Several large public production builders took their turns in the limelight at the 2008 Deutsche Bank Homebuilding Symposium Monday, detailing how they're coping with what several called the worst home building market in history and how they plan to thrive coming out the other side.
Here's a summary of their presentations:
Meritage Executives at Meritage Homes said they believed builders will not have to wait too much longer before a housing recovery hatches.
Citing improvements in existing home sales and new-home inventory, a flattening of the pending sales index, and a greater number of completed homes sold than added to inventory, director of investor relations Brent Anderson said, "There's some consensus around expectations that we'll see some improvement in the latter part of next year."
But just in case the indicators are leading toward a false bottom, Anderson said that management would be continuing its "asset efficient" strategy--and, of course, thanking its lucky stars for a concentration in Texas, where local housing markets have fared better than many other parts of the country. Of Meritage's $2.3 billion in housing revenue last year, Texas operations accounted for more than $1.0 billion of it.
The key to furthering the company's asset efficient model rests with three factors:
A built-to-order mentality: Anderson said that the company, like other public builders, has worked hard to reduce its standing inventory, reducing its total unsold inventory by 48% since June 2007. Today, the company counts three to four spec units per actively-selling community, with between one and two units finished and the rest under construction. "This [reduction] creates less pressure to reduce [home] prices going forward," he said.
A land-light philosophy: Anderson pointed to the company's 60% reduction in lot supply from peak as an indication of how well positioned the company is to not only survive the downturn but also thrive in its wake. CFO Larry Seay said the company had one of the lowest exposures to land risk out of the public builders with a total 3.2-year lot supply and roughly 1.8 years' worth of optioned land.
Adaptability and flexibility: Both Anderson and Seay mentioned that the company has shifted its customer focus more toward the entry-level buyer and first-time move-up buyer. Consequently, the company has invested time and money into repositioning its product to meet that demand at lower price points, including the introduction of 30-plus new floor plans across its Western markets. Changes include reducing square footage, increasing the number of bedrooms, and standardizing some home features such as kitchen layouts and window sizes.
Anderson and Seay also pointed to the fact that the company was looking to purchase new land as an early indication of a housing recovery. However, the company is pursuing with caution; it's targeting smaller land parcels, ones that would include anywhere from 50 lots to 100 lots. Seay said that the company had purchased as many as three new land positions and was actively seeking parcels in Orlando, Northern California, and even Phoenix. The deals were happening at significant discounts, but Seay said the downside was that the company was going to have to hold the lots on its books. With land bankers caught in the credit crunch, access to option deals is restricted, forcing more buildings to buy rather than option new land. The good news, said Seay, is that risk is reduced by purchasing smaller parcels.
"Sure, we may need to put some [lots] on the balance sheet, but we're keeping a short-term perspective," he said.
Pulte Pulte pushed its strong balance sheet and low-debt and defended its strategy to hold on to land on which it plans to build in the future.
By the end of the year, Pulte expects to have $1.9 billion in cash on hand. And, with its debt-to-capitalization in the 40% range and no debt bills due for a few years, CFO Roger A. Cregg told investors the company is in good shape.
That large cache of cash allows Pulte to comfortably hold on to its land, Cregg said. It hasn't gotten any easier to get approvals for development, and it will cost less to hold on to it than to buy it back in the future.
"Most of the people buying land today are not builders," he said. "They are hoping to make 25% on it. Our approach has been to impair the land down to market value and keep it on the balance sheet."
For a company with enough cash to hold the land, it doesn't make sense to sell it at a loss and take a tax write-down on it. "It doesn't put you in a good position unless you need the cash," he said.
Pulte also touted its diverse market platform as a strong advantage. About 17% of its sales go to first-time buyers, 22% to first-time move-up, 15% to second-time move-up, and 46% to active adult buyers.
The price of existing homes will have to fall farther before the industry truly turns around, Cregg told investors.
In the meantime, Pulte has been working with value engineering and supply chain improvements to build better houses less expensively.
The company has pared down its number of floor plans across the U.S. from 2,500 a couple of years ago to 400.
"This has given us the ability to leverage window sizes," for instance, realizing savings by buying in even greater bulk.
"We are doing more interfacing with manufactures, reducing the middle men in the process," Cregg added.
During the boom years when some home prices were going up $10,000 or more over a weekend, it was difficult to get people to think about cutting $500 or $1,000 out of the cost of construction. Now it's imperative.
"We've got a more centralized approach to the business in general to take costs out, commonality and standardization, and we are sharing more across the organization than we have before," said Cregg.
Beazer The market should start getting better by this time next year, Beazer Homes USA CEO Ian McCarthy told investors Monday. And stability in the Mid-Atlantic home market will likely mark the beginning of an over-all market stabilization, he predicted.
In the meantime, Beazer has been busy divesting itself of lots under option, moving out of markets where it doesn't see a future, value-engineering its products to give consumers more for less, and renegotiating its revolving line of credit.
In the last year, Beazer has lowered its lot count by about 25,000, most of which was achieved by walking away from options to buy. But a funny thing has begun happening lately when Beazer told landowners it planned to abandon options.
"Many of the landowners who had extended us the option have taken a different tack in the recent quarter and have been very aggressive in trying to rework those options,"CFO Allan Merrill said. "If it's not a strategic project and we are not going to make good money ,we are not staying in those deals....But we are seeing some success in re-striking the economic relationships embedded in those options."
Beazer has also had success in selling some of its assets to generate cash, including lots in Ohio and two condominium buildings in the Mid-Atlantic to apartment developers.
The Atlanta-based builder has also shrunk itself to better fit the existing market, reducing head count by 65% from the peak and by moving from six regions to three and from 20 financial centers to five.
Also, it's become focused on building houses for less while giving consumers more, such as better designed homes with improved storage. It's also decreased the number of floor plans and the number SKUs of its products, simultaneously simplifying processes and cutting costs.
Merrill, who has renegotiated the company's debt three times in the 20 months since he joined Beazer, said he hopes the most current restructuring will last for a while.
Even though the company had no outstanding debt on its revolving line of credit, the company kept violating the loan's covenants for interest coverage and tangible net worth, putting the company in "quarter-by-quarter crisis mode," Merrill said.
"We've removed all the financial covenants except for tangible net worth above $100 million," he added. Of course, that came with a price tag; the company had to increase its collateralization and reduce the amount it can borrow from $500 million to $400 million. "We feel like this is now in a position where on a quarter-to-quarter basis there won't be a lot to talk about."
Centex Even-flow production has a new name at Centex Corp. these days: cadence building.
Centex CEO Tim Eller and CFO Cathy Smith touted the term during an investor presentation this afternoon at the 2008 Deutsche Bank Homebuilding Symposium, calling it the new corporate strategy for improving profitability and ultimately "building a better Centex."
The strategy attempts to inject predictability and reliability into the oft-undulating home building market through discipline and efficiency.
The first step is clearly defining and standardizing the core business processes across every Centex division, from strategic marketing to the construction of homes. Eller said the building of this corporate playbook was well underway and would be finished by the close of the company's fiscal 2009. The move had already played into some decisions to exit markets. When local business dynamics are preventing a consistent delivery of land, materials, or labor, management is making the decision to get out.
By having a regimented set of plans and processes, Eller said that the company will be able to build more profitability. The business will be forced to move away from a spec-builder model toward dirt sales, which have historically yielded better margins because they aren't generated through the high-cost Realtor channel. Smith noted that the company has been bringing its spec count down; she said the company now is averaging 2.5 specs per community versus 7 specs per community at the peak of the cycle.
The new plan also hinges on a revamp of the scheduling process. In response, the company is developing Centex Ace Scheduling. Few details on the new system were disclosed during the presentation, but Eller said it results in savings by helping trades achieve higher crew utilization and improved quality of workmanship.
"Overall, we're seeing 0.5% of cost savings per month," Eller said. "And we think we're just getting started. We will see the greatest benefits ahead of us."
However, the system only works with full buy-in from trade partners, a fact that would require the company to develop deeper partnerships with trades.
But correctly implemented, the company should be able to build fewer homes more profitably--a fact that Smith predicted would stand up to an anticipated continued pressure on sales volume and elevated cancellation rates. In fact, it's estimated that 450 homes built under the cadence program would be more profitable than 600 homes built the old way.
Learn more about markets featured in this article: Anderson, IN.