In 1978, Don Horton waited two hours to ask a banker to back construction of his first home. The banker agreed to the $3,000 loan largely on the strength of Horton's persuasive optimism. "I'm not convinced you know how to build a home," the banker said, "but I am sure you'll sell it."
No doubts remain about D.R. Horton Inc.'s ability to build and sell homes. The nation's largest home building company has achieved extraordinary performance levels:
- 105 consecutive quarters of increased revenue and increased profit
- 90% of the company's projected closings of 43,000 (up from 37,000 last year) achieved in the first five months of fiscal year 2004
- projected 2004 revenue of $10.2 billion to $10.4 billion
- a top-five ranking in 31 of its 47 markets
D.R. Horton has been the nation's fastest-growing home builder for 10 years, and now Don Horton, its chairman of the board, intends to see it become the first to reach 100,000 annual units, by 2010. "It will be easier to get from 37,000 to 100,000 than it was to get from one house to 37,000," he says.
Staying top dog is important to Horton, provided higher earnings and higher profits continue to accompany the ranking. D.R. Horton wants to distance itself from the Lennars and Pultes and show Wall Street that its stock should be valued higher. Profitability is thus a central theme.
"We could have reached the top sooner if we had chosen volume only," says Don Tomnitz, vice chairman and CEO. "We have scrapped and scraped, and we have achieved magnificent economies of scale that help us profitably aggregate market share faster than anyone."Then and Now
Don Horton hails from northwest Arkansas. He briefly carried on his father's real estate business in Marshall, but the opportunities were too limited for a man with Horton's drive. In 1977, he moved his family to Fort Worth, Texas, looking for more. He began in new home sales and moved quickly to new home construction, focusing on profitability from the start. D.R. Horton's profitable performance has been and remains a function of controlled risk, entrepreneurial energy and lean overhead.
D.R. Horton went public in 1992, with 899 units to its credit. Aggressive growth followed, both internally and through 17 acquisitions. The company now operates in 20 states, with 53 divisions charged with 20% annual growth objectives. Expansion has broadened the product range, adding upper-end and active-senior housing, but 80% of D.R. Horton's sales still come from entry-level and first-move-up buyers, with homes priced at less than $250,000 accounting for 69% of closings.
D.R. Horton's commitment to this segment has proved itself many times over as a shrewd business decision. "These buyers make up the largest segment of the home buying population and the most consistent," says Stacey Dwyer, executive vice president and treasurer.Have It Your Way
The home building industry often underserves price-driven buyers in terms of choice and service, but their money talks at D.R. Horton. In-house mortgage and title services smooth the purchase path. Customer satisfaction is paramount, and a compensation system partially based on satisfaction ratings motivates division and regional presidents to achieve it.
D.R. Horton offers the typical one-year general/10-year structural warranties but will serve an unhappy customer beyond those parameters. The company understands that being right carries no weight in the court of public opinion.
"One dissatisfied buyer can cost you 10 referrals," Tomnitz says. "We have no fancy slogans about quality and value. We just take care of business, and our policy is that the customer is right, period."
The company also offers a level of choice that makes it stand out from the competition. About 50% of revenue comes from customization options, including floor-plan changes. Even entry-level buyers can specify a larger master bedroom, a fireplace in the living room instead of in the family room, or a kitchen sink installed somewhere other than in the standard layout.
Don Horton used this strategy to gain a competitive edge when his company was new, and it still makes a new home purchase more enticing in any interest-rate climate. "No one else does this for entry-level buyers, and it's a big deal," Tomnitz says. "It's something our competition has not replicated very well thus far, and it drives sales in every market."
Analyst Tim Jones of Wasserman and Associates concurs, adding that D.R. Horton's 1998 acquisition of Phoenix-based Continental Homes generated the dual market strengths of offering customized homes and straight-across production with lower per-square-foot costs.
Divisions work to make plan customization feasible and profitable, Tomnitz says, because the corporate office in Arlington, Texas, makes that expectation clear, but the split between straight production and customized plans is informal. Each division president determines where and how to offer customization.Home-Field Advantage
Management views D.R. Horton's divisional autonomy as a core strength. It's also unique among public builders.
Responsibility and authority for the principal risk elements of land and lot deals, IT and financing rest with corporate. Each division carves out market share based on local knowledge and experience. "We don't tell division presidents what to build or how to build it," Dwyer says. "If they don't know what to build in Albuquerque, we don't either."
Corporate empowers divisions to respond quickly to the forces and idiosyncrasies of their back yards, and division presidents can count on fast action from corporate to support strategic goals. For example, this company can close a land deal quickly, giving it a distinct advantage over competitors with more bureaucratic layers. "We are nimble, and we need to be," Tomnitz says. "We must stay light and flexible to skirmish with our major competitors."
Depth of knowledge keeps the structure robust, with two or even three experienced people per slot for key areas such as land acquisition, purchasing and construction. The six regional presidents, who report to Tomnitz, reinforce the network, scouting land opportunities and market trends and strategizing with division presidents and corporate. They represent the company's first line of risk aversion, with all deals vetted for profitable growth before being recommended to corporate. Computerized networking helps corporate spot problems and opportunities quickly. At least once each year, all senior managers gather for learning and comparison sessions.
"We export a lot of our people from market to market," Tomnitz says. "The business is much more complicated these days, and the more our senior managers know, the better."
Division presidents average about 13 years with the company, and regional presidents average 15 years. D.R. Horton doesn't bother with headhunters. Promotions fill most senior-level openings, and employees recruit new hires who they think will integrate with the company's culture.
A subcontractor base thoroughly familiar with D.R. Horton rounds out the knowledge roster. When the company began, it divided its subs between regular production and customizing; 26 years later, the separation holds, and so do the efficiencies. "Our subcontractors have grown up with the company," Horton says. "We're a team."
Jones adds: "Any other major builder would be hard-pressed to achieve the esprit de corps you see at Horton. This is a motivated group with accessible corporate personnel."
D.R. Horton stresses hands-on training. A corporate manual defines policies and expectations, but no corporate construction manual exists. "The best way to improve our processes is to make sure we have the right people in the right positions and then measure their performance by looking at our revenues, our customer satisfaction ratings and our profits," Tomnitz says.Tight With a Buck
D.R. Horton watches every penny. "We have the lowest overhead in the industry," Dwyer says. "We do more with less, and we are always looking for ways to do even more with less." For example:
Aggregate purchasing: The company began this initiative in 1998 with appliance purchasing contracts that saved $350 per house (see chart, page 19). Last year, the per-house savings totaled approximately $2,600 on a $230,000 average sales price, or more than 100 basis points per unit. The goal is to reach more than $3,000 per home on an average price of $200,000. Tomnitz says the company saved approximately $100 million last year with its three-pronged aggregate purchasing program:
1) D.R. Horton negotiates national contracts for products applicable across all divisions. "We still go through local distributors, but the price per given item is totally different when the unit total is 43,000 as opposed to 3,500 for one market," Dwyer says.
2) Regional purchasing managers seek aggregate opportunities for products applicable only to certain regions. For example, roof tile is a given in the Southwest but not in Illinois.
3) Streamlining completes the picture. Driving more business to selected manufacturers — one or two window manufacturers instead of eight, for example — the company asks for savings in return. "We want our suppliers to get 3% more competitive for us each year," Tomnitz says. "We get more efficient, they get more efficient, and that translates to lower costs for D.R. Horton."
Aggregate labor contracts hold only mild interest for D.R. Horton at this point. Dwyer points out that a joint venture shows up on the income statement. "We would never rule anything out, but when we look at the subs we use right now and our competitive bidding process, we are confident about the economies we are realizing," she says.
Keeping it all in the family: Mortgage and title subsidiaries help D.R. Horton achieve more economies of scale. Loans are originated, packaged and sold within 20 to 30 days and underwritten to the purchasers' standards, keeping ongoing credit risk out of the financial picture. The companywide capture rate of approximately 66% jumps to 70% where Horton has mortgage offices. The next objective: an 80% capture rate.
Satellite markets also fuel revenue growth. Managed by the nearest division and staffed with sales and production personnel only, satellites enable the company to reach deeper into markets without adding excessive overhead. The Coastal Carolinas satellite reports to Charleston, S.C. In Florida, Tampa links with Orlando. The Laredo, Texas, satellite is based in San Antonio, and Huntsville, Ala., hooks up to Birmingham.
"We're taking the Wal-Mart concept of low overhead to the housing field," Dwyer says. "This strategy helps us compete with small and medium-volume builders that cannot match our economies of scale and with larger builders by helping us improve market penetration."
D.R. Horton relies primarily on lots from third-party developers in its 15 satellite markets, with option agreements helping leverage its balance sheets. Closing totals are relatively modest (Laredo's can be from 200 to 300, for example), but with less overhead linked to the satellites, they deliver more profit.
The company markets frugally, too. More than 50% of sales come from Realtors bringing in qualified buyers. "Their commission is tied directly to a sale," Tomnitz says. "Advertising might bring you buyers, and it might bring you what we call carpet stompers."
D.R. Horton emphasizes thrift in every area. It has no company plane, cars or cell phones. "We set the example," Tomnitz says. He adds that the company aims to keep selling, general and administrative expenses under 10% of total overhead and that they're down to 9.6%. "This is the fully loaded figure, including corporate overhead, which is different from the way some of our peer companies structure and report," he says. "They are 300, 400 or even 500 basis points higher than we are."Land, Lots of Land
D.R. Horton is committed to a three- to four-year supply of land, which assumes 15% growth in deliveries during the next three years. Its supply is skimpy compared with those of large-scale competitors, which typically are eight years out, but Horton and Tomnitz experienced the Texas oil boom/bust. They prefer not to risk a land surplus. The company owns about 48% of its supply, with 52% optioned from third-party developers. The ongoing goal is to keep ownership at 50% or less.
Acquiring other companies has boosted D.R. Horton's land supply, as has anticipating trends. Seeing entitlement processes grow lengthier and more arduous in California, for example, the company staffed up the land acquisition side about six years ago. Now it has surplus land, helping it convert astute decisions into seller's-market revenue. "We focus on a sound, clean balance sheet with very little risk on the landownership side," Tomnitz says.
The company owns no unentitled land and prefers to avoid joint ventures. Those in which it has an interest are consolidated, acquired in the company acquisitions. D.R. Horton does no deal too large for it to do alone. Corporate holds these reins, whether a division proposes a $20,000 lot purchase or seeks a multimillion-dollar parcel.
The competitive land market has influenced the company's branding strategy. Acquired companies once retained top billing in logos, collateral and signs, but Dwyer says the reverse is true today. D.R. Horton wants to make all others in the land game aware they are dealing with a large, reputable national company.
"Local brand recognition worked well with local vendors, buyers and suppliers, but it did not capitalize on our national brand recognition, particularly as this relates to land deals," Dwyer says. "Now we keep our builder companies as lines of D.R. Horton, with their identification second to our brand."Going Forward
For now, the company no longer focuses on acquisition but on growing market share and improving margins. Simply by increasing market share, the company can achieve its earnings-per-share (EPS) line without acquisitions for at least a decade, Tomnitz says. The company already enjoys double-digit penetration in 10 markets, including Denver, Phoenix, San Diego and Orange County, Calif.
This strategy also aims to support enhanced margins, with established markets offering more operating efficiency than uncharted territory can achieve. "We have consistently improved our margins since 1999, and we can keep doing better," says Tomnitz. "We have proved our ability over the past 10 years, and now we're working on a less risky business model as we go forward."
Credit Suisse First Boston analyst Ivy Zelman has called D.H. Horton an underperformer in her most recent reports but cites the company's acquisitive phase as a reason. "Their return on capital is lower than their peers', but they have put a lot of capital into getting new companies, and that's reflected by this lower return," she says. "Their divisional autonomy has been a plus for performance. Horton has had a tremendous track record in overall delivering and exceeding expectations. If they do what they say they are doing, a lot of their financial measures will improve."
D.R. Horton stockholders can take comfort in an EPS that has increased 25% over last year as well as a 46% jump in net income. Earnings visibility is sound, with a steadily climbing backlog of new home sales and a 33% increase in sales orders.
History counts, too. The company has never lost money in any quarter. "We're the only publicly held company that can tell you this," Tomnitz says. He points out that the 105 consecutive quarters of increased earnings and profit eclipses Wal-Mart's record of 96.
D.R. Horton claimed 0.2% of the national home building market in 1992 but 3.6% in 2003 and has targeted 6.3% for 2006, with $14 billion in revenue and 63,000 homes closed, as it pushes toward 100,000.
The beat goes on.