High Jump

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.

MARKET MINDED: Stewart Cline (right), chairman of Morrison Homes, says his company's growth in Florida, Arizona, and California justified the decision to leave Atlanta, where it couldn't gain market share from other builders.

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.

PARING DOWN: Isaac Heimbinder (right) believes offering fewer floor plans and packaging options for buyers will lead to continued growth for Rolling Meadows, Ill.–based Kimball Hill Homes.

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.

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.

A “less is more” strategy is taking shape at Rolling Meadows, Ill.–based Kimball Hill Homes, which expects to increase its subdivisions by 25 percent to 100 in 2005. Last year this builder reduced its specifications to three “good, better, best” levels and began whittling the number of floor plans it makes available to buyers. “There's a significant difference between what people want and what they are willing to pay,” says vice chairman and president Isaac Heimbinder. Pulte Homes is pursuing a similar simplification strategy, not only for its customers but also for its building trades “who are becoming less, not more, sophisticated,” says Steve Petruska, Pulte's COO. Last year, the Bloomfield Hills, Mich.–based builder brought down its floor plans to 1,250 from 2,200, reduced or eliminated options, and consolidated its specifications. Petruska notes that Pulte's 47 markets had been buying from 17 window manufacturers offering 13,000 SKUs. “Our goal is to lower that to two to three suppliers and 800 SKUs.”

Builders that are soaring, such as Pulte, acknowledge that, at some point, they must land. Knowing where and when, and how to keep from crashing, will depend on how many variables builders can control, which wasn't easy last year when unpredictable factors such as rising interest rates on mortgages and entitlement-related delays stoked the industry's volatility. Chicago-area Lakewood Homes reported a 46 percent increase in closings in 2004, but only because “some jobs finally came on line” after protracted zoning proceedings, says Lakewood's president Buz Hoffman, whose dilemma on this front plagued many of his peers on this year's BUILDER 100. Dallas-based Centex is relying on information technology to provide better insight into the predictability of bringing a neighborhood online at a time when 50 percent of the markets where it builds are “entitlement constrained,” Eller says.

JUST REWARDS: Increasing performance-based bonuses to division presidents led to greater growth and reduced overhead costs in 2004 for D.R. Horton. The company closed 44,005 homes in 2004 and has set a goal to close 100,000 annually by the end of the decade.

Builders seem to have a better handle on another critical factor affecting their ability to grow: finding, hiring, and developing employees to manage their burgeoning businesses. Last year, 1,200 of the 4,000 employees that Pulte hired came from one of the 120 colleges at which Pulte recruits. Toll Brothers conducts a year-long, project-management training program that exposes trainees to virtually every aspect of its field operations. And in October, Holiday—which nearly doubled in size over the previous two years—created an organization development department, headed by Karen Tracy (whose 20-year resume includes stints at Wendy's and Nationwide Insurance), who is devising “competency-based models” the builder's divisions can follow in their hiring and training procedures.

Zoning restrictions and other millstones may keep some builders earthbound. But standing still wasn't any more of an option last year than it's been for the past decade, and builders jumped on growth opportunities as they presented themselves. Bensalem, Pa.–based Orleans Homebuilders, for one, entered Orlando, Fla., and Chicago, respectively, through acquisitions of Masterpiece Homes (whose 2004 sales rose to $68 million from $26 million in 2003), and Realen Homes, a $150 million builder. “We're going after companies that are below the radar screen of the nationals,” says Joseph Santangelo, Orleans' CFO. Newport Beach, Calif.– based William Lyon Homes, which enjoyed triple-digit profit gains last year, completed two high-yield debt offerings that raised $550 million, which “will help us reduce our dependence on joint ventures,” says Lyon's president Wade Cable. And Red Bank, N.J.–based Hovnanian Enterprises used its “nimble and flexible” approach to land acquisition to get into high-rise development for the first time last year through a $100 million transaction in San Diego for which “we had to complete the due diligence very quickly,” recalls CEO Ara Hovnanian.

The blockbuster deal that could alter the competitive landscape didn't materialize in 2004, mostly because some high-flying companies preferred to probe their own backyards for business. Centex, says Eller, has been content in recent years “going deeper” into its existing markets. Don Tomnitz, CEO of Arlington, Texas–based D.R. Horton, insists that his company could achieve its growth objectives—which, in 2005, are to become the first builder to close 50,000 units in one year, and to be closing 100,000 homes per year by the end of this decade—without acquiring another company during that period.

To fertilize its organic expansion, Horton last year doubled the bonus it pays its division presidents when their divisions hit certain inventory turnover marks. Those presidents receive 1.5 percent of their division's pretax income, and are eligible for another 1.25 percent when their divisions achieve 20 percent revenue growth, 21 percent gross margin growth, 20 percent growth in return on inventory, and keep their selling, general, and administrative costs under 10 percent of gross sales. (Last year, those costs were 9.96 percent, compared to 10.5 percent in 2003.) “We're not building homes for practice, and we're paying our people for performance,” states Tomnitz.

MONEY, MONEY: Home price appreciation helped many builders on this year's list grow their top lines, but these companies posted the healthiest gains. There's no surprise that some of our biggest closings winners make this list, too.

CLOSINGS CHAMPS: These builders set the pace for the BUILDER 100, which increased closings an average of 20 percent. Taylor Woodrow, which posted the third-largest jump in closings in 2003, made an even bigger push last year. These jumps propelled four of the top 10 on to the BUILDER 100 for the first time.

For several companies that vie with the megabuilders for market position, 2004 was a year of stretching exercises to limber up their operations for future leaps forward. Frederick, Md.–based Dan Ryan Builders decentralized into four divisions and beefed up its workforce by one-third, to 200 people. Notwithstanding the overhead and the arduous process of getting each division's information systems to talk with one another, these moves “were still a very good decision,” says the company's CEO Daniel Ryan, because they placed divisional presidents closer to the markets their divisions serve and give the builder more of a “presence” in those communities. Ryan expects his company's closings in 2005 to increase by 21 percent to 981 units.

By the second half of last year, efforts by Technical Olympic USA (TOUSA) to transform itself into a professionally managed national home builder “started showing results,” says CEO Antonio Mon. TOUSA—which was formed in 2002 by the merger of Engle Homes and Newmark Homes—had regionalized its operations, restructured its mortgage company to accommodate a large entity, installed a uniform operating platform, and moved its corporate headquarters into one location in Hollywood, Fla. Within that structure, TOUSA has an operational support organization that takes what Mon calls an “integrated approach” to product development, marketing, and supply chain management. That process helped TOUSA trim the time it takes to develop home designs to seven days from as long as 22 weeks and “contributed significantly” to the builder's expansion in 2004, says Mon.

TOUSA's earnings jumped 45 percent last year to $119.6 million, after two years of relatively modest gains. Since 2002, TOUSA's community count has nearly doubled to 245, and the lots it controls have increased to 50,000 from 12,000. Yet it is a top-five BUILDER in only two of its 15 markets. Mon states that TOUSA is set up to run a business that's twice its size. “Our machine is essentially built, and our costs are behind us. All we need to do is execute our plan.”

John Caulfield is a freelance writer based in Old Bridge, N.J.

TO MARKET, TAKE MARKET: The BUILDER100's strength in the housing market grew at roughly the same pace in 2004 as it had in the previous two years. The group closed 448,851 homes nationwide last year, 35.74 percent of the country's housing activity as measured by new-home sales (1.2 million) and completed attached for-sale homes (such as condos, 73,000 of which were built in 2004). One measure of the industry's extreme growth: Though the BUILDER 100 total market share has climbed more than 8.5 percent since 1995, these top companies closed 254,293 more homes last year than they had a decade earlier.

TOP 1O TREND: The nation's top 10 builders have enjoyed quite a run since 1999. In 2004, they grabbed more than 20 percent of the total U.S. market share for the first time. Much of that growth has come at the expense of builders ranked between 11 and 50, and those ranked between 51 and 100 on our list, though both groups made slight market share gains in 2004, too. With 65 percent of the market still not controlled by the BUILDER 100, though, there's no doubt that there's more room to grow.

A SMALLER PIECE OF PIE: Less pie might be a good idea for successful dieters, but not so for builders measuring their fitness in terms of how much of the housing industry they control. Builders ranked between 11 and 50 and between 51 and 100 have watched their peers in the top 10 gradually deliver larger and larger portions of all BUILDER 100 closings during the past 10 years. In 1995, the top 10 built just about 37 percent of BUILDER 100 homes; in 2004, that figure stood at 56 percent.