Giants Top 25: Jockeying for Position

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Builders with the majority of their operations in the Northeast, California, Arizona, Nevada and Florida where pricing surges were strongest made the biggest moves in this year's rankings.

April 01, 2006

Sidebars:
Dugas Credits 'Segment Diversity' for Pulte's Perch at No. 1

Burning to be Best

Phasers on Stun

Savvy Land Deals Key Mercedes' Fast Rise

Take a close look at this year's Top 25 rankings, (see below for complete list) then compare this list of billion-dollar brutes to last year's. You'll see that it takes more than double-digit growth just to stay in this race. (But it helps if your home track is in California or Florida!)

Houston-based David Weekley Homes, for example, dropped out of the Top 25, despite closing 660 more home sales in 2005 than the previous year, and pushing revenues up 23.4 percent to $1.27 billion. Even though Weekley operates in 16 cities in six states, the firm is heavily concentrated in the Texas markets close to its home base. And those weren't the hot markets for price appreciation during 2005. Price spikes combined with closings growth to boost the strongest movers in this race.

Fueled by fast-flipping investors, pricing surges were strongest in the Northeast, California, Arizona, Nevada and Florida. Builders with the majority of their operations in those states made the biggest moves in this year's rankings. For instance, publicly-held Toll Brothers, the Horsham, Pa.-based luxury home specialist with its base in the Northeast, but operations in all those hot states, made the biggest move of all. Toll took the inside rail from No.10 to No. 6 on the strength of a 32.3 percent increase in closings (to 8,769) and a whopping 50 percent increase in revenues (to $3.84 billion). Weekley, on the other hand, dropped from No. 25 to No. 27, a victim of stunning bursts into the Top 25 by two other private builders — Newport Beach, Calif.-based WL Homes (which pushed closings up 41.4 percent to 2,891 and revenues a staggering 67.3 percent to $1.64 billion) and Melbourne, Fla.-headquartered Mercedes Homes (which increased closings by 24.8 percent to 5,714 and revenues by 54.3 percent to $1.44 billion). WL, which markets under the name John Laing Homes, moved up from No. 26 to 20. Mercedes went from No. 30 to 23.

Private Giants Pass Publics

One of the most surprising aspects of the race for housing revenue supremacy in 2005 was the ground lost by many small-cap public builders. WL, for instance, passed two publics (Morrison and M/I) and Mercedes one (M/I) on the way to its new position.

While the top 12 spots are still held by publicly-traded firms, seven public companies lost ground in the rankings. Reston, Va.-based NVR dropped from No.6 to 8 after being passed by both Toll and public Giant Hovnanian Enterprises of Red Bank, N.J. Atlanta's Beazer Homes also lost a spot (from No.8 in 2005 to No.9 this year). Denver's M.D.C. Holdings faded from No.9 to 10. And Weyerhaeuser Real Estate of Federal Way, Wash., retreated two positions to No.16. California-based William Lyon Homes lost two spots to No. 19, and Atlanta-based Morrison Homes dropped from No. 20 to 21. Columbus, Ohio-based M/I Homes dropped completely out of the Top 25 by sliding from No.24 to 26.

Of course, not all the public companies lost ground in the rankings. In addition to Toll's four-spot jump, Scottsdale, Ariz.-based Meritage Homes moved up a position from No.15 to 14, Technical Olympic USA, based in Hollywood, Fla., went from No.16 to 15, and Bonita Springs, Fla.-based WCI Communities moved from No. 19 to 17. The other public builders all held their positions, some with large boosts in production. For instance, Irvine, Calif.'s Standard Pacific stayed at No.12 even though it hit $4.18 billion in 2005 revenues (up from $3.48 billion in 2004), on closings of 11,694 (up from 9,091 the previous year).

Walnut, Calif.-based Shea Homes remains the top-ranked private builder, a fixture at No.13, after pushing revenues by 18 percent to $3.06 billion. But Shea is now joined in the Top 25 by WL, high-rise condo builder MCZ Development of Chicago (No. 22), Salt Lake City-based Woodside Group (No.24) and rental apartment Giant Trammell Crow (No.25), based in Atlanta, Ga.

It's obvious that the largest private builders are no longer encumbered by capital formation barriers to growth. They can hit mammoth proportions, even if it takes them a little longer to grow. And the ground lost by so many of the small-cap publics has to fuel speculation on Wall Street that the smaller public companies are ripe for acquisition by the five Supernova Giants at the very top of the rankings. Those gargantuan beasts, in fact, now face the possibility that small-cap public builders may be more accessible acquisition targets than large privates, because the private builders have no interest in selling.

Fierce Fight For No.1

While there's lots of movement among builders ranked from No.6 to 25, there's none this year at the very top — in the five Supernova firms leading the race to dominate a consolidating housing industry. Bloomfield Hills, Mich.-based Pulte still leads Ft. Worth, Texas-headquartered D.R. Horton by a nose in a stretch run for the top spot in housing revenues, even though Horton has the top rung in closings. In fact, Horton became the first builder to pass 50,000 closings in a single year, hitting 51,383 in 2005. But Pulte rode a 29.5 percent increase in revenues (to $14.37 billion) to hang on to No.1 as Horton's revenues rose 26.9 percent (to $13.72 billion).

Both Pulte and Horton claim the bottom line is vastly more important to them than the top line, and they have the margins to back that up. But the intensity of their fight for No.1 in revenues seems to indicate each covets the crown. And all five Supernovas — Pulte, Horton, No.3 Lennar (based in Miami, Fla.), No.4 Centex (of Dallas, Texas) and No.5 KB Home (Los Angeles) — are now a threat to grab the lead, especially if one were to begin acquiring public builders in the next tier of the rankings, which Professional Builder dubs the Masters of the Universe.

The Big Five have clearly separated themselves from all the others in every measure of operating scale. The gap in revenues between No.5 KB Home and No.6 Toll Brothers is now nearly $3.6 billion, while KB is less than $2 billion short of No.4 Centex in housing revenues (although Centex has $3.34 billion in revenue from other sources). Toll, with less than 9,000 closings last year is not in the same race with KB (which had 37,876), despite the revenue boost the luxury builder gained from price run-ups in many markets. In fact, No.7 Hovnanian, with nearly 18,000 closings in 2005, looks to have more legs for the long run that Toll. Especially with prices now flattening in the previously overheated markets, don't be surprised if Hovnanian overtakes Toll in next year's race. The four acquisitions Hovnanian made in 2005 offer a platform for strong growth in both units and revenues in 2006.

Few analysts on Wall Street, or economists in Washington, expect the current crop of more than 20 publicly-traded builders to still be running by the end of this decade. Logic seems to dictate that some of the smaller public firms will be acquired by the larger ones. The only question is when it will happen.

UBS Investment Bank housing analyst Margaret Whelan expects a wave of consolidation in the next 12 to 18 months, but says valuations favoring the largest companies over the smaller ones will have to emerge to overcome the issues — such as "goodwill" — that discourage such deals today. "Small-cap builders with good market share positions in one or two markets would be very attractive to large builders, with national operations, who lack strong positions in those particular markets," she says. "If there's a discrepancy in the valuations of the two companies, that's what could lead to a deal."

Another factor that could lead one of the Supernovas to make a bid for a second-tier public builder would be the opportunity to add a market segment or a different business model. "Toll, NVR and WCI (the Florida.-based specialist in coastal condo towers) all have unique business models that could be very enticing to one of the Big Five," Whelan says. "I like the concept."

Pulte CEO Richard Dugas Jr. is interested, but cautious. "None of our plans assume any M&A activity, but we are not blind to the opportunity. It would take the right set of circumstances to be the catalyst for it. We are intrigued by the possibility, but there are precious few companies out there with a brand anything like what we got with our Del Webb deal."

2006: A Very Different Race

While price appreciation was a major element of Top 25 growth in 2005, the biggest run-ups look to be long gone this year. Late last fall, investors fled the markets where they pushed prices up most dramatically. Now those markets are languishing, with torpid sales and many builders resorting to incentives, some of them in six figures. Uncertainty is the prevailing sentiment most builders express about 2006, fear is the one they don't mention.

 

It seems likely that it won't take double-digit growth in 2006 revenues to hold onto a position in next spring's Top 25 run for the roses. But it may take more closings to duplicate 2005's revenue totals. The big public builders say they are certain sales will pick up once they work through the temporary over-supply situations produced by investors dumping housing units. "Investors are gone, and their homes are back on the market," says Pulte's Dugas. "That's adding to supply, and a lot of people are sitting on the sidelines, trying to determine what a good buy looks like. But we've got some of the best economic conditions in recent memory in many markets.

"Look at the Eastern seaboard," he says. "There's very strong job growth. The (national) fundamentals are still good — positive population growth, strong immigration. This is more of a pause, people catching their breath. We think 2006 will be a very good year for housing. As good as the last few? No, I doubt it, because you won't see the same price appreciation. I'd say this year is going to be more of a 'normal' housing environment."

The public builders have to take that position because Wall Street demands that they continue to grow. Some private builders are not quite so confident. "If you ask me if I'm nervous about this year, I'd have to say yes," says Mercedes Homes principal and COO Scott Buescher. "The investors were both a blessing and a curse. They allowed us to push margins, but the scary thing now is that we have more of those houses turning into specs than we'd like. When you have three years like we've had, you start to believe that's the new reality. And you start buying land to feed the machine at that pace.

"Then it goes away. The best thing, we've found, is to stay up all night and worry. And that's what we're doing," Buescher laughs. But it's a nervous laugh. He's planning for a 20 percent reduction in sales and production, just in case.

Biggest Movers in Rank
2006 Rank 2005 Rank Biggest Movers in Rank Change in Rank
23 30 Mercedes Homes, Inc. 7
20 26 WL Homes LLC aka John Laing Homes 6
6 10 Toll Brothers, Inc. 4
24 27 Woodside Group Inc. 3
17 19 WCI Communities, Inc 2
14 15 Meritage Homes Corporation 1
15 16 Technical Olympic USA, Inc. 1


Top 25 GIANTS Rankings
2006 Rank Total New 2005 Rank Company City State Total New
Residential Closings1 Residential Revenues
1 1 Pulte Homes, Inc. Bloomfield Hills MI $14,370,667,000 45,630
2 2 D.R. Horton, Inc. Ft. Worth TX $13,716,638,000 51,383
3 3 Lennar Corporation2 Miami FL $12,711,789,000 42,359
4 4 Centex Corporation Dallas TX $11,330,467,395 37,876
5 5 KB Home Los Angeles CA $9,364,803,000 37,140
6 10 Toll Brothers, Inc. Horsham PA $5,759,301,000 8,769
7 7 Hovnanian Enterprises, Inc. Red Bank NJ $5,707,906,000 17,783
8 6 NVR, Inc. Reston VA $5,177,743,000 13,787
9 8 Beazer Homes USA, Inc. Atlanta GA $5,093,346,000 18,401
10 9 M.D.C. Holdings, Inc. Denver CO $4,802,875,000 15,307
11 11 The Ryland Group, Inc. Calabasas CA $4,628,889,000 16,673
12 12 Standard Pacific Corp.3 Irvine CA $4,178,159,576 11,694
13 13 Shea Homes Walnut CA $3,060,042,000 6,901
14 15 Meritage Homes Corporation Scottsdale AZ $2,996,945,963 9,406
15 16 Technical Olympic USA, Inc.3 Hollywood FL $2,810,700,000 9,435
16 14 Weyerhaeuser Real Estate Company Federal Way WA $2,686,430,161 5,647
17 19 WCI Communities, Inc Bonita Springs FL $2,217,400,000 2,909
18 18 Taylor Woodrow, Inc. Bradenton FL $2,078,111,000 3,932
19 17 William Lyon Homes Newport Beach CA $1,745,067,000 3,196
20 26 WL Homes LLC aka John Laing Homes Newport Beach CA $1,634,579,000 2,891
21 20 Morrison Homes Alpharetta GA $1,539,000,000 4,921
22 21 MCZ Development Chicago IL $1,450,000,000 4,020
23 30 Mercedes Homes, Inc. Melbourne FL $1,438,000,000 5,714
24 27 Woodside Group Inc. North Salt Lake City UT $1,296,718,423 3,676
25 23 Trammell Crow Residential Atlanta GA $1,291,618,000 9,784
1 - Completions for rental
2 - Includes units related to unconsolidated joint ventures whose revenues are not included in totals
3 - Includes revenues from unconsolidated joint ventures


Greatest Drop in Rank
2006 Rank 2005 Rank Company Change in rank
8 6 NVR, Inc. -2
16 14 Weyerhaeuser Real Estate Company -2
19 17 William Lyon Homes -2
25 23 Trammell Crow Residential -2
9 8 Beazer Homes USA, Inc. -1
10 9 M.D.C. Holdings, Inc. -1
21 20 Morrison Homes -1
22 21 MCZ Development -1


 

Dugas Credits 'Segment Diversity' for Pulte's Perch at No. 1

Pulte Homes president and CEO Richard Dugas Jr. knows 2006 will be a tougher year than the last three, but he's counting on product diversity and sophisticated market segmentation to keep the Bloomfield Hills, Mich.-based Giant at the top of our revenue rankings. Pulte hit $14.37 billion in 2005 revenues, on 45,630 closings, to claim the top spot this spring for the second straight year.

 

Chairman of the Board Bill Pulte, left, and President & CEO Richard Dugas Jr. of Pulte Homes, Inc.

"We're investing in all major categories of the U.S. housing market," Dugas says. "Some of our competitors focus on one or two key segments, but we want to operate in entry-level, first move-up, second move-up and active adult. We even break those markets down into a lot of sub-sets through our 'targeted consumer groups' research. Because we have so many places to invest, we have great growth opportunities. Specifically, the active adult sector is really helping us."

When Pulte acquired Del Webb Corp. in 2001, it staked claim to the top brand name in active adult, age-restricted community development across the Sun Belt. But Pulte quickly hatched plans to bring Del Webb communities to all 54 markets in which the Michigan-based firm builds. "The best is yet to come in the active adult sector," says Dugas. "The number of Americans between the ages of 55 and 75 is now around 50 million, but by 2020, that will explode to nearly 80 million. In 2005, Del Webb represented 39 percent of our business, and that's going to grow. The active adult market is 60 percent in-place retirees, who don't plan to leave their home town when they retire. We now have Del Webb communities open in about half the markets where we build. That leaves the other half still to be tapped for growth.

"Del Webb has been fabulous for us, and it's the biggest piece of those targeted consumer groups," he says. "We're getting ready to open communities in Raleigh and Atlanta. We recently opened our first in Michigan, and another in Denver."

Dugas wants to expand Pulte and Del Webb operations into new markets that, as yet, have neither. "Look for us to go into the Northwest in the next few years," Dugas says. "We'll take it slow and steady, as opportunities present themselves. The lion's share of our investments will go to grow existing markets where we still have relatively small market share. But we'll try to open one or two totally new markets a year over the next few years."

Pulte is also easing into high-density urban development "where it makes sense," Dugas says. "What's driving so many people toward higher densities is lack of affordability, especially in coastal markets in the Northeast and California."

Pulte's biggest move into density development is in the San Francisco Bay area, where the firm is moving forward with plans for a five-story condo building over two levels of parking. "We don't contemplate any high-rises. We want to crawl before we walk, and walk before we run into the mid-rise business."

Another major innovation for Pulte is what the firm calls "business simplification" — reducing the number of house plans it builds and the number of options offered in those houses. "Our DiVosta Homes operation in Florida has taught us a lot," Dugas says. "They've operated this way for 40 years. It's a heck of a model for us to move across the company, but we're only in the third inning now. It's a long game. We've reduced our floor plans from more than 2,500 18 months ago to about 1,000 now. We want to get that down to 500. And we're rolling out four consistent spec levels on those houses."

Pratt Becomes Pulte

Pulte's Pratt Building Systems joint venture, to bring in-house the bulk of trades building Pulte houses in Phoenix and Las Vegas, passed its initial tests with flying colors, Dugas says. "We closed on the other 50 percent of the transaction in January. It's now Pulte Business Systems. That's a terrific transaction for us. Not only does it allow us to capture additional margin, it allows us to control the building process and pace of framing, concrete work and underground plumbing installation. We have plans to expand it to additional trades and geographies," Dugas says.

California might be next, but Dugas will not be pinned down. "It's not as easy as it looks to move it to another market. Not every market has vertically-integrated, sophisticated trades like you see in Phoenix," he says.

Pulte's Top Metric: Return On Invested Capital

Pulte's senior management rates return on invested capital as the top metric for measuring the performance of its far-flung divisions. "We look at every subdivision on its own," Dugas says. "Each of them has to pass certain hurdles to even be funded. Our goal is to maximize pre-tax dollars, rather than margin percentage. We want to have the biggest stack of cash at the end of the day. You can do it through volume, margin or maybe SG&A (control of sales, general and administrative costs)."

Dugas also places high importance on metrics measuring quality and customer satisfaction. "We have an internal tracking system," he says, "that has indices that closely match what J.D. Power measures. The No.1 thing is the quality of the physical product, (2) is service after the sale and (3) is the relationship with the sales staff. We've been measuring customer satisfaction for 14 years — long before J.D. Power came along."

Pulte also measures the rate of repeat and referral business. "It's in the mid-40 percent range now," Dugas says, "which is impressive when you consider that it was 17 percent five or six years ago."

With builders across the country worried by a slowdown in sales, we ask Dugas if Pulte had any plans to sell off any land holdings. "We'll continue to buy land for now. They're not making any more of it," Dugas quips. "We do a nice job of consumer research, so we invest smartly. But we're never going to stress the company's balance sheet. We maintain a 40 percent debt to capital ratio. If the market were to go very negative, we'd have to adjust our land strategy. But as long as we see positive opportunities, we're going to put the lion's share of our investment into land."

Burning to be Best

They're everywhere. D.R. Horton's satellite markets strategy may soon make home building's hard-charging retailer almost as ubiquitous as Don Horton's favorite business model. What shall we call them — Donny Worlds?

 
Chairman of the Board D. R. Horton and President and CEO Don Tomnitz sit with their executive team (from left) Jessica Hansen, Sheryl Brimson, Bill Wheat, Stacey Dwyer, Sam Fuller, and Shannon Farrell in D.R. Horton's corporate offices in Fort Worth, Texas.

Tomnitz or Horton. Either of the two Dons, or both, together or apart. Neither of the two leaders of the vast Horton housing empire seems capable of conducting a conversation for more than ten minutes without a reference to Sam Walton or Wal-Mart. Forget about off-hand allusions. These guys are a lot more straight-forward than that. Describing Horton's satellite operations, Tomnitz doesn't beat around the bush for long:

"We're three years into our satellite markets strategy, where we enter smaller cities near markets where we already have full divisions," Horton CEO Don Tomnitz explains. "These are small markets where other public builders would have a hard time competing with us because we have the highest operating margins and the lowest SG&A costs in the industry. We can make money where others have trouble.

"In San Antonio, we had an 8 percent market share in 1998, but today our share is above 20 percent. Rather than just try to get to 25 percent, we take our show to Laredo, about an hour and a half's drive away. Only sales and construction people. A third of our overhead — the back office stuff — is covered out of San Antonio. So we are in Laredo with two-thirds of our industry-low overhead. We can compete with the pick-up truck builders.

"From Seattle, we're doing it in Olympia. From Portland, we've moved into Bend and Eugene, Oregon. In Sacramento, we service a satellite in Reno, Nevada. From Boca Raton, we get Naples and Ft. Myers. From Charleston, we go into Hilton Head, Savannah and Myrtle Beach. We're now in 77 markets and the satellite program is the reason. From Dallas, we're in Oklahoma City. Our strategy is very similar to the Wal-Mart model. We believe we can take our superior house plans and construction methods to mid-sized markets," Tomnitz beams, "and beat the price that small, local builders can offer."

Horton's original business was always based on the principle of finding ways to compete with small and mid-sized semi-custom builders: "Don't forget, half our production is still in plans where we offer extensive customization," Tomnitz says. (That's half of 51,383 closings in 2005, for $13.72 billion in revenue. It really does begin to sound a lot like Wal-Mart, doesn't it?) "The smaller builders can't match our purchasing power, so they can't match our price/value equation," Tomnitz explains.

"The thing that drives our business is that we continually focus on affordability, at every price point," Tomnitz says. "We'll have a better price, even if the product is a $700,000 townhouse. California is a good example. Prices have appreciated at double-digit rates there, but our average home price in California has gone up 3 percent over the last three years." (What do you suppose is happening to Horton's market share?)

To keep prices affordable in high land cost markets, Horton is going more and more into density. "At the end of 2005, we had 16 percent of our production in attached product," Tomnitz reveals. "Now we have a special division in California to do what we call 'podium buildings' — six or seven stories over two to three levels of parking."

How about high-rise?

"We've spent the last three years getting into low- and mid-rise, now we've got some buildings on the drawing boards that are 12, 15, 20 stories," Tomnitz answers. "We're looking at a building in Las Vegas. I told them, 'No pre-sales!' Horton and I don't like pre-sales because, if it's a good deal for the buyers, they'll close. If it's not, they'll give it back to you. We're looking at getting into this next tranche, but if we do, we'll be very conservative about pre-selling. We want to know our costs. We'll have higher upfront costs, but don't forget, we'll also have a much higher requirement for return on inventory for that product," Tomnitz says.

Horton is big on return on inventory. "If you have high gross margins, we may accept fewer inventory turns," Tomnitz explains, " but if not, you better make up for it with velocity. Horton always says, 'A lot of people make money in the home building business, but not a lot keep it!'"

Sounds a little like Sam Walton, maybe? Watch out, Bill Pulte, here comes Donny World.

Phasers on Stun

Remember Rick Barry shooting foul shots underhand? You had to laugh, but then you noticed he never missed. It's like that with WL Homes (which markets under the name John Laing Homes). How can a company having so much fun actually set the California home building industry on its ear?

 
Larry Webb, second from left, CEO of John Laing Homes, poses with his management team, left to right, Wayne Stelmar, CFO; Richard Rodriguez, senior vice president, operations and process; Alejandro Macia, vice president, people services; and Bill Probert, executive vice president, sales and marketing, at their office in Newport Beach, Calif.

The last time we checked on former school teacher and soccer coach Larry Webb and his Newport Beach visual aids department, they'd just won Professional Builder magazine's 2003 Builder of the Year award. Webb, CFO Wayne Stelmar, and sales and marketing vice president Bill Probert finished that year with 1,801 homes closed, for $744.1 million, in between decorating their offices with life-size cutouts of themselves as officers of the Starship Enterprise.

Well, hold onto your hat and watch out for the puppies. They've got that one beat. WL, John Laing, Scotty and Bones or whatever they're calling themselves these days is now the second largest privately-held home building company in the U.S.A. (or is it the Milky Way?) The closings in 2005 are up to 2,891 and the revenues hit $1.635 billion. Coach Larry's feel good culture sure seems to be working.

Deferential as always, Webb says, "You have to say, 'Who's kidding who?' We're riding the hottest housing market in history in California this decade. With the lion's share of our land base in Southern California, that ride is even faster. We have great people. We bought the land four and five years ago to make this happen, so our timing was very good. But I have to tell you, this was not luck.

"We're competing with the largest builders in the world, but we always felt we could compete because of our great house plans and our relationships with land sellers," Webb says. "We've worked hard to build a reputation as a great company to sell land to. And Wayne Stelmar has done a fantastic job pulling together the capital, both debt and equity, we need to grow."

Luck is out. There are hundreds of home builders in California, and none of them put up numbers like WL. "We're not growing just for growth's sake," Webb says. "We want to build great houses and have a great place for our employees to work, and we do really outstanding customer care. The growth is an off-shoot of that, as is the profitability.

"If you have a bunch of empowered people, they can accomplish things that no one could ever dream up," Webb asserts. "It sounds like BS, but it's true. We're private, we don't have to answer to stock analysts. I anticipate we'll do 2750 to 2900 units this year, but if the market slows, we don't have to grow 20 percent a year."

What 20 percent? Last year, this company grew closings 41.4 percent, in one year, and revenues 67.3 percent. And while 2006 will be more or less flat, what Webb is not mentioning is that many of the stratagems put in place in 2003 will not impact closings until 2007 and 2008 — like the urban division in Culver City and the three master-planned communities in California and Colorado that will add 7,780 lots to WL's land inventory.

Press Webb and he will admit that "in two years, we're pretty sure we'll hit 3,500 closings." Larry Webb handles a home building company the way Pistol Pete handled a basketball. Keep your eyes open because you won't see it coming, but there's a good chance WL will be in your face before you know it.

Savvy Land Deals Key Mercedes' Fast Rise

COO Scott Buescher, a principal of family-owned, Melbourne, Fla.-based Mercedes Homes, freely admits frenzied investors were the driving force behind his company's mind-boggling performance in 2005. The Bueschers are bracing for a 20 percent decline in sales they hope won't materialize.

 
Mercedes Home representatives from left Mark Neubauer, Patrick K. Longo, Stuart McDonald, Howard Buescher, and President Scott Beuscher pose in a model home in Melbourne, Florida.

Old-time management maven Lee Evans used to berate builder audiences to push margins hard in a hot market. "Nobody is going to give you a nickel when it goes the other way," Evans would say, "and if you stay in this business long enough, you'll go broke!"

The Bueschers are probably not going broke anytime soon, after racking up a 54.3 percent increase in revenues to $1.438 billion and a 500 basis point improvement in the bottom line in one year — 2005.

Buescher credits savvy land buys and new product development for putting Mercedes is a unique position to capitalize on a nearly perfect year.

Mercedes' president of marketing Mark Neubauer calls it fundamental marketing to buy sites where targeted buyers want to live, then carefully fit elevations to the location and floor plans to the targeted lifestyles. In this case, the target changed as well-heeled investors poured into Florida. "We got into a lot more second and third move-up homes instead of the entry-level and first move-up houses we were building," Neubauer says. "When we combined that with our hurricane-resistant wall technology (see Shelter From the Storm, October, 2005 Professional Builder, page 80), it really gave us a boost."

Mercedes hit the optimum blend of margin and velocity over and over, at projects all over Florida. "The hurricane-resistant, cast-in-place wall technology really helped our marketing," Buescher says.

The only drawback: "We'd have been able to grow at an even faster pace if we could have produced houses at a normal rate," Buescher says. "But when you get hit by a hurricane, it slows everything down by a good month. And we had two hurricanes last year. They caused major shortages in building materials and trades. We could have really blown the doors off if we could have built houses at the same rate as in previous years when there were no hurricanes."

Buescher calls the investor presence in the market both a blessing and a curse. "We were able to push our margins and velocity at the same time," he says, "but now the investors are gone and it's going to take a while for the market to get back to equilibrium. I think we'll probably drop down below true demand for a couple of months — until all this excess demand is eaten up. The underlying economy seems to be fine."

As much as they worry, Buescher and Neubauer still betray the usual builder optimism: "People are still going to move to Florida," Neubauer says. "This is a great place to build because, even if the economy craters, the retirees and baby boomers are still going to come. And we get job creation, to some degree, off that migration. And it's not just Americans. We get second home buyers out of the tourist economy that draws people from all over the world.

"U.K. buyers have been a big part of our market," Neubauer says, "especially in Orlando. They get a very favorable exchange rate and that really helps second home sales. We have a lot going on here that should keep our market strong, even if Ohio, Colorado and the rest of the country go down."

Investors hurt the market, Buescher says, but if that's all there is, it will recover fairly fast. Maybe that 20 percent downturn won't materialize after all.

Comments on: "Giants Top 25: Jockeying for Position"

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