Interview: Bruce Karatz

10/1/2007

29 MIN READ

BK: At the time when Eli [Broad] was chairman [of Kaufman & Broad] to send me down to Orange Co. to be head of land acquisition and entitlement. And a year after that, I got a call asked if I wanted to start up a business of my own in Marseille.

BB: Did you speak French?

BK: Not at the time.

BB: And you were still like, “Ok, sure!”?

BK: It was a very amusing conversation because I said, “Absolutely,” and he said, “Well don’t you want to check with your wife?” And I said, “Absolutely, but don’t offer it to anyone else. I’ll get back to you tomorrow.” I went home, and my wife said, “If you want to do this, I’ll go with you.” And we had two small children at the time, 3 and 4 [years of age]. I never asked how much I was going to get paid or where I was going to live or where the kids were going to go to school-quite different from trying to move someone today in the corporate environment when they have to check out everything and know every answer to all their questions of their daily life before they accept a job. It was a fantastic adventure.

I moved to France, ended up moving to Aix-en-Provence, which was in between Lyon and Marseille. We put the kids into a little village school that had never met an American before we arrived. I hired an assistant who did not speak English, purposely so that? I was determined to speak French; I thought there was no way that I could be a successful businessman without speaking the language. And I had seen a couple of other Americans shipped over by KB at the time and they were really more what I would call the typical ex-pat that went there and it was a couple year experience, very much like what law firms do, and that was not what I had in mind.

BB: Was the business in France run differently than what you experienced in California?

BK: There were differences because, one, the homes were all built with masonry block. Second, the whole approval process was very different from California in the sense that there were probably a dozen layers of approval, any one of which could veto a project but no one could approve it. So, you had people like a mayor of a community, who if the mayor was not in agreement, you were going nowhere. But nevertheless, even if the mayor did approve what you wanted to do, that didn’t mean you could do it; there were other regional layers of approval and so forth. So, it was a tedious approval process and to that extent, it was similar to California but with very different steps. And there were far fewer submarkets to California. California there’s a deal a minute; there’s an intensity of transactions that is just far great than what you would experience in France. I mean, the number of homes built in California is about the same as what is built in all of France.

BB: Do you remember your first day with the company?

BK: As a matter of fact, I had never heard of KB when the headhunter called me. Do I remember my first day? No. I remember my first days, where I wanted to meet everyone and I wanted to be a businessman not a lawyer. So, I tried to offer any services people wanted to learn the real estate business. I’d go in an introduce myself and chat with them. People who had any need for advice at all, some of whom called me, and we got to know each other. After a matter of months, I found myself involved in land transactions. It was an exciting place to be then.

BB: Can you tell me a little more about Eugene “Gene” Rosenfeld and the kind of ship he was running on the day to day?

BK: In those days, the company was very much a survival of the fittest. Gene and Eli believe in hiring the best and the brightest and moving them along as fast as they could. And those that hung themselves, they were excused, and those who could handle it and be successful moved onward and upward. There really was not the kind of systems and business model discipline that eventually the company evolved into.

BB: Can you tell me a little about the promotion at the French department store, Au Printemps, which was the precursor to your next promotion?

BK: That’s a good story. So, I am now president of Kaufman & Broad Provence, and Provence was Lyon and Marseille. While I had moved to Aix, the business very quickly developed more heavily toward Lyon than Marseille. There were more opportunities; we were making more money. And I was moving very fast and so I decided that it would be better business-wise to live in Lyon rather than driving from Marseille; I wanted to spend more time there [in Lyon].

Just as I was about ready to move my family-this was on August 1, 1976-I get a call, and Eli called and said he was coming over and that Bill Meeker, who was president of Kaufman & Broad France at the time, to whom I reported, left. And Eli had been very rough with him; he had lost confidence in him. And so, I think rather than just replacing him, I think he just rode him very hard. Bill ended up leaving and setting up his own business. [Bill] was a very nice guy. He was a polo player, and that annoyed Eli to no end. [laughs]

So, [Eli] called me, and I went and met him, picked him up at the airport. He said, “What are the top three names of the guys I should talk to to try to get them to come in as president.” I said, “Well, one of them ought to be me.” He said, “You could never do this.” And I said, “Why do you say that?” He said, “Well, you’re too young; you haven’t been here long enough.” There was very little support from Los Angeles; you were on your own-banking relationships, you were running your own company. Although it was a division, it could’ve just as easily been your own company, which is why the two of the people who proceeded me, both Bill and Harold Guttrad, both went off and started their own businesses. So, he went out and I gave him some names, and he came back to me and said, “Well, I didn’t like any of them. I know you’re not going to be successful, but why don’t you give it a try.” With a big smile on my face, I said, “Thank you very much, Eli, for all the confidence, and I won’t let you down.” And that’s the way I started.

Literally within a month later, I received an invitation from the owner of Le Figaro [newspaper]. Their publishing group was celebrating their 25 years in business; the family name was Hersant. They invited the biggest advertisers and the ad agencies on a special trip. I got the invitation, and they had chartered a boat on the Caribbean and so forth. It was a very extravagant invitation. And I said, “I can’t take off 10 days to do this thing.”

And they were very smart, and they organized a cocktail party where everyone who was invited could come and say hello to other people who had been invited. So, I went to the cocktail party, and I saw that it was all the CEOs of France. I came back and I said, “You know what? We’ve got to go. How often do you get an invitation to where you get the opportunity to meet the business leaders of France?” So, we went. And I ended up making the best friends that I had in France on the trip. Many of whom are still my friends today, which is pretty cool 30 years later.

But one of the persons that I met on that trip was from an ad agency. And I had come back to Paris about a week past this, and he calls and say, “Hey, I’ve got a great idea for you. Au Printemps would like you to build a house on the roof. And they’re prepared to do a couple things to entice you to do.” I said, “How much do think it’ll cost?” He said, “I don’t know exactly, but I know they are so excited they are going to do X, and he went through a whole bunch of things.” So I said, “I’m interested, but we’ve got to get into the details.” Well, he had never spoken to Au Printemps at that point. [laughs]. He wrote a book about this; it’s a great story. So, then he goes to Au Printemps and says, “I’ve got this American home builder, Kaufman & Broad, I don’t know if you’ve heard of them, they’re new in town, and they’d like to build a house on the roof, which will bring the traffic.” You know, one of the department stores challenges is to get the traffic from the ground floors up to the upper floors. So, the idea is that we should put these things up top, everybody wants to do it, you put them on the escalator, they get off and they notice the goods that are sold on the other floors. Long story short, we put the deal together.

We built it in three weeks at night because it had to be done when the store was closed. We got Citroen to lift a car into the garage with the largest crane that existed at that time; it was on the front page of Le Figaro. We had 500,000 people go through this, which is twice as much as went through every Kaufman & Broad subdivision for a whole year, in the whole company at that time. It was spectacular. Eli came, and Eli is not one to be impressed or to show it. And I remember, we were up there, and he said, “Bruce, I’ve never seen anything like this in my life.” And honestly, I felt while I knew it was good, I felt that I could come up with one of these things every year. I was too young.

It was up for about four months, and the store wanted to continue it. They loved it. It was a huge, huge success. It was costing us-at the time it seemed like a lot of money-I’m going to say $15,000 a month to staff it because we had sales people up there to talk to people about selling them a home. I’m thinking, “Fifteen thousand dollars a month, that’s a lot of money. Maybe we sort of had the play we wanted.” I mean, people were buzzing all over Paris. In my own mind, no, we don’t want to extend it. I was thinking, “This was a great promotion, we’ll come up with something next year.” While I’ve done many since, that was probably was as good as it ever got. No one knew who Kaufman & Broad was at that time. Literally overnight we became known. And people thought we were bigger than we were because this promotion? people thought it cost us millions of dollars, and it didn’t.

BB: Is this where you started to really push the marketing envelope?

BK: I don’t know if it was that. I think I had it in me before that. I’ve known for a long time, I articulated it much more clearly as I got older than I did at that moment in Paris, that branding in home building is difficult if not impossible to do, in my opinion. There really is a funghiability of product in the industry, and no one has been able to really brand their product. Buyers really don’t care. They don’t care one builder versus another builder, small builders can compete just as effectively with big builders in a development. There are certain things that I believe helps one builder to sell better than another, again assuming similar product. I think that changing our name to KB Home was a big deal. I think we-well, it’s no longer me but-the company has the strongest logo.

And it’s very important because when people are driving down a road to visit a community, you see signs for Pulte left, Lennar right, and this one and that one. Families do not visit them all; they don’t have time. They’ve got two kids in the backseat, one of whom is crying, and they’ll do a reasonable search. And a reasonable search today, and much more so because every body is skittish about buying today, but in normal times, they might look at four, maybe five. But they’re not going to look at 15. So, the question is, when they turn, where are they going to turn? So, that logo becomes very important.

In France, we created [a brand]. One, this [promotion] certainly was a part of it, but also we were a foreign company so we were very different. And we played up on that. There were lots of marketing people who thought that might be a negative. You know the French think American business is far more organized than French. They give us-not so much today, by the way, because they’ve seen Detroit, which hasn’t fared so well, and up until a year ago Airbus seemed to compete extremely well against Boeing; no American company can compete against French cosmetics company or food-but at that time, generally speaking and it may even be true today, I don’t know, they gave Americans far too much credit. And I used it for all it was worth. [laughs] As an American businessman, somehow you were smart. And some people were, and some people weren’t. It certainly didn’t go by nationality. That helped us create a brand.

And frankly what was interesting was that at that time, even true to this day, Kaufman & Broad in the United States was known as a first-time buyer builder, you know, modest priced builder; Kaufman & Broad France was known as the Mercedes or Tiffany’s of builders. And I always found that very curious because what we did was not terribly different; it was because of certain things Kaufman & Broad did in the very early days-like the 1960s-that set a tone for how people perceived the company. It is very, very difficult to break out of that once people have it in their head. Even reporters, journalist at your magazine that follow the industry very closely, which is very different than a journalist at large, if you were to ask most people that you work around, that’s what they think, as compared to [for example] Lennar or Centex.

BB: So, did you bring this sort of brand philosophy with you when you came back to the United States?

BK: I did. We were in a horrible housing recession, particularly in California. This is in the early 1980s. It was awful, awful, awful, awful. I spent the first two, three weeks flying around the country, Canada, and we were in Belgium and Germany, and looked at every asset that the company owned. And the company at that point, the company really didn’t have an edge. France was a really good business in1981. The United States was not a good business; there really weren’t any competitive advantages that the company had in any division. In my view, we were sort of a middle of the pack kind of player.

So, after flying around, I said, “I’m not smart enough to figure out how to operate in all of these markets, from Montreal, Toronto, Boston, New Jersey, Detroit, and Chicago, all of these places.” I came up with a plan to liquidate everything except California and France. France was a terrific business, and I knew it, and California because it’s a good housing market and that’s where I lived. If the company had been based somewhere else, it would’ve made a difference. But you know, it was where I lived, it was convenient, and it was a big market.

I put together a plan. It meant working like the devil to liquidate property when no one wanted to buy-very similar to today, very similar. If someone said, “Go out and sell $100 million in property,” the easy question is, who is going to buy it? And it was the same thing then. You have to get very creative to sell. I did things like found builders in markets, convince myself they were good builders, and made arrangements with them to build on KB’s land, do not pay us anything-zero-when the house closes, we’ll take our lot price in escrow. The advantage to the builders is that you aren’t investing anything in land. You want to sell at a speed, so you have to have thin margins, and you have to give us [for] the lot [a sum] that is greater than what I could sell it for in cash at the time.

The fact was, even today, you call sell anything; it just depends on the price you sell it at. If it gets cheap enough, somebody buys it. But I didn’t want to do it. And over two years, we got rid of everything. It was unbelievable the liquidation. At an overall loss-not substantial, although some thought it was-but it created the foundation for a new business. I think the force that I’m most proud of is, for the company, I think I’ve been a catalyst for reinventing itself many times.

And I think the survivors today, when we look back, I don’t know if it’s five years from now or 10 years, who knows, the survivors are going to be companies that really reinvent themselves. You cannot go through the market is going through right now and end up in the end at the same place you started. You’ve got to think of a new model.

And we did. At that point in the early 1980s, we became California and France. Period. We were not going to be a national home builder. We did that; it didn’t work that well. We’re going to be very regionalized. And that worked great until 1989,1990, when the next recession hit. And guess what? The values in California dropped 35 percent. France very similarly. So all of a sudden you have a balance sheet that might’ve been, I don’t know, a billion dollars that, in theory, you just lost $350 million, which was stunning in those days. So, you had to move very fast to figure out what the heck do you do.

One of the things that came out of that-and people are going to start coming to this, they might answer it differently than the way I answered it back then, but the issue is when is this recession going to be over. It’s still a little too fresh for anybody, in my opinion. We haven’t seen bankruptcies yet-enough of them. I came to the conclusion a year and half into it? you know, people had theories. A down market will last 28 months, you know, and that makes no sense. And when you’re dealing with your life, you don’t want to be on averages.

So, I said-remember I had spun off from Eli in 1986-we spun off and went public, and by the time I came back in 1981 from France, he was thoroughly absorbed with the financial services; he couldn’t care less about home building. He was totally wrapped up in that. And actually when we came up with this idea of morphing into a California-French home builder, I used to go to board meetings and there were a couple of directors who would say, “Eli,”-and of course, the results were not good because we were in a housing recession-“what the hell are we in the housing business for?”

After a couple meetings, I went in and said, “Eli, look, whatever goes on in a board meeting eventually is heard by everyone in the company; you can’t keep things secret. The board does not like the home building business. That’s their prerogative. I happen to like it. It’s one of the only things I know, and I happen to like it. Either we end up rallying around and supporting it or I’ll help you sell it or maybe I’ll buy it. But sort of getting up at every board meeting, it does not work.” And that evolved to one day that I had this idea that, frankly, I was going to leave, but that I would consider staying if we split up the two companies, which I thought would be in the best interest for both Eli and me. I presented it to him, and I asked him to lunch, and he looked at me and said, “You’re serious, Bruce, aren’t you?” And I said, “Of course I am.” And he said, “Call the lawyers.”

It took us about 18 months to get it done because we started off trying to do a master limited partnership, sort of the hot structure at the time, then we decided that wouldn’t work for a home building business. So, we split off in 1986, and it was really like a leveraged buyout because he made the home builder take all the debt. So, we had a horrible balance sheet, horrible, because [Eli] said the financial services business needs the strong balance sheet, and of course I had no leverage. We were heavily over levered. But we worked hard. It’s very exciting to spin off. We had our own future; it was in our control.

And we worked like crazy. We had a couple of good years and made some good decisions, so we strengthened the balance sheet very quickly. Then, boom! The recession 1989, 1990 hits. That’s when I said, “You know what, there’s no rule that says this thing has to be over any time soon. We have to now change our view and look at going into other markets because California was awful.” I mean really terrible.

I put together a plan and went to the board; Eli was still on the board. He stepped down in 1993, I think, maybe 1992. He wasn’t so sure it wasn’t a good idea to start going into other markets, but I got the vote of the board. We went right from there to Vegas, Phoenix, and then this Rayco acquisition was really a seminal moment in the company’s history because Rayco, a company that I had followed very closely and tried to buy a couple years before and couldn’t quite get to their price. They didn’t sell it. About a year and half later, I called them and said, “Tell me how much you want. You got it. I want to buy it.” Rayco really had the disciplines in place that formed the foundation of what KB Home is today.

BB: So, how exactly did you come across Rayco?

BK: Rayco was very well known back then, even though it was a private company. They had, if you can believe this, a 45 percent to 50 percent market share in San Antonio. Think about that. They had one out of every two new homes sold in San Antonio was a Rayco home. It was unbelievable.

BB: Has a performance like that ever been repeated?

BK: No. And nothing’s ever come close. And I don’t know that it makes sense, to be honest. You’re better off, probably, with more diversity. But it was a machine that had a risk-adverse operating philosophy that they adopted out of necessity. They didn’t go bankrupt, but they could’ve gone bankrupt. The operating management went to bankers and said, “Hey, if you give us some time, we’ll get you back your money.” The bankers said, “Ok. But one, the founder Ray Ellison, he’s got to back away.” They knew he loved every piece of land he ever saw, which is what got him into the trouble to begin with. Too much land, not enough capital.

BB: Sounds similar to some builders today?

BK: You can say there are some similarities with that. Land is what, when the market turns, gets you into trouble.

So, they had adapted and adopted this operating philosophy that you don’t build spec homes. They’re the ones that started the studio, what we just adopted. But they did it differently. That’s where KB did it better job than they did. But they had the base house and let people personalize it.

BB: So, was that really the beginning of value engineering?

BK: There you go. They were a well oiled machine. And frankly, other people who looked at them-and I’ve talked over the years with some of my peers, who told me that the reason that they did not buy it-I think I acted faster than they did, who knows-was that they were afraid that Rayco’s model wouldn’t mesh well with the rest of their business. The difference with me was I knew Rayco’s model was better than the rest of KB’s business, and I wanted to change the rest of KB’s business to be like Rayco.

In fact, I called a management meeting right after the deal closed. And I put the CEO of Rayco on a bar stool with me. He was on a bar stool; I was on a bar stool; we had lavaliere microphones, and I had two screens behind us. I had put an income statement, but I didn’t do the combined income statement. I did it by percentages, with 100 for total revenues so you couldn’t tell which company it was. I didn’t do the actual numbers; I did it so you got percentages and you see what the gross margins are. I put KB’s on one [screen] and Rayco’s on another. There were probably 300 people in the audience, all the KB people who were very suspicious about what my intentions were with Rayco, very skeptical. Very, very skeptical. Several senior KB people shortly left after this.

And I said, “Ok, would you rather have an investment in company A or company B, please raise your hand.” And of course nobody wanted A, which was KB, as it turned out, and B was Rayco. So, I said, “Ok, men and women out there. You are smart. You’d like to have your money invested in B; so would I. B is Rayco; A is KB. Now I could sit and tell you we’re all wonderful, we’re the smartest people in the world, make everybody feel good, and then we go home and do the same thing we’ve been doing, go on our merry way and just be mediocre.” I said, “This is an opportunity to take our company in a new direction for the betterment of everybody, including shareholders and the whole employee group.”

I believed it then, to the point where I was prepared to lose people over that. It was very rocky for awhile. People didn’t buy into it. Change in companies is, even when it starts at the top, very tough. Very tough. But anyway, that was the catalyst for changing, and all of what you hear from management today goes back to Rayco then.

BB: So is that what made Lewis Homes such an interesting acquisition? The fact that they’d been in a sort of peer group-like a Builder 20 group-with Rayco and had adapted some of the operating principles to their business?

BK: No. And frankly, they had a management group in Las Vegas that was very good. Many of the elements are still there and part of KB. So, when they understood what the principles were, they bought into it. But what made Lewis attractive was that they had this phenomenal business in Las Vegas at that time. Their business in Southern California was ok, but they had a phenomenal business in Las Vegas. We had a good business, but a very young business [run by Jay Moss]. While Jay wasn’t crazy about the decision that I made at that time to merge the two together and to have the Lewis team be the management group not the KB team; they were running a much bigger business. So, I took Jay and several other senior KB people in Vegas and moved them to Northern California. But that was motivated the Lewis acquisition. They were either the first or second biggest builder in Vegas at the time.

BB: You had said that the Rayco acquisition was a proud moment for you. Is there anything else in your career of which you are particularly proud?

BK: I think the evolution of France. We created a magnificent company in France. Two-thirds of the French business is urban, is condominiums. It’s a home builder, but that’s a small part of the business. It builds office buildings, condos?

BB: And an office remodeling arm, at least at one point, right?

BK: Yes, and it still does.

BB: So, then the arm, Maisons Individuelles, is that condos?

BK: Yes. But it’s done very well. And more recently, the partnership with Martha Stewart has got great legs. At a time like now, I remember when I was presenting it to the division presidents, trying to get their buy in, and I said, “You guys are selling houses hand over fist, saying, ‘What do we need to pay anybody, who cares about Martha Stewart, that’s going to be difficult working with her and her people.'” I said, “When it gets tough to sell homes, you’re going to be thrilled to have Martha helping you, ok?” And it’s worked out exactly like that.

BB: And it has. You look at the numbers, and those communities are outselling other communities.

BK: Honestly, if [division] presidents had been more enthusiastic, there’d be three or four or five times the number of [Martha Stewart] communities right now. You had to force it down their throats. Have you visited a Martha Stewart community?

BB: Yes, I was at the opening of the first [Martha Stewart] community in Cary, N.C.

BK: Oh, you were there? [Martha] has been really sweet. I’ve talked to her and she’s written me a lot. Trish [Hanchette, Raleigh division president]? thank god for Trish. Let me just tell you since I’m not running anything these days, I think it’s an example of [when] people talk about, are there any differences between female executives and male [executives]? You can sit and speculate, but I really think it ends up being more on individuals rather than their gender, but here is a case where I do believe there is a characteristic difference. It’s stereotypical, but I think there is something there.

Here I was, chairman and CEO, asking a [division] president to embrace a new idea, namely Martha Stewart. And all of them gave you lip service-“Terrific, Bruce. Oh yeah, my wife loves Martha Stewart”-all this sort of sucking up. No one stepped forward to do it. “Would love to do it, but you know, god, I’m so busy with this right now. I don’t have the right piece of land”-you think of the excuse, they had it. Trish was a relatively new KB division president at the time; she’d been there a couple years, but she wasn’t part of the old guard. She said, “Bruce, that really sounds exciting. What do I have to do?” So, I explained it. She said, “You got me. Would love to do it.” And she embraced it, and they did it beautifully. I mean, you remember Cary?

My point of the story is Trish; she didn’t fight against something new. She was prepared to let the ideas evolve and actually embrace something that she didn’t know exactly how it was going to end. She had a little more guts, in my opinion. And to that extent, I think that it was a female executive that was able to step out and take a little risk and do it. I mean, it was not easy. That first community was a bear.

Honestly, I can tell you that in home building, which is a huge industry, lots of people have tried to do lots of different things. In my opinion, no one has been able to create a true brand of home. And this is the first. Now, I don’t know how it big it can become. You can raise all sorts of questions, which have already been raised by the way, and we don’t have the answers. But one of the things we have answered was when it was done, the skeptics at the time said, “Bruce, don’t tell me people are willing to pay a premium because it’s a Martha Stewart home.” I said, “Yeah, well they are.” [They said,] “Don’t tell me you are going to sell better just because it’s a Martha Stewart community.” I said, “We will.” And there’s no doubt that that is true today.

Now, what we don’t know is it a big business. Let me put it this way, and I hadn’t thought about it until just this second, if you could go and buy KB’s Martha Stewart communities-only Martha Stewart communities right now-and buy the right to build any future communities with Martha and her name, I would rather have that business over the next five years than I would all the rest of it. In my opinion, if all you had were Martha Stewart communities, you’d have a very good business. And you could do it all around the country.

BB: Are there any deals you wish you would’ve done in retrospect?

BK: Absolutely. U.S. Home. I had the deal all teed up, ready to go. And there was a little stumbling block because Bob Struddler, who was chairman, wanted to have half the board meetings in Houston and half in L.A. and so forth. I didn’t think that was very practical, and by trying to keep two corporate offices, we wouldn’t get the benefit of consolidation. And [Lennar Corp. CEO] Stuart Miller, right after, ended up going in and figured [it] out and gave Bob and Isaac Heimbinder, who was co-CEO, and gave them some money, and guess what? The deal got done. He was really more creative in figuring out how to get he deal done. I would guess that it was in the early 1990s. But it ended up being a phenomenal transaction. They bought it at significantly below book value. It’s not terribly different from the times today. Anyway, it would’ve been a terrific deal for Kaufman & Broad, and it ended up being a very important transaction for Lennar.

BB: What would it have brought to Kaufman & Broad?

BK: Just as KB was just starting to go cross country, it would’ve given KB a national footprint much more quickly. It would’ve given KB a Florida business, which KB didn’t have at all in those days. And you know, retirement communities, which KB has had difficulty, even to this day, in adequately getting into [that business].

About the Author

Sarah Yaussi

Sarah Yaussi is the vice president of business strategy at the National Multifamily Housing Council in Washington, D.C. She can be reached at [email protected].

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