Rich, Famous ... and Quiet

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It would be easy to jump to the conclusion that the Masters of the Universe captain their own destiny and do as they please.

April 01, 2003

 

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Especially compared to the headline-grabbing high profiles of the mostly public Masters of the Universe, the builders ranked from No. 21 to No. 125 might be Rich and Famous, but they are also private and quiet.

Ralph Drees, John Wieland, David Kimball Hill and Art Rutenberg are famous in industry circles, brand names in towns where they sell houses, but their companies run as quietly as Swiss watches. Even the public companies in this group, such as Alpharetta, Ga.-based Morrison Homes, seem to stay out of the headlines.

You see no press releases from Fort Mitchell, Ky.-based The Drees Co., which jumped from No. 33 to No. 21. No splashy acquisitions for Morrison.

"We did one deal for a 100-unit-a-year builder in Denver," says John Rymer, Morrison's vice president of marketing. "We have nine major markets and three satellite operations. Our plan is to grow those 12 markets organically. We have a 20% compounded annual revenue growth target. We want to increase our market share in each division. For instance, we are now No. 8 in Tampa [Fla.]. Our target is to get to No. 5."

Morrison made one of the biggest moves in the group, from No. 29 to No. 22, by increasing closings from 2,936 to 3,197, all in single-family detached homes. That drove revenue from $696.2 million to $804.7 million, setting the stage for Morrison to crack the top 20 soon.

Chicago-area builder Buz Hoffman's Lakewood Homes moved from No. 122 to No. 71, and yet he, too, fits the quiet profile of the veteran practitioners among the Rich and Famous. "We'll go up one year and down a little the next," he says. "I don't want to grow too fast. Everybody in Chicago takes customer satisfaction very seriously. If you grow too fast, you can't stay on top of that."

 

Lakewood closed 1,250 units in 2002 for $241.4 million, up from 826 units for $149.6 million in 2001. Hoffman works the first-time buyer and first move-up markets hard, with about a third of production concentrated in attached housing, mostly duplexes. He says he has flexibility to adjust production to the market because he builds in fewer projects, though larger ones, than competitors. "That allows us to keep corporate lean and mean. My accounting department has six people. Purchasing is two guys and an assistant. When we want to jump into expansion mode to take advantage of a hot market, all I have to do is add people in the field. My G&A expenses are always low."

In 2002 Lakewood had just seven locations, but several with multiple product lines. Hoffman will add two more this year. His plan was to close 1,100 units this year and sell 1,500. "But we're already 100 ahead of that pace at the end of the first quarter," he says. "We just had our biggest month in history, with 180 sales. The war's not stopping us. We sell to kids. All they care about is whether they have a job and how low the mortgage rate is."

Sounds like the sky's the limit. "No," Hoffman says. "I'd love to settle into a steady 1,500 homes a year for $250 million to $300 million. I don't think it's sustainable to do over 1,500 units a year in Chicago."

Another quiet company making a big jump is G.L. Homes of Florida, based in Coral Springs. Expansion to Florida's west coast in Naples pushed G.L. from No. 57 to No. 41 as revenue jumped from $295 million (1,040 closings) to $434 million (1,355 closings). "I think it's all interest rates," president Itchko Ezratti says. "The low interest rates really push up our sales. We got a lot of land in 1999 and 2000. Now those investments are paying off. A couple of hundred units in Naples is a big difference-maker for us."

Asked if he has fielded offers from public builders, Ezratti said, "We're not for sale. I've been in business for 27 years. I hope I'll be here for another 27. It's a shame so many midsize local builders are selling to the nationals."

The Rottlund Co., based in Roseville, Minn., also made a major move in the rankings - from No. 66 to No. 52, as revenue grew from $251 million to $319 million. Closings advanced from 1,344 to 1,641. The firm is the top builder in the Twin Cities area and also builds in Des Moines, Iowa, and Tampa. Attached housing accounts for 60% of its production. Formerly public, Rottlund retreated into the private sector last year as the Rotter brothers, David and Bud, pulled the plug on multimarket growth.

 

"We concentrate on the three markets we know best," David Rotter says. "We'd like to take credit for our growth, but really, this is the best housing market I've seen in 30 years."

Rottlund builds some high-priced homes. Detached houses in Florida sell for as much as $450,000, and a Minnesota townhouse sold for $560,000 in one infill development. But the firm's specialty is entry-level and first move-up product. "We're getting people buying a lot more house than ever before because rates are so low," David Rotter says. "But we design with the possibility of a rate increase in mind. We want to be sure our product doesn't become obsolete. We're specialists in density and very flexible. We can turn out a new product, from scratch, and have it under construction in the field in six months."

Fieldstone Communities in Newport Beach, Calif., climbed from No. 67 to No. 55 by pushing production to higher levels than expected to take advantage of a suddenly hot market. "We went from 723 units in 2001 to 800 in 2002," president Frank Foster says. "That got our revenue up to $291 million from $250.2 million. But we closed some houses last year that really should have closed in ‘03. We had a phenomenal selling season in the first half of 2002. But we're now projecting that we'll be off a little in units this year, probably to about 720. We just don't have the land to keep growing this year."

Foster says, however, that the pipeline is full for 2004 and 2005. "We acquired a 1,500-unit master-planned community in Corona," he says. "We'll build half the houses and sell the rest of the lots to other builders."

One builder that stayed relatively flat in rank this year is projecting large increases in 2003 revenue that will show up in next year's GIANTS report. "We'll have to see what this war does to us, but our unit volume in Southern California should go way up," says John Peshkin, president of Taylor Woodrow in Bradenton, Fla. Taylor Woodrow remained at No. 26 even though housing revenue declined from $720.8 million to $650.7 million. Units increased from 1,568 to 1,838 as TW shifted California operations from the ultra-luxury production market above $1 million to more midrange pricing from $300,000 to $800,000.

LIn Florida, we're also shifting to somewhat lower price points," Peshkin says. "It seems that the lower you go, the more you sell."

TW also has operations in Texas, Phoenix, Northern California and Toronto. The firm's land development, country club operations and lot sales add 20% to total gross revenue. Operating margin is 12.7%.

Comparing the average cost ratios and profit margins reported by builders in this segment of housing's GIANTS with those for the groups above and below this one, you begin to see anomalies that break the straight-line pattern of improving results moving from small to larger firms. Especially notable: higher costs for labor, materials and financing than those reported by Achievers. But there's no breakdown in the progression of profit margins. The Rich and Famous report margins averaging 10%, .6% higher than those of Achievers.

Among opportunities and hurdles, the Rich and Famous view market expansion and operational efficiencies as somewhat more limited opportunities, compared with the answers given by Masters of the Universe. However, they have considerably more enthusiasm for niche markets. That's not surprising because niche market products often are advocated as a vehicle to allow smaller builders to compete with national GIANTS.

On the hurdles side, it seems builders in this second tier of GIANTS are beset by land-related problems and economic and interest-rate issues at about the same rate as the largest builders. Interest rates play no favorites, and an absence of buyers in the market hurts builders of any size.

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