Meritage Corporation

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Meritage Corporation

6613 North Scottsdale Road, Suite 200
Scottsdale, Arizona 85250
U.S.A.
(602) 998-8700
(800) 210-6004
Fax: (602) 998-9162
Web sites: http://www.montereyhomes.com http://www.legacy-homes.com

Public Company
Incorporated: 1985 as Monterey Homes Corporation
Employees: 180
Sales: $149.38 million (1997)
Stock Exchanges: New York
Ticker Symbol: MTH
SICs: 6552 Subdividers & Developers, Not Elsewhere
Classified; 1521 General Contractors, Single-Family
Houses; 1531 Operative Builders

Meritage Corporation, formerly Monterey Homes Corporation, is a leading homebuilder in the United States, designing, constructing, and selling distinctive single family, entry-level, luxury, and move-up homes. Under the Monterey Homes name, the company’s primary marketplaces include the Phoenix and Tucson, Arizona metropolitan areas. The Monterey division builds single-family, move-up, and semi-custom, luxury homes. Under the Legacy Homes name, the company’s primary market places include the Dallas/Fort Worth, Austin, and Houston, Texas metropolitan areas. Legacy builds lower-end, entry-level, and move-up homes. Under the Meritage Homes of Northern California name, the company’s primary marketplaces include the San Francisco and Sacramento, California metropolitan areas.

Home-Grown Company Starting Out, 1985-87

Monterey Homes was founded in 1985 by two graduates of Chaparral High School and Arizona State University, William W. Cleverly and Steven J. Hilton, to build semi-custom luxury homes in the affluent Phoenix-area suburb of Scottsdale. The company became only the second Arizona-based company that had originated in the area, joining Dix Corporation, owned by Valley resident Von Dix. The following year, the company began building operations in the City of Phoenix, as well as the surrounding metropolitan area, as a custom builder, competing against some 75 other builders in the market.

In the Right Place at the Right Time, 1988-91

In 1988, Cleverly and Hilton won the Best of Show Award in the Street of Dreams home show and began looking for their first major project. The following year, a slow-down in the housing market weakened many established homebuilders, giving young, lean companies such as Monterey a chance to establish themselves, and Dix closed his company down that year, joining local rival AM Homes as its president. Things looked good for the fledgling company. And then their big break came when a rival, Malouf Bros., passed on buying 72 lots at Scottsdale Country Club, with a golf course designed by golf legend Arnold Palmer. Cleverly and Hilton stepped in with their innovative designs, and the country club owner, Alan Mishkin, was so impressed with their designs, he not only sold them the lots, he became a major investor in the company.

Following the company’s opening move of being in the right place at the right time, in 1991, the company picked up a piece of property ideally located near the Scottsdale Fashion Square shopping center, the Gallería, and the Neiman-Marcus store in the posh neighborhood. The parcel was obtained from The Resolution Trust Corp., a federal savings and loan bail-out agency, which inherited the property when Sun State Savings and Loan became insolvent. The Village at Pavoreal was built there, and Cleverly and Hilton, standing by their products, both purchased homes there. In a similar move, the company purchased a subdivision from Dividend Development Corp. after the latter ran into financial problems. Monterey launched Mira-Bella there, with 123 lots. Other projects during 1991 included Monterey at Mountain View in Scottsdale.

The Roaring 1990s

Skye Top was the company’s premier project in 1992, located at The Troon Country Club in Scottsdale. The 96 homes there ranged from 1,658 to 2,524 square feet and varied in price from $179,500 to $220,000. Paloma Montana at Pinnacle Peak was also built that year, and featured 3,200- to 3,600-square-foot homes ranging in price from $329,500 to $399,500.

Later that year, the company built La Reserve on the location where the landmark Brophy House once stood. The 70-year-old landmark, built in 1920 by Frank Cullen Brophy, president of the Bank of Douglas (progenitor of Arizona Bank and, later, Security Pacific of Arizona), once hosted balls, parties, and intimate tea gatherings featuring such Hollywood legends as Ethel Barry more and Helen Hayes. The home of the former Bisbee store clerk had fallen into disrepair over the years, years during which Cleverly grew up, a mere one mile away, occasionally traipsing across the Brophy property and being run off by the owner or the caretaker. Cleverly and his company built homes on the property, attempting to capture the spirit of the house and saving as much of the citrus grove as possible.

In 1993, the company built “7600 Lincoln” at that address, a gated, guarded community of 113 homes. By 1994, the company had gradually expanded to include the building of quality move-up homes. The Scottsdale Mountain community was built, featuring 21 homes in the McDowell Mountains, laid out in the washes and lush vegetation of the Sonoran Desert. The homes, each with an unobstructed view of Phoenix a thousand feet below, ranged from 3,361 to 4,178 square feet and varied in price from $362,900 to $399,900. The beautiful and isolated area brought competition from Ryland Homes, A.F. Sterling Homes, and SunCor Development Co., among others. Total revenue for Monterey Homes for the year climbed to $61 million. In both 1993 and 1994, the company was listed in Inc. magazine as one of the country’s 500 fastest-growing privately held companies; was recognized by Arthur Anderson as one of the top 100 privately held firms in Arizona; and was among the top 15 Valley homebuilders.

In 1995, the company’s first condominium project, The Vintage, was built in Scottsdale, with living space ranging in size from 1,232 to 1,678 square feet and in price from $114,900 to $145,900. That year, total revenue reached $133 million. In April 1996, the company entered the Tucson, Arizona metropolitan area market, building move-up and semi-custom homes ranging in price from $120,000 to $380,000 and from 1,600 to 4,500 square feet.

On the last day of that year, the two related privately owned Arizona homebuilding companies, Monterey Homes Arizona II Inc. and Monterey Homes Construction II Inc., owned by Cleverly and Hilton, became a publicly traded company on the New York Stock Exchange through a reverse merger with Homeplex Mortgage Investments Corporation, a real estate investment trust. The company sold itself to Homeplex, which changed its name to Monterey Homes Corp., for approximately $11 million. Cleverly and Hilton became co-CEOs, with the former becoming chairman, and the latter becoming president. Alan D. Hamberlin, previously financial vice-president of Coventry Homes, president of Courtland Homes, and Homeplex’s chairman and CEO of six years, became a member of the company’s board of directors. The reverse acquisition came after nearly two years as Homeplex searched through some 30 homebuilders in an effort to acquire operating companies it could use to move its highly liquid capital base. Previously Homeplex, incorporated in May 1988 in Maryland as Emerald Mortgage Investments Corporation, had provided short-term and intermediate-term mortgages on improved and unimproved properties and owned residual mortgage assets. The merger lost Homeplex its real estate investment trust status, but Monterey went public for a very inexpensive $1 million and without the fuss.

During 1996, the company was ranked Number 27 in the Business Journal’s “Top 50 Homebuilders in the Valley [of the Sun, Arizona].” At the end of the year, the company had closed on 307 homes and sold 283 homes with an aggregate sales value of $90.2 million. Total revenue for the year reached $85 million for just Monterey, with a net income of $6.1 million. Total revenue for both companies reached $173 million.

By 1997, the company was in the number one spot in its price range ($180,000-$500,000+) and one of the top five builders of quality move-up homes in the Phoenix area, building homes ranging in size from 1,600 to 4,500 square feet.

In a strategic effort to diversify its homebuilding operations, the company in July made its first acquisition, acquiring Legacy Homes Ltd., a privately held, Dallas-based builder of entry-level and move-up homes, with operations in the Austin, Houston, and Dallas/Fort Worth areas. Along with the acquisition came Legacy Enterprises Inc. Monterey paid approximately $1.5 million in cash and 667,000 shares of common stock for the Texas company.

Company Perspectives:

We understand that homebuilding is above all a local activity. Not only are the majority of one’s costs—from land to materials—incurred at the local level, but each section of the country, each metropolitan area has its own particular style. We will not lose sight of the fact that it is our relationships with employees, suppliers, subcontractors, and financial institutions in the communities in which we do business that allow us to provide quality homes at competitive prices.

Legacy was founded in 1988 by John R. Landon, a former employee of Nash/Phillips Copus, one of the largest builders in the country at the time, to build mostly move-up houses in Dallas. Landon, who started his company with a mere $50,000 in capital, became the chief operating officer and the third co-CEO in Monterey Homes, as well as president of the company’s Texas division. Legacy entered the Austin metropolitan market in 1994, constructing 124 and 103 homes in 1996 and 1997, respectively, ranging from 1,600 to 3,100 square feet and averaging $124,000 in price. In early 1997, the Legacy Homes subsidiary entered the Houston metropolitan marketplace, with 1,900- to 3,300-square-foot homes averaging $135,000 in price. Legacy’s sales in 1995 and 1996 were $62 million and $84 million, respectively. The acquisition doubled the company’s revenues. By the end of fiscal 1997, Monterey Homes had closed on a total of 644 homes and sold 693 homes with an aggregate sales value of $157.5 million. Net income reached $14.2 million on revenues of $149.4 million.

In late 1997 and early 1998, the industry saw some consolidation in the Arizona and Texas markets, with Monterey’s Arizona-based competitor Continental Homes being acquired by Dallas-based D.R. Horton Inc. in a $422 million stock swap. In March 1998, Del Webb Corp. stunned the industry as it announced it was looking for a buyer for the veteran company, known for its Sun City developments throughout the West and Southwest. The price tag was announced at $1.2 billion.

In May 1998, the company established its headquarters in Piano, Texas, moving planning, acquisition, and strategic functions there, but leaving the financial and administrative functions in its executive offices in Scottsdale, Arizona. The following month, the company acquired California-based builder Sterling Communities. Sterling, engaged in the construction and sale of high-quality, single-family homes in the San Francisco Bay and Sacramento areas, closed on 105 homes and generated earnings of $2.7 million before taxes on total revenues of $31 million in 1997. Sterling President Steve Hafener remained in charge of the California operations. The acquisition, which cost the company approximately $15 million in cash and assumption of debt, brought the company an immediate entry into the booming northern California market.

In mid-September, the combined company, consisting of Monterey Homes, Legacy Homes, and Sterling Homes, changed its name to Meritage Corporation, remaining on the New York Stock Exchange and under the ticker MTH. The Sterling Homes division was renamed Meritage Homes of Northern California.

As 1998 drew to a close, the company had a record year-end backlog, demand in the company’s existing markets in both Arizona and Texas continued to be robust, and the company was looking to extend its operations into new markets, through start-ups and continued acquisitions. Some 121,000 people moved to the Dallas/Fort Worth area alone in 1997, and the company looked strong as it headed into the 21st century.