Out with the old guard, in with a new brain trust, a new financial structure, and a new competitive strategy.

Source: BIG BUILDER Magazine
Publication date: 2005-11-01

By Lisa Marquis Jackson

ARLINGTON, TEXAS, SEPT. 21—The moment was one in a series over the past several months that called for a declarative assertion of stability over volatility, control over chaos, calm over incipient disarray—finally. Revolving door owners and executives—a painful months-long hemorrhage of company leadership that started a year ago this spring—were gone, but far from forgotten, leaving a convulsive wake of questions in the industry and jitters among 400-plus employees. So, as Choice Homes' regional vice presidents gathered at their Arlington headquarters on that Wednesday, senior-level organizers of the strategy session would have had to be wondering whether the heavens themselves somehow had it in for Choice. As 87 percent of the company's operations are based within the state, nary a manager present could ignore the urgently pressing phenomenon of then-Category 5 Hurricane Rita as she barreled toward the Texas coastline.

Weathering storms is hardly new for Choice. The just-under-a-half-billion-dollar company—at one time the largest builder in the Dallas/Ft. Worth market—has been battered by the winds of change for the past 18 months … struggling with a brain drain, plummeting market share, decreasing revenues, and rapidly disappearing expectations. “The bar has definitely been raised,” says newly anointed COO Dan Couture, acknowledging the quality and quantity of builders butting into their highly competitive markets. “And there is no doubt we didn't do as good a job as we should have in recent years. We were too conservative.”

CHOICE SNAPSHOT

But today, as new president and CEO Bob Ladd radically re-sets a course for the enterprise, the traditionally low-profile company has battled back from its own private brink, recruiting and digging deep from within its ranks to cobble a determined new go-to executive team, realigning business plans with a growth-oriented financial structure.

Questions remain. A third of the company's ownership is in financial limbo—subject to the disposition of a family trust—and less competitive product and land positions characterize an enterprise that drifted into an inertial state as its long-time owners and top managers sorted out their personal and professional differences and split with their take. Ladd's challenge has been to regroup and re-focus speedily, at the risk of having Choice disintegrate into a collection of once-admirable assets, a shell of its former self. The shift from auto-pilot to operational strategy may be critical, whether its owner operators intend to carry the company forward as a home builder brand or to extract value from the organization as the industry's behemoths target companies like Choice in a slow steam-roller of consolidation.

The first challenge was a management team to replace a suddenly depleted executive suite. Stabilization at the top came decisively, and from within. This past January, Ladd tapped controller Steve Garza to step up to the plate as the company's CFO. And, as evidence that perhaps the dust is finally settling on what employees admit has been “a transition time,” the company named Dan Couture as COO in late September, in effect filling out Choice's executive dance card.

Promoted directly from his position as regional vice president for Texas-based operations in Ft. Worth, Amarillo, and Lubbock, Couture has been with the company since its inception. His appointment “is a great move for Choice,” according to strategic consultant and residential market researcher Ted Wilson, president of Dallas-based Residential Strategies. “He knows all the intricacies of the company and he is certainly on board with the makeover that is going on.”

As Ladd, Couture, and Garza establish their bearings, the company is bidding its past goodbye. “We will have a lot of good things to report,” says Couture of Choice's rebirth. “Many of them are still being put into play as we speak.”

Choice's inadvertent metamorphosis began in April of 2004, as the company lost its co-founder husband-and-wife team of creative front man, COO Dale LeMaster, and his finance-focused wife Victoria.

The couple had been a powerful force at Choice since they teamed up with oil industry and construction investor Bill Bowerman to form the builder in 1987. Choice evolved quickly into a top 20 builder and a regional powerhouse. As 2003 drew to a close, the LeMasters found themselves looking for an exit strategy. After exploring the possibility of a public offering, the principals decided to stay private. The LeMasters divorced and sold their combined one-third ownership to Bob Ladd, a Masco executive. Most observers assumed Ladd's role would be as a passive investor, and most observers believe that's what Ladd assumed at the time as well.

Within 12 months after company directors opted to keep Choice private, longtime CEO Steve Wall resigned. Neither he nor Choice owners will comment on his reasons, but industry observers can take well-educated guesses as to why. Wall had been leader of a management team that felt that—as company owners became fixated on disposing their respective holdings over the past couple of years—“ownership was taking profits out of the business, basically starving the company and stifling growth,” opines Tony Avila, managing director of home building at JMP Securities. Another factor: Wall, who was widely credited with driving Choice's successful growth since he stepped up as CEO in 1999, was also known to have sought an equity stake in home building, a doubtful scenario at Choice.

“I wanted something of my own,” he said of his decision to form Wall Homes. What's more, Wall took quick advantage of having no non-compete restrictions to abide by, raiding several high-level Choice executives to join him in April of 2005.

Compounding the management challenges, executive bailouts occurred precisely as the simmering Texas marketplace exposed Choice's competitive vulnerabilities. Choice's entry-level focus since its inception proved for years to be a niche few other big builders had any interest in contesting. However, in the early 2000s, as Texas's relo juggernaut stalled out, companies like Highland Homes introduced its entry-level Horizon line. David Weekley Homes jumped in with the Imagination series, and Ryland came out with its Crescent product for first-time buyers. “They had a nice little goldmine that they were mining and the rest of the builders looked up and realized that there was some profit to be made in the entry-level market,” says Wilson. “Then everyone came and camped out in their back yard.”

Choice's historical land position strategy—100 percent options—also took on risk abruptly. As players with greater leverage—and cash—got into the game, Choice was left on the sidelines on deals it normally might have secured. What's more, a decentralized regional structure created such autonomy among its parts that headquarters couldn't achieve scale enough to manage escalating building materials costs. By 2004, the effects of weakened grip on its sweet-spot market took their toll. As other top private builders across the country enjoyed increasing revenues of anywhere from 6 percent to 61 percent from 2003 over 2004, Choice posted an 8 percent decrease, and closings fell 13 percent (see “Choice Snapshot,” page 76).

Ladd stepped directly into the breech, assuming the role of president, CEO, and COO, the positions both Wall and LeMaster had vacated. Tirelessly juggling the day-to-day and strategic responsibilities, he's mapped out a new-and-improved company, and simultaneously managed to introduce a calm and determined confidence among the rattled ranks. “What I have witnessed is that there is a lot of respect for Bob Ladd, and that the core management has really rallied around him,” says Wilson.” And Ladd's staff couldn't agree more. “I have 100 percent more confidence in his leadership than I ever did with Steve Wall,” says a high-level employee who worked directly with both executives.

Ladd's jump from building products to the home building arena may raise eyebrows among observers. But, those who've witnessed the entrepreneurial flair he exhibited while nourishing the small cabinetry-manufacturing business Ladd bought from his father—and eventually built into a $150 million enterprise that Masco Corp. acquired in 1997—are confident in his abilities. “He is one of the brightest business guys I have ever run into,” says Ron Ayers, Masco group president and Ladd's former boss. “He's very astute, probing, and inquisitive. Any company that is lucky enough to have him on board is certain to benefit from his talents.”

Under Ladd's hands-on guidance, the days of Choice's financial ambivalence seem to have come to an end, as newly committed resources flow toward better penetration within neighborhoods via expanded price ranges and new products in the move-up market. “We now have a syndicated bank line anchored by Banc of America,” confirms Garza. “We have been able to get more favorable terms, and that's a big positive.” Another top priority is the focus on better land and lot positions that will include a blend of optioned lots and purchased ones. “We've gotten the commitment to do what we need to do,” says Marc Jungers, Choice's regional vice president for the Houston division, of the competitive land situation. “I'm not saying we're going to go run out and buy up a bunch of raw land now, but we know we can do what it takes to be successful.”

The company has also devised a planned spec program for the first time in its history. “In the past, ‘spec' was a bad word. Inventory only came from bust-outs,” says Couture. “Now we analyze our inventory and starts weekly and want to maintain a constant amount on the ground.”

Currently working with three architects, the company is paying more attention to design and architecture, and a portfolio of company plan options will be completed by the first quarter of next year. And the former “survival of the fittest” decentralized model that created a competitive environment among community managers is being replaced with an approach that includes more consistency and gains some leverage. “We didn't have the synergy and volume,” says Couture of their former structure. “So far we have negotiated 17 national contracts in '05 and we expect to do more in the next six months.”

“There are always things that you'd do a little differently,” admits Wall, looking back on the business model he directed at Choice. “But my perception was that we had a niche. And with our modular business units, our advantage was our speed.”

As Couture steps up to the plate, expect Choice to begin implementing its makeover's first phase—affording Ladd the opportunity to step back and focus on long-term strategy. In October, the company began exploring the idea of establishing a mortgage business arm. And as the fastest-growing demographic in the state of Texas, the Hispanic market presents a huge opportunity that few builders have effectively penetrated because of cultural differences, language barriers, and an overall understanding of the home buying process. “We are considering some opportunities in that arena,” says Garza.

At the same time, even as Choice reassembles its organizational chart and sets its strategic reinvention into motion, outside speculation continues to swirl around the question of whether the company is preening itself for an acquisition. “I can tell you emphatically that that's not the case,” asserts Couture in his answer to a direct question about this scenario. “I want to make that very clear.”

But of course, for a builder with this footprint—and given the industry's expectations to feed the big-player consolidation machine—acquisition talk comes as part of the territory. “I can't tell you the number of times I have come to work and heard that we were just bought by D.R. Horton,” laughs Jungers.

Instead, it appears that the revitalized company is determined to carve its own way back into a top 20 perch among Builder Magazine's Builder 100—and maybe climb even higher. “For now, we plan to improve our position in existing markets and see Houston as being key to our growth,” says Garza. “But by '07 we may be ready to consider new market positions for an '08 entry.”

“I think that Choice is poised to come out of this highly competitive environment with new products, new ideas, and a new introduction to the market,” predicts Wilson. “The future looks quite bright for Choice.”

The company closes on 74 homes.

Bill Bowerman, chairman and director

Bob Ladd, president and CEO

Steve Garza, CFO

Daniel Couture, COO

Mike Edge, vice president/director of real estate

Steve Lubbers, regional vice president, Ft. Worth, Amarillo, Lubbock

Zack Jones, regional vice president, Dallas

Bruce Heikkinen, regional vice president, Georgia

Frank Prince, regional vice president, San Antonio/Austin

Marc Jungers, regional vice president, Houston region

Robert (Bob) Ladd, director, president, and CEO

Age: 56

Education: Not available

Experience: Ladd came to Choice Homes in 2004 after an illustrious career in the building products arena. Started by Ladd's father in the 1970s, Duncanville, Texas-based Texwood Industries became known for its cabinetry, and Ladd, who eventually purchased the business and carried the title of president, was acknowledged for “building Texwood's business and manufacturing capabilities, and developing a management team that could lead the Texwood team into the future,” according to Taylor, Mich.-based Masco Corp., who acquired Texwood in 1997. After five years, Ladd requested a lesser role with the company and began laying the groundwork for his exit strategy. “It was certainly at his request,” says Ladd's former Masco boss and group president Ron Ayers. “We knew the time would come when he would go off and dedicate himself to a different venture, and we prepared for it. He always had a passion for new construction.”

Dan Couture, COO

Age: 49

Education: Graduated from University of Massachusetts in 1979 with a B.S. in Business Business Experience: Promoted directly from his position as regional vice president for Choice's Texas-based operations in Ft. Worth, Amarillo, and Lubbock, Couture has been with the company since its inception—starting in sales and climbing the ranks since 1988. His career in home building dates back to 1980 when he worked with Brighton Homes in Houston. According to strategic consultant and residential market researcher Ted Wilson, president of Dallas-based Residential Strategies, his appointment as COO “is a great move for Choice. He knows all the intricacies of the company and he is certainly on board with the makeover that is going on.”

DAN COUTURE, COO

STEVE GARZA, CFO

Steve Garza, CFO

Age: 40

Education: Graduated from Boston University in 1987 with a B.S. in Business/Accounting Experience: Promoted from a three-year stint as controller for Choice Homes, Garza applies experience in a variety of industries to his current role as CFO. Starting his career as an auditor for Arthur Anderson, Garza moved through the ranks as assistant controller for Taco Cabana's corporate operations and then in the same capacity for Dal-Tile. In 1994, he joined Danka as division controller where he started a three-state division from scratch. After the company centralized operations in Florida, Garza joined Physicians Resources Group as controller in 1997. For two years he worked with the turnaround company that had filed bankruptcy, but in 1999, they folded and he joined Page-Net where he was quickly promoted to vice president/controller. Garza then joined Choice in 2001 after Page-Net was acquired.

SOURCE: BUILDER 100 DATA