MY BIG BUILDER 101 EDUCATION CONTINUES. Your ongoing patience with my learning curve is appreciated. In New York in early December, I got to hear a whole day's worth of publicly held big builders taking their stories to investors as they courted “the Street” at the New York Society of Securities Analysts 8th Annual Homebuilding Industry Conference.
They spoke mostly about year-on-year rates of change in home deliveries, backlogs, new market activities, profitability per home, total sales, record net income, etc.; my head spun. They focused on a litany of topics that have become a now-familiar checklist for chief executives speaking to the investment community—outstanding performance metrics, outstanding 2005 visibility, return on capital, product diversification, market segment expansion, geographical plays, acquisition vs. organic growth, affordability, interest rate uncertainties, improved business disciplines, etc.
They made sure that hyperboles used to detail 2004's business measures differed from those that they used to describe 2003. They came up with answers to analysts' smart questions about how much corporate value they ascribe to their respective optioned and owned land positions, and they danced around projected basis-point increases coming down the pike from the office of Alan Greenspan, while I tried to sort out which of my stupid questions I'd sooner than later need to ask, and which of them I'd better not voice for a while—or ever.
The line-up included Beazer Homes' Ian McCarthy and Jim O'Leary, Toll Brothers' Fred Cooper, and Meritage Corp.'s John Landon and Steven Hilton, and that was just the morning sessions. Larry Sorsby from Hovnanian Enterprises and Gary Reece from MDC Holdings anchored the afternoon program, and one thing I learned is that it's a stroke of genius to get Sorsby up to speak after lunch, for there are few presenters as caffeinated and contagiously energetic as Larry to offset the somnolent effect of pre-plated dessert served under the stern portraits of bygone Harvard University provosts.
Throw in some pithy observations and prognostications from the likes of N.Y. Federal Reserve economist Jonathan McCarthy, UBS Investment Bank equity analyst Margaret Whelan, and Freddie Mac chief economist Frank Nothaft to round out the proceedings, sprinkle in some of the demographic and household formation trend data, and, before you know it, the sentiment that production home builder stocks are significantly undervalued seems entirely believable.
I've chalked the day up as one I needed to go through to begin to know what I don't know, so that I might one day ask a smart question about the relative merits in this economic environment of having an eight-year supply of owned and optioned lots in the bank versus the MDC tack of just-in-time land acquisition. But what became clear to me during that day in New York was that most of the people leading the leading home building organizations into the next five years were around in the industry in the early 1980s and early 1990s. They're like many of our parents who came of age during the Great Depression years, and there's always a guardedness underlying almost every enthusiasm, a “we remember…” that tempers almost every “we expect…”.
So while high-volume home builders' senior management might justifiably succumb to an instant of exuberance about how their companies profitably supplying the “hard asset” that physically embodies the American Dream at a rate of four new homes every five minutes, they also know there's more work to be done to evolve their organizations. And it's not just about saying the right thing to investment advisers to boost their companies' stock price.
It's about creating a culture out of a multitude of disparate parts that make up their enterprises today. While no law says an organization needs to define itself as a traditionally centralized corporation to drive share value, there are four key publics who will decide which big builders will be around in five years. They are probably each of equal importance: consumers, employees, business partners, and investors. Those four groups—not competitors and not central banks in Asia—own the future of this stunning group of financial overachievers.
John McManus, Editor