- Big Builder Impact of Leverage and Asset Turns
- Public Home Builder Sales, General, and Administrative Expense Reductions
Stephen Palmer has it better than many of his peers. As CFO of Duluth, Ga.-based Bowen Family Homes, his company is well capitalized and building in relatively healthy markets, including Dallas, Austin, and Atlanta.
That's not to say there aren't challenges. Bowen's owners want Palmer to break even in 2009?and that's the good news. The principals are at least on the same team, but there's another group beating him down for results?and they're not quite as forgiving. "I still have to answer to my bankers, and they want to see earnings," Palmer says. "They want to see interest coverage and debt being reduced."
Palmer is definitely under the gun. With sales grinding to a halt and debt piling up, builders, their lenders, and pretty much anyone who reads a newspaper is nervous. So what's a regional home builder or division head to do?
For many people, surviving 2008 and making it to the years beyond means chopping overhead. But builders still want to generate income, and that means getting a good return quickly. "If you're going to spend $1 today, you want $2 back tomorrow," says Stephen Friedman, a partner with Ernst and Young in McLean, Va.
But how do you get those $2 back sooner rather than later? It's a question many divisions and smaller builders face on a regular basis. The answer revolves around one objective: to move homes.
"You look at every expenditure to see if it helps you sell another house in some form or fashion," Palmer says. "You can trim back field overhead relative to volume, but if your neighborhood looks shabby and you don't cut grass on the specs, you won't sell houses. Even though some of those things are dead costs, they're still part of sales and marketing expenses."
As a percentage of their revenue, builders seem to be spending more on marketing and advertising than ever before. For every "Deal of the Century," "MISSION: POSSIBLE," or even a local weekend sale, builders are spending to get the word out in their markets.
"We have not cut anything in our marketing and sales departments," says Mark Sochar, vice president of operations for Neal Communities in Bradenton, Fla. "We've added and increased in both departments."
It all starts with getting customers into sales offices. That's a focus for Bowen. The builder changed ad agencies this fall. "We're looking to gear up and recreate ourselves," Palmer says.
Palmer's strategy may not necessarily include going through the conventional methods of reaching customers. Instead of using newspapers, magazines, and billboards, he's looking for other methods. "Real estate advertisements are one-third of the size they were two years ago," he says. "There's a sense among the builders that it's not working."
The Internet is muscling its way into the picture and siphoning advertising dollars, but no one seems ready to spend their entire marketing budget online. "Everyone is afraid to take advertising dollars and dump them into the Internet," Palmer says.
Many builders are also throwing money at Realtors–a group they shunned in the past–to bring potential buyers into their sales offices. "Builders are offering very juicy incentives to Realtors, ranging from as low as 3 percent to as high as 16 percent," says Alex Barron, an analyst for Agency Trading Group.
If builders sink a lot of money into bringing customers into the sales office, they better have people on staff who can convert them into customers. At the height of the market, salespeople could basically be order-takers. Those days have passed. If a salesperson shows potential, a builder will spend the money to train them.
"There's a lot of emphasis on cultivating the sales staff, giving the keepers better training, and jettisoning the losers," Friedman says.
But salespeople have to offer a good deal as well. Builders on a local level have to compete with the community down street. In many cases, that community is offering gobs of upgrades and discounts. Whether they like it or not, the division head has to compete. That costs money. And until pricing hits bottom, you can expect to spend more dollars on concessions.
"One of the things that they're spending a ton on is various incentives to try to get people to sign, whether it be closing costs or buying rates or free options or a free car or free vacations," Barron says. "Those kinds of expenses are multiples of what they're spending on advertising."
Time the Turn
Take away the expenses incurred in selling a house, and there's little builders are spending money on right now. But for those who are well capitalized, that could change in the next year.
"There will be some companies who have either raised capital or have capital available to them," says Jamie Pirrello, CEO of Fort Myers, Fla.-based Vision Homes. "I think some of those will see some real opportunities because there will be significant distress in the market."
With the expectation that land prices will drop in 2008, a lot of builders are storing capital to swoop in and complete deals. They may be looking for distressed debt, as Bob Toll, CEO of Toll Brothers, alluded to in a recent conference call. But on the local level, the safest move may be waiting for the price of land to fall.
"The time will come when hopefully we will see a turn in the market; we will want to take advantage of the lower land prices, and there will be some opportunities," Palmer says.
And he's not alone; Neal is in the market as well. "We are in a buying mode," Sochar says. "We have deals on the table and deals we're looking at. We're definitely in the market to buy."
What's on these lots could change, though, and that's another prompt for builders to spend capital. Many are incurring costs to redesign their floor plans in an effort to make them smaller and more affordable.
"We all got carried away with the bells and whistles," Sochar says. "Now we're value-engineering everything and doing new plans."
In some cases, developing new plans may equate to hiring an architect to do the work. In others, it may just mean dusting off old floor plans. Ian Guttman, a principal with Cincinnati-based The Hills Cos., says his company is investing in redesign, but it has a bit of different story: Most of its products are affordable.
"The land has gotten more expensive than our affordable product can handle," Guttman says. "It's forcing us to introduce larger product that is more expensive and can support a higher land price."
Learn more about markets featured in this article: Atlanta, GA.