Emotions ran high today during D.R. Horton's fiscal third quarter conference call, as CEO Don Tomnitz spoke passionately to analysts about his company's performance, his feelings on the recently passed housing legislation, and management's stubborn commitment to spec building.
The company posted a greater-than-expected loss (-$1.26 per diluted share), a 44% drop in home building revenue, a 47.5% falloff of homes in backlog, and a 36% reduction in homes closed for the quarter.
Speaking to what he referred to as "the dark side," Tomnitz noted that pricing power was minimal in most markets and said he expects to see continued pressure as well as continuing weakness in the areas of financials and consumer confidence.
D.R. Horton continues to position itself as the low-cost leader in housing and, as a result, anticipates further strain on sales due to the recently passed housing relief legislation. "I'm disappointed," Tomnitz stated during his opening remarks. "The tax credit doesn't offset the elimination of [down payment assistance (DPA) programs] that the industry so desperately needs."
Giving his thoughts as to why DPA was eliminated from the legislative package, Tomnitz quipped, "If I knew the answer to that, I'd be a potential Vice Presidential candidate. I'm shocked by it. I'm upset by it. If you agree that we need stabilization in [housing], why take the buying decision away from 10%, 20%, 30% [of the market] at the time we did?"
According to Stacey Dwyer, the company's executive vice president and treasurer, 65% of the company's buyers utilize government-assisted loan programs such as FHA and VA. Year to date, 21% of Horton's FHA buyers have utilized a DPA program--a figure that already stands in stark contrast to the 7% of DPA buyers seen in fiscal 2007. And for the most recent quarter alone, the percentage was even higher at 29%.
Tomnitz jokingly referred to himself as "suicidal over DPA going away" when the legislation was passed and acknowledged that the true impact of the measure is unclear at this point. Though 29% of buyers utilized the program last quarter, it has yet to be seen how many of them truly needed it.
"The real question is, how many [buyers] really could have come up with the money if they needed to? We don't know. We'll find out over the next several months, but I don't think 100% of our DPA buyers will just go away," he said.
Tomnitz went on to make what he called his "social statement," noting that there may be a higher risk in mortgage products today because of DPA, but that it was a good tradeoff as opposed to the HUD programs of the past. "Our federal housing program is a disaster," he said. "The DPA loans have a higher [rate of] default, but it helped put people into single-family homes that otherwise would have been living in the inner city."
Management defended the company's dedication to a spec building operation by saying that the strategy allows Horton to "capitalize on every buyer when they are ready to buy." The current spec inventory stands at 7,400, a figure the company says it is "relatively comfortable with" based on trailing 13-month sales, as well as the fact that it is down 45% from the company's peak.
"In most communities, we are in an opportunistic sales position because we maintain specs and have pricing power," Tomnitz said. He also noted that the company sees better margins on spec homes because "build jobs are having to be resold. On specs, we don't have to re-trade the price during the construction process."
The key is to keep the right number of specs and ensure that they are newer, lower cost inventory. Of the company's 7,400 spec units, only roughly 400 are more than a year old. "It's a tough balancing act, and we continue to adjust on a daily basis," Tomnitz said.
Management acknowledged its unusually high cancellation rate of 39%, justifying it as a part of the company's selling strategy. Tomnitz told analysts that, despite the current market challenges, one thing that lets him fall asleep at night is knowing that his salespeople are working harder than those at other builders to write contracts.
"Our can rates are high, but I say, 'Leave no buyer unturned,'" he said. "As long as a buyer has a pulse, we need to be writing them and trying to get them qualified."
In previous quarters, the company was clearly focused on cash flow generation as a top priority, but after eight consecutive quarters of positive cash flow--generating $3.6 billion in total--the company is turning its attention toward a return to profitability.
"We'd like to hope that will happen in the next two or three quarters," Tomnitz predicted.
Tomnitz and company founder and chairman Don Horton are personally evaluating each community in the country as the company seeks to expand its mothballing based on whether a community is capable of producing a profit on either a pre- or post-impairment basis. Management expects the majority of mothballed communities to fall into second- and third-tier rings of the market.
"The real intent is that it's a good piece of land, but it can't be supported by demand," Tomnitz said. "We'll wait for the absorptions because the demand just can't justify the SG&A that has to be thrown at it [today]."
Horton generated $390 million of operating cash flow in the quarter and posted an $851 million cash balance. There are currently no cash borrowings on the revolver.
Gross margins stood at 10.1% for the quarter, which reflects a 660 basis point core margin deterioration over the previous quarter.
Tomnitz ended the intense Q&A session by expressing his dismay at the way the questioning unfolded.
"We continue to out-close the competition; we continue to outsell the competition; we continue to have the lowest SG&A in the industry," Tomnitz said. "I am disappointed in terms of recognition. We outperform in a good market, and we outperform in a bad market. People keep asking why we are doing what we are doing, and I have to wonder, why would we be doing anything else?"