With less than two weeks to go before ending the company's fiscal year, D. R. Horton's CFO Bill Wheat and Treasurer Stacey Dwyer were unable to shed much new insight on the company's cash flow situation, but they were quick to assure investors at the Credit Suisse 2007 Home Builder Conference today that the company was closely monitoring closings and adjusting starts accordingly in a proactive effort to offset the dislocation caused by the mortgage market.
The nation's largest builder operates in 27 states and 83 markets and has 80% of its business entrenched in the first-time buyer and first-time move-up market. Both segments have been extremely vulnerable to the mortgage fallout. Before they all but evaporated, sub-prime specifically accounted for between 2% and 5% of the business that went through the company's mortgage unit. By the end of the June quarter, Alt-A loans accounted for about 14% of the company's mortgage business; Wheat noted that the number is trending down.
The company has initiatives in place to help transition buyers into conventional mortgage products, although Wheat said Horton is expecting an increase in cancellations because of the mortgage environment. "We are not in the business of originating a loan that we can't sell," Wheat said.
According to Dwyer, initiatives such as Horton's Home Buyer Club are now in place to offer potential buyers an "advocate" that can coach customers on ways to get their credit cleaned up. "It's about a four-to-six-month process," said Dwyer. "Then these customers can go on and end up buying a home from us or another builder."
According to Dwyer the company's top priority is to reduce its debt load which is completely transparent on the balance sheet. "What you see is what you get," she said. "There are no off-balance sheet transactions."
The company pointed out that it continues to generate pre-impairment profits as a result of the following initiatives:
- Maintaining the lowest overhead in the industry with SG&A hovering between 10% and 11%. The number of employees was reduced from 10,000 at the peak to 6,700 currently.
- Citing increasing downward pressure on home prices, the company continues to adjust incentives and pricing strategies to reflect market conditions.
- Starts are down 33% year-over-year versus the quarter ending last June. Today, "the brakes are on. Starts are only initiated for a qualified, non-contingent buyer and every one is approved by our CEO," said Dwyer.
- The company is actively working to decrease costs through an ongoing process. Starting with local subcontractors, the negotiations have expanded to material providers so the company can continue to find benefits of its scale.