Revealed: The Top 10 Builders for 2008

The depressed sales environment forced the top 10 builders to play some serious defense. They retreated from marginal markets; sold off land at discounts; continued personnel reductions; cut expenses; and struggled to regain profitability.

The top 10 worked overtime to generate cash flow and allay investor concerns that they could not meet debt obligations. Unlike many builders in the second tier of the Builder 100, the top 10 all managed to stay in business thanks to long-term debt financing. Even companies reporting the biggest losses stockpiled large cash reserves that they hope to one day deploy to fuel growth.

The country’s biggest builders are now shadows of their former selves. In 2005, the top 10 builders sold 289,354 homes. Last year, they closed only 132,994 homes, a 54 percent decline.

Many of these companies operate on fiscal year budgets that end in months other than December, making side-by-side sales comparisons difficult. So each year, Builder magazine, as part of its Builder 100 survey, asks the nation’s biggest builders to total their calendar year closings.

Every one of the top 10 companies recorded a sales decline, though some fell more than others. One builder, Meritage, made its first appearance on the top 10 list, despite a 51 percent decline in closings. Another, Pulte, jumped two positions; its closings fell only 24 percent. Read on and find out who the top 10 builders were in 2008.

10. Meritage Homes Corp.

Scottsdale, Arizona

CEO: Steve Hilton
2008 closings: 5,627
Percent change: -51
Previous rank: 12

Meritage makes its first appearance on the Top 10 list, bumping off last year’s tenth-place finisher, M.D.C Holdings. Meritage managed to make the list even though it reported a 51 percent decline in closings last year, above the 37 percent average for the group. Meritage reported a $298 million net loss last year, but nearly all of that was due to land write-offs and joint-venture charges. The company was helped by a footprint that includes some hot Texas markets. CEO Steve Hilton reported in late January that gross sales hit a quarterly low in November and inched up in January. Meritage has one of the highest average new home sales prices of the group; it stood at $259,800 in the fourth quarter of last year, a 9.7 percent drop from a year earlier. In a fourth quarter conference call, Hilton reported that the company has $206 million in cash on hand, and expects to take $112 million in tax refunds during early 2009.

9. Beazer Homes USA

Atlanta, Georgia

CEO: Ian McCarthy
2008 closings: 6,642
Percent change: -42
Previous rank: 8

Beazer Homes took a hammer to its cost structure last year. Early in 2008, the company announced plans to pull out of five markets-- Charlotte, N.C.; Cincinnati/Dayton, Ohio; Columbia, S.C.; Columbus, Ohio; and Lexington, Ky. Later in the year, it exited Colorado. The moves enabled Beazer to cut personnel, which by year end stood at 70 percent of 2006 levels. As a result of cost savings, Beazer closed its fiscal year with $436 million in cash on hand. Even as its losses narrowed, its cash flow turned negative ($112 million) during the first three months of its fiscal year 2009. Despite its troubles, Beazer dropped only one spot on the list of largest builders, and its decline in closings, 42 percent, wasn’t much higher than the average for the group.

8. The Ryland Group

Calabasas, California

CEO: Chad Dreier
2008 closings: 7,352
Percent change: -29
Previous rank: 9

Just like an old school builder, The Ryland Group worked hard last year to reduce its direct construction costs and maintain its margins in the face of rampant price concessions. The company opened its competitive bidding process to multiple trades at each community stage. It eliminated turnkey suppliers in favor of buying all materials itself. And it worked hard to simplify its home designs by standardizing room sizes, adjusting roof pitches, and squaring footprints. Ryland’s average selling price dropped 8 percent to $246,000. Despite these efforts, Ryland wound up losing $396 million last year, $62 million more than the previous year, though most of it was on paper. By December, the company was operating with a $432 million cash balance. But the biggest news at Ryland is that after 15 years at the helm, Chad Dreier will step down as CEO in late May.

7. NVR

Reston, Virginia

CEO: Paul Saville
2008 closings: 10,741
Percent change: -21
Previous rank: 7

Thanks to its “asset-light” approach to land (it prefers to option rather than own land) NVR was the only top 10 builder to actually make money last year, $100.9 million. Even so, by year end NVR had joined its peers in reporting losses, $30.5 million for its fourth quarter ending on December 31^st. The loss was the result of approximately $121.5 million in option write-offs. A relatively healthy balance sheet allowed the company to re-enter the Columbus market with a bang last year, scooping up assets from Beazer. NVR still controlled 45,000 lots by the end of the year. The company’s strong liquidity puts it in a great position to pounce on distressed opportunities in coming years. NVR enjoyed the highest core home building margins during the cycle, and its closings were off only 21 percent last year, the best performance among the top 10.

6. Hovnanian Enterprises

Red Bank, N.J.

CEO: Ara Hovnanian
2008 closings: 11,281
Percent change: -25
Previous rank: 6

Hovnanian Enterprises, one of the most acquisitive builders during the housing boom, now faces repeated questions about its liquidity, especially since its cash flow turned negative during the most recent quarter. Hovnanian has $842.6 million in cash on hand, way more than enough to pay off a $100 million redemption coming due this year, but not enough to cover the $2.5 billion in long-term debt that it’s carrying. The company continued to lose money in its most recent quarter, reporting a net loss of $178 million, though the lion’s share of it was due to impairments and write-offs. By the end of January, Hovnanian controlled 37,600 lots, a 69 percent decline from its peak total land position in April 2006. The good news is sales have picked up at Hovnanian’s communities for the last several months. The company reported 2.2 net contracts per community during February versus 1.8 new orders per community a year ago. "This is hardly a cause for celebration," said CEO Ara Hovnanian, who attributed some of the increase to seasonal variation. "But it's definitely a shift in the right direction."

“The sales environment remained persistently challenging throughout the first quarter," said Ara K. Hovnanian, president and CEO. "While we have experienced a typical, seasonal pickup in traffic and sales since the middle of January, this increase is coming off of extremely low levels that have prevailed since mid-September."

5. KB Home

Los Angeles, California

CEO: Jeffrey Mezger
2008 closings: 12,438
Percent change: -48
Previous rank: 5

KB Home was all over the news last year. Early in the year, the company pared its footprint, exiting the Albuquerque, N. M., Chicago, and Mid-Atlantic markets. Then an outside research firm ranked KB Home first among public home builders for its record of sustainability. More recently, the company has received a ton of publicity for its campaign to build smaller, value-engineered homes and allow customers much more freedom to configure interiors. KB Home targets first timers with its Open Series of homes. At 1,239 to 2,300 square feet, the homes feature three to five bedrooms and prices in the high $200,000s to the mid $300,000s. Despite the publicity it received, KB Home reported $976 million in losses last year, though by year end its operating income had turned positive.

"Housing market and general economic conditions in 2009 are expected to remain difficult or possibly worsen as the timing of any meaningful recovery for the homebuilding industry remains uncertain," said Jeff Mezger in an early January statement.

4. Lennar Corp.

Miami, Florida

CEO: Stuart Miller
2008 closings: 15,735
Percent change: -53
Previous rank: 2

Lennar started early to record impairments and price its land holdings to market, selling a portfolio of land to a Morgan Stanley land venture in 2007. Since the peak, it has aggressively cut its land-holding inventory from $8.6 billion in 2006 to $4.1 billion through the third quarter of last year. Even so, the builder controls a 14-year supply of land. Lennar also has an above-average exposure to joint ventures, which it is trying to reduce. Executives are focused on rebuilding the company’s operating profitability, improving its gross margins, and right-sizing the business. They have attacked the company’s direct construction costs, achieving a 15 percent reduction per square foot, while scaling back dramatically the number of floor plans the company builds and SKUs it keeps. Even so, Lennar recorded a bigger decrease in closings than any other top 10 builder last year. Going forward, the company plans to separate its land and home building businesses by creating separate land funds.

"Our view of housing going forward is that a home builder does not need a land supply locked and loaded," says CEO Stuart Miller, announcing in November that the Lennar of the future will be a builder of homes, not a developer of land.

3. Centex Corp.

Dallas, Texas

CEO: Tim Eller
2008 closings: 18,241
Percent change: -41
Previous rank: 3

Centex spent much of last year cutting its losses, emphasizing a made-to-order home building model. The company prefers to pre-sell its homes, holding only two to five spec homes per community, and building to a cadence.  Hoping to beat its peers back to profitability, Centex aggressively reduced its footprint. It exited Detroit and Columbus, Ohio, and announced plans to exit the Denver market by this spring. Centex also sold its Builder Supply operation to ProBuild. The moves helped the company report steadily narrowing losses in its most recent quarters; $664 million for its most recent quarter (with $590 million of that coming from impairments and land-related charges) compared to a loss of $976 million during the same quarter a year earlier. Centex estimates that about half its 127 neighborhoods have been impaired so far. It continues to beat analyst expectations for cash flow, ending its most recent fiscal quarter with $1.47 billion in cash. The company hopes to be cash-flow positive in its next quarter and be in a strong position to capitalize on potential distressed opportunities.

"The depth and duration of this financial and housing correction make this a game changer for home builders like no cycle that has come before," says CEO Tim Eller. "And I believe this is going to dramatically change the competitive landscape for home builders for years to come. [This market will] test the best and eliminate the rest.

2. Pulte Homes

Bloomfield Hills, Michigan

CEO: Richard Dugas
2008 closings: 21,022
Percent change: -24
Previous rank: 4

Pulte is the big gainer on this year’s list of the top 10 builders, moving from fourth to second on the list. Closings were down only 24 percent year over year, the best showing among the biggest builders, in part because of the company’s focus on active adult buyers, who, until the stock market collapsed last fall, seemed more interested in buying during the downturn than other buyer segments. Pulte’s emphasis on building lifestyle communities for older buyers also means that it’s longer on land than most of its peers. The company has a 12.8 year supply of lots, 81 percent of them owned, including three years worth of finished lots. In recent quarters, Pulte has been selling lots to increase its liquidity and strengthen its balance sheet. The company ended the year with $1.65 billion in cash and no borrowings on its revolving credit facility. Its debt-to-capitalization ratio was 52.8 percent, and none of its debt matures before 2011. The company lost $1.5 billion in its last fiscal year, but impairments and land-related charges accounted for the entire loss.Pulte retreated from the Long Island market early this year, selling its lots back to the builder who had helped it enter the market.

“Pulte is built for the long term,” says CEO Richard Dugas, who plans to remain in current markets and build share as weaker competitors fall by the wayside.

1. D.R. Horton

Ft. Worth, Texas

CEO: Don Tomnitz
2008 closings: 23,915
Percent change: -37
Previous rank: 1

D.R. Horton remains the largest builder in America , based on closings, for the seventh consecutive year. Though it’s more focused on cash flow than ever before, the company otherwise hasn’t changed its operating philosophy much in the face of the downturn. First, the builder unabashedly continues to build homes on spec, out of concern that today’s buyers want to move in immediately but also out of a desire to burn through its four-plus years of land holdings. Second, executives continue to believe in the benefits of a broad geographic footprint, which they haven’t trimmed much in recent years; Horton builds in 82 metro markets in 27 states. They also believe that the company’s size and scope enables it to purchase building materials at a lower cost than competitors. The company is focused on the needs of first-time buyers, who bring less baggage to the purchasing table today than other buyers. The approach seems to be working. D.R. Horton beat analyst estimates for the most recent quarter, recording only a 35 percent sales decrease, though the consensus is the company has more work to do to mark its land holdings to market.

“In spite of these headwinds facing our industry, D.R. Horton is in a solid position to weather this downturn and be in a preeminent position to capitalize on the eventual housing recovery,” said CEO Don Tomnitz in a February 3^rd conference call with investors.

Top 10 Builders for 2008