Founded: 1976

Headquarters: Houston, Texas

Website: www.davidweekleyhomes.com

Revenue: $223.8 million

Closings: 1,469

No. of employees: 54

Markets served: 3

Revenue: $1.1 billion (estimated)

Closings: 2,950 (estimated)

No. of employees: 1,047

Markets served: 17

Hear David Weekley discuss the challenges and benefits of being a private builder in Part I of our video series. In Part II, Weekley shares what being selected as Professional Builder's 2013 Builder of the Year will mean for his company.

The circumstances were so unprecedented, so perilous, that hundreds of builders simply hung it up. Others, like Weekley, which chose to make some very tough choices with no guarantee of a positive outcome, were truly tested. Our 2013 Builder of the Year passed the test and learned in the process that its systems and processes and, perhaps most importantly, its company culture, are built for the long haul.

“Back in ’07, I remember telling people that my biggest concern, other than survival, was how much of our culture we would lose,” says John Johnson, CEO of David Weekley Homes. “We had 1,600 team members and we had to reduce down to 600. Now some of that was through natural attrition, but it was very, very painful for us. I think we handled the reductions in a very caring way. Where other companies would call 300 people into an auditorium and tell them they did not have jobs, we handled it one-on-one with the manager and the team member. We gave triple the severance pay. We offered to transfer them. We tried to help them find jobs with other companies. And we got extremely good feedback from everyone—even those who had lost jobs.”

Conducting the reduction in force in a thoughtful and humane way cost the company millions more than it might have if they had made other choices, but company managers and leaders chose to “do the right thing.” In fact, the phrase “do the right thing” is repeated, mantra-like, around the halls of the company’s headquarters in Houston; and, says Johnson, the phrase represents the core value of the company culture he feared might be irrevocably lost by laying off so many valuable employees.

This year, the company will build and close nearly 3,000 homes with $1.1 billion in revenue, up from 2,400 homes and $861 million in 2012. Like many of the industry’s finest companies, its growth coming out of the downturn is dynamic, but even in the worst of years—2008, the only year it lost money—the company stayed committed to its team members, its customers, and its community well beyond any other builder we know.

Throughout the downturn, the company paid profit sharing to eligible employees, helping the company make Fortune magazine’s ranking of the nation’s 100 best companies to work for, its seventh time on the list. (Only one other builder has achieved this distinction, and that was for a single year.) During the doldrums, the company experienced its highest levels of customer satisfaction ever recorded, and today it stands at over 90 percent “delighted.” Significantly, during this period the company also honored its long-held commitment to give back to the community. Weekley has given more than $100 million over the last 20 years, and more recently has pledged to contribute 20 percent of its pretax income to charity. Fast growth and logistics will keep the company from hitting this goal in 2013, but its giving will surpass 18 percent, says company founder and chairman David Weekley. Half of that money goes to educational and character development groups in the United States, such as the YMCA. The other 50 percent goes to international assistance projects, mostly in Central African countries such as Rwanda, Burundi, and Ghana, to name a few.

But beyond the commitment to its teams and time-honored charitable endeavors, the company’s true “secret sauce,” says Weekley, is the company’s strong relationships with customers.

“What is wonderful is that our purpose is building dreams, enhancing lives. We have our values just like everybody has their values. Everybody has their stuff, right?” says Weekley, holding a large stack of emails and letters from happy customers. “I’ve got to tell you that our people really do live out their purpose here. Coming through the downturn, we had layoffs, and it was just miserable, and our people were doing three jobs. But the fact that they were doing a great job for the customer really felt good. It was the only thing they had going. At times, we really were not making money, and that is where they got their affirmation. Our people are a competitive advantage that you cannot replicate.”

Much of the company’s customer-centric, do-the-right-thing culture stems from an organizational structure that is unusual in home building. Whereas a builder might typically have a local sales manager, a construction manager, and a warranty person, David Weekley Homes operates with general managers who run all aspects of the business and allow the company to “speak with one voice” to the customer.

“We want that general manager to focus on the customer,” Johnson says. “That is truly something that has worked well for us. We started it back in 1990 and it has been a good breeding ground for growing senior leaders. They will get very early responsibility for all of the different functions, as well as for having P&L responsibility.”

Johnson says that placing the authority in the hands of a local general manager makes it easier for the company to come down on the side of customers and their happiness. Putting decisions in the hands of a functional leader like a sales manager might make it too tempting to rush a house through closing in order to boost numbers at the end of a reporting period. But a general manager linked to customer satisfaction scores, among other measures, is less likely to take shortcuts.

General managers usually rise up through the construction side of the business, though leaders have come from sales and purchasing. Before being given a general management position, each individual is cross-trained over a period of several months and given the title followed by the words “in-training,” says Johnson. “It tells their team, and them, that they have a lot to learn. With that title, team members cut them a little bit of slack. It also keeps them from getting a big head.”

David Weekley’s land strategy is the result of a philosophy he credits to his mentor, co-founder, and older brother, Dick. The elder Weekley was a real estate broker during his early career, and he wrestled with a conflict of interest between representing his customers and his home building company.

“How could he go represent to his customers that he was bringing them the best piece when we are buying land as well?” David Weekley says. “That’s how we got on to not buying land.”

Instead, the Weekleys bought land on a rolling lot-option basis. They contracted with sellers for a set number of lots at a fixed price. Over time, the company exercised those land options. Consequently, the risk for David Weekley Homes is the cost of the option. The builder avoided getting hit by land devaluation or getting stuck with a huge inventory of lots waiting for demand. That strategy helped Weekley survive the bust during the 1980s when oil prices collapsed and petroleum production in the Texas oil patch plummeted.

The company also benefited during the Great Recession. While other builders were stuck with land and unable to pull out of markets, David Weekley Homes redeployed assets by quickly closing communities. In Florida alone, the builder was able to rapidly reduce 50 percent of its assets in that state. The approach stays true to one of Weekley’s favorite sayings: Never bet the business.

“It’s always ensuring that you’re looking for a back door because we are in a cyclical business, [and] it will remain a cyclical business,” Weekley says. “As you’re doing business, always structure land deals [and] all kinds of things in a way where you’re not betting the company.”

Now that land values are climbing, Weekley is content with letting his development partners profit from land appreciation. He wants to grow by building homes, and 60 percent of the company’s business comes from being active in master-planned communities. Besides brand and reputation, the land strategy also helps maintain relationships with lot developers who invite David Weekley Homes to build in their communities.

A strong culture and a tight team-alignment around “doing the right thing” has been the glue that enables David Weekley Homes to consistently demonstrate being a private home builder and being a large builder with a national reach are not mutually exclusive. The company’s core operations are located throughout Texas and the Southeastern U.S., but in recent years it has grown into new markets via opportunistic asset purchases as well as through acquisition.

David Weekley Homes’ long reach requires eight area presidents. Seated, left to right: Jim Rado, Rick Moore, Ladd Fargo, and Walter Watson; standing: Randy Braden, Jon Calbert, Ken McDonald, and Steve Ebensberger.

The company moved north of the Mason-Dixon line in 2011 when it purchased a large number of entitled lots in Indianapolis that had previously been owned by Estridge Communities. Later, the company acquired the widely admired T.W. Lewis company in Phoenix. And most recently, the company expanded into the Salt Lake City market at the invitation of global mining giant Rio Tinto and its subsidiary Kennecott Land, which own the massive and hot-selling master-planned community Daybreak in South Jordan, Utah. Presently the company is building and selling well in three Daybreak neighborhoods. The company’s Utah success is particularly notable in light of the number of national builders who entered the market only to retreat later. The company culture, says John Johnson, helps keep it from making erroneous assumptions about new markets and to be very respectful of local design and sales nuances.

The company’s strategy on land is a simple one (see sidebar on previous page). It only options lots for anywhere from 5 to 20 percent of their value. Dating back to the oil-and-gas bust that crippled the Houston market in the early ‘80s, the company has stayed out of the land development business—except in rare instances—and has focused exclusively on building new homes. Today, its average cost for optioning all of its lots is slightly more than 5 percent. This strategy helped the company get through the downturn in relatively good financial shape, says Johnson. “We have a get-rich-slow and a get-poor-slow model of doing business.”

The company maintains secured lines of credit with more than a dozen lending institutions and for many years this was the extent of its debt. Early this year, however, the company accessed the public debt market, selling $200 million in bonds at 6 percent interest, says its Chief Financial Officer Heather Humphrey, a rate that reflects the lowest afforded any private builder in similar debt offerings (see sidebar on page 30). Public builders, like our 2012 Builder of the Year Toll Brothers Inc., have been able to access the debt markets for much lower rates and for larger offerings; but Weekley and other privates have the benefit of being able to access the public markets without all of the sometimes onerous and intrusive Securities and Exchange Commission filings that fuel short-term expectations and sometimes create an atmosphere of short-term decision-making in public companies, says Weekley.

“If you go public, your goals change,” he adds. “My goals are long term. To me, when you are put into public scrutiny—what your earnings were this quarter—it kind of changes the way you think. Public companies cannot give the profit sharing that I can. They cannot give 20 percent of their pretax earnings to charitable endeavors. So, to me, being private and being able to share the wealth, so to speak, is a way that allows us to behave better over the long term.”

Historically, an even bigger long-term challenge for private builders is how best to transition to new ownership. Most either go public or sell their companies. But unlike other private builders, Weekley is not averse to selling stock to key stakeholders in the company. He and his brother Richard own most of the shares, but for the last 25 years the builder has invited pivotal team members to buy into the company. Today the firm has 26 stockholders, all working within the company. Where other private builders would rather pay more to keep these employees, Weekley says he wanted others “in the boat with him.” All of the key leaders who are asked by Weekley to buy stock in the firm are offered the book-value price of the company. In addition, they sell at book value, which helps keep the focus on the long term.

Over the years, Weekley sought the counsel of many leading business thinkers and consultants, including Jim Collins, the author of “Good to Great.” In a meeting in 2007, Collins looked around the room and told Weekley that he had a problem: “Everyone here is old.” That conversation led the company to create another long-term plan called Noble Journey 2025. The plan has three main goals. The first is to create dedicated and financially secure team members. The second goal involves developing a world-class brand. (In 2012, J.D. Power and Associates named David Weekley Homes one of the top-50 brands in America across all categories of consumer brands.) The third goal concentrates on high financial sustainability and growth.

“Sustainability means that we are very conservative. We don’t own a lot of land. We don’t want to start operating in a different way than we have in the past,” says Weekley. “And growth? We have said that we want to be a $5-billion company by 2025.”

By 2025, David Weekley will be 72 years old and most of the existing leadership will have transitioned out of the company with new leaders ushered in. A key to that transition process goes back to the importance of being a private company, of being able to make long-term decisions about the way profits are allocated. Weekley says in most years 40 percent will go to taxes, 30 percent will go to stockholders, and 30 percent will be reinvested in the company. This way, “The ownership group does not have to sell out to harvest,” Weekley says. “That is why I expect this company to be here 100 years from now—private—doing what we are doing, taking care of customers, taking care of our own team members and their families; a great place to work that does meaningful work. To me, that will be success after I am gone.”

Publicly traded companies raise capital by issuing stock while privately held companies depend primarily on their bank lines.

Yet those borders aren’t set in stone for privates that have the scale to raise money through a 144A-for-life bond offering. After seeing a handful of private companies raise money through public debt with no coupon (zero-coupon bonds where bondholders are paid in the form of capital appreciation rather than by interest payments), David Weekley and Chief Financial Officer Heather Humphrey took a deeper look into the high-yield bond market.

“As we really started to investigate it, we thought it foolish not to opportunistically take advantage of a high-yield market if we could get 10-year money at a really good coupon (interest) because that would effectively be equity to us,” Humphrey says.

Weekley Homes has a long-standing practice of not taking on huge debt. The company already had lines of credit with at least seven banks. The terms included two-to-three year windows and provided the builder with access to credit in case another downturn occurred. But an offering under 144A, which refers to Securities Act Rule 144A, provided longer-term cash at a fixed interest rate. A 144A issuer has reporting requirements, but those financials are available only to investors who are qualified to buy and subsequently seen only by the bondholders. This option is attractive for a company that wants to raise more capital without having to sell an ownership stake in the public market.

After securing a B2 rating from Moody’s, Weekley Homes in the first quarter sold to approximately 80 investors $200 million of senior unsecured debt due in 2023 at 6 percent interest. Those terms are among the cheapest issued this year to a home builder for long-term senior unsecured debt. Weekley used about $165 million to pay off bank lines.

“You have the benefit of having that long-term money without the day-to-day pressures from meeting expectations for quarterly returns,” Humphrey says. “Our investors want us to perform consistently; they don’t care if we grow because we can cover what we need to cover. (The senior unsecured notes) don’t add the kind of pressure that the public (companies) have on their earnings every quarter.”

Designs That Stand the Test of Time

Small cross-functional groups of team members still get together to brainstorm and work on company issues.

By the following year, it was clear that a calm after this storm was not coming any time soon. A series of layoffs ensued and over the next couple years the workforce of 1,600 was cut to about 600. Many of the laid-off employees had been with the builder for a decade or more. The experience was traumatic and seemed at odds with numerous accolades the company had received over the years for being one of the best companies and great places to work.

As time went by, benefits were reduced, Christmas parties cancelled, and the employees who remained had to wear multiple hats. The company pulled out of communities, closed sales offices, and slashed housekeeping and landscaping expenses by having salespeople clean homes and pools, and builders mow lawns at spec homes.

In the end, David Weekley Homes pulled through and made a profit every year but one between 2008 and 2011. Yet the builder did more than just count beans to survive the Great Recession. During the darkest period for the industry, employees increased the builder’s customer delight score to the highest level in company history.

By the time the housing market picked up again in 2012, the David Weekley Homes brand was as recognizable and as shiny as ever in terms of customer satisfaction and housing quality awards. Sales grew 40 percent in 2012 and increased 10 percent during the first 10 months of 2013 versus the comparable year-ago periods. More than 130 laid-off employees were rehired and the company staff now totals 1,047. David Weekley was not just back, but was expanding with entries into Indianapolis and Phoenix during 2011 and Salt Lake City this year.

Weekley introduced Green Rooms in its sales centers and models to give shoppers a look at what’s behind their homes’ walls.

Now a $1.1-billion company in terms of annual revenue, the builder is aiming to reach $5 billion by 2025. Johnson says David Weekley Homes has enough room for growth in its existing 17 markets to meet the milestones executives set for the next five years of that journey.

There were several initiatives that chairman David Weekley launched to get his company to this point, and ROC was the company-saving rally cry. ROC, introduced in 2007, is an acronym for a three-pronged attack on the downturn where “R” meant revenue generation, “O” stood for overhead management, and “C” targeted cost reduction.

“Before going through ROC, we had years of profit sharing. All of a sudden we weren’t having profit sharing, and people were getting laid off,” Weekley says. Executives shared the company’s numbers with employees and told them they needed to shut down some operations.

“Everybody knew we were having a tough time, so you might as well be honest about it,” Weekley says. “We said we’re going to make it through; we made it through before. We’re in good shape; we still have our bank letters in place. Be at peace, but let’s get to work.”

David Weekley Homes was not careless with cost, but that category had not received the intense focus that had been allotted to other tasks such as budgeting or growing market share. Now cost had to be a top-tier concern and, after trying several approaches to tap employees for ideas, management settled on work simplification meetings where two to three managers sat with cross-functional groups of team members in every office and asked, “What gets in the way of doing your job?” Many people shared that they were afraid to ask co-workers for assistance with unfamiliar tasks because everyone already was taking on a greater workload. That revelation led to an effort to provide more training and redirect job duties, which resulted in more productivity. That effort also showed employees that management was listening.

Eventually all sorts of cost reduction ideas came in. Team members figured out ways builders could share a construction trailer, work without a trailer, and save money by removing seldom-used fax lines from the trailer. A project coordinator in Jacksonville, Fla., even figured out a way to save 3 cents per bottle of water. Some of the ideas were large scale and offered significant cost savings, such as simplifying house plans. Most changes were small-scale suggestions that cut cost by less than $100 a pop. But it all added up.

“What we learned again and again is when you sit down with our people, and you start talking about things and really listen to them, and do something with what they are telling you and share it across the organization, they really appreciate being heard,” says Mike Humphrey, vice president of operations.

Cost reduction was becoming a company mindset, and the employees increasingly were sharing best practices. Weekley had been building model homes within 90 days. One overhead management edict for ROC called for building the models in 30 days so the company could launch its sales campaigns quicker. A couple of project managers figured out how to do it and shared their practices with builders in other Weekley markets.

Founder and chairman David Weekley attends to daily duties in his office at Weekley Homes’ Houston headquarters.

On the revenue generation front, employees took classes that taught them how the company makes money, with one of the clear lessons for sales and warranty people being don’t shoot down profits by giving away too many incentives to customers. Closing rates increased with the addition of Internet advisors, a specialized sales force that engages online prospects, matches them with products and communities, and refers them to a mortgage servicer if needed. Today, the advisors generate 30 percent of Weekley’s sales.

“Everybody here knows how our business works and, with profit sharing, it’s in everyone’s best interest to ensure that we do things right,” Weekley says. “No one here is just marking time. We’re all individually owners of our success, so when those profit-sharing checks are handed out at the quarterly meeting, the cheers go up because everybody on the team did extraordinary things."

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