Hanging On to the Boom
Land, Market Strategies Help NVR Post Profit

By Allan Lengel
Washington Post Staff Writer
Monday, April 28, 2008; D01

Along Gum Spring Road at the edge of Loudoun County, the rumbling of a tractor and the pounding of hammers are reminders that local builder NVR, one of the nation's largest, is still putting up homes.

The housing industry is ailing, foreclosures are rising, consumer confidence is waning, and NVR of Reston is playing the contrarian, chalking up modest profits while big competitors are posting huge losses.

Industry analysts say the company has remained profitable by offering a variety of prices, focusing on locations where it can have high market share and taking a conservative approach to land acquisitions. Instead of buying land outright, it options to buy, minimizing its risk of getting stuck with too much land and tying up too much capital, particularly in downtimes like this.

"They are now seen as a company in an enviable position," said David Zelman, president of Zelman & Associates, a housing analysis firm that closely tracks NVR. "Clearly their business model has been proven out in this very difficult environment."

In 2007, NVR posted a $333.9 million profit, a sharp contrast to competitors such as Pulte Homes, which lost $2.25 billion, and D.R. Horton, which lost $712.5 million.

In the first quarter of 2008, NVR showed a $43.5 million profit. Pulte lost $696.1 million, and D.R. Horton lost $128.8 million in its fiscal first quarter.

NVR operates in 12 states and 22 metropolitan areas under multiple brand names. NVHomes offers high-end houses. Ryan Homes has a broader range of prices, and Fox Ridge Homes and Rymarc Homes target first-time buyers.

"They have maximized the builders to serve all the targets," said Robyn Burdett, a real estate agent with Re/Max Allegiance in Reston. "When the higher-end market is working and more people want options, they were doing well. Yet in this market, when nobody is selling, they're doing well because they have the low end of the market. They have spread themselves across different targets and territories."

Dwight C. Schar, 66, a former junior high school teacher who is part owner of the Washington Redskins and Johnny Rockets restaurants, started NV in 1980. In 1986, he made a successful hostile bid for Ryan Homes, a company five times NV's size. The company was then renamed NVR.

Like other builders, NVR bought up chunks of land. But by 1990 the market was sinking, and the company lost $261 million. Two years later, NVR filed for bankruptcy protection. It emerged in September 1993.

That fall from grace changed the way the company did business.

Instead of buying raw land, it started making down payments -- often 10 percent or less -- with an option to buy land that already had infrastructure such as streets and sewers. And it exercised its options to buy lots only when consumers signed contracts.

In uptimes, that meant less profit because the company often paid a higher price for optioning developed land.

But in a down market, like now, the strategy shines.

Competitors who bought land outright were stuck with depreciating land, and too much of it. As demand waned, they ended up nixing projects and selling off parcels at big losses to generate money.

Conversely, NVR, which maintains a strong balance sheet, was able to walk away from its deposits and lose far less. In some cases, it was able to renegotiate the price for the land it had walked away from.

"The risk was far less, but so was the margin," said Gopal Ahluwalia, vice president of research at the National Association of Home Builders.

NVR's inventory peaked in 2005, declining in 2006 as the market started to go down. One analyst said some other companies weren't as realistic about acknowledging the downturn.

Nowadays, NVR's contractors and laborers are still pounding nails and moving earth, mostly in the East. NVR is the dominant builder in the Washington-Baltimore region, with about 18 percent of the market, according to Hanley Wood Market Intelligence, which tracks housing activity. In the past year, NVR sold 2,456 units in the region.

Homes aren't selling as quickly as they did in the boom times, but people are still buying in NVR communities such as Little River Commons off Gum Spring Road in eastern Loudoun. That project is slated to have 103 townhouses and 69 single-family houses, and as of last month, 23 townhouses and 38 single-family houses had been sold, according to Hanley Wood.

Although NVR has fared better than most builders, it certainly has not been immune to the industry's downturn.

NVR's stock has jumped around from over $900 a share in July 2005, at the peak of the housing boom, to $665.15 on Friday. In May 2007, Banc of America Securities downgraded NVR from "neutral" to "sell." In August, the bank upgraded from sell to neutral.

Its profit of $333.9 million in 2007 was down from $587.4 million the previous year. Gross profit margins for homes declined to 16.3 percent from 22.1 percent, the result of tough market conditions and $262 million in lost land deposits that NVR chose to walk away from, according to the company's 2007 annual report.

"Although these results were far from where we would like them to be, we adjusted to changing market conditions; and consequently, we are proud to have outpaced the broader home-building industry," wrote Chairman Schar and Paul C. Saville, the chief executive, in a letter to shareholders in the annual report.

Through a company spokesman, NVR officials declined to comment for this article.

But the annual report gives some insight into the uncertain future.

"We expect to see continued pricing pressures and in turn, continued pressure on gross profit margins in future periods," the report said.

"To offset these declining selling prices and customer affordability issues, we are aggressively working with our vendors to reduce material and labor costs . . . in addition to the focus on reducing lot costs."

Additionally, the report said the company was providing some housing at lower prices by reducing square footage and was providing fewer upgraded features as standard options.

NVR has "done very well marketing and stabilizing the price points" in this area, said Guy Sheetz, regional manager for Hanley Wood. "Some of the smaller builders are still juggling the price points. Finding the right price in a down market seems to always be a difficult position."

NVR's performance has brought accolades, particularly for Schar, who stepped down as chief executive in 2005 but remains chairman. Saville, 52, who succeeded him and has been an NVR officer since 1993, is credited with running the day-to-day operations.

"In my opinion, Dwight Schar has the best real estate sense in the industry," said Bob Kettler, chief executive of Kettler homes in McLean, who has done business with NVR for years.

As for the company's houses, JDPower.com, which rates customer satisfaction, gives NV Homes and Ryan Homes in the Washington area a rating of "about average." Its survey is based on a host of factors including workmanship, warranty and customer service, price and value.

Zelman, the analyst, predicts that NVR will come out of the housing slump in an even stronger position in the industry and will probably expand geographically.

"I wouldn't be surprised to see them go into the Carolinas more aggressively and good growth markets," Zelman said. "They're clearly in a position to take advantage of all the distress in the land markets because of their strong balance sheet."