With the company's loss declining and new-home orders stabilizing during its fiscal third quarter, D.R. Horton CEO Don Tomnitz told analysts during an earnings call Tuesday that the company was laying off the brakes and reaching for the gas pedal in the back half of the year.
"We are in a position of accelerating our growth," he said.
Driving the growth was an effective retooling of its product, including the launch of its "Freedom" series of homes, which was helping the company better compete for first-time buyers against foreclosures.
One of the biggest indications of this move to ramp up operations was a rise in the number of units under construction. At quarter end, the company counted 10,900 units under construction. Tomnitz said management's target was to keep inventory at about half of forward-projected 12-months closings. However, executive vice president and treasurer Stacey Dwyer noted that the uptick in units under construction also was reflective of some seasonal order trends as well as the expiration of the federal $8,000 first-time home buyer tax credit at the end of November, which is expected to goose demand in the fall.
Analysts asked if the company would increase its spec production in the hopes of capturing some of that anticipated surge in demand for home in the days leading up to the tax credit expiration; specs currently account for 51% of the company's inventory. Tomnitz replied, "No, sir, we are comfortable with our spec levels."
In fact, during its fiscal third quarter, the company cleared a decent amount of its old--anything older than six months--spec inventory. With specs older than six months numbering about 1,000 units, Tomnitz said that's the lowest level of aged inventory the company's had since fiscal year 2007. And by reducing its older inventory, management expected margins to improve.
Tomnitz also said the company's net number of communities will be higher in 2010 than 2009, although he declined to divulge community count.
Although management intends to open more communities in the weeks and months ahead, it's following a conservative strategy to refill its land pipeline. Although the company had earmarked roughly $500 million for land acquisition and development for the year, management said it probably won't spend anywhere near that. To date, the company's spent roughly $225 million, mostly on finished lot acquisitions and takedowns.
Moreover, Tomnitz said management was most interested in lot option deals. During the quarter, the company grew its lots under option by roughly 1,000 from the previous quarter. By focusing on options, management hopes to be able replace lots on a just-in-time basis. "We aren't just going to bank lots for anyone any more," he said.
With all the talk about management accelerating the company's production and at the same time being cautious about spending on land and development, analysts questioned whether the company, with roughly $2 billion in cash on the balance sheet, was overcapitalized.
"Absolutely not," Tomnitz responded. "No one is going to intimidate us into thinking we have too much cash."
Noting that the company recently terminated its revolver, Tomnitz said the cash will need to be used to fuel its planned increase in units under construction, as well as strategic land plays. "We are funding 100% of our lot purchases and construction with cash," he said.