In the weeks since the close of D.R. Horton's Sept. 30 fiscal year-end, news of the company's efforts to shed land has cropped up in markets from Florida to Washington. The latest information was related to Starwood Land Ventures' bulk purchase of more than 2,500 of Horton's home sites across Arizona, California, and Florida.
Horton management was under pressure to unload land and lots at deep discounts before its fiscal year-end, after which the company would no longer be able to apply the losses on the land deals against taxes paid in 2006 for a cash refund. At the end of its fiscal third quarter, Horton had $819.4 million in cash in its corporate coffers; however, between the losses its operations have been hemorrhaging and the $584.6 million in debt due in 2009, management was staring a cash crisis in the face.
According to the company's preliminary fourth quarter results, released on Nov. 4, the company sold roughly 32,000 lots during the quarter, bringing its total lot count down to 99,000 at fiscal year-end. The sales brought in roughly $200 million in revenue for the company.
But the real win for the company's balance sheet came in the shoring up of a sizeable tax refund in the months to come. JMP Securities' estimated that at the end of Horton's third quarter, the company had, to date, impaired roughly 30.3% of its assets. That write-down trend continued during its fourth quarter, as the company took roughly $1.1 billion in impairment and write-off charges. By selling off those impaired land assets at pennies on the dollar, management locked in additional refunds. Up for grabs from the government is $753.8 million, the amount of taxes the company paid in 2006.
Analysts and company stakeholders no doubt will be clamoring for more color on how the company was able to bring its land holdings down 25% in a single quarter during the company's fourth quarter earnings call tomorrow.
Because of the closing window of opportunity for tax carry backs, many of Horton's land deals were sewn up in the 11th hour. For example, Mike Moser, Starwood Land Ventures' Eastern Region president, said Horton first approached Starwood about the 2,500-lot portfolio deal during the first week of September. In a matter of days, Moser, working with Mike Forsum, the company's Western Region president, completed diligence on the lots and decided to seal the deal. The lots are classified into six different assets--one in Palm City, Fla.; one in Phoenix; two in Southern California; one in Los Angeles County, Calif.; and one in California's Inland Empire.
Although Moser and Forsum acknowledged the deal was motivated by Horton's desire for a tax carry back, neither region president commented on the purchase price or discount to book value.
"We don't know what their book value was," explained Forsum. "That's what's glamorous--the cents on the dollar--but it's really irrelevant to us."
Moser added that Starwood's strategy for buying assets in today's market was based on local market dynamics. The company has been expanding its holdings in markets that its management believes have sound local economies, fundamental home buyer demand, and strong big builder presence.
"We're looking at who's going to be alive to buy our lots," said Moser. "We're betting big on national home builders."
Learn more about markets featured in this article: Los Angeles, CA.