Stanley Martin Communities began preparing for what it saw as the inevitable housing downturn in a 1998 planning retreat. Nine years later, with its strategy accomplished, the company is standing strong, despite having to lay off a number of employees.
Building only estate homes up to that point, the Reston, Va.–based builder made the decision to broaden its customer base by adding a new, smaller product line to the 4,500- to 6,000-square-foot homes that were becoming unaffordable for most buyers, says Steven Alloy, the company's president and CEO. The company began planning and then building smaller homes, between 2,550 and 3,400 square feet, but with all the quality and amenities of a larger luxury home, Alloy says.
“We thought, ‘We'll never be able to grow the company, and the company will have tremendous risk, as long as we are exclusively an expensive builder,' ” Alloy says. “Because of the hyperinflation of home prices, we thought that fewer and fewer people would be able to afford new houses.”
In the past few years, Stanley Martin has further expanded its plan to target more potential customers, phasing out its estate product by 2005 and adding a line of even-less-expensive smaller homes to its product portfolio.
Credit: Randy Lyhus
The move to reach a wider customer base has paid dividends, as the company will see the number of homes it's contracted to build increase for 2007, despite a likely decrease in revenue, Alloy says. And revamping its product line is just one of many adjustments Stanley Martin made to remain strong and competitive.
But not all builders had the foresight to plan ahead for the downturn like Stanley Martin did. And strength in this market is relative. While Stanley Martin is in better shape than many, it still had to cut its workforce from 159 employees at its peak to 103 as of October.
With conditions varying by region and submarket, a builder's health is measured by many factors. From the quality and stability of its market to the strength of its balance sheet to the depth, experience, and smarts of its employees and leadership, there is no magical recipe for success.
SURVIVAL MODETaylor-Morley Homes, of Chesterfield, Mo., is a home building and land development company just trying to keep its head above water. In late October, Southwest Bank of St. Louis filed a lawsuit against the home builder, alleging it was in default of two loans with outstanding balances of $16.56 million, acknowledges Bill Taylor, company chairman and CEO. The lawsuit alleges Taylor-Morley hadn't made its monthly payments to the bank since February and seeks receivership for five of the company's developments, which the bank claims are partially constructed.
Taylor concedes that the company has financial problems and that he knew a lawsuit was likely but says he had been hoping to avoid it and had worked out forbearance agreements with the bank. Taylor-Morley faces a similar situation with Bank of America, with which the company has forbearance agreements on five developments. Taylor says he is working with a group of investors to buy back the company's land and homes.
“We will for sure end up with at least three to five developments and could wind up with as many as 10 to 15, depending on our ability, with our restructuring group, to repurchase those assets from these two banks,” Taylor said in early November. “That will probably be determined over the next 30 days, if not sooner.”
Taylor says the company's woes can be traced back to a three-year buyout legal battle with former minority owner Harry Morley that ended in the summer of 2006.
Drained, Taylor says he cut back on office time and left the company's leadership team in command while he recharged his batteries. Then, in January 2007, the CEO started getting calls from his trades that the company was behind several months on many bills. Taylor blames the company's leadership for choosing not to discount homes, which suppressed sales and left the company without needed cash, he says.
But that account is disputed by Kevin Krafve, former company president, who states he and then-CFO Julie Kennedy resigned in May 2007 after a plan they pitched for lowering overhead costs was rejected. Krafve, who expresses fond feelings for the company where he spent more than 20 years, says Taylor-Morley's financial problems stem from an aggressive land acquisition strategy.
“The essence of our problems was this: We had too much ground,” Krafve says. “We continued to buy ground, even as late as the fall and early winter of 2006. And at Taylor-Morley, the responsibility for buying ground lies with the chairman and CEO.”
Taylor admitted acquiring too much land during the boom, noting that the company had roughly 1,500 lots under contract, about a five or six years' supply, at its peak.
“Money was cheap, that was a biggie,” Taylor says. “When we were borrowing money at so many points over LIBOR, or a half to a point under prime, people were saying, ‘What the hell? This market will last forever.' And therefore not really seeing too far down the road.”
Taylor also acknowledged not keeping an eye on certain financial fundamentals, including what the company's outstanding payables were against its backlog and margins.
“Our cash situation was probably the biggest thing; I wasn't keeping an eye on cash,” he says.
COST-CUTTING MEASURESWell, as the saying goes, cash is king. Now, the plan is to sell as much land and inventory as possible at whatever price is available in order to generate cash, and take steps to reduce overhead, Taylor says. The company sold five parcels of land for about $20 million, and discounts and sales offers led to a cut in standing inventory from 110 homes to about 40, he says.
To reduce overhead, Taylor-Morley had to undergo massive layoffs. At its peak between 2002 and 2005, the St. Louis–area builder had about 150 employees in its home building business and another 300 in a carpentry company it owned and operated as part of its building apparatus, Taylor says. Fast-forward to 2007, and the company has only between 40 and 50 people in the home building business and just 30 carpenters.
Other overhead cost-cutting measures included moving out of a high-priced new office building, which had cost them $700,000 a year in rent, to a smaller space that costs $90,000 annually. Taylor-Morley also owned a 50 percent stake in the new office building, which it sold, Taylor says. The company sold off much of its construction equipment, reduced insurance coverage, and started shortening the amount of time it kept its display homes open, in an effort to reduce staffing and utility expenses.
“It's all about liquidity: taking a look at assets that were nonperforming and trying to liquidate them. But it's tough to do,” Taylor says. Taylor-Morley is also holding weekly meetings in which it considers further trimming, he says.
Letting people go can be hard, but learning to live in the present and not be attached to the past is a lesson learned from the last housing recession, Stanley Martin's Alloy says.
“Think about the market the way a new entrant would,” he says. “A lot of bad decisions get made and got made because of legacy issues. Once you stop remembering the good market and just focus on the here and now, pretending it's your first day in business, the decisions get better.”
As part of reducing nearly one-third of its workforce, Stanley Martin cut its laborer and punch-out crews, which led to savings Alloy deemed “priceless” and, eventually, better work by subcontractors.
“We're already paying the subs for that [work]; that's in their contract,” Alloy says. “Those positions were a crutch for less-disciplined management. By eliminating that crutch, it has required everybody to build to a higher level of standards.” Alloy says the subs agreed because they needed the work. And, because of the slowdown in construction, they tried to keep all the relationships they had forged.
FINDING NEW ROLESEven companies that aren't facing as grave circumstances as Taylor- Morley are cutting back on employees to balance their overhead expenses with lower revenues. Stanley Martin and Kimball Hill Homes, of Rolling Meadows, Ill., have reduced staff but also are shifting employees around.
Kimball Hill, which is likely to close a little more than 3,000 homes in 2007, down from 4,079 in 2006, and expects revenue decreases to match, cut its workforce from 1,000 to 770 in the past year. No further cuts are planned, but, says Bob Ryan, senior vice president of people, “We are also smart enough to never say never.”
To boost morale, the company did increase benefits for the remaining employees. The improved benefits included more training for sales, construction, and management staff, as well as more vacation time, health-care enhancements, adding scholarships for employees' children, and even offering more in tuition reimbursement for continuing education.
Making better use of its resources, Kimball Hill created a new role in June for California division president Mike Paris: vice president of national supply chain. Paris' mandate is to decrease direct construction costs by working with vendors as well as assessing the company's internal processes to make sure they are as efficient as possible, Ryan says.
Stanley Martin has taken the shifting around of employees further, and it begins with Alloy, who worked in a variety of roles at the company when he started there during the housing recession of the early 1990s.
People who stick with a company through a downturn obtain beneficial experience in different roles, gain an understanding of the inner workings of the company, and develop a sense of camaraderie. With fewer layers of bureaucracy to cut through, people become decision makers, Alloy says.
“There are tremendous ways people grow and become connected in a downturn that they don't in an upturn,” he says. “In an upturn, it's about stock options and perks and cruises, as opposed to really creating or developing all kinds of skills.”
Stanley Martin's land development staff isn't building roads in the current environment, so they've been refocused to build houses. The company has brought its architectural group in-house and moved a construction supervisor with an architectural degree onto that team. Instead of hiring part-time workers to work at sales sites, the company has trained office staff to fill in at the sites, Alloy says.
LIVE TO EARN ANOTHER DAYTaylor-Morley is still in flux, working through negotiations with its many creditors. The company's CEO, who is determined to avoid bankruptcy and plans to shrink the company down to a bare-bones structure in order to keep it afloat, isn't sure how many of its 15 developments will be viable after it settles with the banks. “It's really a musical chairs kind of situation,” says Taylor, who plans to change the company's name to Taylor Homes.
Credit: Randy Lyhus
Kimball Hill, according to Ryan, has been reorganized to handle 50 percent more business without adding significantly to its overhead. Information technology improvements will be a big part of that and will even help the company understand more about its customers, both those who choose to buy and those who do not, he says. (To learn more about Kimball Hill's technology solution, visit BUILDER Online.)
Using the Internet for more direct marketing is another way of reaching out to customers that Ryan believes will pay big dividends.
“Traffic is down all over the place, but it's the quality of the traffic that you want to increase, not the quantity,” he says. “We're trying to reach out to the right customers.”
Stanley Martin is a private builder but has long-term public debt, something that will allow it to ride out any downturn, Alloy says. He urges fellow builders to get a handle on their balance sheets, make sure they have long-term capital, and avoid over-leveraging.
Alloy's key to success—“Make a ton of money when it's good and survive it when it's down, so you can make a ton of money next time it's good”—requires that a company stay alive through the downturn.
For Stanley Martin, thinking about survival began long ago. Housing is a cyclical business: There's always a big upswing and a big downswing. It's nearly impossible to know when the downswing will come while riding the wave of success, Alloy says, but as long as a builder plans ahead with the understanding that eventually the wave will break, the company will endure.
“If we don't embed that knowledge into our decisions, we could make a bunch of dumb decisions,” he says. “And there will be plenty of examples of people who drank too much Kool-Aid.”
EXPERT FEEDBACKHome building consultants offer their opinions on builders' reorganization plans.
BUILDER interviewed three home building consultants—John Burns, president of John Burns Real Estate Consulting; Martin Freedland, founder and CEO of The Berke Group; and Steven Hays, a partner at RubinBrown—to discuss the plans and actions of Kimball Hill Homes, Stanley Martin Communities, and Taylor-Morley Homes. The builders operate in different regions, vary in size, and find themselves responding in dissimilar ways to many of the same challenges.
KIMBALL HILL HOMESBURNS: “What you can do depends on how strong your balance sheet is and how much liquidity you've got. Starting new initiatives to become better usually requires a lot of cash and pays off later and is the right thing to do during boom times. During times like these [however], it's all about generating as much cash as possible—seeing the biggest bang for your buck.”
FREEDLAND: “I'm surprised that they've kept that many people, because they probably didn't do as much cutting as maybe some of the others did. What is especially smart, though, is doing some training. They're not so consumed with delivering homes now; they have time to improve the quality of the organization.”
HAYS: “Spending money on technology is great. Some may not have the resources at this time, but if you do, certainly that will give you a competitive advantage in the future.”
STANLEY MARTIN COMMUNITIESBURNS: “[Home building] is a great business. The number of adults in the U.S. increases every day; they want more homes; home prices will go up eight out of every 10 years in your lifetime. The issue is, it's a cyclical business, and cyclical businesses have very hard corrections, and you need to prepare your company for when those occur. The folks at Stanley Martin sound like they did almost everything right.”
FREEDLAND: “The idea that prices were getting too high really stimulated most builders, because they thought there was never going to be an end to it, and that they could just keep jacking their prices up forever. So when [Stanley Martin] started building apparently high quality at a lower price [with] less square footage for the same kind of buyer, that was a really smart, strategic marketing move.”
HAYS: “Re-engineering product in recent months has certainly been a theme, to create a sense of urgency, to get something exciting in the market, something that people just gotta have. Because there has been a lot of order-taking in the market, maybe the new-product development has slowed down a little bit, because there hasn't been as much need to do it. If you have new, exciting product, that's a reason to buy. A lot of builders are looking at what they have on the shelf now and trying to predict what they need to have on the shelf—whether it's next year or in a couple of years—to get a competitive advantage in the marketplace.”
TAYLOR-MORLEY HOMESBURNS: “One of the tough decisions builders have is whether to pay people what they owe them, including the banks. Some will do whatever they can to pay off everything, while others will protect their net worth by not honoring their agreements.
“I agree with Bill [Taylor]. This needs to be viewed as a battle for survival. Nice office buildings and luxuries of all sorts need to go. Keep your best people, possibly by providing incentives that will pay off over the long run (such as company ownership or profit sharing in future years). The market could get better next year, but you're a real gambler if you run your business under the expectation that it will.”
FREEDLAND: (who worked with Taylor-Morley many years ago, under different management) “In the end, responsibility is at the top. If there is a problem with a ship, the captain takes the hit, even if it was his time to sleep. I hate that he is in this jam and wonder if the company can survive, based upon his story and the deteriorating market.”
HAYS: (who currently works with Taylor-Morley) “There's quite a few for whom ‘survival' is the hot word today. All of us have preached margin over the years. But you have to be realistic about the competition around you today. The most important thing now is sales. Keeping the debt load down as much as you can, so every house that you sell is one less lot that you are carrying. The top line is where the game is played today.”