IT TOOK D.R. HORTON 27 YEARS TO GET ITS ANNUAL closing rate up to 50,000 homes. But at the pace it's going, the nation's largest home builder would double its annual closings within the next five years.
When the Dallas-based builder completed its latest fiscal year on Sept. 30, 2005, it had achieved several milestones, not only for itself, but also for the housing industry. It became the first builder to close more than 50,000 homes within a 12-month period when it reported a 17 percent increase in closings to 51,172 units. It also became the first builder to sell more than 50,000 homes in a year (53,232 units, representing a 17.6 percent gain and a 28.3 percent jump in dollar sales, to $14.6 billion); and the first to generate more than a half-billion dollars in profit in one quarter ($563.8 million, up 61.3 percent).
On Nov. 16, the day D.R. Horton released its quarterly and annual financial results, its chairman, Don Horton, and CEO, Don Tomnitz, spoke with BUILDER about their company's accomplishments and its future. Both attribute the builder's success primarily to the dedication of its 9,000 employees, who last year generated $1.5 million in revenue per worker. Horton notes that the company's decentralized operational structure—it builds in 74 markets in 25 states—“empowers” employees to take a personal stake in D.R. Horton's growth and profitability. Tomnitz is a firm believer in the concept of accountable management, where people are rewarded for taking the initiative and making it work. “That's the beauty of our business model,” claims Horton. The workers' commitment, Tomnitz adds, manifests itself in the company's selling and general administrative expenses, which are among the lowest in the industry (9.2 percent of revenue in 2005), and in gross margins that are among the industry's highest (24.2 percent of sales, which represented a 2.3-percentage-point improvement over fiscal 2004).
D.R. Horton has been a symbol of the industry's consolidation, having acquired 17 companies between 1993 and 2003. But Tomnitz insists that its near-term expansion would be strictly organic, as the builder steps up its production by around 10,000 homes per year. He identifies several regions—Florida, coastal Carolinas, Maryland, Virginia, the Pacific Northwest, and Hawaii—where D.R. Horton has made significant investments in recent years and where its penetration strategy is likely to be focused over the next half-decade.
The builder projects its closings in fiscal 2006 to increase at a slightly slower 13 percent pace, to 58,000 homes. But neither Horton nor Tomnitz backs off from their company's stated goal to be closing 100,000 units by 2010, nor is either fazed by the prospect that consumer demand for housing might be receding, especially after D.R. Horton's sales backlog hit $5.8 billion and 19,244 homes in 2005. Tomnitz notes that 40 percent of D.R. Horton's production targets first-time buyers, and another 40 percent aims at second-time buyers. “We look at our part of the business as being the safer segment” than a company such as Toll Brothers, the luxury-home builder that recently lowered its forecasts for deliveries and earnings in 2006.
Still, D.R. Horton, like most big builders, continues to diversify the products it sells. Tomnitz declined to comment on a Nov. 10 report in The Dallas Morning News that D.R. Horton was expanding into the high-rise condo construction. But Horton notes that 15 percent of the homes that the builder sold in 2005 were attached, compared with zero percent 10 years ago. Both executives also spoke enthusiastically about Podium, a mid-rise product the builder launched a few years ago that allows for higher-density construction in land-constrained markets. “We're getting at least 100 units per acre with Podium, compared to seven per acre, on average, with our other products,” says Tomnitz.