CEO Spotlight: Long Distance Operators

They work 1,000 miles apart but couldn't be closer. They don't get buried in long teleconferences, but frequently make joint decisions in short phone-bursts of a minute or less.

Ever since merging their home building businesses to form Meritage Homes Corp. in 1997, John Landon, in Plano, Texas, and Steve Hilton, in Scottsdale, Ariz., have shared financial responsibilities and divvied up supervision of 14 divisions across the Southern and Western United States without a hitch. The experiment was a success; the company is stoked for growth.

Steve Hilton (left) and John Landon

New home orders dove in the fourth quarter across the Midwest, Mid-Atlantic and even the Sun Belt. Texas was truly a Lone Star state, gifting builders with 20 to 30 percent increases — Meritage saw 22 — but order growth was down for many builders and a flat 1 percent for Hilton and Landon's enterprise. But that was the only shadow in an overwhelmingly stellar financial quarter for Meritage that handily beat analysts' predictions.

Facing the déjà vu of a record year peppered with doubts over future demand, the co-chiefs remain "fairly aggressive" on growth "in spite of some people's opinions that we shouldn't be," Hilton says.

Their efforts to run a conservative balance sheet are equally aggressive. At last year's end, debt to capitalization was 38 percent, a few points better than average among public builder peers. And land holding debt reduction continues as the company increasingly turns to options via developers and third party land bankers. This move lets the company accomplish at least three objectives:

• Control more land with less up-front investment
• Reduce Meritage's exposure to risk if land values decline
• Free up capital for continued acquisitions

The company holds roughly 55,000 lots or four to five years' supply of land. This is one way the company leaders have stoked its production engine. And they'll need it; Meritage entered 2006 with a record $2.2 billion order backlog. This is the strongest in company history, representing about 56 percent of this year's projected revenue.

While this bodes well for the first half of 2006, it carries the need to recover from a 10 percent decline in backlog conversions last year. The risk is always hovering that pricing power "may not be as strong as it was the last couple of years," threatening market demand projections for the back half of the year.

But through debt reduction and land banking, the co-captains of Meritage continue to forge ahead with plans to grow through acquisitions, greenfield startups and existing market growth. Landon says acquisitions are preferable to startups when right ingredients are present: "the right fit, the right management team, the right product and the market that we want to be in." Then, the plan is to double the company's size in three or four years by backing the local management team with big-builder capital.

Meritage has averaged roughly an acquisition a year in its near-decade bid for growth, but found Florida elusive until recently.

"We'd been studying the market for the right acquisition for quite some time, and we couldn't find one," Landon says. In November 2004, the company opened a greenfield startup in Orlando. The pieces have been falling into place since, buying Colonial Homes in the Fort Meyers/Naples area in February 2005 and Orlando-based Greater Homes in September.

"Our strategy in Florida is to grow a billion dollar business within the next four to five years," says Landon, from an expected $400 million by the end of 2006. He and Hilton plan to double the size of Meritage's Texas business, shift some focus from a soft Northern California market opportunities in the south, while nurturing existing business in Arizona, Colorado and Nevada.

"We can double the size of our overall business from where we are right now without going into any new states," Hilton says, when asked about the prospect of a play in the Midwest or East Coast. "The economy is robust everywhere we're doing business. Employment is growing; it feels good. You know, there's a reason we're not in the Midwest or the Northeast. I was in Cleveland yesterday, and the economy there is tremendously different than Phoenix."

At least in their markets and sub-markets, both executives are bullish on economic trends such as employment, interest rates and consumer confidence, which they feel point to a strong year ahead. Asked about the specter of more Ford-like layoffs, Hilton replies, "do you know where those people are going to go? A lot of them are going to pick up the paper and look at manufacturing jobs in Phoenix vs. Detroit.

People continue to migrate from the Rust Belt in the Midwest, where a lot of those manufacturing jobs are going away." He says those jobs are migrating to places like Arizona and Texas, where construction and manufacturing jobs "are just waiting to be filled."

"Picking up on Steve's point," Landon says, "I just came out of a Dallas sales meeting this morning, to pick up the mood of the market." He says relocation there is the strongest the division has seen in years. "And a good relocation market is the sign of a strong economy."

In Meritage Homes' hot Sun Belt markets, even if orders, pricing power or prices "moderate" to cool sales a bit, the long-distance leaders see a steady stream of buyers due to the growth of baby boomers as well as an influx of immigrants crossing Southern borders.

"We built our company for the long haul," says Hilton. "As John says, we're about building the right products in the right markets at the right price. And we have very much focused on the South and the West because we believe that's where the prospects for home building are . . . The rest of this decade is going to be tremendous for housing."