Bert Selva wants to move Shea Homes, the nation's No. 1 private home builder, into Florida, and wants it so badly he can just about taste it. The Sunshine State's been hovering in the sights of the Shea CEO and president for 18 months or more. It's no wonder, as it's growing faster than any other state in the nation, and it's practically mortifying for one of the nation's top 15 home builders not to have a major presence there. Lately, he's been kicking the tires on a number of deals to get a foothold, and word is Shea is near announcing the acquisition of a south Florida neighborhood builder, Minto Communities, in the coming weeks.
“We've looked at large land deals and potential company acquisitions,” Selva says. “I really like the Florida markets—they match up well with our strengths. Florida has strong current and projected job and population growth and a very desirable housing market—15 percent of all U.S. permits are in Florida, and we want a piece of it. It's a good fit for us.”
Being in the right mix of markets is critical right now, and that's true whether you're a public company or a leading private one. As concentrated as Shea is in Arizona and California with its volume and profitability, it is particularly vulnerable, as runaway demand, overly friendly mortgage rates, and soaring land appreciation turn dramatically into oversupply and crashing prices, at least in some markets. A “good fit” these days may well be more about cutting risk than it is about heightening opportunity. Selva knows Florida is the right move, a good investment, and the last thing he needs is a hundred thousand second-guessers, including a few enormously powerful hedge fund blocs, telling him that he shouldn't do what he thinks is the right thing for the company right now.
The thing is, this is today—mid-2006—that Selva's talking about an aggressive expansion move into another state, not last year, and not 2004. Contrast Shea's strategic inroads into a new marketplace with the emerging strategy of the publics, who as a group are tilting more toward using their cash troves to buy back their own stock, deleverage further, and turn down the volume as declines in the marketplace move from spotty to seriously challenging. It's been a while since such companies would bet on it being smarter to allocate their invested capital in their own shares versus going back out into the land market for that precious raw material as it got more and more valuable. Whether the widening use of share repurchase programs is about placating shareholders, waiting for overheated land markets to settle back or not, or making more profitable use of cash, it's what they're doing. Why is that? It's all about whose money calls which shots. “Being large and private provides the ability to be patient, if necessary, and it provides us flexibility,” says Selva.
APPLES TO APPLES? In 2005, the top 20 or so publicly traded companies generated $118 billion in revenue on sales of more than 350,000 homes in 30 or so states. They account for one of every four new homes sold, and one of every three dollars spent on new homes in the nation. Now, compare that with the leading 20 private players, who together topped out at about one-fifth the number of homes sold and collective revenues of almost $100 billion less than about the same number of publics. You'd hardly think both sets of companies were in the same industry, but the business model is the same—revenues on home sales minus expenses equals profits.
What's more, whether you are big and public or less big and private, the game is about managing customer care, real estate savvy, and operational expertise so that you can iterate the process at a considerable scale, whether it's an average of 40 houses sold a day like the publics, or five a day, like the private companies.
Since housing markets are local, publics are, in many cases, more like holding companies, and less like operating organizations with templated strategic and executional programs that work in synchrony across their enterprises. So, often there's more than a passing resemblance between a public division and an entire private company. No surprise there, as many of those divisions were private companies in their former lives. One thing to note in any comparison of publics and privates is that, for as many home building companies as there are, there are almost an equal number of specific business models, financial structures, ownership levels, etc., which set them apart from one another. In the broadest terms, the biggest differences among them come down to where most of the publics get most of their money, and where most of the privates get most of theirs.
In acknowledging those differences, the leaderships of many private companies view their enterprises as agile and highly motivated. Their conviction is that they control their own destiny, and after a solid decade of ready-access to the money they want to grow, the conviction runs deep. The publics often tend to see privates rather as moving targets the size of rounding errors in their balance sheets. Then again, the temptation among private builder strategists is to look at senior management of some of the publics and wonder whose interests they're really looking after. If they issue guidance that they're not going to deliver on performance expectations, their stocks tumble and eventually they're gone, replaced by new management. But if they keep to their line that they'll keep hitting their numbers, whatever impact that might have on the longer term health of the company, they'll be able to keep their jobs, at least for the moment. The incentive to tell the absolute truth in a declining market is questionable. What's to lose by remaining defiantly optimistic and saying you believe all those homes you're starting without orders today will sell as the market picks up?
“We model ourselves after the public companies in our approach to disciplined execution on plan and making our numbers, and I think the pressure from Wall Street makes them better operators in some ways that we try to emulate,” says Kenneth Neumann, CEO of Chicago-area-based Neumann Homes, which has spent the past 15 months digesting a large 2005 acquisition—Tadian Homes—and reorganizing its home building capacity around the introduction of two new manufacturing plants. “The big difference I see is in the flexibility we have, because we're not answering to the expectations of analysts.”
METEORIC GROWTH The fact is flexibility, patience, and agility are the terms you most often hear to describe the big differences between leading private companies, who netted out an aggregate 25 percent revenue growth in 2005 over 2004, and did it by selling 14 percent more houses than they did the year earlier, which compares admirably with the 25 percent revenue boost publics got on home unit sales growth of 11 percent.
Learn more about markets featured in this article: Los Angeles, CA.