Developer Schuler finds success in calculated risks

By Andrew Gomes
Advertiser Staff Writer

Jim Schuler is good at building homes for a living. But one could argue that this Hawai'i developer has been even better at building a company.

Jim Schuler has built roughly 10,000 homes in Hawai'i and about the same number on the Mainland. His company, Schuler Homes Inc., has grown from an $80 million firm nine years ago to a $1 billion business. Cory Lum • The Honolulu Advertiser

Over the years, Schuler has speckled the Hawai'i landscape with roughly 10,000 homes, and nearly as many on the Mainland. In the process, he has taken his company, Schuler Homes Inc., from an $80 million operation nine years ago to a $1 billion business that early next year will become a division of a $6 billion family of companies.

The meteoric rise earned Hawai'i's second-largest builder of homes the No. 39 spot on Fortune's list of 100 fastest-growing companies a year ago.

Although Schuler Homes will cease to be a publicly traded, Hawai'i-based company by becoming a division of Texas-based D.R. Horton as part of a $1.2 billion buyout announced last month, it still will be the business that Schuler built.

Jim Wilson, an analyst at merchant banking firm Jolson Merchant Partners in San Francisco, summed up Schuler's performance as smart, lucky and good all at the same time. "You kind of have to have all of those things going for you to build such a successful company," he says.

What essentially enabled Schuler, 63, to achieve something he never envisioned a decade ago was taking calculated risks in new markets, and a knack for incorporating strong companies into his own.

"In business I've never been happy where I am today — I always want a little bit more out of it," he says. "As long as you keep your mind open to opportunities, and you act on them rather than saying, 'Oh, no, I don't think I should do this.' "

During the past nine years — some of the worst for Hawai'i's economy — Schuler Homes made money in all but one, with an average annual profit of $15 million over the period.

"I give him a lot of credit," says Mike McCormack, a residential developer who left Hawai'i in 1996 and established a smaller operation on the Mainland. "He's done extremely well."

Adds Harry Saunders, president of O'ahu operations for Castle & Cooke Homes Hawaii, about his competitor: "They build a good home, they have a good organization and they made smart moves."

Schuler got his first taste of the business as a 13-year-old in Canada sweeping floors of houses built by his father, Carl. Both moved to Hawai'i in 1956, with Carl building homes here with the help of his son who pounded nails while studying architecture at the University of Hawai'i.

After forming an architectural firm in California and then moving back to Hawai'i where he worked at a couple real estate development companies, Jim Schuler started his own business in 1973 and built his first project, Papakea, a 364-unit oceanfront condominium in Ka'anapali.

"Nobody told me I'm supposed to start out doing small projects," he says.

Schuler shifted from building resort condos for investors on Maui and the Big Island to building single-family homes on those islands and later on O'ahu.

Around 1980 when interest rates spiked, Schuler adjusted again, pausing his home building for three years to develop sports clubs in Seattle. "No sense building houses," he recalled. "Who's going to take out a mortgage at 18 percent?"

But Schuler had tapped into the health craze and built eight clubs in eight years, eventually selling them to Bally's Health & Tennis Corp.

After nearly two decades of residential building, Schuler saw a niche in low-end entry-level homes as real estate values soared because of the Japanese bubble economy. He wanted $25 million to get started, and agreed to take his company public after an investment banking firm told him the move could raise $45 million at a cost of 25 percent of his equity in the business.

A 1992 initial public offering of Schuler's company, renamed Schuler Homes, raised $80 million, part of which Schuler spent buying Hawai'i real estate for future projects.

Two years of increasing business, however, were followed by two years of decline. After the first year of the slowdown, 1995, Schuler says he was ready to expand to the Mainland where the economy was better. But major institutional investors who had enjoyed higher profit margins from Schuler's Hawai'i operation were against the move.

"They said, 'Why do you want to go to the Mainland and get a bloody forehead at 5 and 6 percent margins when you're making 15, 20, 25 percent margins in Hawai'i?' In 1996 I said, 'Hey guys, this thing is not going to get any better. It's not coming back. I can't wait any longer.' "

Schuler started two divisions in Northern California and Oregon. Over the next three years, he acquired four existing companies with presences in California, Colorado, Oregon, Washington and Arizona.

Earlier this year, Schuler Homes merged with a similar sized firm, California-based Western Pacific Housing. The new Schuler Homes, of which Schuler owns 24.5 percent, became one of the 15 largest builders in the country.

At that point, Schuler says he knew it was only a matter of time before he would be in the corporate big leagues as part of a large-cap company.

What he didn't expect is that the biggest deal of his life would come so quickly. He figured he had a couple of years before someone acquired Schuler Homes. Last month, D.R. Horton agreed to purchase Schuler Homes for $1.2 billion in cash, stock and debt.

The buyout, expected to be completed in the first quarter of next year, will create the second-largest homebuilder in the nation with more than $6 billion in combined annual revenue. Schuler figures he will own 4 percent to 5 percent of the company.

Schuler views the sale as though the corporate family he's built will become part of a bigger family. In essence, Schuler's family of builders — Schuler Homes, Stafford Homes, Western Pacific and Melody Homes — will become D.R. Horton companies alongside Arappco Homes, Cambridge Homes, Dobson Builders, SGS Communities and others.

Schuler will become a D.R. Horton senior vice president, and president of its "Schuler Homes Region" consisting of California, Hawai'i, Washington, Oregon and Arizona.

Other than no longer having to go on exhausting, cross-country road shows raising capital for new projects, Schuler says he will continue operating Schuler Homes much as he has.

Typically, he spends six to 10 days a month in Hawai'i, with the rest of the time spent in Washington, Colorado and California. Soon he will add a stop in Texas. His primary office in Hawai'i will remain, along with a second corporate headquarters in California and an office in Seattle.

Because Schuler has four children and nine grandchildren in Hawai'i, Washington, Colorado and California, he doesn't mind all the travel. "I can see my kids pretty much every place I go," he says.

Daughter Pam Jones, who with her husband joined Schuler in 1988, has taken a leave of absence and likely will not return as Schuler Homes chief financial officer.

"She was wanting to take time off the last couple of years and I wouldn't let her," Schuler says, adding that his daughter is enjoying life being a mother.

The company may lose a few more of its roughly 1,000 employees in the D.R. Horton deal, though specifics have yet to be determined, Schuler says. Son-in-law Mike Jones will continue as Schuler Homes' Hawai'i division president.

Schuler has a three-year contract with D.R. Horton, but he says company Chairman Donald Horton told him he could stay as long as he wants.

How long that will be, Schuler says he doesn't know.

"I don't have any timeline on that," he says. "I've been around the business my whole life and I love it. Do I think that some day I would want to go back pre-1992 and just be a little, small builder? I don't think so."

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.