THROUGH MORE THAN 15 YEARS IN the home building business, Larry Webb has worked both sides of the aisle, public and private. He ran a division for KB Home for four years, worked for a private builder as it transitioned to a public company, and later ran the California division before becoming CEO of Newport Beach, Calif.-based John Laing Homes, one of the country's largest privately held home builders.
Big builders' corporate testosterone being what it is, publicly traded nationals are quick to assert that they are the future of the sector. Private powerhouses' retorts range from contentious to playful, choosing to channel their most ferocious competitive reprisals into the field, not on the radar. Webb is as familiar with the debate as he is well-versed with both sides of the public vs. private operational model—the pluses and minuses of both— and he takes frequent stock of the relative outlook of each business and financial structure. From his perch, his noncommittal hedge on which model works better in today's and tomorrow's business environment probably epitomizes that of most home builders today. “I am very happy being a private builder, and I'm sure that there won't be a public builder you talk to who won't say they love being public,” Webb says.
What's not to love about being a large home builder in the robust market of recent years? While public home builders very publicly break records on every front—units, sales, earnings—and tout their dynamic growth and growing corporate strength to Wall Street, large, privately owned builders for the most part have quietly matched their performance. Will public and privately held players of all sizes and stripes continue to co-exist as economic trends change and scale itself becomes a determinant in who gets to stay in the game? Or will an almost inevitable shrinkage in the number of powers tilt the playing field itself?
PRIVATES, WHO'S YOUR DADDY? With revenues of $2.794 billion, Shea Homes of Walnut, Calif., was the largest privately owned U.S. home builder in 2004. Shea's revenues were greater than nine of the 20 biggest publicly owned builders and well over double those of the next largest private builder. Five other private builders surpassed $1 billion in revenues last year. In contrast, Centex, the industry's publicly held revenue leader, exceeded $12 billion for the period.
Shea led U.S. private home builders in closings, too, with 6,408 last year, exceeding seven public builders. But Shea's closings were a fraction of what the largest public builders did last year—representing 13 percent of D.R. Horton's 44,005 closings, 15 percent of Pulte's, 16 percent of Lennar's, and 18 percent of Centex's.
Excepting Shea as something of an anomaly, clearly “big” as applied to privately owned home builders generally doesn't measure up to “big” when it comes to public companies. Despite the disparity in their relative sizes, however, public builders and the largest private builders are more similar to one another in their “bigness” than either is similar to other home building companies.
“I think you reach a size where the issues that you have to deal with are similar whether you are public or private. So the solutions are very similar too,” says Michael Kahn of Michael P. Kahn & Associates in Ponte Vedra Beach, Fla., a financial and management consulting firm deeply involved in the industry. Even if they aren't the size of the public builders, the large private builders are a “formidable force,” because “they certainly are growing equally dramatically based upon their size,” Kahn adds.
As a group, the 15 largest privately owned home builders averaged year-over-year revenue growth of 18.73 percent in 2004. Public builder revenues grew by 24 percent for the same period. However, private home builders tended to be more productive in terms of revenue per employee. Again, Shea leads the list with $1.96 million per employee, and 10 of the top 15 private companies took in more than $1 million per employee. Only three of the public companies did as well, led by D.R. Horton with $1.48 million per employee.
Last year's performance was typical of recent years. Shea's revenues have increased 73 percent in the past five years, and profits climbed 153 percent for the period. Revenues at John Laing Homes have doubled in the past five years, as have those of other large private home builders, company executives say.
“INSTITUTIONAL” STRUCTURE Like their public counterparts, the large private builders have made the transition from their entrepreneurial roots to more formal corporate structures. They're “institutionalized,” explains James Pugash, CEO of Hearthstone in San Rafael, Calif., a large residential investment firm. They have corporate resources for recruitment and training, compensation programs, design centers, mortgage companies—the things smaller builders aren't likely to have, he says.