Former CNN news correspondent Gene Randall was trying hard to put four of the housing industry's leading CEOs on the firing line about perennial investor concerns over rising interest rates and talk of a housing bubble. But the CEOs--Don Tomnitz of D.R. Horton, Bruce Karatz of KB Home, Chad Drier of The Ryland Group, and Ara Hovnanian of Hovnanian Enterprises--speaking at the opening session of the inaugural "Big Builder '03" conference were unanimous in their response: Wall Street still doesn't get it.
"The bubble talk sells a lot of newspapers," Tomnitz told Randall, who served as the session's guest moderator. But the facts, said Tomnitz, just don't support the case for a bubble. "Demand is outstripping [housing] supply and will for the next five years," said Drier, noting that state and local budget problems are exacerbating land constraints, which will only further suppress supply.
Challenged by Randall about concerns over rising interest rates, Hovnanian acknowledged that "Interest rates will go up when the economy improves," but added that "[rates] were at 8 percent for a long time in 2000, and housing was strong in 2000." He added circumspectly: "We've gone through terrorist attacks, we've had fires and floods, and unfortunately everyone knows these tragedies are now a part of our world." Yet housing, and big builders in particular, kept right on growing, he said.
Hovnanian expressed exasperation that investors are still looking at the cycles of the '70s and '80s in evaluating builders today. "We have much more capital than we did then," he said, "and there were no such things as ARMs. Interest rates were 18 percent. We've been undervalued for too long."
Karatz acknowledged there was room for at least some concern. "I'd like to see more job growth," he said. But he shrugged off the modest rise in interest rates. "Low interest rates allow people to buy more house than they would otherwise, but people buy homes because of life events: marriages, births, divorces," he said. "Those events are going to continue."
Tomnitz, who also served in the role of chairman of the conference, dismissed the impact of interest rates on the ability of big builders to keep growing, noting that "People are buying a monthly payment, not an interest rate," as much as the house itself, he said. Additionally, "[big builders] are going to grow 5, 10, or even 15 percent annually at the expense of less efficient, poorly capitalized smaller builders," he said.
Little it seemed could dim the optimistic outlooks each of the executives had toward the future of housing and their businesses. That optimism clearly pervaded the mood of the more than 300 high volume home building executives who attended the three-day educational and networking event held Nov. 11-13 at Las Vegas' Mandalay Bay Resort.
The BIG BUILDER '03 conference was created and programmed by BIG BUILDER and BUILDER magazines, published by Hanley Wood Magazines, with the aim of addressing the management challenges unique to the country's high volume production builders. Hanley Wood Exhibitions designed and coordinated the event and Hanley Wood Marketing promoted it.
D.R. Horton's Tomnitz, in agreeing to serve as the inaugural conference's chairman, concurred there has been a gap in meeting the needs of large volume builders. "I've found that the vast majority of educational seminars, trade conferences, and workshops are designed for medium- and small-size builders. They rarely address the operational issues and competitive pressures faced by the nation's largest volume home building companies," he said in a welcome letter to attendees.
"There is a micromarket emerging in the housing industry," said Hanley Wood president Frank Anton. "This is the first educational event in our industry where high-volume builders are surrounded only by their peers," he said. "We felt big builders were hungry for an educational and networking event such as this one, and sponsors see that consolidation of purchasing power at the top of the industry has significant implications for their businesses."
The new conference was notable for having more than 60 speakers representing the country's largest home builders and building specialists covering a diverse range of program topics included building, finance, sales and marketing, and business mergers and acquisitions. The event was made more distinct with the creation of a "MarketSpace" area designed for executives that included interactive kiosks and meeting and exhibit spaces designed with a boardroom look and feel. Major sponsors included Timberlake Cabinet Co., Masco Corp., Nextel Communications, Whirlpool Corp., and nearly 40 other leading suppliers.
"Acceptance of this event, by both sponsors and builders, was extremely strong," said Anton, noting that exhibitor spots for the event sold out in less than a month.
Among the highlights from individual panel sessions:
* Growth strategies: Larry Sorsby, executive vice president and CFO of Hovnanian Enterprises, joined by CFOs Bruce Gross of Lennar and Joel Rassman of Toll Brothers, debated the best paths to growth, noting that builders need to generate $100 million in after-tax profits to consider going public. Gross emphasized that "Larger isn't better, better is better," adding that for Lennar, the three-legged stool for strategic growth revolves around delivering superior earnings-per-share growth, competitive return on capital, and keeping leverage within the 35-to-40 percent range.
While Toll Brothers believes in organic growth, Rassman noted that when the company expands into new markets, acquisitions still usually make economic sense to avoid the "dumb tax" associated with inevitable start-up errors and the lag in local learning curve issues. The advice to prospective sellers by all the panelists: Position companies as a good match, in terms of cultural and business systems, with strong return-on-capital figures and great people. Additionally, they advised against turning to investment bankers intent on packaging builders up for auction.
* Buying better: National purchasing directors Ric Rojas of D.R. Horton, David Singer of Beazer Homes, and Tara Clark of Richmond American Homes, spoke of the ongoing challenge to make national accounts work on a regional level. Beazer has been moving aggressively toward a more standardized, centrally directed approach with its biggest suppliers. D.R. Horton, in contrast, is maintaining a decentralized operations approach, but is working to capitalize on large volume common purchases. Clark added that national account programs are still a misnomer, noting that regional account plans offer the strongest opportunity for optimizing products for selected markets at the best pricing.
* Brand matters: Keith Burke, the director of marketing at Pulte Homes, stressed the importance of moving beyond the notion still widely held in the industry that "building a brand is the marketing department's job." Brands matter, he said, because they represent the relationship with both current and potential customers. Furthermore, "brands pay," says Burke, noting that a strong brand lowers the cost of customer acquisition, increases referrals, and bolsters the confidence level of customers. "They know they will have a good experience, if they trust your brand," he says.
A coordinated brand strategy involving radio, print, signage, and moving trucks was described by Dan Horner, vice president of sales and marketing of C.P. Morgan Communities. Building its identity with some humorous ad spots contributed to the building of the company spirit, he said. "It made home building more fun." David Miles, president of Denver's Milesbrand Real Estate Brand Development, stressed the need to build and reinforce trust across the company and across the country when big builders build their brands.
* Management depth: Martin Freedland, president of Atlanta-based Organizational Development Associates, noted that neither innovation nor growth were possible as long as builders' "bench strength" remained thin. Experienced employees are aging out of the workplace, and many builders do not have good people in the pipeline waiting to take over, he said. "The leaders of the future want a clear evaluation process, regular training and reinforcement of their skills, mentoring on the job, and challenges at every level," he said. Freedland stressed the importance of adapting hiring and retention strategies not from other builders, but from companies found outside the industry: Microsoft, GE, Wal-Mart, and Southwest Airlines.
* Market outlook: Dave Seiders, NAHB chief economist and senior staff vice president, debunked the housing bubble talk among some in the media by noting that all nine census divisions and all states recorded house-price increases in the third quarter, but that housing prices increased at a lower rate, suggesting that prices are stabilizing. The surprising surge in third quarter GDP, improving job figures, and predictions the Fed will hold the line against interest rate hikes, among other factors, pointed to a strong outlook for continued new housing, even if 2004 might not match 2003's output. The wildcard, he said, has been the recent undercounting of immigrant population. Estimates of population and household growth may still be understated in forecasts.
Tim Sullivan, a principal in The Meyers Group, pointed to marketing and design ideas that have been much more customer-focused than in the past as examples of how the market is likely to evolve. Creative pricing and design, especially with smaller square footage dwellings in higher-priced urban and suburban areas, can open home buying to current renters, he noted.
* Technology tactics: The "holy grail" of a zero-defect home is an approaching--but still distant--dream for most builders, but the biggest builders are mastering the technologies necessary to connect with customers and trade partners and deliver the dream house and a clean punchlist, said Michael Dickens, CEO of BuildIQ. "It takes a change in culture, processes, and technology, and all three are lacking," he admitted, adding that the technology piece is evolving, but at a price that would make even the biggest builders blink. "The bottom line is that customer service is one of the final frontiers for big builders," he said.
How best to drive customers to builders' Web sites was another matter of debate. Toll Brothers senior vice president, Barry DePew, continues to find success advertising on newspaper Web sites in major markets, such as The New York Times and The Washington Post, which are commonly bookmarked. Beazer Homes is shifting resources to TV and away from traditional newspapers, according to Beazer CIO Jonathan Smoke. Beazer's success with a Spanish language Web site has convinced Smoke that builders need to think of English as "just another version of content."
* Municipal approval: The basics in community design still matter across the country, said Tom Morton, vice president of developer Carma Colorado, adding that everyone in today's companies is in sales. "We must understand our customers, by reading what they read and what the planners read," he advised. "The customer is not always right, but they are always still the customer." That includes municipal planners whose approval is critical to growth. They remember the last bad experience that any builder provided. "You have to win their trust, by doing what you say you'll do, every time," he said.
* Differentiate or die: What makes home builders stand out from the crowd goes beyond operational effectiveness and saying "I'm going to do things better," said Ron Robichaud, an industry management consultant. He, and Bob Florsheim, co-owner of Stockton, Calif.-based Florsheim Homes, and David Bessey, CEO of Maracay Homes Arizona, outlined five steps to creating better-valued, more clearly defined companies in the face of declining sales. Those steps included: commitment to reinvention; research; identifying your niche; implementing focused products and systems that reinforce that niche; and marketing internally as well externally.