IN 2001, OFFICIALS AT M.D.C. Holdings raised the bar for their Denver-based company when they set it on an ambitious course to double its size within five years. The builder, which markets itself as Richmond American Homes, would no longer confine its growth to existing markets and would more aggressively seek expansion opportunities through acquisitions and startups in new areas. Over the following three years, M.D.C. entered seven states. And where its 20-plus divisions had been reporting directly to its CEO Larry Mizel, M.D.C. segmented its operations into eastern and western sectors and four regions, each with its own president.
This divide-and-conquer strategy paid off handsomely in 2004, when M.D.C.'s revenue swelled by 37 percent to $4 billion, its closings increased by nearly 24 percent to 13,876 units, and profit soared by 84.3 percent to $391.2 million, the highest percentage gain among large publicly owned builders, according to Paris G. Reece III, M.D.C.'s CFO. Sales in Jacksonville, Fla.,—one of two markets (the other being Salt Lake City) that M.D.C. entered by acquiring other builders' assets—jumped 400 percent last year. In Texas, a startup state for M.D.C. during its latest expansion push, sales increased 300 percent.
While perhaps not as dramatically as M.D.C.'s leaping to loftier levels of market share and financial performance, many builders nevertheless bounded to new plateaus in 2004 on the strength of buyer demand that continued to confound most industry watchers. Builders started more homes in 2004—1.95 million—than in any year since 1978, and new-home sales increased by nearly 11 percent to 1.2 million units, according to the Census Bureau. The tallies chalked up by the elite group of builders that comprises this year's BUILDER 100 are even more impressive, as their revenue in 2004, on average, increased by 28 percent and they closed 20 percent more homes than in 2003.
When BUILDER informed Centex Corp.'s CEO, Tim Eller, that it was preparing an article that would focus on builders who reported gains of at least 25 percent in revenue, closings, and/or profit in 2004, Eller quipped, “Isn't that just about everyone?” Centex's home building revenue and operating income exceeded those marks in calendar year 2004. And many builders around the country drew water from seemingly bottomless wells. Toll Brothers, which rose to 14th place from 15th in 2003, consciously induced more business by accelerating sales from its order backlog, and by motivating managers and salespeople with richer performance bonuses. Robert Toll, chairman of the Horsham, Pa.–based builder, says the slogan for his company's campaign was “Deliver More in '04,” and it produced the desired results, as Toll's revenue for the fiscal year ended October 31 rose 40.1 percent to $3.9 billion, its closings grew by nearly 35 percent to 6,627 units, and its net income jumped 57.5 percent to $409.1 million.
Such hearty gains, for Toll Brothers and other builders, reflect a supply-vs.-demand pendulum that continues to swing in builders' favors, and has catapulted the price inflation that fattened many companies' balance sheets. Last year was the first time that the national median selling price of a new home exceeded $200,000, and nearly one-third of the 104 percent revenue increase reported by Costa Mesa.–based Warmington Homes California could be attributed to price appreciation, according to Warmington's CFO Michael Riddlesperger. Robson Communities increased its home prices by 40 percent to 60 percent over a rolling 12 months, while its production costs during that period increased 8 percent to 10 percent, says Steve Soriano, executive vice president for this Sun Lakes, Ariz.–based builder.
M.D.C.'s Reece asserts his company's infrastructure could support 25,000 annual closings. And it has wasted little time gearing up for that eventuality: In January 2005, it negotiated a bump in the expansion capital available through an existing line of credit to $1.25 billion from $700 million. One month later, the builder announced that it is relocating its headquarters into a commodious six-story, 155,208-square-foot building. M.D.C. also debuted an 11,000-square-foot Design Gallery in Denver, the first of 10 showrooms it plans to open in several markets this year.
Builders' expectations about buyer demand may sound surreal at times, but they have altered the entire calculus of what qualifies as a “growth market.” For a decade, Alpharetta, Ga.–based Morrison Homes made money in Atlanta, where it generated $4 million in profit and closed 312 homes last year. But in February the builder's British-based parent, George Wimpey Plc, decided to halt construction there. “Atlanta is too fragmented—the top 10 builders only capture 24 percent of sales, which is much lower than other markets—and we've struggled to get the returns we're getting in other cities,” explains Morrison's chairman Stewart Cline.
Atlanta became expendable, if you will, to Morrison Homes because this builder's business has been so vigorous in Central Florida, Phoenix, and Northern California, markets that, along with Las Vegas, are lands of milk and honey for many builders. For the year, Morrison's revenue jumped 29 percent to $1.29 billion, its closings increased by 21 percent to 4,422 units, and its net income rose nearly 60 percent. Cline says one ratio his company monitors closely—sales per community per week—increased last year to 0.93 from 0.72 in 2003, which indicated a higher inventory absorption rate. And at a time when home prices nationwide are escalating through the roof, Morrison Homes attracted more business by introducing lower-priced townhouse products that, in Orlando and Tampa, Fla., sold for under $200,000. The builder expects to have at least seven townhouse developments ready for sale this year.Exercising Caution
Cline notes that for the past four years Morrison has been installing a new operating system by SAP, which, when fully implemented by the third quarter of 2005, “should put us ahead of other builders by at least a couple of years.” The accuracy of that prediction may prove to be less relevant than the importance Morrison Homes places in its ability to internally manage its business for growth. Other builders express equal concern about how far their current operational structures can take them, and whether their systems, personnel, and supplier relations are scaled properly with the size they want their companies to become, at profit margins to which they've grown accustomed.
On a few occasions last year, Melbourne, Fla.–based Holiday Builders scaled back production so that the quality of its homes wasn't compromised. “You can sell homes all day long down here, but controlling our growth has been the key for us,” says Holiday's CEO Richard Hawkes. Robson Communities has been retaining ownership of its commercial and multifamily properties as a hedge against a downturn in the market, and this year for the first time will develop master planned communities for other builders. It has acquired more than 6,000 acres in Casa Grande, Ariz., and will bring the first phase of 6,200 developed lots to builders at the conclusion of 2005.