Building on the Bust

“We worked right through that,” Rotter recalls. “At one point, we had zero net worth. We had made commitments to customers to close houses, and we guaranteed an interest rate of 9 or 10 percent. We couldn’t do it, so we had to pay the points. We spent all the money we had in net worth to close those houses for those customers.”

Staying Inside the Sandbox

In building their company, Dave and Bernard Rotter made one rather surprising turn: They took their company public in 1992. The reason: to raise money for expanding beyond Minnesota. Gary Carlson, a former stockbroker with Minneapolis investment firm Miller Johnson (acquired by St. Louis-based Stifel Nicolaus earlier this year), was one of the few analysts covering the company, and decided to attend one of Rottlund’s first annual meetings as a public company.

“I was one of the only non-officers [or] non-directors to show up, at least at first,” Carlson recalls. “I was asked why I was there. When I told them, they said, ‘Gosh, I guess you can be here, but it is going to be a very brief meeting.’” Carlson told Rottlund management that he’d been in the equities business for 25 years, and that he knew of financial public relations firms that could help them.

“I had the impression they were reluctant for business reasons to discuss future projects and land acquisitions in any great detail, and did not realize that by going public that was part of the package,” he says. Carlson also noted that the company had solid credit lines with plenty of access to money, and questioned whether it had needed to go public.

Still, he liked the company’s balance sheet and had confidence in its management. Carlson started recommending Rottlund stock to his customers and even accumulated some himself at around $3 or $4 per share, which is about where the stock traded for as long as the company was public. “I did accumulate a fair amount of the stock,” Carlson recalls. “I felt management was good. And even though I didn’t know where they were buying land”—something Rottlund didn’t reveal at the time—“I had faith they knew what they were doing.” (In 2002, the Rotters returned the company to private status, offering more than $9 per share for stock held by the public.)

Through the 1990s and early 2000s, Rottlund witnessed the entrance of many large public homebuilders into the Twin Cities market, including Centex (headquartered in Dallas), Lennar (Miami), K. Hovnanian (New Jersey), Pulte (Michigan), D. R. Horton (Fort Worth), Ryland (California), and Mattamy (Toronto). According to Stutz, the Twin Cities is a top-20 metropolitan area in housing starts, making it an attractive market to large publicly held builders searching for opportunities to provide shareholders with revenue and income growth. In 2006, with 444 permitted units, Rottlund ranked number five in the Twin Cities metro market, with 3.5 percent market share. (The metro area accounts for about half of Rottlund’s total business.) The top local builder, Lennar, had 1,065 permitted units—8.3 percent of the Twin Cities market.

But Rottlund won’t go head to head with the large nationals. “We have to define a market that we can work within,” Rotter says. “That market”—small to midsize developments in its three geographical areas—“becomes our sandbox. Can we compete in our sandbox against any other builder? Yes. Can I go out as a building company and do a 1,000-lot subdivision and compete against one of the national builders? I just went to play in their sandbox. Probably not a good idea.”