AFTER 22 YEARS COMPETING IN A Southern California market dominated by giant public builders, Fieldstone Communities is in what may prove to be a transformative year. The privately held, locally owned builder based in Newport Beach has built more than 18,000 homes and earned in excess of $4 billion in revenues since it started building homes. In recent years, Fieldstone has closed between 750 and 800 homes annually. Now Fieldstone is poised to double that volume by 2006.
As part of a strategic five-year plan, Fieldstone has been marshaling its forces over the past several years. In 1998 it entered the Utah market. In 2002 it began a joint venture with Starwood Capital Group, of Greenwich, Conn., to develop a master planned community called Sycamore Creek on 715 acres south of Corona, in one of the nation's fastest growing housing markets. Although Fieldstone had built in the area previously, this was a significant expansion of activity in California's Inland Empire. Last year, the company entered both the Los Angeles, Calif., and San Antonio, Texas, markets.
During the same period, it brought new perspectives into the company by adding outside directors to the board. It has developed a sophisticated blend of private and institutional financing resources. It has refined its products and honed production efficiencies.
Talk to Ken Artz, executive vice president, CFO, and company director, and he'll tell you Fieldstone's strong culture and core values, the quality of its employees, and the strength of the relationships it has carefully nurtured over the years are all vital elements in its success.
Now the critical questions are: Will the same values and priorities enable the company to make the quantum leap in size and scope for which it is poised? Can Fieldstone achieve its ambitious goals and remain true to its distinctive character?
You can't overstate the importance of the company's culture and values, answers Artz. “No one joins Fieldstone without understanding our values and no one stays at Fieldstone without practicing them.” In place and virtually unchanged since the company's creation, “They really do drive our corporate culture and guide us as to how we treat ourselves and others,” he explains.
They remain a living, day-to-day part of the company because that's a management priority. Management surveys all employees every year, soliciting their written input about whether “we are living our values and if the leadership in the company is modeling the values,” says Frank Foster, CEO and president. The values are part of both development and compensation reviews. “We specifically identify areas where people are measured against living our values,” he says. But measurement isn't the reason the values persist. “People really believe in the values and that's how they model their lives,” Foster adds.
The Fieldstone Group Of Companies
Fieldstone was created in 1981 by Peter Ochs, now chairman of the board, and Keith Johnson, current vice chairman. Today the group consists of the home builder Fieldstone Communities, Fieldstone Communities Mortgage, Fieldstone Home Services, and the Fieldstone Foundation.
Since 2001, in a program to help build customers for life and to open a new revenue stream, Fieldstone Home Services has delivered a variety of “after market” services to homeowners. These include an extended service plan for Fieldstone home buyers, a maintenance plan, and Handyman Service. Some 60 percent of home buyers purchase the extended warranty, the company says. The Handyman Service enables customers to locate qualified contractors for home decorating, repair, or remodeling through a single source. Fieldstone Communities uses its established network of subcontractors and guarantees their work.
The Fieldstone Foundation was formed in 1983 to support nonprofit organizations serving the communities in which the company builds. It is funded entirely by contributions from Fieldstone profits. The Foundation focuses donations on “humanitarian, community and education, cultural arts, and Christian ministries.” Of particular interest are programs serving children and families with priorities including prevention of child abuse, and domestic and community violence.
Through 2003, the Fieldstone Foundation has made more than 6,000 grants totaling some $16.7 million.
“From our standpoint, it is just another way that we honor our values,” says Ken Artz, executive vice president, CFO, and company director. “It helps to build community within our communities and we never tie [donations from the Foundation] back to our home building operation. We've guarded against ever saying that we will help with a donation in a particular community because it will get us a piece of land.”
Disciplined Flexibility If strong values and relationships are the bedrock of the company, its operating principles are the twin poles of flexibility and discipline. The need for both is evident in the area of land acquisition.
“We are placing some big bets here in California,” Artz says. Land is extremely expensive in coastal areas. In some cases land can make up 60 percent of the home price. As a result, “we have to be disciplined in our land acquisition decisions,” Artz says.
“We have to sharpen our pencils to make those deals work. To be the winning bid, we have to be aggressive in knowing the markets, knowing what we can build immediately, knowing the market acceptance of those homes.” They must plan and calculate all projects costs carefully “to make sure at the end of the day it's economically feasible for us,” says Artz. “That also means we have to have the discipline to walk away when it is too risky or too expensive.”
Fieldstone's land committee plays an important role here. It meets every Monday, and members who are traveling attend via phone if possible. Unlike many similar committees, this one gets into the acquisition process early. “We spend little time going through the actual approval of a deal. If you're asking all the questions right before you need to say yes or no and there is something you don't like, it's too late. What is far more important is to get involved early on when negotiation is taking place, when the terms haven't been cast in stone, and when there is flexibility by all parties involved,” Artz says.
Another way Fieldstone manages risk is in the timing of land acquisition. The company wants to secure land when there is what's called in California a tentative tract map before entitlements are obtained.
“We tie up the land at the optimal time,” Artz says. Management determines the kind of home to build, the costs of entitlements, grading, construction, etc., and the intended margin, then “we back into what we can afford to pay the landowner.” This approach creates value for the seller but enables Fieldstone to walk away if it can't get the entitlements or the market goes soft, Artz explains.
Emphasis On Choice This discipline also enables Fieldstone to protect resources and retain flexibility, which has proved to be very important in Fieldstone's product development and marketing.
In response to California's sharp downturn and weak market in the mid-1990s, Fieldstone put flexibility to good use with products that give consumers an unusual degree of choice. Buyers were insecure about holding their jobs and uncertain about the direction of home prices. In these conditions, competition came from resale housing as well as new, Artz says. “We had to craft a way to overcome those objections and drive down our base home price.”
Fieldstone opened a free-standing design center—one of the first, Artz says—for options and upgrades, and developed a very flexible home design. The design allows buyers to exercise structural options that enable the floor plan to flex from three to six bedrooms and from two-and-a-half baths to seven, Artz says. More than 20 floor plans, which include choices such as an attic/loft combo and a downstairs master bedroom, are possible within one footprint.
This flexibility also serves California's dynamic market demographics. Ten years ago, some 85 percent of Fieldstone buyers were families, Artz says. But in the same market, “that's just not true anymore.” There's a far broader mix of life-stage and demographic buyers, he says, and they all want different things. Offering flexible designs is a lot better than trying to second guess them, Artz says.
The same flexibility that worked in a weak market works well in today's thriving market. When buyer confidence was down, they moderated their upgrades and options to lower the cost of the home, Artz explains. Today, they self-regulate to the high end both in home size and amenities, which naturally adds to sales volume and profits.
Between structural options and those available in Fieldstone HomeFitting Centers, a Fieldstone buyer has some 30,000 choices to make. Great for the buyer, but hard on sales and production management. Fieldstone does not begin construction until buyers choose all their options.
Technology At Work “We have to price all those combinations and be able to pull up that data instantaneously for someone selling the home at the site or in the HomeFitting Center,” Artz says. “Production superintendents must be able to make sure electronically that everything that is supposed to be in that home will be, and communicate that to all the subcontractors,” he explains.
Fieldstone works closely with its subcontractors—a strategic partnering program has been in place since the mid-1980s—and uses a lot of technology to keep it organized and running up to speed. Field and sales offices are connected to an intranet by the fastest means available in a given area. The back office, which is comprised of estimating, scheduling, purchasing, options, and accounting departments, is fully integrated using a fast software package. Superintendents use a variety of scheduling software programs, cell phones, and handheld devices for moving information back and forth. It all adds up to a production machine managed for continuous process improvement, Artz says.
Production discipline is essential to the company's approach in Utah and Texas, Foster explains. In those markets, Fieldstone strives to be the value producer, which means keeping costs low and values high.
“In that strategy it is important to be very consistent and predictable,” Foster says. Today in Utah, Fieldstone starts one house a day and tries to close one a day. Increase to two a day, and then to three, and you gain efficiency with each step, Foster explains.
California requires a different strategy. “It's hard to have those level starts and closings because of land constraints,” Foster says. In its home state, Fieldstone must be “opportunistic” in land acquisition, he says, and that can create opportunities. Infill development, for example, may necessitate building smaller-scale projects but often allows homes to command a premium price.
Mid-way through its five-year plan, Fieldstone is on track to double its volume and has broadened the base of its business in two directions. Infill projects will become more important as the supply of land in Southern California inevitably dwindles, and the company plans to pursue larger-scale master planned community development elsewhere.
The Sycamore Creek joint-venture, for example, “is a home run in terms of the land development,” Artz says. It's a new product for the company. It recognizes that demand will outstrip available lots, it lets Fieldstone leverage its skills and strong relationships, and “it feeds lots back into our home building business, which is the core of what we do,” he adds.
Next Step Looking five years ahead, Foster says he sees Fieldstone with its current four offices in California and potentially a fifth, doing at least twice today's volume. It may be one of Utah's top three builders, he says, with 400 to 600 annual closings in both Utah and the San Antonio market. And it could be “looking for opportunities outside of California to expand the non-California strategy,” adds Foster.
There is no question that five years from now Fieldstone will remain independent, Foster and Artz say. “There are so many benefits in being private that relate to how we operate our business, how we treat our people, and the career opportunities we can afford our people. And there's no great desire on the part of any shareholder to sell out and reap the financial rewards of a one-time sale,” Foster explains.
Learn more about markets featured in this article: Los Angeles, CA.