Consistent Performers

With home building operations in 77 markets across 26 states—which generated 51,383 new homes last year—D.R. Horton can get a good read on the health of the housing market. “There are pockets of weakness. For certain, 2006 will be a more challenging year for the industry and for D.R. Horton,” says Don Tomnitz, the company's president and CEO. “But I don't see overall weakness at all. I see just the opposite, with a strong economy and strong job growth.”

These observations come from one of the top executives of a company that took full advantage of 2005's extraordinary housing market to accomplish the high-profile goal of delivering 50,000 homes in a year. D.R. Horton's performance set it atop the BUILDER 100 for the fourth consecutive year, and the company is already well on its way to growing that number to 58,000 this year, slowdown or not.

Many of Tomnitz's BUILDER 100 peers also had high-volume growth in 2005—albeit at slightly lower levels—and share his expectations for 2006. Last year they capitalized on a boom that lasted longer than expected to once again outperform the averages of a home building industry growing at a rapid clip.

The BUILDER 100 drove much of that growth. As a group, the 100 largest home builders closed 504,670 units, an increase of 55,819 units—or 12.4 percent—in 2005. That performance led to a substantial market share gain, too: Our list captured 36.57 percent of the for-sale housing market last year, up from 35.18 percent a year ago.

For many of the builders, tried-and-true strategies coupled with continued strength in buyer demand accounted for substantial growth. Some started new divisions in hot markets, while others expanded product offerings to capture additional buyers. Still others bought their way bigger, acquiring a number of BUILDER 100 and Next 100 companies. Some may have to shift their approaches as the slowdown shakes out, with the largest among them ready to use their well-capitalized machines to grow even more.o

For Fieldstone Communities and Vantage/ Raylee Homes, growth didn't come overnight—though the jumps they made in 2005 may make it seem that way. Like D.R. Horton, both companies fulfilled plans made years earlier to increase their volume. Fieldstone developed a five-year plan in early 2002 that called for building between 1,500 and 1,600 units by the end of 2006, recalls Frank Foster, the company's president. Fieldstone hit the goal a year early, delivering 1,622 homes in 2005, a 131 percent jump over its 2004 production that landed it back on the BUILDER 100 this year.

Vantage/Raylee also made the leap from the Next 100 to the main list this year by nearly doubling its closings. It grew top-line revenue by 118 percent.

Geographic expansion, long a hallmark of BUILDER 100 growth, helped the company achieve its goals. Co-presidents Vincent Pizzonia and Scott Grady had made headway in their home market of Albuquerque, N.M., gaining quickly on D.R. Horton, the area's No. 1 builder. In 2004, they opened new offices in Phoenix and Houston. Both divisions grew quickly in 2005, with 147 closings in Phoenix, up from just six in 2004, and 119 in Houston, an increase from 23 the year before. The company's goal is to double the unit volume in the two markets again this year. They're not stopping there: They're also ramping up production in Dallas, where they bought their first lots last year, and looking at entering San Antonio.

They'll have plenty of company. Florida was the hot state for startups and acquisitions in 2004, but now Texas takes that title. Margins have never been easy to make in the Lone Star State, but land is plentiful, and entitlement processes are much less complicated than in other states, making Texas a good bet for builders looking to grow.

BIG JUMP: Seven of the top 10 builders here appeared on last year's Next 100 list. Does this prove that it's easier to post big percentage gains from a lower starting level? Don't tell that to John Laing Homes or Pasquinelli Construction Co., both of which climbed eight spots higher on the BUILDER 100.

Many of Vantage/Raylee's peers are also looking to grow in San Antonio. Standard Pacific Corp. and Corky McMillin Cos. both acquired other builders in the market during 2005, and Fieldstone, Crosswinds Communities, and Kimball Hill Homes recently opened shop there, too.

Strong fundamentals in San Antonio made it a good choice for Corky McMillin Co.'s first expansion beyond California, says Mark McMillin, who became co-chairman and co-CEO of the company with his brother Scott after their father passed away last September. Historically, the market has enjoyed between 3 percent and 5 percent growth, and its employment outlook is brightening further with a new Toyota plant being built, he says.

Standard Pacific, also continuing expansion beyond California, feels so strongly about San Antonio's strength that it expects its acquisition of Eagle Valley Homes to contribute most of the company's unit growth in 2006; the company estimates it will close about 1,200 homes there this year, compared with fewer than 250 in 2005.

It's not the right move for everyone, though. M.D.C. Holdings announced that it will not buy any additional land in Texas, where it builds in Houston and Dallas, and instead will redeploy that capital into other markets around the country.

After considering expansion, a few BUILDER 100 companies decided to stay put. Rolling Meadows, Ill.–based Kimball Hill Homes came close to entering the Detroit market, but opted instead to grow its existing operations, which include building in five of the nation's top six markets (and 11 of the top 30), says Sheldon Moore, the company's director of marketing and communications.

Robert Gutierrez, president of San Antonio–based Armadillo Homes, also builds across Texas in Laredo and Austin, but he pulled out of the Houston market in 2005 and doesn't plan further expansion, focusing instead on growing the company's profitability in a changing housing market. “We're just not going to get the pricing power. We're going to have to focus on operational efficiencies,” he says.

CASHING IN: Public builders spoke frequently last year of their improved financial performance—which no doubt helped the BUILDER 100 achieve an overall increase in gross revenue of 28 percent—but they didn't make this list. Another year of strong price appreciation likely helped these private companies grow their top-line revenue even faster than their unit volume.

That's a sentiment echoed by many others on the BUILDER 100. While most are optimistic about their prospects for growth in 2006, they acknowledge that the boom times are over, giving way to a transition period before—they hope—a soft landing. Sales traffic has slowed, for-sale inventories have risen, and pricing power has faded.

“The problems seem to be a little deeper than anticipated,” says Greg Gieber, an analyst with A.G. Edwards. “We had prices pushed to a high point, a sudden oversupply in several markets, and we have to work that through,” he says.

Much of that oversupply is being attributed to the abrupt exit of speculators from many markets. Many big builders say they didn't sell to investors. Nevertheless, they're competing for sales with the speculators who managed to buy during the last two years and are now in a rush to unload those homes.

Recent public builder earnings calls have included discussions about the visible effects of changing market conditions. KB Home and William Lyon Homes, among others, reported higher cancellation rates than at the same time last year, Toll Brothers' signed contracts in 2006's first quarter fell 21 percent compared with the same period in 2005, and multiple companies have acknowledged that gross margins will grow more slowly than they have in recent years.

“Demand in many markets was propelled to unsustainable levels by speculative buying. We are now on the other side of that slope,” Robert Toll, Toll Brothers' chairman, told listeners during the company's first quarter earnings call in February. But that performance came in second only to the first quarter of 2005, and Toll expects 2006 to be either the best or the second-best in the company's history.

Not every member of the BUILDER 100 is so optimistic, though. Dan Ryan Builders, which grew 14 percent in 2005, is projecting a 12 percent drop in closings this year due to a more challenging sales environment and some project delays, says Paul Yeager, the company's senior vice president and CFO.

Melbourne, Fla.–based Holiday Builders jumped 29 percent last year, to 3,819 closings, but president and CEO Richard Hawkes says he's assuming that the company may deliver slightly fewer homes this year. “We had a buildup of about 300 homes that we couldn't finish because of the storm season in 2004 that added numbers we didn't expect,” he says. “The demand for new homes last year was just above anybody's expectations.”

Getting through the slowdown may mean returning to strategies builders haven't employed for years, including price cuts and other incentives. Holiday Builders has offered some incentives to help move inventory, and Hawkes says that some of his competitors are offering discounts of up to $70,000.

Centex made headlines with its 12-hour sales earlier this year, but other big builders are offering deals, too. “They have the financial strength and can offer incentives in markets where it's slowing. It would be tougher for smaller builders to do that,” says Samuel Cypert, executive director of the Public Home Builders Council of America, which represents 14 of the largest public builders.

The BUILDER 100 took full advantage of the opportunities offered by 2005's boom market. The group closed 504,670 homes, more than double its production just seven years earlier, in 1998. Even in the best year yet for housing starts, that meant the top 100 builders took market share from their smaller competitors: They grew their overall share to 36.57 percent of the nation's for-sale housing activity, up from 35.18 percent in 2004, as measured by new-home sales (1.282 million) and completed condos for sale (98,000).

But at least one analyst thinks that incentives may hurt builders in the long run. “The more you discount, the more you erode consumer confidence,” says Credit Suisse's Ivy Zelman.

Carl Reichardt, an analyst with Wachovia Securities, sees more long-term opportunity in the approach Armadillo Homes' Gutierrez is taking. “If the rising tide isn't there, to generate cash from the house you sell, you are going to have to be a better builder,” says Reichardt. “We're starting to hear that, which is a very good sign.”

Count Crosswinds Communities' CEO Bernard Glieberman among the builders focused on finding efficiencies this year. “If you're building 2,000 homes a year”—Crosswinds closed 2,200 last year and anticipates growing to 2,500 this year—“and you knock even 10 days off those houses, you're talking about millions of dollars,” he says. Assuming it takes his company about 90 days to build a house, that would mean the company could build about 11 percent more homes with the same amount of overhead, he's calculated.

An 11 percent growth rate, even in a slower housing market? Considering the BUILDER 100's record of outperforming its smaller competitors, that seems entirely possible.

Home builders suffer as central markets continue to falter.

Pieces of good economic news from Ohio and Michigan have been few and far between in the last year, and home builders concentrated in the upper Midwest haven't been immune to the economy's ill effects: Dublin, Ohio.–based Dominion Homes' closings fell 24 percent in 2005, and the company now holds a nine-year land inventory; M/I Homes consolidated its three Columbus, Ohio, divisions into two, laying off more than 100 employees in the process; and Centex Corp. has moved people from Detroit to other markets.

Some Midwest builders are responding to the ever-darkening storm cloud by expanding. Bernard Glieberman, CEO of Novi, Mich.–based Crosswinds Communities, says his company's continued push to diversify geographically has kept Crosswinds growing; just 36 percent of its closings were generated in Michigan last year.

M/I Homes projects flat growth in Columbus for 2006 and 2007. Consequently, the company is systematically moving capital away from its hometown. “A couple of quarters ago, about 75 percent of our business was in the Midwest. In the next couple of quarters, that could get down to the 30 percent to 35 percent range,” CFO Phillip Creek said at a recent Wachovia Securities investor conference.