–By Teresa Burney, Lisa Jackson, and Sarah Yaussi
- For an inside look at public builder executive compensation packages, visit our online exclusive. [Go to article]
- 2007 Public Builder Financials [Download PDF]
- Five Year Trends [Download PDF]
- Avatar Holdings
- Brookfield Homes Corp.
- Centex Corp.
- D.R. Horton
- Hovnanian Enterprises
- KB Home
- Lennar Corp.
- M.D.C. Holdings
- Meritage Homes Corp.
- M/I Homes
- Orleans Homebuilders
- Pulte Homes
- The Ryland Group
- Standard Pacific Corp.
- Toll Brothers
- WCI Communities
The numbers tell no lies.
The year 2007 was miserable for publicly held companies in the home building industry. At least they managed to remain in business, in most cases. Thus the grades contained in Big Builder's 2008 Public Builder Report Cards reflect a below-average performance across the board, that of a lesser class than those of years past.
There was only one "A," which went to NVR; one "B-plus" (Avatar Holdings); three "Bs" (Toll Brothers, Pulte Homes, KB Home); and three "B-minuses" (Centex Corp., The Ryland Group, and M.D.C). The rest of the group was mediocre, at best.
There are four fewer home building companies in the class this year: Dominion, which was taken private, Comstock, Levitt Homes, and TOUSA–the latter three having sunk into insolvency. Another, Beazer, could not be evaluated because it had not filed the necessary financial statements with the Security and Exchange Commission by press time (see "Where are They Now?" on page 36).
The industry has already written off 2008, barely into its second quarter. Some optimism remains that home prices, and thus the market, may hit bottom this summer and then bounce along through the end of the year until a 2009 turnaround. However, that scenario does not take into account the possibility of a prolonged recession, the failure of one or both of the GSEs, or a worldwide recession–all events that have surfaced as real possibilities.
With 2007 in the books (see accompanying charts), here's a progress report on how the publics are looking a third of the way into 2008.
Blessed with large chunks of land it bought years ago, the ability to raise cash by selling off some of it for commercial and industrial uses, low debt, and ample reserves, Avatar could probably get away with building no houses at all until the market turns around. In fact, its sales numbers have fallen so far that the 780 houses it built last year add up to only a little more than one-third of the 2,122 homes it built in '06. The company basically has the ability to put itself into near hibernation, slowing down its metabolism until the Florida and Arizona markets where it builds come back.
Brookfield has too much land, too concentrated in formerly very good markets–California and Washington D.C.–that are certain to rebound in the future. Much of the land is of older, prime vintage. Brookfield also has too little cash, all of $9 million at press time. The company needs to sell land to generate cash. The question is: At what price? It may make the difference between survival and getting fleeced of the family jewels.
Centex began to divest businesses in 2006 to focus on "core" home building operations. That move back toward becoming a merchant builder in 2008 led it to sell off and walk away from communities, exiting secondary markets. It also followed a "transparent" pricing strategy, with steep discounts, that allowed it to move product. But Centex still has loads of land on its books. It ended the calendar year with 1,050 communities, of which 60 percent were active. The trouble is, 67 percent of them had never been impaired, and about 75 percent of the inactive ones were not impaired. That means Centex will likely be selling and/or impairing land throughout 2008. CEO Tim Eller puts it this way: "We are gaining share and strength in the markets that we feel will provide the best future margins and returns. We are really going to focus on those markets where we will have a top-three to top-five position to maximize our relative market share."
The nation's largest builder operates in 27 states and 83 markets, with 80 percent of its business in the first-time buyer and first-time move-up market. Treasurer Stacey Dwyer says that, as of year-end, the company's top priority is to reduce its debt load. The good news, she points out, is that the debt is completely transparent on the balance sheet. "What you see is what you get," she says. "There are no off-balance sheet transactions." The strategy includes maintaining a low overhead, with SG&A hovering between 10 percent and 11 percent, continuing to adjust incentives and pricing strategies to reflect market conditions, and keeping starts to only those for a qualified, non-contingent buyer (each one is approved by the CEO). The company also needs to reduce its land position. With 144,000 owned lots at the end of 2007, Horton has its work cut out for it. Most in the stock analyst community think Horton has more–perhaps much more–to impair. But Horton has had success selling owned lots at a profit, even in this market. It also has little JV exposure, and although it has significant debt maturing in 2008, it appears to have the cash to pay it down.
Watching Hovnanian's stock price during 1Q2008 was instructive. HOV's big problems have to do with buying assets at top-of-market prices in 2005 and 2006 as it pursued fast-growth for high returns. Its shareholders were doing just that, shorting the stock when the builder stocks were falling, but riding it hard as the builder stocks rose between mid-January and the end of March. HOV, its symbol on the New York Stock Exchange, is a risky bet, at once posing risk of great losses and promises of great returns. It has joint venture exposure, that nasty stuff that, if it goes bad, has to be brought onto the balance sheet with all the attendant write-downs that entails. HOV is also an oft-mentioned candidate for acquisition because of its balance sheet issues, its debt and covenants possibly becoming a slippery slope if the downturn gets even worse or stays prolonged. The company is also not well positioned, in terms of cash and assets, for a rebound.
If marketing can get a home building company through a slump, that company would be KB Home. With partners such as Disney and Martha Stewart, KB will continue to benefit from marketing budgets and media exposure far greater than it could generate on its own. The company also puts a premium on architecture, and in a market in which product differentiation often means the difference between a sale and a price reduction, the look of the home counts. On the negative side, KB is still focused on the first-time buyer, which CEO Jeff Mezger sees as the company's base customer. The company has done well at retooling its product line to reduce square footage, value engineering construction costs down, and pushing home prices down. Still, absent the sale of Kauffman & Broad (in France), the company would have posted big losses for 2007. KB has reduced its geographic footprint, exiting markets in Florida, Indiana, Illinois, New Mexico and the Mid-Atlantic region, a 38 percent drop in active communities that should help keep overhead down in 2008. KB does have JV exposure, including the two massive Las Vegas developments, Inspirada and Kyle Canyon, that have been the subject of speculation that one or more of the partners may default.