Horton Holds Little Hope For Strong Spring Home Sales

CEO Tomnitz: Economy's woes are likely to hold home sales in check next year.

By Teresa Burney

D.R. Horton CEO Donald J. Tomnitz isn’t expecting much good to come from the 2011 spring selling season.

“I just don’t see a lot of hope for a great spring market,” he told analysts Friday. “I believe our gross margins will have some pressure in spring, simply because right now we are not predicting a huge spring jump.”
And there’s not much the builder can do about that. Macroeconomic conditions, including joblessness and buyer psychology--things that builders really have no control over--most likely will conspire to keep traffic away from sales centers, he said.

“All these factors make it likely that our sales and closing volumes will be below 2010” in 2011, Tomnitz said.

Nevertheless, D.R. Horton is expecting to turn a profit next year, just as it did in its 2010 fiscal year that ended Sept. 30. While it came 3 cents per share shy of breaking even for its fourth quarter, losing a total of $8.9 million, the Fort Worth, Texas-based builder made $245.1 million, or 77 cents per diluted share, for the year. In its 2009 fiscal year, Horton lost $549.8 million, or $1.73 per share.

“I will tell you it will be a bigger challenge” to be profitable in 2011 than in 2010, Tomnitz said. “Unless we have a spring sales bump that we have a hard time seeing today.”

Horton made hay last year by taking advantage of the home buyer tax credit. It built spec homes in anticipation of capturing first-time home buyer demand stimulated by that credit, and it worked. Sales slowed dramatically in July after its expiration, then began to climb slightly again in August before reverting to traditional seasonal slowness in September, the company reported.

Horton closed 20,875 homes in 2010, up 25% over 2009. Orders were up 14% to 19,375. For the fourth quarter, orders stood at 3,979 compared with 5,008 at the end of September 2009.

Tomnitz said the company has sized itself to meet the market, and, if sales fall further next year, D.R. Horton has already identified what cuts it needs to make. It has successfully trimmed its SG&A costs to 12.1% of home building revenues. It managed to close 25% more homes in 2010 with essentially flat costs. And it has managed to grow its gross margin on home sales by 4.2% to 17.3%.

“Most of our competitors would be very happy to face a bleak outlook in the spring with a 17% margin,” Tomnitz said. That, plus debt-to-capital of 16.1% and $1.6 billion in cash and marketable securities, leaves the company in an enviably strong position.

Horton has given marching orders to its sales teams to sell first and let management figure out how to qualify them for loans. “If they are warm and they have a pulse, sign them, and we will worry about qualifying them,” he said.

One of Horton’s efforts has been to increase its number of open communities, which it says contribute margins that are 2% to 3% higher than its older communities. Nearly half Horton's communities open at the end of September were newer communities from 2009 or later.

Horton prefers to take down the lots via options, preferably rolling options that offer the ability to renegotiate sales price as the market changes. Tomnitz said those kinds of deals have become more available recently and credited banks with finally being willing to admit just how much the value of its holdings has dropped.

Horton is growing its community count in Florida fast. “Clearly I think Florida has been a great story for us over the course of the last 12 to 18 months,” Tomnitz said.

Tomnitz said lot sellers are willing to give better deals and negotiate with Horton because there are fewer home builders in each market and “because we are performing and we are putting houses on their lots. I believe we are definitely the desired buyer of lots in each market."

Gaining market share has also given the company the ability to get better deals from subcontractors and materials providers. “If anybody has the ability to put pricing pressures on land sellers and lot sellers and vendors, it’s us,” Tomnitz said.