Hanging Tough: Lee Evans Award 2002

By Jill Tunick. Two things set top-of-the-line home building companies apart: superior management practices and healthy profits.

Hallmark Communities, winner of the NAHB's 2002 Lee Evans Award for Business Management Excellence, is one of those rarities. Focusing on details and maintaining a strong balance sheet enables the San Diego-based builder to not only stay alive, but to thrive in one of the most expensive housing and land-constrained markets in the country.

"They have consistently high performance on net profit," observes juror Emma Shinn. And how. Double-digit net income is a factor of the company's enviable bottom line. Last year, its closings soared 240 percent, its revenues more than tripled to $58.2 million, and its gross profits exceeded 25 percent. Ironically, the company's been stumping for improvement, not growth. "We're not trying to be a big company, we're trying to be a great company," says CEO Mike Hall.

Hard lessons

Things weren't always so rosy for Hallmark, which builds everything from entry-level single-family homes to luxury condos, with prices ranging from $225,000 to $550,000. The 18-year-old company has weathered two recessions, most notably the one that crippled the banking sector and subsequently depressed housing in the early '90s. "Two of the largest Samp;Ls were based in San Diego," Hall recalls. "After they went bankrupt, a lot of builders disappeared."

Hallmark toughed out the market but learned the hard way not to over leverage itself on land when it saw its profits drop. "We screwed up," Hall admits. "We had to make payments on land that had no income. If you get into a down market, any profit you make from selling your product goes to paying the debt on dirt."

These days, Hallmark buys land free and clear and then puts it into building mode. Hall will borrow money to finance construction, but he'd sooner cut off his right arm than owe money on land.

The builder had another learning experience recently. In 2000, Hallmark's closings dropped precipitously, mostly due to "schedule creep," as Hall puts it. Part of the problem was trade contractors who showed up lackadaisically--or sometimes not at all--because Hallmark's sites weren't ready. "At that time, we put more emphasis on hiring subs and telling them where to work than on preparing the site for them," says Hall.

That changed when Joe Lawn joined the company as director of construction and customer service a year and a half ago. Lawn shaved five days from Hallmark's cycle time by developing stringent procedures for site preparation, materials staging, and cleanup. Now there's a designated location for everything on Hallmark's sites, including construction trailers, Porta-Potties, and every last roofing tile and 2x4.

You won't find mud blanketing the roads near Hallmark's sites either. The company lays down gravel (which it later removes) for vehicles to drive over before heading home. "It's part of our good neighbor policy," says Lawn.

Hallmark straightened up its scheduling, too. Trade contractors don't always manage their time well, so the builder decided to do it for them by putting their schedules on a master document. "We can tell the plumber when he needs to be on which job nine months out," Hall says. That step, and giving the trades a complete schedule of each project a month before it starts, cut construction time by another 10 or 12 days, bringing cycle times for entry-level homes to 90 days and high-end product to 110 days.

The builder also improves its efficiency by soliciting outside feedback. Each time Hallmark expects to reuse a plan, the builder asks trade contractors to weigh in on what worked and what didn't the last time, and tweaks it accordingly. Even when Hallmark doesn't reuse plans, it brings the trades into the office to discuss what can be done to make the work easier and more efficient. "When they know they're sandwiched between people and they're not just out there by themselves, they take more pride in their work and give us a better product," Hall says.

The effort has paid off. "You can see the results of their value engineering in their decreased costs," says Shinn. Hallmark's indirect construction costs dropped by almost a full percentage point last year.

Land rules

That frees up money for the backbone of Hallmark's business. When it refocused in 2000, the company set its sights on land and realigned its business strategy to generate the capital required for site acquisition and land development. These days, Hallmark allocates huge amounts of capital to acquire and entitle 400 lots a year. The tactic reduced its cost of sales by almost 5 percentage points in 2001.

"When we see a piece of land, we make sure we have the money to buy it," says Hall, who monitors cash flow almost daily. "Land is the smart part of the business. We watch it very carefully."

So carefully, in fact, that when the company's land acquisition pros view a desirable piece of land, they know exactly what type of customer will want to live there. Feasibility studies and lots of market research give them the edge.

Serving buyers

Hallmark's customers--and their expectations--span the spectrum. The unassuming folks who buy Hallmark's entry-level homes don't want much; just a nice house at an affordable price in a decent neighborhood. "They're happy about getting their own place and living the American dream," says Hall. Then there are the high-end buyers, who've already bought three or four homes and want everything perfect.

To ensure that everyone gets what he or she wants, Hallmark uses detailed quality control and customer service procedures, basing its program on the NAHB's Residential Construction Performance Guidelines. To Hallmark, though, the book is "The Bible." "I show them the book and say, 'We will meet or exceed these published specs,'" says Hall.

Expectations are established up front with buyers. Customer requests, options, and selections are spelled out during preconstruction meetings, monitored on the daily production schedule, and inspected during walkthroughs, which customer service reps and supers organize with six-page checklists.

To gauge satisfaction, Hallmark surveys customers 30 days after move-in. It tracks warranty service requests with software to make sure work is completed on schedule--10 days for most items. And, the customer service department checks up on trade contractors by surveying homeowners after each warranty item is completed. "If we get a guy who's fast and comes in with a good price but he's not good with people, we won't use him again," says Hall.

Hallmark hopes such customer service emphasis will boost its healthy 87 percent referral rate to 90 percent. "We taught our employees how to talk to customers," Hall says. "We train everyone to be on the same page with the same set of expectations."

That didn't happen overnight. The company pared its staff to 28 from 36 when it realized some folks didn't buy into doing things better. "Attitude, then aptitude," is one of executive vice president Allison Britton's tenets.

Hallmark strengthened that culture with training and cross-department contests that reward teamwork. Every so often, Hall takes the office staff out to one of the company's houses to remind them of what they're working toward. "Mike is a great leader," says Britton, "but without the people, we won't get there." Hall's a community leader, too. He's particularly devoted to an educational program he developed, where he gives a presentation to a local elementary school each time Hallmark breaks ground on a new community and then follows up with a field trip during framing. The program draws more than a few inquiries about Hallmark from parents and teachers, but marketing isn't the company's aim: giving home building its proper due is. "As an industry, we need to counteract the environmental emphasis school systems have," says Hall. "We want to tell the kids, 'We're not the evil, black-hat guys. We're the ones building your community.'"

And Hallmark envisions many more communities on the horizon. As Builder went to press, Hallmark had 800 lots on its books and plans to close 250 homes in 2003. Britton predicts next year will be the company's biggest ever. "Our goal is to always be processing 400 lots," she says. "I think we're definitely going to hit that."

--Jill Tunick is the communications manager for the NAHB's business management department.

Hallmark Communities

CEO: Mike Hall

Web site: www.hallmarkcommunities.com

Location: San Diego

Founded: 1984

What they build: entry-level, move-up, and custom single-family homes, plus high-end condos

Average sales price: $360,000

Financial philosophy: To be fiscally responsible Management Team

Mike Hall, president and CEO
Allison Britton, executive vice president
Linda Metcalf, director of purchasing
Joe Lawn, director of construction and customer service
Tom Archbold, director of sales and marketing