D.R. Horton CEO Don Tomnitz this morning dismissed the notion that the company's chief competitors had achieved a "land light" model and suggested that Horton is the "most flexible" of the "top five or six" public home building companies.
In a conference call with analysts following the company's announcement of a $1.3 billion loss for its fiscal second quarter, Tomnitz rejected the possibility of a bulk land sale to decrease the company's existing 5.2-year supply to reach the stated goal closer to a high three-year or lower four-year supply. "We are building through our existing land and lot supply, and as we work through it, we are deriving a 50% return," said Tomnitz. "We'll continue to use impairments if needed, but we can get a better return than if we did a bulk sale to an investor."
During the quarter, the company made strides in the reduction of its inventory and particularly, its spec inventory, primarily by slashing prices through its "Un-Auction" sales events. "When you look at where we are with specs, the beautiful thing is, we are in the best position of the last three or four quarters," said Tomnitz regarding 7,000 units of spec inventory held by the company. Currently, that classifies 48% of inventory as spec, and although management remains committed to the strategy in order to satisfy relocation buyers and realtors, Tomnitz said he'd prefer to see the figure closer to the low-40% or even high-30% range.
Tomnitz predicted that margins should be "heading north" once the company clears most of its older inventory and a large number of completed specs.
"We are still committed to our spec policy. Some competitors have had a zero- spec policy, and that has made it tough for them to compete in many cases. Now that we have specs down to the correct level, it should help us drive higher margins going forward. I feel like sales people ought to be selling at a 15% [margin] or higher," he said.
Specific to its 82 active markets, management pointed to Las Vegas, Arizona, Calif. and Fla. as the most challenging and said that there "weren't enough [good markets] to talk about.". Still, Tomnitz doesn't see the company shrinking its footprint any time soon. "We don't see any markets today that we would leave because we see them as sound," Tomnitz said. He noted, however, Horton's efforts to consolidate multi-market divisions such as Denver and San Diego into single market divisions.
The company continues to maintain a key operator and profit center manager in each area but claims the realignment has allowed Horton to reduce its people and be more prudent about how it operates in the market. "We think it's the better answer," said Tomnitz.
The company has spurred demand by meeting the market with pricing during its special sales events. Tomnitz even noted that there were prospective buyers camped-outs at two California community events. He noted, however, that "the level of those sales are not sustainable" and also admitted during the call that he is concerned about foreclosures and the negative impact they might have on pricing going forward. To date, the only markets where he sees foreclosures having a significant impact are Phoenix and Las Vegas.
"There is not a lot of pricing power or stability out there today," Tomnitz said of the overall environment, which "continues to be a house-by-house, community-by-community, market-by-market battle."
In other news, Tomnitz announced that senior executive vice president of finance; Sam Fuller plans to retire from the company at the end of May. Fuller's career with the company began when he was hired 1991 to consolidate information in preparation for its public offering. He has been with the company for 17 years in various finance capacities.
"I can't imagine why he would choose this time to leave the industry," said Tomnitz, tongue planted in cheek. He also took time to wish Fuller well in his "quest to improve his golf game, take pleasure in his motor home, and drink his way through his wine collection."