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D.R. Horton Inc. The Aggressive Acquisitor
The numbers tell a remarkable story.
The numbers tell a remarkable story. In 21 years the company has grown in revenue, units and profitability every single quarter. Not a blip here where just sales went up. Not a blip there where units and revenue increased but profits were flat or down. Across the board, top and bottom line, for 84 consecutive year-over-year quarters, the only direction has been up.
|A triumvirate of muted egos have propelled D.R. Horton, Inc. to the top. Executives include (from left) vice chairman and CEO Don Tomnitz, chairman Don Horton and president Rick Beckwitt.|
The most recent four quarters continue this remarkable trend. In the fiscal year ended September 30, 1999, D.R. Horton, Inc. posted record numbers in every category--revenues, closings and net profits. Home building revenues for fiscal 1999 increased 45% to a record $3.11 billion from $2.15 billion a year earlier. Homes closed climbed to 18,395 from 13,944 in fiscal 1998. Net income rose 71% to a record $159.8 million. The company’s backlog of homes under contract at year-end was 7309 ($1.35 million) compared to 6341 homes at the same time last year.
While significant and even impressive, the numbers tell only part of the story at this national home builder. What produces those numbers year in and year out is the better story and the real accomplishment. It’s a tale of strong management with a clear vision and strategy for growth. It’s a tale of an aggressive acquisitor with a plan and process to integrate quickly and profitably those acquisitions. It’s a tale of employees who are encouraged and compensated to act as entrepreneurs in their local markets. It’s a tale of a company where every employee is completely focused on delivering more homes to more buyers. It’s a tale of an organization that has learned to manage the risks and costs inherent in home building without squashing the fun out of the job for the people charged with doing the work.
For these accomplishments, we at Professional Builder proudly name D.R. Horton, Inc., our thirty-third Builder of the Year. Note this isn’t a personal award for the man Don Horton, company founder and current chairman. Rather this is an award for the corporation as a whole and every employee in it. It is impossible to believe in today’s competitive and complicated home building arena, or in a company the size of D.R. Horton, Inc., that one individual is responsible for everything, good or bad. It takes a team of talented, empowered associates at every level to amass the successes that D.R. Horton Inc. has in its 21-year history and continues to do today.
An Eye on the Future
Don Horton is likely one of the most impatient men you will ever meet. He listens to reasons, discusses options and debates outcomes until satisfied he understands a situation, but once a decision’s been made, he moves on. He refuses to second guess or what if the past. He’s too focused on the future, and he’s created a company and a management team in his image.
In truth, Don Horton isn’t in temperament a whole lot different today than he was when he built his first house in 1978. Horton’s first customers walked through the spec in the framing phase, liked what they saw, but wanted to add a bay window in the kitchen. Horton had a choice: he could sell the house and add the window as the customer wanted or keep the house as it was. No hesitation. He sold the house, made the change and told the buyer, "Here’s what it costs me to make that change and here’s what it’s going to cost you."
|Fiscal Year Financial Review|
|$ in millions|
|Fiscal Year Ended September 30|
% of revenues
% of revenues
|Earnings per share||$1.67*||$2.50||50%|
|* Exclusive of one-time merger costs|
Today, nearly half a million homes later, D.R. Horton Inc. reflects the same can-do customer orientation its founder exhibited at the start. Custom homes still account for a significant share of the company’s overall units. To the product mix, both through acquisition and green field start-ups, Horton has added production and attached housing.
This product diversification is very much by design, explains vice chairman Don Tomnitz. Together with Horton and president Richard Beckwitt, Tomnitz intends to cross-pollinate the company’s five regions and 40 local markets, introducing all to the sales and profit opportunities that come with line extensions.
"We’d like to offer multiple price points in each of our markets," explains Tomnitz. "That way, if the market moves either up or down, we’re covered."
Presently the company’s best example of this multiple price point strategy exists in its Denver operation. Under the D.R. Horton name, the company’s customized operation builds homes from $180,000 to $400,000 or higher. Continental Homes builds single- family production homes priced from $140,000 to $210,000. Under a third brand name, Trimark Communities, Horton sells attached product that fills in the lower price point, starting at roughly $80,000.
"The neat thing about the Denver set-up is each division has its own individual brand name and identity in the market, though all fly under the D.R. Horton Company banner," says Tomnitz. "There are a lot of referrals among the divisions, yet each can have its unique niche in the market."
To date, Tomnitz estimates that the company provides this type of price point diversity in only about 30% to 40% of its markets. "We have a lot of growth opportunities still out there," adds Horton.
Hand in hand with the company’s product diversification effort has been a geographic expansion, primarily though acquisition. Since April 1994, D.R. Horton (or one of its companies) has acquired 14 different builders. Its list contains some very recognizable names: Joe Miller Homes, Arappco Homes, Regency Homes, Trimark Communities, SGS Communities, Torrey Homes, C. Richard Dobson, Continental Homes, Mareli Development, RMP Properties, and Cambridge Homes. In addition, Continental has expanded its reach by acquiring three companies: Aspen Homes (San Antonio, Tx.), Heftler Realty (Miami) and Westchester Homes (Dallas/Ft. Worth).
|Though still a custom home builder, D.R. Horton, Inc. has expanded its product offering to include attached product like that shown in Las Colinas, Texas. Allowing buyers to customize their homes has been a factor in the infill project’s success.|
Beckwitt is the company’s point person on acquisitions. He brings to the role a unique blend of building expertise and business savvy. As Don Horton puts it, Beckwitt once made an honest living as a framer and custom home builder before he abandoned the tools and joined Wall Street as a building materials and construction specialist at the investment banking firm of Lehman Brothers.
As the company’s acquisition record shows, Beckwitt’s blended background works well in helping Horton achieve its geographic expansion goals. "Acquisitions are a pretty easy process for us now," explains Beckwitt. "We’ve got the due diligence side of the process down cold. We’ve created a SWAT team that looks at a company’s land holdings and communities and meets the people. We can identify pretty early whether the people will fit within our organization and are willing to work to make this marriage successful. If they won’t fit or don’t want to work after the deal’s done, there’s no deal."
For every company it acquires, Horton looks at 20 possibilities. Executive managers exercise great care before expanding into new markets. "We investigated California for six years before launching an operation," explains Beckwitt. "It took us nearly three years to find SGS in New Jersey. We are very meticulous."
It is a process that the company insists be done in house. Horton, Tomnitz, Beckwitt, regional presidents and division presidents all investigate new markets. "We drive an area," says Tomnitz. "We look at product. We study the make-up of the community. We visit the school and meet with the principals, teachers and attend a PTA meeting." With this on-the-ground knowledge, Beckwitt steps in.
"We’re looking for market leaders," says Beckwitt. "Our acquisition strategy is simple: We want to be the number one builder in every market we serve. The way to accomplish this is to grow with the best and give them the tools and resources to achieve more.
"We’ve been the acquisition leader for a couple of simple reasons: We do our homework and we allow those acquired to run their own business and continue to be successful. We take over the job functions that aren’t fun--hunting down money, managing payroll and administering employee benefit programs. With those out of the way and ready access to capital, the way is clear to concentrate on the fun parts of this business--finding land, designing product, building houses, selling homes and managing an operation."
For all its growth throughout the 1990s, D.R. Horton plans for still more in the next 10 years. There are geographic gaps to fill in and new product opportunities to consider. With the acquisition of Cambridge Homes earlier this year, Horton jumped the learning curve in the booming active adult housing market. Plans are to share the expertise of Cambridge managers Richard and Doug Brown throughout the company.
"We’re looking for growth. We’re looking for returns," says Tomnitz. "We’re not in this business for practice; we’re in it to make a profit. Our expansion strategy ensures both and insulates the company from the rolling recessions that have marked the residential construction industry in the past."
Strategy is only as good as the people expected to execute it. D.R. Horton Inc. knows its people managing a region, building a development and selling new homes must focus and achieve their goals if the corporation is to achieve its. What makes this possible says Tomnitz, is setting targets together and then providing the resources, services and support to help them reach those goals.
"We have what we call ‘Hortonisms’ in the company," explains Tomnitz, "and one of the favorites we all talk about is ‘Tell me what you’re going to do and then go do it.’ It sounds so simple but this is really our expectation. I’m not looking for excuses, I’m looking for performance."
While performing to plan is expected, how it is done is nearly a totally local decision. No one at corporate headquarters in Arlington, Texas tells any division president or regional president how to achieve their numbers. "Home building remains a local business," says Horton. "We can’t know the particulars of every market the way those in that location do."
What those in management at D.R. Horton can do is relate to the work-a-day world of those in the divisions. Horton, Tomnitz, Beckwitt and the regional presidents all came up through the business, be it through land development, sales or construction management. "We understand the challenges a division manager faces," says Tomnitz. "Our days doing that same job aren’t so long ago."
Management’s understanding and appreciation of marketplace realities help D.R. Horton Inc. attract entrepreneurial managers and create a compensation plan to motivate them to grow sales and profits.
"Another Hortonism is BSCM,” says Tomnitz. "We want our division managers—--very day, week after week--to spend their time building, selling, closing homes and making money. We always tell them if ninety percent of whatever’s coming across your desk isn’t related to BSCM, you’re doing the wrong things.’"
To help ensure that focus, corporate manages all administration in Arlington. Accounting and finance, information technology, human resources and cash management responsibility all resides at headquarters. In addition, the company reduces paperwork and streamlines procedures at every opportunity. For example, a division manager completes a three-page report (which includes a subdivision gross profit margin analysis) for a desired plot of land and submits it to the regional president. The regional manager reviews the property, approves the deal and forwards all information to Tomnitz, Horton or Beckwitt. Any of the three can sign-off on the purchase.
To reinforce focus at the local level the company created a compensation plan that reflects the corporation’s financial goals. The five-point bonus plan is based on achieving:
- a 20% gross margin on new homes,
- 10% for sales, general and administrative costs,
- a 15% return on inventory,
- 20% growth in year-over-year revenues, and
- the targeted pre-tax income level for the market.
This compensation plan forces the company, at every level, to keep its focus trained on the home buyer. Division presidents decide on land, select product, determine features, all because they are the buyer experts in their market.
"Nothing is going to happen until you sell a home and we focus on what it takes to make that sale happen," says Horton. "We constantly ask ourselves, ‘What does this do for the customer? What’s the benefit to them?’ That’s the way you sell more homes."
The final piece of the puzzle that makes up D.R. Horton’s remarkable track record of top and bottom line growth is a near religious devotion to risk management and expense control. The three big risk factors in home building--land, money and numbers--are what the company manages most closely.
"Walk through the builder graveyard and all the tombstones read ‘long and wrong on land,’" says Horton. "These companies aren’t bad builders; they owned too much land at the wrong time in the cycle."
Ever mindful of Don’s warnings, D.R. Horton Inc. likes to get in and out of land transactions in three years. Typically, the company owns half of its land holdings and options the other half. Now, "we’re trying to option as much land as we can as new opportunities loom," says Tomnitz. At the close of its fiscal year on September 30, 1999 the company’s current land inventory totaled 62,610 lots.
Money, borrowing and the issuance of public and private debt, is another area under the watchful eye of the company’s board and operating committee. The operating committee, the three executive officers and the five regional presidents, meets regularly to review asset allocations. "We go through the regular budgeting process just like any other company," explains Beckwitt, "but we never let the budget dictate the business." For example, should an attractive plot of land come up for sale, "there is enough dry powder in our allocation system to take advantage of it."
The final leg of the risk stool is numbers, and two really stand out--sales and costs. Should the overall economy tighten and buyer preferences change careful tracking of the numbers helps division managers make product and price adjustments.
"We’re poised to do well in any economic environment," says Beckwitt. "We can adjust our houses quickly, pulling features and squaring off corners if financial realities dictate. In boom environments when demand outpaces supply, we can raise prices and improve margins through customization. Careful tracking makes us nimble."
The cost side of the equation is studied just as carefully as sales. In fact, in the last year under the leadership of vice president/purchasing Todd Temanson, D.R. Horton has begun a national purchasing program that has reduced material costs more than $10 million. To date, Horton has negotiated national pricing for appliances, air conditioning and heating equipment, reducing its number of vendors in each category to the two most competitive.
"We’ve only begun this process," says Beckwitt. "We can squeeze a lot more costs out of the new home price without affecting what we deliver to the customer."
Managing costs while increasing value is the single goal that unites all the very disparate and far-flung parts of the Horton business family. "We’re as different a group of people as you can imagine united under one umbrella," says Tomnitz, "but we all believe in the same goal."
"And we’re all ready for more," adds Horton.
Tomnitz is Mr. Manager
Beckwitt is Horton's Acquiring Mind