How builders make money with land options instead of purchases.....
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washingtonpost.com
Home Builder Banks on Location
NVR Went From Bankrupt to Best Performer by Staying Close to Home
By Daniela Deane
Washington Post Staff Writer
Monday, April 29, 2002; Page E01
Home builders in the Washington area had one of their best years in memory in 2001. They like to joke that the recession simply passed them by.
But even though many home builders in this region enjoyed a boom fed by low interest rates and continued consumer demand for new homes, NVR Inc. stands out. Way out.
By far the largest builder in the Washington area, NVR's profit in 2001 bordered on the ridiculous. It expects another mind-boggling performance in 2002. All this from a company that 10 years ago filed for Chapter 11 bankruptcy protection.
Ranked by return on equity, NVR, which sells homes in the area under subsidiaries Ryan Homes and NV Homes, was the region's most profitable public company in The Post 200 last year with an astounding 67.83 percent.
Return on equity is a measure of how well a company puts its stockholders' money to use. Even the most profitable industrial companies rarely have a return on equity of more than 20 percent.
NVR's stock price has also more than doubled in the past six months, closing at $365.50 a share on Friday, compared with $153.25 a share at the end of October 2001.
NVR's bottom line demonstrates one of the fundamental strengths of the region's economy, which continues to produce corporate growth even in the face of a mild recession and the tech implosion. That so many Washingtonians continue to buy new homes means they are comfortable with their jobs, and with spending and investing their money.
"NVR has had the best financial performance of any of the builders," said John Stanley, an equity analyst at UBS Warburg who has been following the home building industry for years. "There's no question about that."
How did the company go from bankruptcy to being the top financial performer in the Washington area?
By learning from past mistakes, said Dwight Schar, NVR's chairman and chief executive.
"We made about every stupid mistake you can make" in the period before the real estate crash of 1989-1990, said Schar, who shuns interviews as much as possible. "We did everything wrong."
The biggest change NVR has made was in the way it acquired land, the foundation of the home-building industry. It stopped. When the real estate crash came at the end of the 1980s, NVR got caught with a lot of unsold land on its books, said analyst David Weaver from Legg Mason Wood Walker Inc. in Baltimore.
"When they emerged from bankruptcy as a new entity, their strategy became no land at all, the extreme opposite of how they operated before," Weaver said.
Rather than buying land outright, as many builders do, NVR now almost always takes out options on land, putting down a deposit to hold it. NVR only buys a piece of land after it has found a buyer for a house on that land. Because of that, its balance sheet stays healthy, analysts say.
"Other builders use a mix of options and ownership," analyst Stanley said. "They buy their lots earlier and do the development work themselves. So they have much more capital invested. By acquiring virtually all their land on options, NVR doesn't have to invest much money at all. They also end up being much more focused on the house because they don't get involved in the land."
By taking such conservative land positions, the company has managed to keep its debt extremely low.
"Their debt levels are lower than any other of the nine public builders I follow," said bond analyst Matt Wilcox of KDP Investment Advisors of Montpelier, Vt. Wilcox said that as of March 31, NVR's overall debt from its home-building operations was only $115 million against cash reserves of about $75 million. That figure excludes debt from its mortgage finance business, which varies considerably over the course of the year and is normal for a mortgage banking business.
Another way NVR keeps debt levels low, analysts say, is by not joining the shopping spree some other large builders in the country have embarked on. Many builders have been expanding mostly by acquiring other builders. When the crash came in the late '80s, NVR had recently acquired Ryan Homes, which put it deeply in debt when the downturn came.
Now, analysts say the company is only making small acquisitions, preferring to grow by expanding its present operations or setting up its own businesses in markets it's trying to enter. NVR builds and sells homes in 18 metropolitan areas in 11 states in the eastern United States.
More than half of NVR's business has historically been in this region, which remains one of the best residential real estate markets in the country. In 2001, the company built and settled on a total of 10,372 homes, 5,007 of which were in the Baltimore-Washington area.
The third financial strategy the company has used since 1994 is a large, systematic buyback of its stock, which analysts say has boosted its share price.
"It makes a stock look more attractive if the company is buying it back," analyst Wilcox said. "It shows they think it's a good investment opportunity."
Employee training at NVR is also good, said Peter Bisset of the Meyers Group, the largest research firm in the country tracking residential new homes. "They do a lot of hiring from within," he said. "They bring people through the ranks. A sales manager isn't just in sales; they'll go out to the construction sites for a while. Their employees have a good understanding of all facets of the company."
The company has a full-time psychologist on staff whose job is to ensure that employee training is successful, several sources said. This couldn't be confirmed with the company, however, since NVR executives decline to discuss the company's policies or strategy. Public relations employees at the company limit themselves to giving out known statistics.
"They don't have to talk," analyst Stanley said. "Their numbers and sales speak for themselves."
And then there are the houses themselves, which analysts say appeal to home buyers.
"They have very salable floor plans," said Debbie Rosenstein of Rosenstein Research Associates, which studies the local new-home market. "The perception by the consumer is that they are a quality builder. Not a custom builder, but the next-best thing. Their color selections on exteriors are excellent and their neighborhoods look really good. Those are some of the reasons they're doing this well.
"Basically, they've got all bases covered," Rosenstein said. "They've just got their act together."
Besides sound business practices, though, NVR's success can mostly be traced back to the hot housing market of the past three years, during which nearly every kind of property has sold well.
"They've benefited from this protracted positive cycle, which the whole sector has benefited from," said Beth Campbell, director of the real estate group at Standard & Poor's. "Home building has performed very well."
Low interest rates and low unemployment are the major factors behind the housing market's continued strength, economists and housing analysts say. And the Washington area has stayed particularly strong with the federal government underpinning it.
"Washington didn't turn down as much as everyone thought it would," analyst Wilcox said. "NVR has reaped the benefits of Washington's success."
© 2002 The Washington Post Company |
