John Wieland Homes and Neighborhoods. Choice Homes. David Weekley Homes. Do they belong to a dying breed? As mergers and acquisitions swallow builders as large as active adult leader Del Webb and as specialized as Dallas-based CityHomes, the number of large--but not super-sized--home builders on the BUILDER 100 shrinks each year. "There aren't many of us left," says John Wieland, CEO of the Atlanta home building company that bears his name. "As someone said to me the other day, 'You're a dinosaur.'"
In a time of consolidation, builders such as Wieland and his counterparts may be the most threatened species around. While small builders stay nimble in niche markets and the mega-builders enjoy ever-increasing efficiencies, the guys in the middle feel the pinch on land, capital, and purchasing.
Just ask Randall Birdwell, who ran Emerald Builders (ranked #56 last year) in The Woodlands, Texas, before its acquisition by Arlington, Texas-based D.R. Horton last year. "Can a builder make money in a market without being associated with a big builder? Yes. Can he make a good living? Yes. Can he maximize his return? No."
"In this business," believes Birdwell, now a region president for Horton, "you need to get bigger to gain the leverage and operating efficiencies you need."
Strength in numbers
For builders and those who watch them, consolidation represents a familiar topic. As early as 1985, the BUILDER 100, in only the second year of this annual story, alluded to how the big builders were only going to get bigger.
Little did they realize just how large these companies would become. That year, Centex (then ranked 10th, after a handful of multifamily builders) broke the billion-dollar mark, grossing $1.2 billion for 6,500 units.
Today, of course, Centex Corp. is the biggest of the big builders. Last year, the Dallas-based company closed 26,060 U.S. homes--8.1 percent of all BUILDER 100 U.S. closings. (If international units are included, Pulte ranks first, with 30,394 total closings in the United States, Mexico, and Latin America.)
Centex owns the top financial spot as well, with gross revenues of $7.76 billion, if its commercial and related businesses are added to home building.
Centex's counterparts are growing, too. Last year, the top 10 builders increased their U.S. closings by 11 percent, maintaining their share of the BUILDER 100 market at 51 percent.
Such trends have caught the attention of people inside and outside home building. In January, Andersen Corporate Finance (a subsidiary of accounting firm Arthur Andersen) released the report, "The Impending Consolidation of the Homebuilding Industry."
Its prediction? By 2011, the top 20 builders will deliver 75 percent of American homes, thanks to their superiority in land, capital, and operating costs.
"Up to the mid 1990s, consolidation was just talk, so people ignored the real trends," says Paul DeCain, managing director. "Prior to 1995, the biggest builders delivered less than 2 percent of homes. The numbers are very different today."
It's an aggressive prediction--too aggressive, many analysts say, given that the top 10 home builders currently build about 17 percent of all U.S. homes. "It's [more] likely that they'll double their market share [to 35 percent] in the next 10 years," says Scott Campbell, analyst for Raymond James and Associates in St. Petersburg, Fla.
Caught in the middle
But no one disagrees about the pressure consolidation places on midsize builders. Good land positions are becoming difficult to find. Capital, while more available now than in years past, remains costly. Building materials will never be as cheap as they are for the big guys--making competitive home prices a constant challenge. Insurance is the latest hassle.
"For the midsize builder, I think it's going to be a gradual strain," says Campbell, who sees the industry becoming stratified into two layers: the big builder and the custom/semi-custom builder.
Others predict more dramatic changes. "I think the builders who do 500 to 3,000 homes a year will be an extinct species," says John Stanley, a home building analyst with UBS Warburg in New York.
The most critical issue? Land. For builders of all sizes, the scramble for dirt has become a motivation for consolidation. "The difficulty in buying and entitling land is one of the key drivers [in consolidation] right now," says Ian McCarthy, president and CEO of Atlanta-based Beazer Homes (#8). "That is really changing the way the market works."
Smaller builders simply can't get the longer term financing they need for an ever-lengthening entitlement process--and the public builders can.
The public builders also have more options for capital. "The biggest difference between public and private is that the public builders have a variety of sources, and the private guys are stuck with the banks," Stanley says. Public debt often costs less as well.
And, as the public builders option vast land tracts, it reduces the supply for everyone. "It drives demand up, so the pricing gets pushed [on all land that's sold]," explains David Weekley, chairman of David Weekley Homes (#22) in Houston. "The big builders don't always have two separate profit centers for land and building, so they can be more competitive on [home] pricing, whereas we have to pay the developer, who has to make a profit."
Having cash and capital on hand certainly helps in land deals. "We bought an $8 million piece of land yesterday, which isn't huge in the land thing," Wieland says. "But it was $8 million that needed to happen soon, and we couldn't wait for the bank. So we had to write a check for it." But that's not always an option, even for large midsize builders like Wieland. "Two years ago, we couldn't have done that," he says. "It makes all the difference in the world."
Surrounded by such challenges, many midsize builders are seriously exploring their options: sell to a public builder, get bigger by acquiring other builders, or go it alone. "I don't think we're at the point where the private guys are failing," Campbell says. "It's more of a decision process these guys will be going through."
If you can't beat them...
For Emerald Builders, that decision process happened last year, as the company grew in new and existing markets. "We were expanding into Austin, Texas, and Dallas at the same time. Meanwhile, Houston and Phoenix were rocking along," says Birdwell, whose company closed 1,394 homes in 2000.
But the company's capital situation couldn't keep up with its growth. It wasn't that money wasn't available--the response from the investment banking community was "overwhelming" when Emerald broached the idea of investing in the company, says Birdwell. The problem was that it came at too great a price. "We were going to have to go out and risk our equity to raise the capital to ramp up," he explains.
So Emerald changed directions. "We saw the trend of consolidation in other industries and our own," Birdwell says, "and we sought to find someone." That "someone" proved to be D.R. Horton, who purchased Emerald for cash and stock.
"We're delighted with the relationship," says Birdwell, who says Horton has provided both the operational flexibility Emerald wanted and the capital and purchasing efficiencies Emerald needed but couldn't achieve on its own.
"The operating efficiencies of large home builders are substantial and logical," says Birdwell, particularly when it comes to the hard costs of building homes. "We'd gone as far as we could on that."
Eat or be eaten
Some builders aren't interested in being bought--they'd rather be the buyer.
That's the case with Meritage Corp., a growing but still smaller public builder with dual headquarters in Plano, Texas, and Scottsdale, Ariz. "We're in a position of being a company that's looking to acquire other builders," says John Landon, who shares the chairman and CEO spot with Steven Hilton. "We're public, with access to capital ... and we're looking for companies that are like us."
Last year, Meritage (#23) did just that, buying Hancock Communities from Las Vegas-based American West Homes (#26). The acquisition significantly boosted Meritage's presence in the Phoenix market, bringing it to 1,064 closings there in 2001. It's not the top builder, but that's OK. "We don't need to be No. 1," Landon says. "We think the sweet spot is in the [numbers] four to six range. You get all the good deals and the economies of scale, and you can focus on profitability."
For many builders, growing through acquisition represents an undeniable way of reducing hard costs. "Pulte, by adding 8,000 units a year, can then go back to its suppliers and say, 'What can we do?' It expects to carve $25 million out of purchasing synergies [from the merger with Del Webb]," says analyst Campbell.
Surrounded by such consolidation, public and private builders alike are feeling acquisitive. Twenty-four of the Builder 100 plan to grow through acquisitions in 2002.
That includes Meritage, of course, which sees such acquisitions as a "top priority." But if the company were private, Landon acknowledges it would probably have a different strategy: "I'd be exploring all options we had as builders, from teaming up with a medium-sized public builder to selling out to a public builder to growing a little longer [as a private company]."
Making room in the middle
For those midsize builders who choose the last option, surviving under consolidation will require operational and entrepreneurial creativity to overcome the land, capital, and purchasing obstacles.
Some, such as David Weekley Homes and Arlington, Texas-based Choice Homes (#21) have turned to technology to maximize time and efficiency. "I think our teams in the field are able to build twice as many homes as they would without technology--and that's a conservative estimate," says Choice CEO Stephen Wall.
That speed has kept Choice competitive, even in the challenging land arena, as the company touts its velocity to developers.
"We've been able to buy lots," says Wall, who closed 3,652 homes last year. "I'm not concerned about land consolidators."
Neither is he worried about the increasing size of the largest builders. "I don't think the big will eat the small," Wall says. "I think the fast will eat the slow." Others have taken a more niche-oriented approach, despite their production volume size.
In Atlanta, John Wieland Homes and Neighborhoods (#49) believes it has found friendly (and profitable) ground for the large midsize builder through expanding product lines and challenging infill projects. "Small builders don't have the money, and large public builders don't have the patience," Wieland says. "It creates opportunity for us: We're big enough to have the money, yet we're small enough to have the patience for architecture or zoning a difficult piece of land."
The builder points to the example of Old Ivy, an Atlanta development of condos, courtyard homes, and townhouses over commercial space--on land that also includes a historic site.
"That's the kind of project we like and do well, because it's too big, too complex, and too expensive for a small builder, and the detail is too crushing for a Pulte, a Ryland, or a Centex," Wieland says.
That's the approach midsize builders need to take if they're going to survive in an era of consolidation, Wieland believes. "If you try to mimic a public company, it's going to be a problem because you don't have the cost efficiencies and the capital structure. But if you figure out what they don't do well, and you take on those harder projects, you'll do very well," he says. "You can't play copycat with those guys."