesterday in what has to be one of the Western World’s best real-life metaphors for why we’re in the mess we’re in, the $9 billion Dubai World/MGM real estate moon shot, The City Center.
“What I’m really excited about right now is that we’re so close to making money. We’ve been operating in the red, but working on getting back to profitability for more than two years now, and we’re just about there,” he says of the company he co-founded 25 years ago amid the S&L crisis. “I can’t tell you how good it’s going to feel when we start making money again.”
Hilton has a long-term vision and a short-term plan that probably strongly reflect what many other home building company executives–from companies large and small–find the courage to get up each day and keep going at it through the downturn.
His long-term vision is of an industry cycle parabola that stretches from 2005 right through to 2015.
“I’m not seeing real recovery from this thing until 2015,” Hilton says. “I call this home building’s ‘lost decade.’ If you look at where we were in 2003 and 2004 and where were going to be when we come out in a few more years, it’ll look like we’re exactly where we were 10 years earlier.”
Imagine the intestinal and financial fortitude you have to have to weather a decade-long slog to stay alive and stay flat. By the same token, Hilton points out, if you take a look at an even longer period of 20 years, you see healthy growth for the business that suggests recovery after a thrash for another few years will be strong.
So, long term vision ultimately positive. Short term plan is to fight it out in the trenches, focusing not just on rival new home builders but where the real battle is, with resales.
To that end, Meritage recently brought on Phillippe Lord as director of market research, a former Acacia Capital and Centex market research real estate market model whiz. What Lord is introducing at Meritage will be a knowledge base drawn from real time home transaction data that shows sales, price points, demographics, and absorption velocities by submarket. Using this data, which includes both resale and new home sales, Meritage can much more knowledgeably reload its lot supply in submarkets where it has the right product to compete.
“We used to do our land deals by driving out to the tract, picking up all the sales brochures in the sales centers of competing builders, going back to the office and penciling out a product that would beat new home rivals on price in the submarket if we could,” says Hilton.
Lord’s analytics will allow Meritage to do lot acquisition in a more logical and strategic fashion.
“We can put a polygon around a submarket that’s got some good sales going and be much smarter about a lot of things,” Hilton says. “For instance, you can zero in on which Realtors are the producers in a market and focus on working with those few folks versus a scatter shot Realtor effort.”
So, having a more strategic approach on the ground as Meritage works to keep reloading its current mid-one hundred stores at when and where it needs to. Typically, like many publics, Meritage turns a third of its communities a year, with a 3.5 year avergage sales cycle for each community it opens. Importantly for the near term will be not overpaying for new lots even as multiple home builder bidders seem hungry for buildable lots these days.
“We feel the finished lot business has gotten a little overheated ahead of where real end demand might be,” Hilton says. This means his company needs smarter rationalization of land pursuit both on price and location.
Meanwhile, as Hilton and his finance and investor relations team put the finishing touches on their message for investors next Wednesday, they’re also unvailing an aggressive trifecta of product and sales programs aimed to capture every possible bit of momentum for today, tomorrow, and this weekend.
Remember, “spring selling season” officially starts practically the minute the cooler of Gatorade gets dumped on the coach of the winning Super Bowl team in a couple of weeks.
As much as Hilton can almost taste the deliciousness of operating a profitable enterprise some time in 2010, he’s leaving little if anything to chance or luck. Likely, post April 30th (the deadline for sales that qualify for the current expanded home buyer tax credits) and post first-quarter 2010, when heavy-handed Treasury policy is set to cease supporting mortgagte interest rates with its MBS purchase program… the free market itself will test the fortitude of home builders yet again.
Meritage’s sales initiatives focus on three buyer programs.
- It will brand its entry-level and first time buyer product line “Simply Smart.” This program will be an all-out push to get qualified buyers who are currently paying rent to look at the once-in-a-lifetime opportunities to move into home ownership that’s affordable on a monthly-payment basis.
- It will seize a leading-edge position vis a vis sustainble, energy efficient performance in every home as a standard offering.
Effective for homes started after January 1, 2010, Meritage Homes will include the following green elements in every home it builds to provide buyers more value while respecting the planet’s resources.
* Energy Star qualified. Meritage Homes exceeds the strict energy efficiency criteria set by the EPA and US Department of Energy, employing materials and practices such as more effective insulation, high performance windows, tight construction, sealed ducts, higher SEER energy efficient cooling and heating systems, and Energy Star qualified appliances, lighting, and water heaters. Energy Star qualified homes are inspected and tested by independent home energy raters to ensure they are at least 15 percent, and typically 20 to 30 percent, more energy efficient than homes built to the current International Residential Code. * SEER 14 minimum HVAC. Developed by the DOE, the Seasonal Energy Efficiency Ratio is a measurement of an air conditioner or heat pump's energy efficiency. A higher SEER indicates higher efficiency and typically lower energy bills. Comparing with models 10 years or older, cooling costs can be lowered 20 to 40 percent with newer, more efficient models. The 14 SEER units provide significant savings over many of the newer models -- so efficient they exceed the EPA's Energy Star Program' high efficiency criteria. * Low-E windows. The average home loses 25 percent of its heat through windows, which can be the greatest cause of heat loss in a home. "We've chosen to use windows manufactured with Low-E coatings because they reduce energy loss by as much as 30 to 50 percent over regular windows, even though they typically cost us about 10 or 15 percent more. The energy bill savings over the life of the homes more than makes up for this increased cost," Hilton said. * Energy Star programmable thermostats and Energy Star appliances. "By incorporating Energy Star appliances along with programmable thermostats, Meritage home buyers will have advanced technologies that use 10 to 50 percent less energy without sacrificing features, style or comfort," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. "This makes Meritage homes a fantastic long-term value proposition over older homes that contain less efficient technologies." * Low-flow faucets and showerheads. Every faucet and showerhead in a new Meritage Home exceeds industry standards for water savings. Installing low-flow shower heads and faucet aerators provides the single most effective water conservation savings for the home, reducing water bills and the cost of heating water by as much as 50 percent. * Low VOC carpets, paints and finishes.
- Lastly, as a foreclosure fighter tactic, Meritage is betting its latest new learning on construction cycle time excellance get a home buyer from square one–a finished lot and a visit to the design center–to the closing table in 99 days or less.
“Lots of people think that buying a new home takes six months or a year,” says Hilton. “This program will be about getting people into a new home practically as fast as they could close on a resale.”
So, Hilton can almost taste victory even though he knows the market’s going to remain hostile for many months more.
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