A 30-year home building industry veteran, Robert Freed is no stranger to the turbulent ups and downs of the real estate cycle. Originally an auditor with Kenneth Leventhal, which later merged with Ernst & Young, Freed joined KB Home in 1994 after serving as controller and eventually CFO of Blackhawk. Having run all of KB's Northern California operations, Freed spent his last two years at KB handling its international investments, including land acquisition and joint ventures. Just a few months after his June 2007 retirement, Freed grew restless and joined Palo Alto, Calif.-based SummerHill Homes as president and CEO. In March, he spoke with managing editor Lisa Brown about navigating the downturn and kicking back in Napa Valley.
RF: I have been in the home building industry for 30 years, and It's probably best to say that I stumbled into it, fortunately. I graduated from UCLA as an economics major and intended to get my MBA when I decided to take a time out before I went to graduate school. I wasn't sure what I could get employed doing. I ended up convincing a CPA firm, Kenneth Leventhal--which subsequently merged with E&Y--to hire me without any experience as an accountant. Their clients were largely related to the home building industry. I started my career auditing home builders, got my CPA, passed the exam--I actually had to go back to school after I passed because I didn't have enough units.
I started as an outside auditor, also doing some consulting along with that. After about three and a half years of doing that, I chose not to pursue my masters and to try to get into the industry on the private side. Unfortunately, I was labeled as a bean counter.
BB: How did you work around that obstacle?
RF: I tried to convince people I could do management development and got laughed at. I was hired at Blackhawk, where I started as the controller. So I used the accounting background to move from controller to CFO and over time was able to convince some folks that I could do a little bit more than accounting. In 1994, I went to work for KB Home, and I got involved in the land acquisition side of the business there. During the course of the 13 and a half years I was there, I ended up running all of Northern California, and my last two years I took a corporate position where I handled our investments nationally--land acquisitions, JVs, etc. I retired from KB after 13-1/2 years at the end of June last year.
BB: What convinced you to exit retirement and join the SummerHill team?
RF: After being retired for a couple months, I realized I wanted to be a little more active, and I was fortunate enough to hook up with SummerHill. The majority owner, George Marcus, is someone I've known for many years. I started here in mid-September.
BB: Coming from a public builder background, what do you appreciate about working for a private company?
RF: I was working for KB in the last four or five years in Northern California, it was a very big business. While that was enjoyable, you lose a lot of intimacy. You don't get out on job sites very often, and you don't get to talk to salespeople and superintendents very often. While that was challenging, you're not anywhere even close to the field. To me, coming back to a smaller, private home builder where you're touching the ground more--I'm enjoying getting back to that, that intimacy.
BB: How would you categorize the experience thus far?
RF: For me, it's been a great experience for a number of reasons. I grew up in Northern California, and our business is in the Bay Area where I grew up. It's fun for me to be back home. The staff here is a great group of people, experienced, hard working. So far, they seem to genuinely enjoy having me around. I have three children; my middle is 24. He was able to join the company with me. The poor group here got stuck with two Freeds, but it seems like it's working pretty well. He's a land acquisition manager.
BB: What is your personal strategy for managing through the downturn?
RF: Certainly a company like SummerHill that's been around for 30 years had a strategy, but I think what I was able to bring to the table here was a touch more aggressiveness, and I don't mean that as an insult to the firm. One of the things that we were able to do when I got here on a couple projects that needed a kick in terms of velocity was aggressively find where there was a market. We did reduce pricing, but one of the big contrasts in comparison to a company like KB--that's more of a strategic project-by-project opportunity, whereas the public side is more volume driven. Here, we work real hard to find balance between absorption and retaining margins.
BB: What steps, if any, have you taken to right-size SummerHill's operations?
RF: A fresh look is always healthy for an organization. We did make some adjustments, but I think we did it in a thoughtful, strategic way, not a panicked fashion. The other thing I believe is critical in managing through this downturn--and a huge opportunity--is where many peers are dumbing down their product and shedding staff, we've actually spent a lot of time planning for the future. We're managing through the downturn by appropriately organizing our existing assets to match the market, but we've hired a number of senior people from other companies, increased the size of our land dept, and we are addressing product trends we think should be resulting in a competitive advantage for us when the market stabilizes. We're fortunate to have the luxury of thinking aggressively about how we grow our business coming out of the cycle.
It's very easy in a residential real estate depression to get down on yourself; the morale can slip. We've spent time defining smaller victories in order to keep the morale up and spent a lot of time sharing visions of the future. We balance the tough decisions with the brightness of the future.
BB: Did you anticipate the slowdown, or were you taken by surprise?
RF: You wouldn't think much of me if I said I was taken by surprise [laughs]. It began with recognizing that with a continued boom came more risk. At some point, if there was an adjustment that was going to occur, the balance sheets were bigger, the pipeline was bigger. The magnitude of projects in development were much larger than they had been in the past.
Did I anticipate this? No. We made efforts to deal with risks during that boom, so that did lead to an increase in some of our joint venture activity--which is a way to mitigate risk, by sharing it. I think it's reasonable to say that during my tenure at KB, Jeff Mezger and I maybe had a three- or four-month jumpstart ahead of our competitors where we started reducing acquisitions to generate cash. I don't think we did any better job of predicting the current situation than anyone else. I was surprised that geographic diversity and product diversity didn't provide protection from the downturn--it really failed us, to be quite candid. In the midst of this downturn, you need to define a strategy for when the market stabilizes. Organic growth on national basis has proven not to work, at least in my opinion. It'll be interest to see what comes next. I expect to see M&A activity on a large-scale basis of companies, not land.
BB: What would you point to as your company's biggest challenges for 2008 and 2009?
RF: Our challenge is, as with all companies, to manage through the downturn, trying to find that balance between absorptions and margins. But our business is poised from a pretty substantial unit increase year-over-year based on new communities opening. Part of challenge is managing growth during the downturn, if that doesn't sound like an oxymoron. Our volume is modest compared to large companies, but large for us; making sure our processes and systems and people are in place is part of our challenge. As we look to acquire land in today's market, underwriting land today is a real challenge.
BB: Do you think the recent decreases in inventory and median sales prices indicate that we may be close to a bottom?
RF: My guess, and that's really all it is, is that it's a bit of a false bottom. That comment is meaningful at the highest level, but not meaningful on a submarket basis. I still believe that there's further turmoil and volatility that I personally expect is going to last for the rest of the calendar year. I'd be surprised if the market didn't decline further and the bottom is more in the first part of '09.
BB: Of the decisions you've made since you stepped into your current position, what would you say has been the most valuable or influential?
RF: All of us try to assess our own performance. I think one of the things I hope I did well when I first joined the organization--I had the advantage of knowing a lot of people--I gave us the opportunity to get to know each other before I started making huge changes. I think the organization deserved my respect for its success to date, and I didn't have a big change agenda. So I think coming in patiently, observing, learning, and establishing rapport was a wiser move than assuming that I had to immediately put my stamp on the organization.
And at the same time, by asking questions that challenged the performers here, they actually started putting in their own change. "Is this the best we can do?" If someone hasn't been asked that in a while, the rubber kind of hits the road in the relationship, because they don't really know how to answer me. Some of the subtle changes in the way topics are addressed have caused us to think, "Hmm, there's opportunity for us to improve as a team." That's the message I've been sending, and I think it's starting to get some traction.
BB: What do you do to unwind during your time away from the office?
RF: Our home is actually in the Napa Valley. I unwind with a glass of wine, listening to jazz, sitting and talking with my wife and three dogs, I'm a pretty simple guy.
BB: Do you have a favorite jazz musician?
RF: I like just listening to what my kids call "elevator music." Smooth jazz, kind of mellow, we have it piped throughout the house. To me, it's just a relaxing background. What I have found kind of historically, I'm fairly intense when I'm at work, and when I'm fortunate enough to shut down, it's a glass of wine, music. I like to read. I relax rather quickly, then gear it up when it's time.
BB: What type of books do you typically read?
RF: I read a lot of spy novels, escape stuff. A lot the Clive Cussler adventure things; I read a lot of Stuart Woods. They are certainly not intellectual reads, I'll tell you that. I like some kind of mystery story, terrorists being destroyed, something that takes me away. I don't try to read to challenge my brain; I read to keep my brain calm and just kind of escape. Half the time I couldn't tell you the name of the book. James Patterson, I think I've read a lot of his stuff.
BB: What is something that people would be surprised to learn about you on a personal level?
RF: I really enjoy cooking. In the last couple years--I'm far from a gourmet cook, but I'm learning how to be a better cook, I really find that very relaxing. People are surprised because when we entertain, I'm like my Jewish mother. My wife sets the table, but I do all the appetizers, all the cooking, and I serve dinner. My wife has gotten me a lot of books, and she got me a couple subscriptions to some cooking magazines.
One of my goals when I choose to retire, because the Napa Valley is such a foodie destination, we don't live too far away from the culinary institute, so at some point I plan to take some cooking classes. I think that would be fun. But right now I'm on the trial and error basis. I've been told I make a really good Caesar salad, I do make the dressing myself. Napa Valley has a lot of natural, simple foods. We have a neat backyard covered patio with a barbecue, so a lot of it is finding different ways, whether it's a marinade or a brine on a good piece of meat or chicken, combining it with vegetables, and grilling it. I'm not into the real fancy sauces--I can't understand how to make it. I'm into fresh foods. But people who visit do request the Caesar.
BB: What is something that people would be surprised to learn about you on a professional level?
RF: Probably that I'm not nearly as competitive as people in our industry tend to be. You go through these various personality profiles, and you're rated--like red is Type A and real aggressive, has to win all the time, and I think then there's blue to yellow or something like that. I have a lot more of the sensitivity rating than I do the aggressive rating. Being that I do like us to do well as an organization and like the people around us to do well, I think people would think I'm a lot more competitive than I actually am.