Standard Pacific Corporation

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Standard Pacific Corporation

15326 Alton Parkway
Irvine, California 92618
U.S.A.
Telephone: (949) 789-1600
Fax: (949) 789-1609
Web site: http://www.standardpacifichomes.com

Public Company
Incorporated: 1992
Employees: 1,026
Sales: $1.38 billion (2001)
Stock Exchanges: New York
Ticker Symbol: SPF
NAIC: 233210 Single Family Housing Construction

Standard Pacific Corporation is one of the largest home-builders in the United States, operating in California, Texas, Arizona, Florida, and Colorado. Standard Pacific primarily constructs single-family detached dwellings, focusing on large projects such as planned communities. The company also operates a mortgage banking subsidiary named Family Lending Services, Inc. that offers mortgage loans to its customers in California. Through a joint venture company, SPH Mortgage, Standard Pacific provides mortgage loans to customers in Arizona and Texas. Standard Pacific’s founder, Arthur E. Svendsen, serves as the company’s chairman, assisted by Stephen J. Scarborough as president and chief executive officer.

Origins: 1960s-80s

Founded by Arthur E. Svendsen, Standard Pacific started its homebuilding operations in 1966, commencing business with a single tract of land in Orange County, California. For roughly the first 15 years of its development, the company’s building activities were restricted to markets in southern California. Serving as Standard Pacific’s chairman and chief executive officer from the start, Svendsen focused on constructing mid-priced and more expensive houses, attempting to position the company for second-time homebuyers wishing to move up the price scale. Throughout its history, the company’s development was buffeted and aggrandized by the conditions prevalent in its industry. The housing market was an exceptionally capricious business, characterized by a volatility that could inflate or drain a builder’s fortunes with great speed. Svendsen’s challenge was to take advantage of the boom years and to withstand the bust years, to survive and thrive during the decades of constant change.

The recessive conditions of the early 1970s proved to be Svendsen’s first great challenge. He withstood the test, expanding geographically beyond the company’s base in Orange County. Svendsen developed houses in neighboring counties during the decade, expanding into Los Angeles, Riverside, San Bernardino, San Diego, and Ventura counties.

The next deep trough in the housing market occurred during the early 1980s, when rising interest rates resulted in only 1.07 million housing starts, described as a “disastrous” year by the February 6, 1984 issue of Fortune magazine. Although Svendsen’s company, operating as the hyphenated Standard-Pacific, shared in the misery experienced by nearly all homebuilders, the company did not flinch in the face of anemic conditions. Unlike other homebuilders, Standard-Pacific retained possession of large tracts of land during the market downturn. In several instances, particularly in the Los Angeles and San Diego areas, the investments were made at favorable financial terms and situated in prime locations. By holding on to the land, Svendsen positioned himself to increase Standard-Pacific’s market share. When the housing market began to recover, evinced by housing starts creeping up to 1.7 million in 1983, Svendsen was able to underprice his competitors.

The improving conditions following the disastrous early 1980s led to a surge in housing starts later in the decade. As market conditions improved, Svendsen made a strategic decision aimed at relieving Standard-Pacific’s tax burden. In December 1986 the company converted to a master limited partnership, freeing it from paying taxes twice, once on its profits and again on its dividends. Under this structure, Standard-Pacific distributed between 60 percent and 70 percent of its earnings to holders of partnership units. The partners then paid taxes, the sum determined by prorating their share of company’s income that was subject to taxation.

Standard-Pacific basked in the surge of business sparked by the upswing in housing construction. The greatest market growth occurred in the company’s primary area of activity—“California is the hottest market in the country,” a building analyst at Salomon Brothers exclaimed in the April 27, 1987 issue of Fortune magazine—but Standard-Pacific also benefited from its expansion into markets in Texas, made several years earlier. By this point in the company’s development, it also had diversified into financial services, operating a savings and loan named Standard Pacific Savings & Loan, which served as the financing arm for Svendsen’s growing business.

Growth and Change in the 1990s

The boom years of the late 1980s gave way to the bust years of the early 1990s as recessive conditions again delivered a blow to the homebuilding industry. During the bleak economic times, Standard-Pacific dropped the hyphen from its name and, in 1992, reorganized into a traditional corporate structure, which was expected to improve the company’s ability to raise funds.

Market conditions improved for Standard Pacific as the company exited the early 1990s. By 1995, the company ranked as one of the nation’s 50 largest homebuilders and the fifth largest homebuilder in California, but the distinctions were not enough to mask the stain on Standard Pacific’s balance sheet for the year. The company generated $346 million in revenue for 1995, but reported a net loss of $27.4 million. In the first quarter of 1996, the company posted $573,000 in net income, down substantially from the $1.1 million recorded for the same period in 1995. The downward trend extended to the company’s sales as well, which dropped 8.3 percent from $77.3 million to $70.9 million during the first quarter of 1995 and 1996, respectively.

Near the end of the summer in 1999, two changes were made in the company’s senior management. In August, the company announced the resignation of its 65-year-old president, Ronald R. Foell, who had occupied the post for 27 years. At the same time, Standard Pacific announced the resignation of April J. Morris, the company’s chief financial officer. The business press expressed little surprise at the resignation of Foell, given his age, but the resignation of Morris, one of the few female senior executives in the industry, caused a stir. “This is not good news,” explained an analyst in an August 1, 1996 interview with the Los Angeles Times. “Any time a chief financial officer resigns without any clear reason, it raises questions,” he stated. “They (Standard Pacific) still have some problems and I’m concerned.”

Other analysts were worried as well. One analyst at Prudential Securities reacted to the Morris resignation without concern, but he did express some reservations about Svendsen’s role as chief executive officer. “They are losing a very capable CFO, but that doesn’t mean she can’t be replaced,” Larry Horan remarked in an August 1, 1996 interview with the Los Angeles Times. “The more important thing is who will replace their [chief executive],” Horan said, referring to 72-year-old Svendsen. “This company really needs some new strategy and vision that will help it resume growth.” Other analysts were troubled by the company’s beleaguered thrift, Standard Pacific Savings & Loan. The savings and loan had once held more than $420 million in loans and assets, but by the mid-1990s its vitality had been drained. Between 1993 and 1995 Standard Pacific Savings & Loan racked up $5 million in losses, adding further to its parent company’s woes. In 1995 Standard Pacific suspended the thrift’s operations, taking time out to decide whether to liquidate the troubled subsidiary.

As would be revealed in the late 1990s, the concern about the management shake-up was misplaced. Standard Pacific’s treasurer, Andrew H. Parnés, was promoted to chief financial officer, replacing Morris. Ronald Foell’s replacement came from within Standard Pacific’s ranks as well, a promotion that drew little attention from the business press. Steven J. Scarborough, a Standard Pacific employee since 1981, was tapped as the company’s new president to Svendsen’s continuing role as chief executive. Scarborough had headed the company’s Orange County building division before earning promotion to executive vice-president. To Scarborough went much of the credit for Standard Pacific’s revival, the source of the “vision” that one of the company’s critics had said was lacking. Scarborough’s arrival in 1996 served as a marker in Standard Pacific’s history, representing the starting point of robust growth that would carry on throughout the remainder of the decade and into the 21st century.

The growth of the housing market fueled Standard Pacific during the late 1990s, particularly as the company evolved more into a builder of planned communities, rather than single homes. The nagging issue of what to do with Standard Pacific Savings & Loan, however, remained. In May 1997 the company laid out plans for the disposition of the thrift, but completing the deal proved to be troublesome. In June 1997 an Irvine, California-based mortgage banking company, First Alliance Corp., made an $11 million bid for the savings and loan. In February 1998 the deal collapsed after federal regulators failed to give their approval. Similar frustration was felt following Standard Pacific’s announcement in February 1998 that it was acquiring Olson Co., a southern California builder of small new home projects in older cities. Yet the acquisition was scuttled in May 1998, with no reason for the collapse provided to the public.

Company Perspectives:

Standard Pacific is one of the nation’s largest and most successful homebuilding companies with shares traded on the New York Stock Exchange. We take pride in having created more than 49,000 homes in California, Texas, Arizona, Colorado, and Florida over the past four decades. This pride comes from knowing that home ownership is a cherished American tradition. A new home is also the largest single financial commitment most families ever make. All of us at Standard Pacific are dedicated to offering the utmost in new home choice, quality, and value. New home developments that bear the name Standard Pacific carry a signature of our longstanding commitment to excellence in design and craftsmanship that has earned the trust and respect of homeowners year after year. When you are looking for a place in which to build your future, look for the signature of excellence that comes with a Standard Pacific home.

If Svendsen and Scarborough were discouraged by the abandoned deals, the release of the company’s annual financial totals in the spring of 1998 must have provided much relief. The company announced the best financial results of its 37-year history in 1997. Profits tripled to $27.3 million and sales swelled 46 percent, reaching $584 million. Standard Pacific shareholders shared in the growth, watching the company’s stock price increase a remarkable 160 percent in 1997. One year later, when the financial totals for 1998 were released, there was cause for further celebration. An expanding California housing market lifted construction activity to record levels, leading to another record year for the company. Sales jumped 30 percent during the year, rising to $759 million, and profits increased 68 percent, reaching $46 million.

Against the backdrop of strident financial growth, Standard Pacific succeeded in its efforts to expand. In 1998, for the first time in more than 20 years, the company crossed a state boundary. By acquiring a building operation in Phoenix, Standard Pacific entered the homebuilding market in Arizona, adding to its presence throughout California and in Texas, where it operated in Dallas, Houston, and Austin. An additional diversification occurred in 1998, when the company began offering various types of mortgage loans through a new mortgage banking subsidiary, Family Lending Services, Inc. After the company’s foray into Arizona, it began providing similar loans to its Arizona customers through a joint venture company, SPH Mortgage, formed with Wells Fargo. In 1999, SPH Mortgage began supporting the company’s homebuilding operations in Texas at roughly the same time Standard Pacific succeeded in severing its ties to Standard Pacific Savings & Loan. American General Corp., a Houston-based financial services company, announced in April 1999 it had been granted approval to acquire the thrift.

The year 1999 marked the end of an era. In December, Svendsen announced he was passing the duties of chief executive officer to Scarborough, ending the 76-year-old’s nearly 40-year tenure as Standard Pacific’s chief executive officer. Svendsen remained chairman, but in Scarborough’s dual capacity as president and chief executive officer, he wielded much control, presiding over the company’s homebuilding operations in California, Texas, and Arizona. The succession plan had been discussed for a number of months, ensuring a smooth transition. Under Scarborough’s leadership, sales had increased 70 percent from 1997’s total, while new home construction had reached 3,400, an increase of 75 percent from the construction completed in 1997. The company ended the decade by eclipsing $1 billion in sales with $1.19 billion, up substantially from the $759 million generated the previous year.

Full Speed Ahead in the New Century

Not long after taking the helm, Scarborough’s responsibilities increased as Standard Pacific continued its geographic march. In January 2000, after two years of casual discussions and six months of detailed discussions, Writer Corporation agreed to be acquired by Standard Pacific in a deal that provided for the latter’s entry into Colorado’s homebuilding market. With $82 million in sales, Writer Corp. ranked as the 11th largest homebuilder in the metropolitan Denver area. Under the terms of the acquisition, which was completed in August 2000 for $65.4 million, Writer Corp. continued to operate under its existing name and with essentially the same management, including the company’s founder, George Writer, Jr. By the time the deal was concluded, Standard Pacific could count itself as one of the 12 largest homebuilders in the United States.

As Standard Pacific prepared for the future, the growth achieved between 1996 and 2001 provided encouragement for further expansion. During the five-year period, the company’s revenues tripled and its net income soared at an average annual rate of 70 percent. In 2002 the company pressed ahead boldly, completing a series of acquisitions that significantly expanded the scope of its operations. In the spring, the company entered the Florida homebuilding market through the acquisition of a Miami-based builder, Westbrooke Homes, and an Orlando-based homebuilder, Colony Homes. Standard Pacific struck again in June 2002, when the company announced it had agreed to purchase Westfield Homes USA for $59 million. With operations in Tampa Bay and southwestern Florida, Westfield Homes helped flesh out Standard Pacific’s geographic presence, adding another piece to the expanding homebuilding empire constructed by Scarborough.

Principal Subsidiaries

Westfield Homes USA Inc.; Writer Corp.; Family Lending Services, Inc.

Principal Competitors

Centex Corporation; KB Home; D.R. Horton, Inc.

Key Dates:

1966:: Standard-Pacific commences Operations on land in Orange County, California.
1986:: The company converts to a master limited partnership.
1992:: Standard Pacific drops the hyphen from its company name.
1996:: Stephen J. Scarborough is appointed president.
1998:: Standard Pacific enters Arizona’s homebuilding market.
1999:: The company tops $ 1 billion in sales for the first time.
2000:: The first foray into Colorado is completed through the acquisition of Writer Corporation.
2002:: Standard Pacific enters Florida’s homebuilding market.