When states began ordering people to stay home in early March, Meritage Homes CFO Hilla Sferruzza called all the land owners her company had deals pending with and asked them to hold tight. Future land and development spend is the one cost the company had absolute control over, so it was the first lever she pulled when the economy turned downwards.
"I connected with every one of our sellers with a near-term expected closing, or a near-term development deadline, and said, hey, we're all in this together. You guys don't want this, and we don't want this. Let’s pull back," Sferruzza said last week in a CFO Thought Leader podcast.
Sferruzza, who joined Meritage in 2001 and has been CFO since 2014, said the majority of sellers agreed to put the deals on hold.
"I wouldn't say they're altruistic," she said. "It benefits them as well. They don't want us to drop a deal. If it takes an extra couple of months to get through the darkest time and gain some visibility, I think they were willing to hold our hand and walk through that darkness together."
By early May, the prospects of the company — the seventh-largest publicly traded home builder in the United States — looked good, despite the slowdown. Sferruzza said she continues to forecast her company hitting its near-term goal of building 300 communities, up from 250 today, but instead of reaching that at the end of 2021, she's projecting it a few quarters later.
"We're now working those phones again," she said. "I wouldn't say we've opened up the purse strings just quite yet, but we can see some green shoots and we’re having conversations about, hey, if things continue to hover along the current trajectory, it’s looking like maybe in the summer we'll start being an acquirer and close on some of those transactions we’ve successfully delayed.”
One reason for her company's solid prospects is its use of technology, a function she took over when she became CFO.
"Hands down, the most intimidating part of becoming a CFO was having the IT team [fall under] my umbrella," she said. "Having to oversee an IT department was not something I ever saw in my path."
That function has become key because of how it integrates the company's back-office operations with new, customer-facing applications that let customers look at and buy homes efficiently, even during the pandemic.
"Fifteen percent of all of our sales volume in April came from virtual tours," Sferruzza said. "That's an incredible number, when you think people are making a commitment for a couple hundred-thousand dollar home purchase through a virtual tour. It's a much higher number than we were targeting. Now that we've seen this 15%, I really think the sky’s the limit."
Sferruzza thinks the consumer-facing technology, coupled with the advantages of a new home over an existing home, is one reason her company has fared much better than existing-homes, which have seen sales plummet.
"It's pretty tough during a quarantine to show an existing home," she said. "If you're living in it, you don't want people in your house. It's also a little bit tougher to do a walkthrough using a virtual tour for an existing home. You can see things and get a feel for it, but you don't know if there's a ding behind the door. In a new home, it's a new home, and you're getting a new-home warranty."
To help Meritage develop resiliency, Sferruzza made improving its cash forecasting process a priority.
"This is a long business," she said. "When you buy land, then develop it, then build the model, then build all of the homes, then start selling, you have to have a confident outlook on cash. If there's not enough cash, you gap out of [lose brand visibility in] communities. If you have too much cash, it's a wasted opportunity."
To get a better handle on cash projections, she asked her planning team to improve their understanding of the cash flow process, and to get comfortable with the building aspect of their business, in part by making visits to construction sites.
"You have to touch the dirt and walk through the home construction process," she said. "You have to really live it and breathe it to model it correctly. That’s maybe the difference to where [the planning team] used to be and where we are today."
The increased attention to accurate projections has made the company more comfortable in making long bets.
"In the past, we maybe over-simplified it," she said. "People would say, in Arizona, for example, my trajectory is 18 months and I have sort of a bell curve, so I’m going to spend money here and there's going to be a big pop in months 9 through 15, with kind of a drag coming down, and by month 18 I should be ready for sales. That’s not reality. We have weather, municipal delays, inspections we don't pass the first time."
"The more we dug into it, the more we realized that is maybe too far of a generalization," she said. "The cash flows definitely did not follow that pattern, and for us, no money comes in until we sell homes. So, it's really important to time the community openings, both because of cash flow — we want to know when the money starts getting returned to the company — but also we’re very concerned about gapping out, which is more of a marketing concern."
The company's newest focus is serving entry-level buyers, a priority it set shortly after Sferruzza became CFO. She knew it would cause a spike in cancellations, because first-time buyers are likelier to back out of their purchase than move-up buyers, so Sferruzza set out to find why buyers were backing out, so the company could get more of them to stay with the transaction through closing.
"It's okay that we saw a spike," she said. "If my funnel is bigger for potential customers, there's going to be a higher cancellation rate. But because the cancellation rate increases, you really need to understand why and whether the reason is within your control."
In addition to metrics that showed her the scope of the problem — appointments made, appointments kept, conversions of appointments to sales, and cancellations — she and her team created buckets of categories to put each cancellation in, instead of relying on one-sentence summaries written by sales and mortgage teams.
"We didn't have consistent categories," she said. "It was really up to the loan officer, or sales agent who took the response, to come up with a sentence. It was hard to analyze."
Once the reasons were categorized — job loss, problems getting financing, insufficient money for a down payment — she could pass along the data to the appropriate business leader.
"If we're hearing that a lot of folks are having issues with down payments, or a lot of fear about being furloughed, we might change our sales incentive for the next month to address that concern," she said. "Instead of offering you a discount on your appliances, we might switch that to helping you with your down payment. Because if that’s the hurdle you need to overcome to buy the house, let us help you with that. That helps us make better operational decisions."
It also has helped the company continue its growth plan even during the downturn.