Lots are like people: they’re made up of identical basic elements but wind up very different. An A lot essentially is the same stuff as any other piece of dirt in residential real estate. It’s a slice of ground, the dimensions of which range across varying amounts of square footage, and, like any other homesite in the detached single-family for-sale world, an A lot normally fronts a street, with one or more properties surrounding its borders.
Which doesn’t, of course, account for why A lots tend to carry nearly mystical powers and, with some, such astronomical prices, this being home building’s and residential real estate’s most-finite of necessary resources. Unlike Coca-Cola or Apple or Nike or American Express, which offer fiercely consistent user experiences of their brands everywhere on the planet, A lots are different, and different from one another, wherever you go.
A typical home builder looks at an A lot as opportunity, given the alternative choices. It’s one of residential real estate’s best shots to expand the distance between input and indirect costs and the ultimate price tag on a home. This lends a sense of optimal value to a home buyer, and it shows up as a healthy gross margin on the sale to the builder. So, if the typical home builder can snag an A lot—or 50, or 3,000 of them—with capital that doesn’t have to yield returns immediately, they’ll normally go all in and do it.
“Typical” being the operative term.
Ask D.R. Horton’s David Auld whether he prefers an A lot—which he can well afford—a B lot, or even a C lot, and the likelihood is he’ll opt for one of the latter two. You see, there’s very little typical about the company that’s been America’s No. 1 home builder (by unit volume) since 2002.
Here’s how Auld, who took over as president and CEO in 2014, explains his reasoning:
“You can turn a B or C land deal into an A subdivision with execution,” he says. “If we miss the absolute best land deal opportunity of all time, I don’t care. I know we can make it up on the land deals we get, because we’re going to make up for it with operational excellence.”
Operational excellence in home building is the ability to widen the gap between the total amount a builder pays for land, materials, labor, and “overheads,” and the total amount the home buyer is willing and able to pay for the home the builder builds.
Operational excellence is a calling card D.R. Horton expects its 7,000 or so associates in 39 separate operating divisions, 26 states, and 78 markets to both live by and disseminate—whether to a prospective home buyer, a real estate agent, a land seller, a trade partner, a competitor, a potential fellow colleague, or just someone who’s curious about what makes home builders tick that day.
For the past three years, BUILDER’s highest annual honor has saluted the extraordinary impact and éclat that home building enterprises have created from bold, opportunistic, strategic, go-big transactions—Toll Brothers in 2014, TRI Pointe Group in 2015, and CalAtlantic last year—and their ability to absorb, integrate, and expand their offerings and elevate their respective organizations within our Builder 100 top 10.
Now, full circle in a period of housing’s cycle where headwinds and tailwinds offset one another almost equally, the differentiation between one builder and another boils down to a pretty simple question: Who’s better? This year, Team D.R. Horton returns as our Builder of the Year after a mere six-year absence from its place as the best of the best among home builders.
Massive Reach
Operating in 41 of home building’s top 50 markets in the U.S., D.R. Horton ranks No. 1 in 13 of them and hovers among the top five in 30 of the top 50 markets. Expectations for the present year are for another in a sequence of stellar performances in unit volume—with 43,500 to 45,000 closings—revenues topping $13.4 billion, gross margins of over 20%, and overhead cost in the low-9% range.
In a mid-March 2017 research note to investors, Wells Fargo senior analyst for home building and building materials Stephen East noted how 12 public home building companies he covers now account for 28.9% of all national new-home sales. D.R. Horton, he writes, accounted for 78% of the 12-company bucket’s uptick of 41 basis points of market share in the fourth quarter of 2016.
By itself, D.R. Horton owns 7.5% of the single-family new-home market. “We believe DHI’s continued domination should lead to better incremental operating margins and strong returns,” East wrote. “Particularly if the company continues its slimmer land acquisition strategy of buying land at a slower pace while optioning a greater portion.”
Any story about D.R. Horton that intends to get at the real reasons the organization is best of class on so many levels inevitably delves less into specifics of where it operates and what it does and more into who does it and why. Like many of America’s best-run business enterprises, Horton operates as a belief system every bit as much as it functions as an operational real estate, design, development, construction, and marketing business model.
And Horton’s belief system is as chiseled and iterative as Horatio Alger’s. It’s a relay-race baton, passed from company founder D.R. Horton, whose words, spirit, vision, and presence drive what each company associate eats, sleeps, and breathes every day of their work lives.
“We have captured industry-leading market share by responding to the needs and wants of America’s home buyers and by introducing new brands to our product line,” explains Don Horton, who founded the company in 1978 and took it public in 1992. “With a solid team, strong lot position, and the flexibility to cater our offerings to a diverse customer base, D.R. Horton is achieving unprecedented success and is in its best position in company history, both financially and operationally.”
From Don Horton, the baton passed to Don Tomnitz, who led the company like an Army general for 15 years, from rip-roaring 1998 through the darkest times in the mid-2000s into the light at the end of the tunnel out of the Great Recession to Auld, who’s put a quarter of a century into learning how to carry it. With that baton comes the imperative to inspire, sustain, and expand the belief that each home in each community can be improved on the one that came before.
“We are fortunate to have a deeply experienced and dedicated D.R. Horton family, many of whom have grown with the company over the last several decades,” says Horton, who’s still involved in day-to-day operations. “The solid performance of our team across our 78 operating markets continues to drive our growth. I am proud of our company’s achievements, both past and present, and it’s a pleasure to work with the industry’s finest.”
It’s important to understand that, in the D.R. Horton sense, as with any exceptional organization, its belief system is not mere metaphysical mumbo jumbo. Rather, its tolerances and specific behaviors are based on the messy, time- and human nature–tested truths of real estate and construction’s real world, the jobsite. When Horton, or Tomnitz, or, now, Auld asks any and every D.R. Horton associate to believe, it’s exactly this:
“Having the best operational team in any market, in all of our flags, will drive the best opportunity for return on our invested capital,” says Auld, referring to his company culture’s fixation on “flags,” a term for D.R. Horton’s actively selling neighborhoods.
Consider that squadron of fluttering, equidistant, tall, skinny banners that greets drivers as they approach the environs of a D.R. Horton community. For members of the organization, each set of these banners, identifying each neighborhood, establishes governmentlike powers, ownership, and jurisdiction for the business and operations team working within them. Flags—in the Horton belief system—signify both a fierce autonomy that affirms the hyperlocal nature of real estate, and devout cohesion and a powerful sense of belonging to a larger purpose.
In other words, for a whole to be greater than its parts, each part has to want to be great.
“Our goal,” says Auld, “is to take a market-rate lot and put value on it disproportionate to its cost, for the home buyer, for the trade partners and vendors, and for us. That’s what we’ve been focusing on.”
Brand Strategy
Now, let’s go back to that initial Don Horton comment, accounting for D.R. Horton’s outsized performance in 2016, and parse it for clues as to what exactly is going so right in a company for which being second to none is simply not good enough. Founder Horton speaks of
introducing “new brands,” a “solid team,” “strong lot position,” and “flexibility to cater community offerings to a diverse universe of potential home buyers,” as ingredients in the organization’s recipe for superior success.
One might start by questioning why one of the most penetrated and opportunistic brand names in home building would wind up today as a four-leaf clover of nameplates, each with its own promise and a well-strategized aim to overdeliver on that promise. Horton, after all, spent decades acquiring companies, each with a brand currency and presence in a respective market arena, only to subsume those nameplates, reputational traction, and local clout into the D.R. Horton mother ship.
So, why expend resources and focus on starting up new brands, each of which would need marketing support, customer service platforms, and varying land strategies? Even today, the D.R. Horton brand represents about seven out of 10 homes the organization sells in units and revenues, in 78 markets and 26 states, with an average selling price of a healthy $310,000. So, why diversify? Why experiment? Why try something you don’t know will work?
The notion first arose among Horton’s brain trust in the mixed-message months of an early recovery in late 2011 and early 2012, as existing-home sales prices began to stabilize. The “falling knife” of value destruction was about to touch earth, and big institutional investors were plowing into the distressed-home market, scarfing up houses at well below replacement-cost prices, with an intent to remarket them as single-family rental homes as they turned portfolios of thousands of these properties into a brand-new asset class on Wall Street.
Following these large institutional investors into a housing market that hadn’t, prior to their insurgence, seen any significant kind of trade in residential properties for three or four years were, of course, the wealthy.
Home prices by then had hit their low point; banks were newly regulated—they might say “hogtied”—under Dodd-Frank rules, and altogether chastened from the thought that any loan gone off the rails would be “put back” into its books as an onus for the bank to figure out, rather than a group of investors who’d bought securities betting on that loan’s performance in a portfolio of them.
This left the housing market open to those with cash, or the ability to put their hands on and use a lot of it: institutions and discretionary buyers who saw opportunities to make their housing dollars go farther than they had in many years, since there were so few buyers and so many lovely places that the Great Recession had removed of residents. And these individual buyers didn’t have to sell a home to pony up the cash to buy a new one. Cash was king.
Now, D.R. Horton had always sold move-up, second-time move-up, and luxury homes as part of its main brand lineup of offerings. However, it was clear to some of its entrepreneurial division and region leaders that in markets where the high end was virtually the only segment in play, it was going to need a go-to-market platform capable of going toe-to-toe with names like Toll Brothers, Standard Pacific, Taylor Morrison, TRI Pointe, New Home Co., and private builders whose specialty was that upper part of the price spectrum.
Hence, Horton’s Emerald brand was introduced, after development in 2012, in the early months of 2013. It’s a line of communities whose average selling price clocks in at around $640,000, representing about 3% of Horton’s total sales, and whose homes can compete, in master planned communities and independent subdivisions alike, with the likes of those other upscale home builders for the “nice-to-have” buyer.
“The move-up and luxury buyer is different and distinct from the first-time and entry-level buyer,” says executive vice president and COO Michael Murray as he looks back at the D.R. Horton approach to introducing the new brand. “This came out of our decentralized network of business leaders, which meant that, rather than looking at home buyers and customer segments as single amorphous groups who all behave a certain way, we could focus first on recognizing what the customer wanted, and then align our business processes around giving it to them.”
Murray says this is the central take-away idea in D.R. Horton’s multisegment branding strategy, which now has Emerald serving the high end; Express Homes, the first-time rental refugees; and, recently, Freedom Homes, the platform Horton means to make synonymous with 55-plus living communities.
“It’s an internal process that allows us first to respond to local marketing, development, design, and delivery opportunity, and port that practice across our enterprise, wherever the business considers it to make sense. But, every time, the best ideas in our company come from the field. We’re constantly on the road, traveling the communities, visiting the flags,” says Murray, a point Auld is quick to second.
“When we opened our Emerald program, it was completely decentralized,” Auld adds for emphasis. “The only way to make something truly scale in our system is to have individual division and regional leaders adopt a strategy that works locally for them.”
Local Expertise
There is a distinctive and nearly exclusive intersect between the D.R. Horton whole and its divisible parts. On the one hand, an independent division that operates with its ears, eyes, and other senses closely tuned to the needs, wants, and values of that particular locality that’s in all ways the “owner” of that piece of business. On the other hand, a beneficent resource base in Fort Worth, Texas, that, as Auld puts it, is “trying to drive a national value across the country,” with floor plans and models that are just as diverse as they need to be, and skinned with exterior finishes and elevations that blend with local design flavors and preferences.
Today, Emerald’s traction is with well-heeled buyers who are in the market more for features and design that speak to attainable aspiration, rather than the self-indulgence-without-a-second-thought super-elite buyer some of the luxury competitors serve. Emerald is in 43 of the 78 total D.R. Horton markets, and in 18 of the 26 Horton states, accounting for about 4% of total sales and 9% of the company’s $12.6 billion in 2016 home building revenue.
One of the profound, elegant, and simple insights D.R. Horton picked up from the Emerald venture was that responding to a stronger pulse beat in the market with a new brand had struck a chord.
Within Horton, Emerald fit like a glove as an operational opportunity area for those regional and divisional business leaders who saw an unmet need for the more attainable luxury its communities offer. However, to the outsider, the all-important home buyer and the equally critical real estate agent, Emerald was a brand-new, more plentiful supply of homes with lots of marketing clout behind them.
In a sense, the Emerald initiative provided somewhat of a template for Horton to consider how it might benefit from having more sub-brands under the D.R. Horton umbrella, sensing a void in the market on a local level, and filling it. By 2014, news media and mainstream conversation had pretty much relegated starter homes to the dustbin of U.S. housing history.
What better time, then, to introduce a new brand, made special for this moment? It would scream, “Welcome to homeownership!” to young adults who by then were starting to feel their job security solidify beneath their feet; had made some progress on their student loan debt; and were, just maybe, ready to start families.
What’s more, they were getting fed up with the relentlessly spiraling prices of apartment rentals and felt that if they didn’t get out of leasing’s vicious circle while home prices and interest rates were historically low, they might be looking at three-to-life as their rental sentence.
Express took off like the early-to-market jackrabbit it was, flowing sub-$250,000 homes and communities into a market as it was just starting to leap from a trickle of early adopters to a surge of pent-up demand. Today, with an average selling price of $215,000, D.R. Horton’s Express line of homes and neighborhoods is available in 53 of Horton’s 78 operating markets, and 17 of the 26 states in the enterprise’s footprint, accounting for 28% of unit sales and 20% of home sales revenue in 2016.
Best of all, for D.R. Horton, is that it matches precisely with a deep-seated, driving focus for the firm since its earliest days as a regional builder in the late 1980s. Express answers the call for first homes for brand-new, never-before home buyers who want to get out of renting into the American dream.
“To the extent that we have and can continue to improve on our operational excellence, it’s to that degree that we can increase the value to our customer, including that entry-level buyer’s first homeownership experience,” says executive vice president and CFO Bill Wheat.
For Express, Auld explains that there’s been a little more headquarters control of floor plan designs and features, with deference to local practices regarding cladding and exterior finishes.
“We did try to become a little more decentralized here, on the Express brand,” says Auld. “The more iterative the construction process—and the more national the sourcing—and take-offs are, the more we can put that value back into what the home buyer pays, and that’s the win.”
Just as Emerald came in and took its place among entrenched high-end–brand home builders, Express’ introduction became a marketing juggernaut—D.R. Horton’s opportunity to say that it had developed something new and unprecedented for the needs of today’s emerging young adult households. Freedom Homes, in 2016, became the third prong of Horton’s de novo brand development.
This time, the “brand-new for you” message was aimed squarely at a void in the vaunted 55-plus market, already big and set to grow rapidly for the next decade or so. Freedom Homes fit as a D.R. Horton brand, partly because it was a new community concept whose objective was to literally pull people out of existing-home, aging-in-place remodeling options into new homes. What’s more, Freedom’s price proposition fills an appreciable void in the 55-plus market by courting people who want “carefree affordable living,” rather than gated, golf-centric, highly engineered, and richly amenitized communities many people associate with the retiree set.
Freedom Homes, launched appropriately around Independence Day in July 2016, was selling actively in eight markets in seven states as of early 2017. But plans are to roll it out nimbly, consistent with Horton’s first-to-market strategy in all its initiatives, opening communities in a third of the 78 Horton markets by the end of the current year.
“We expect Freedom to be a real needle mover for us in 2018,” says Jessica Hansen, vice president of communications for D.R. Horton. “We didn’t have as much of a learning curve with Freedom, partially because we’d already come out with our Emerald and Express programs, and Freedom takes elements of both.”
So, what team members in each of the 78 D.R. Horton markets have to draw on is a four-program repertoire for many of for-sale housing’s biggest opportunities in the market right now. The operational excellence part is where each of those operations figures out how, over and over, to put the most distance between what people will pay for each of those four programs and what it costs to procure the land, materials, labor, and corporate resources to execute them.
Among long-practiced tactics, and especially helpful in today’s tight labor supply environment, D.R. Horton makes the majority of its homes “ready to own.” Building spec allows for more consistent and careful focus on Horton’s operations and workflows, and it levels out the company’s schedules and contracts with the 25 or so skilled trades involved in every home’s construction cycle.
“If we drive a simpler and simpler and more consistent labor process, we can put the trades in the position, week after week, and month after month, to know what we’re committed to them for on an ongoing basis,” says Auld. “This is a win for the subcontractors because it gives them more even cash flow across time, and, for us, we can figure out how to do each home with fewer and fewer hours of labor.”
Auld, Murray, and Wheat are on the road a lot, partly because to do D.R. Horton the way it has to be done, they have to stay close to their leaders on the ground in those 78 markets. What comes of those community-by-community trips is the basis for what the company always expects is next. Among the five regional presidents, who average 20 years of Horton tenure apiece, and the dozens of division presidents and city managers with an average of 13 years of Horton experience, loyalty and trust run at a premium.
“We define winning at D.R. Horton as becoming No. 1 in every market,” Auld explains. “Our expectation of every leader is that they’ll become that.”
This is the belief system that puts D.R. Horton into a league of its own in high-volume home building.
