Ryan McGowan had a lot on his mind when he arrived at last year's International Builders' Show. The president and co-owner of Premier Construction and Development was preparing for another year of explosive growth; 2003 revenues were expected to reach six times the volume seen in 2001 with a five-fold increase in net income.
Yet, like a lot of small and mid-sized builders with grand aspirations, construction activity for the Puyallup, Wash.-based builder in the Puget Sound area had sprinted ahead of the company's capacity to manage that growth and McGowan knew it. Little did he know, however, that a chance meeting in a cab ride in Las Vegas would put the wheels in motion to rebuild his five-year-old company into one that is now coming together not only to support that growth, but making moves to expand outside Premier's core market and into the ranks of fast-track regional builders.
Compared to its first 18 months in business, when it built only 23 homes, Premier was on track to build nearly 300 units in 11 communities in 2003, and McGowan had visions of building 1,000 homes per year by 2007. At the same time, McGowan harbored a dream to build a company that was also a great place to work.
Premier had been fortunate in having access to plenty of capital and real estate, thanks to Trinity Land Co., one of the region's largest land developers, which also happens to be owned by Ryan's father, Clark, who provided the financing to get Premier off the ground. But the home builder lacked a solid grounding in virtually all of the other components--information technology, human resource policies, financial accounting and reporting procedures, and managerial expertise--that an expansion-minded business like Premier would need in order to rise to the next level without capsizing or imploding.
Bill Carpitella, who elected to share a cab with McGowan that fateful day at the Las Vegas Convention Center, listened to McGowan's story and couldn't have agreed more. "They were building 150 homes with only 20 people, and while they were winning the delivery battle with energy and by default, they couldn't even tell at the time whether they were making a profit," recalled Carpitella, CEO of The Sharrow Group, in Rochester, N.Y. That cab ride led to The Sharrow Group becoming one of several consulting firms that McGowan commissioned to assess the builder's strengths and weaknesses, recruit key personnel, and move his company forward expeditiously. It also led to Carpitella becoming a kind of consiglieri at Premier, providing advice to McGowan as he formulated a more comprehensive business model and helping McGowan recruit key personnel to fill several management gaps in a whirlwind of changes at Premier in 2003.
Since June, Premier has hired a CFO, vice presidents of purchasing and construction, and directors of marketing and its design studio, all but one of whom were recruited by Carpitella, and all with big builder credentials. "This is certainly the most dynamic environment I've worked for," said Michael Swanhorst, who joined Premier as its CFO in June, and whose background includes stints with Gemcraft Homes in Texas and KB Home. "But Ryan has a road map that's being refined by the people he's hired," he said.
"He's genuine and has a lot of integrity," said Camille Herd, who joined Premier in September as its Design Studio director. "Ryan's already a very good leader, and he's smart enough to know he can't do this alone."
Premier's transformation began last March, when Carpitella traveled to Puyallup and spent five days with Ryan McGowan to see, in McGowan's words, "where we were headed" and to "create a vision." Carpitella recalled that McGowan wasn't even sure he wanted to expand. "But it was obvious that Ryan wanted the business to be something more."
McGowan envisioned a company that continued to produce quality homes in family oriented communities for first-time and move-up buyers and that continued to nurture its employees but also could manage the construction of thousands of units in several states. Carpitella helped McGowan flesh out that dream and define the operational elements needed to execute it. Carpitella also started searching for people to fill key corporate spots and homed in on executives with big builder backgrounds. "We're looking for people who have walked a mile in the shoes of a company that's the size I want Premier to become," said McGowan.
What consultants and new hires found upon their arrival was a company that lacked management depth, coordination, and procedures. "It had gotten to a size where it needed a common scheduling system and much better [employee] training," said Scott Sedam, president of TrueNorth Development, a Michigan-based consultancy firm. Sedam spent three days in March interviewing more than 50 of Premier's associates and trade partners to assess what was and wasn't working within the company.
Herd, who ran KB Home's largest design center in Las Vegas, said that when she joined Premier, its purchasing department was pricing each home individually, instead of using a standardized price-and-option sheet. "It was not a pretty picture," she recalled. David C. Nelson, Premier's vice president of purchasing and operations, was even more candid: "We needed to know the true cost of our operations."
To rectify the company's financial reporting deficiencies, CFO Swanhorst installed computer software--supplied by Builder M/T and Timberline--to better track lot development and job costing. Another of Swanhorst's departments, human resources, began developing its first in-house manual to be ready by the start of the new year. The organizational disciplines that Nelson--whose background included stints with John Wieland Homes and MDC Holdings--has since put into place include reducing Premier's house plan list to 10 plans from 40 and installing a purchase-order system that he said "takes each plan, defines every cost, puts the appropriate markup on it, and makes sure what's sold is what gets built." In early fall, Nelson hired two estimators from the Wayne Homes division of Centex.
At the Design Studio, Herd needed to know how options contributed to an overall sale. She estimated that the average home includes $10,000 in options, but, because the systems and data are only now coming together, couldn't say for sure. One change she implemented early on was a survey asking Premier what other options it should add.
New financing sought
The pieces to Premier's puzzle that McGowan and his team are assembling have started to assume recognizable shape. NRS Corp., a Madison, Wis.-based consulting firm whose display booth McGowan came upon at the builders' convention, has, since July, polled every one of Premier's home buyers to gauge satisfaction levels. The builder recently gained a 10 percent stake in Security Mortgage, which could be a prelude to Premier taking mortgage financing in house. And the company plans to move into a new 22,000-square-foot headquarters this month that will include a 4,400-square-foot design center.
At the same time, Premier is trying to clarify its public image and has been working with Morton Creative, a Bellevue, Wash.-based ad agency, to develop a consistent marketing campaign that Scott Morton, the agency's president, says highlights the quality of the homes. That will become increasingly important as the builder begins expanding into new and inherently competitive markets. With land in the Puget Sound market growing more scarce (see "Developing Presence in Puget Sound," below), McGowan has been scouting lots in Oregon, where he plans to expand next year. He has his eyes on northern California, too. But Premier is still a work in progress, and is at least a year away from being ready to plant its flag in other states.
There's some debate within the company, though, about what role third parties ultimately should play in determining Premier's direction. That debate touches on such areas as mortgage financing and building materials purchasing, but has focused on sales. Seattle-based Windermere Realty currently hires, trains, and manages what is now a 15-person sales force at Premier's communities. Gary Hendrickson, who manages the Premier account for Windermere, and who is a longtime friend of Ryan McGowan, claims that bringing sales in house would cost Premier more money. But Carpitella and others question the wisdom of using an outside agent for sales, and even McGowan concedes that this setup is awkward, especially when trying to get salespeople more in tune with Premier's construction team. But he says he believes Windermere "has been a big part of our success," and he's in no rush to change this arrangement. He's asked Herd to become more involved in the training of the field staff.
One area where Premier could eventually need outside help to achieve its expansion goals is financing. Premier has benefited enormously from the long-term relationships that Clark McGowan has cultivated with local lenders. But Premier is highly leveraged, according to Swanhorst. During the past two years, the McGowans have taken only enough cash out of their businesses for living expenses and taxes, and they pumped the rest back into the home building company. "We need new sources of capital," asserted Swanhorst. "We expect to double our size over the next five years, so we'll need to double our financing."
Thus far, the McGowans have rejected offers from other builders to buy Premier and insist they aren't interested in relinquishing ownership or control. "I'm still young, so why would I want to sell?" McGowan asked. With his management team in place and his corporate structure built for growth, McGowan sees Premier as being ready to expand well beyond the company he could only dream of a year ago in Las Vegas. His confidence about his company's future and his leadership abilities may be justified or misplaced, but for now it's unshakeable. McGowan is already talking about Premier eventually building nearly 10 times the number of homes it constructed in 2003 and becoming a regional powerhouse. Even the company's debt burden can't cloud that vision. "We have close to $100 million in borrowing ability, and I don't think this will be an issue until we're operating in five states and building 2,500 homes," he said.
That of course may depend on who steps into a cab next with Ryan McGowan.
About 3,700 homes were sold in Washington State's Pierce County between September 2002 and August 2003. Premier captured more than 6 percent of those sales, making it that county's third largest builder, according to New Home Trends, a new construction data source based in Mill Creek, Wash. With some exceptions such as Quadrant and Polygon Northwest, builders there operate with about the same level of sophistication as Premier. "For the past 15 years, builders in Pierce County haven't done any research and just winged it," said Todd Britsch, New Home Trends' account executive.
While a handful of big builders including Centex Homes, D.R. Horton's Stafford Homes division, and Shea Homes operate in the Puget Sound, others have kept their distance because there aren't many large land tracts suitable for master planned communities. Britsch noted, though, that builders from King County (which includes Seattle), where there's a three-year supply of lots, have been migrating south into Pierce County, where there's a 10-year supply. The influx of King County builders, that typically focus on larger and more expensive houses, could alter the home buying calculus in Pierce County, where in the past year 83 percent of the homes sold for between $150,000 and $250,000, and 43 percent were between 2,000 to 3,000 square feet, the ranges that Premier targets.
As more builders enter the market, land gets tighter. Trinity Land Co., which Ryan McGowan's 56-year-old father, Clark, founded in 1974, until recently had supplied all of the lots Premier built on. The elder McGowan said that Trinity had 1,331 single-family lots and 231 multifamily units in the entitlement process in October. But it can take three years for developers to clear a path through environmental and topographical thickets before a lot reaches a finished stage, so Trinity can't deliver enough finished lots on an even-flow basis to keep pace with Premier's needs. Consequently in 2003, outside developers supplied 30 percent of the finished lots that Premier built on, said McGowan.
Land availability hasn't kept Premier's executives awake at night, at least not yet. "Trinity has secured enough land that would allow us to build as many as 700 homes each year for the next seven years," said David C. Nelson, Premier's vice president of purchasing and construction. "But we're not going to do that because Ryan is more interested in building a company that will be around."
Learn more about markets featured in this article: Olympia, WA.