Just 52 months ago, an extraordinary phenomenon occurred in the world of high volume home building. A company, a tiny one at that, introduced itself to big-time global investment capital by ringing the opening bell at the New York Stock Exchange on Jan. 31, 2013. Just short of four-year-old TRI Pointe Homes, as it was known then, became the first company in a full decade in home building to go public. The rest, as they say, is history. In short succession, seven more companies--Taylor Morrison, UCP, William Lyon, New Home Company, WCI, LGI Homes, and Century Communities--IPO'd by the end of 2014.
A prescient comment from the always prescient managing director at Moelis & Co. Robert Crowley:
"The capital markets are wide open right now, and lots of home building companies could go public. The question is whether they should."
We remember Crowley's observation now, because, although it's a different time and place in the housing cycle, there's a great deal of pressure on home building organizations right now to tap growth capital. Sales velocities are picking up, which mean that their owned and controlled lot supplies dwindle faster, which means that they have to restock on developed and undeveloped lots soon or suffer having to pay profit-sucking amounts at retail later.
No matter what anybody says, for privately held home builders, one of the consistently toughest and riskiest parts of the job is in getting fair, equitable, and profitable access to acquisition and development capital.
Our series here, Open to the Public, is an exploration of one company's odyssey in search of the right kind of growth capital at the right moment with terms, timelines, and trajectories that allow a well-run operation to catapult itself into a privileged elite class of powerful, multi-market, enduring private companies, along the lines of Shea Homes, David Weekley Homes, and Ashton Woods.
To gain access to the kinds of financial growth-fueling resources it wants to--big time, publicly held debt--Smith Douglas Homes needs to model itself as an under-valued, diamond in the rough among privately-held builders, a company whose talent base, business systems, and operational processes scale in such a way as to make opportunity abundantly clear. It must navigate a delicate line true to its reputation of offering personalized, high-quality homes at FHA-qualifiable price points, and at the same time, offer investors an under-the-hood confidence level that scale is both more profitable and more sustainable.
In the first segment of Open to the Public, we looked at founder and principal Tom Bradbury's assembly of the "brain trust" of talent he built the Smith Douglas model around. The second part focused on the differentiable systems, processes, and "iterability" of the Smith Douglas operational model, and how good a fit that is in the United States' southeastern regional market right now. Here, in the third part, we take a look at the process business advisor Margaret Whelan is taking Smith Douglas through to expose it to the investment, and note-holder options the company can explore right now.
And as Bob Crowley said before of the period when it seemed as though every private home building company was on track toward an IPO offering, something similar is at work now.
"Companies can get access to big-time capital because of the way global capital, liquidity, and the thirst for yield are working," Crowley notes. "The question is still whether that will work out well for them or not."
The Big Bet
“Smith Douglas Homes is a fast-growth, profitable company and they’re taking a proven, scalable and well-defined business model with a focus on cost and capital efficiency to target high-growth markets including Raleigh, Charlotte, and Nashville,” says Margaret Whelan, principal at Whelan Advisory, LLC, an advisor to Smith Douglas. “Leveraging established relationships to access attractive land, industry expertise to reduce risk and a seasoned management team to achieve profitable growth. It's a unique story and investors are intrigued by it.”
Whelan's "advice" boils down to a three-stage process for a builder like Smith Douglas: preparation, presentation, and pricing. What makes the narrative and the validation make sense to the types of institutional investment decision-makers is a business whose business plan, market opportunity, and track record add up to what comes across in an attention-deficit environment as a "unique" opportunity. Smith Douglas fits that bill.
Part of what makes it unusual is the way Tom Bradbury has—in his personal push to give Smith Douglas a future beyond his own mortality—attracted such strong talent into the operation, talent he trusted from the past.
For just as he’d known that Greg Bennett’s response of “yes” was essential to the plan, he’d several weeks earlier dialed up Charles Schetter, whom he’d originally gotten to know as the KB Home business development guy who got Tom to sell Colony Homes to KB in 2003. In the post-Colony days, they’d eventually parted ways professionally but stayed very much in personal touch through the years.
On July 2015, Bradbury dialed up Charles Schetter, who lived on the West Coast, and put a bug in his ear. “I asked him to consider coming to work with me to help make Smith Douglas an enduring, profitable, private regional home building company, and he said to me, ‘I’ll noodle on it, Tom.’”
A week or so went by, and Charles called Bradbury back and told him he wanted to talk it through. Schetter offered to redeye from the Orange County into Atlanta and meet with Bradbury to explore the venture, but Bradbury had a better idea.
“He got in his Gulfstream turbo prop out of Cartersville Airport in Marietta [Ga.], and flew in to Van Nuys Airport,” says Schetter. “We met for breakfast at the Four Seasons Westlake, and talked about what might be the right strategy for the company. By dinner time, we started to talk about the role I’d play.”
Only a few weeks after that, Schetter and Bradbury were courting Greg Bennett, whom Schetter fondly refers to as “the best COO in home building.”
Two meetings in the summer of 2015, and two big “yesses.” Bradbury was indeed on a role. Now, Schetter and Bennett want to return the favor. On July 15, 2024, they want to give Tom Bradbury the 80th birthday present he’s dreaming about, a 4,000 home, $1 billion enduring, profitable, and independently private regional home building enterprise.
Note: As of our deadline time, Smith Douglas had met with Wall Street investor groups on several occasions, and had decided to put its active pursuit for debt capital into a "stay tuned" mode as it considers acquisition and development option opportunities that have now emerged, such as land banking and other capital structures. We'll keep you posted as we learn how Tom Bradbury, Charles Schetter, Greg Bennett and their team resolve their growth capital needs as they push the company to new, sustaining scale in the Southeast.