D.R. Horton is ready, willing, and able to take your market share.
That strong message was repeated several times Monday as Donald Tomnitz, CEO of the biggest volume builder in the United States, talked with housing analysts about the super-sized company’s super-sized positive earnings and sales results for 2012’s first quarter.
An improving market was partly responsible for the company’s $40.6-million profits, Tomnitz said. But he added that the economy’s macro-economic conditions remain shaky and the improvement has only been underway for a few months and hasn't yet resulted in notably higher selling prices. The larger share of Horton’s success came from picking up market share from faltering, less nimble, less rich builders, he said.
“We see uneven improvement across our operating markets,” Tomnitz said. “However we are finding opportunities to take market share in [the company’s] existing markets while evaluating new sub-markets.”
Horton is gathering market share from private builders, as it has said before. But the business of other publicly held builders, like itself, is within its sights as well.
“I think frankly, this time around, the private builders have been devastated more than they have been devastated in any previous downturn,” Tomnitz said. “So I see our markets and our sub-markets around the country, and the one thing that is consistent among all these markets is that there are fewer and fewer private builders in there who are [still] alive, and if they are alive, [they] can’t get a loan from a bank.”
Public builders whose profitability is being hampered by heavy debt are also vulnerable to lose market share to Horton, whose debt level is among the lowest in the industry.
“I see this as our opportunity to take market share, not only from those small and medium under-capitalized private builders, but I also believe and know that for the first time in our company’s history that we have the opportunity to continue to take market share away from our public competitors who I perceive are way over-leveraged compared to us, and it gives us an opportunity … to continue to take market share from them.”
Even custom builders have a reason to fear the behemoth.
“With our cost structure, both from the land side and in direct costs, we can develop and build equally well, if not better product, than a custom home builder who is having trouble getting financing,” he asserted. And Horton can build the homes faster, he added.
Private builders have long said that the advantage their structure has over large public builders is that they can be nimble, but the downturn showed Horton to be a big company that’s light enough on its feet to adapt quickly to market changes.
For example, when the government offered tax rebates to first-time home buyers, Horton goosed its speculative home production to capture that market. When the rebates were gone and home mortgages became more difficult for starter-home borrowers to get, the company moved the emphasis back to move-up buyers. The result has been sales prices increasing because more move-up customers are buying more expensive homes, and sales numbers growing because move-up buyers tend to have more cash to put down on a home and less trouble getting mortgages because their credit tends to be better.
Some of Horton’s nimbleness also comes from its land-light strategy. It works hard to buy land just when it needs it, and when the downturn came it was quick to jettison land deals that suddenly had become longer-term plays. That process continues. Last year the company’s community count dropped, and its average sales per community climbed. “The key is we culled a number of subdivisions that were not performing,” Tomnitz said.
Horton is working to re-load with land and communities bought at today’s prices that appeal to today’s buyers. An advantage Horton has in its efforts to remain the United States’ dominant home builder is that it continued to hold most of its broad national footprint of markets during the downturn, even as its competitors left markets.
Now that the market appears to be improving and Horton is making money, an analyst asked Tomnitz if he’s worried about suppliers increasing costs of goods and services, cutting into the company’s profits.
“One of the difficult things is, obviously, when we begin to report a profit, then all of a sudden our suppliers and vendors realize that we are making money” and seek price increases. “But the bottom line is we are still not as profitable as we would like, and we are starting more homes than anybody else in the country, so as a result we are very, very competitively pricing [goods and services] and bidding everything out” to get the lowest price possible.
Teresa Burney is a senior editor for Builder magazine.