DR Horton 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Housing market still on track

“Housing market conditions remained favorable and continue to improve in a manner consistent with our long-stated expectations for the housing recovery. As expected, we are seeing the pace and strength of the recovery very significantly across our local operating markets, mostly tied to improvement in each markets economy is measured by growth in jobs, household incomes, household formations and increases in consumer confidence.”

Keeping mum on current trends though

“So in terms of what we’re seeing today, we’re only 3 weeks in April, so we really don’t have a whole lot to share, but we would expect our strongest sales quarters to be our fiscal second and third quarters in the year. So with our positioning, we would expect to have a strong Q3.”

May be some political help for first time home buyers?

“I think if we gain job growth in this country, which I think ultimately, we’re going to experience and I think, clearly, that’s where a lot of those first-time home buyers are going to come from. But I also believe strongly that as we move into this recovery, first-time home buyer is not participating at the level that a lot of our political leaders would like for them to be participating. And I think that they will see some encouragement from the government in terms of trying to get more and more people into entry level homes. So my focus is really the affordable buyer, job creation, as well as a little help in the politics.”

South carried regionally through the recession, now West and East picking up

“And as Rick Horton said, the best thing that could ever happen to him is for the East and West to take the pressure off of him. So they are doing that today. And we’re in a great position.”

Factors affecting first time buyers

“I think most of the jobs being created in this country, Steve, are entry-level jobs. And as a result, just by definition, I think they’re having to save a lot longer. I think the other thing that I was talking earlier, the help from the political side, is with the high student loan debt that these people get, these college kids are graduating and then adults are graduating. And there’s work on the political side that would help relieve them of some of that burden with the college debt. So as a result, even though they graduate from college, many of them have had difficulty finding higher-paying jobs. And secondly, they’re burdened with typically $26,000 with the student debt. So a function of getting them that entry-level job, which is pretty much a lot of them having to go into and perhaps a lower salary than what they expected, and some relief on the student loan debt, I think, that pool begins to grow.”

No comment

“As I’d like to say, I watch too much Fox News.”

Texas is a competitive market because it’s a good market. Fewer frictions

“Texas is one of the most competitive markets, but it also has few barriers to entry. And that’s one of the things that makes it so attractive, and that is that land prices are still competitively priced, so we can deliver a competitive lot. And there’s ease of entry in terms of not having go through, as we do in a number of markets, a 2- to 3-year entitlement period. Most of our land, we can get entitled and plotted within a period of 6 months or less. And there are adequate general contractors to develop lots down here. So in general, we think Texas has been a strong market. It’s a very competitive market”

Going after a more entry level product because others too expensive for many prospective buyers

“we’re trying to increase our affordable buyer pool in that market because we have seen people coming into our model homes in the D.R. Horton brand, who can’t qualify because of the pricing power that we had over the last couple of years.”

Still not a lot of appetite for subprime paper

“We, from our mortgage company perspective, don’t see a lot of institutions willing to buy {\[low FICO score] kind of paper.”

We don’t want a weather report

“we have a policy at D.R. Horton. And it’s a fair policy. And that is we don’t want our division presidents to give us the weather report. And so we’re not really — we work with our broad geographic footprint. To the extent that we did have weather-related issues is really a nonevent.”

Costs are going up driven by labor

“I think costs are going to continue to increase. We are fortunate that we have a lot of volume in most of our markets so that we can be more competitive with our subcontractors on the cost side. But clearly, labor is one of the cost components that’s going up. And lumber, I don’t think, is going to come down nearly as much as what it did last year. It seems like it’s going to hang high at where it is currently right now.”

How to market to first time buyers

“as you clearly are trying to attract the entry-level buyers, a lot of them living in apartments. And so we try to do a special marketing with the apartment complexes that are near us. And another potential pool are the people living with their — the college graduates and others that are living with their parents. And I think we do that primarily with the realtors. I also believe that our Express brand, that it’s going to be easier for perhaps parents to help their children get into homes because they could help them a lot easier with a lower price point, as we have, with the Express brand than they can in a standard price that’s with D.R. Horton.”

Analyst comment: the puck is going towards entry level

“I just wanted to just mention that I totally agree with your strategy there to go after the entry level. I mean, as I recalled last month, I think this is really where the puck is going. And I really congratulate you guys on really being unique and sort of skate to where the puck is going, so good job with that.”

DR Horton 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“Our fourth quarter sales reflect a moderation in demand that started in mid-May and lasted through September, as economic conditions remained sluggish and potential homebuyers adjusted to both higher mortgage rates and increasing home prices. However, we saw improved sales trends in October as our net sales orders and dollar value increased year-over-year and were higher than any month in the September quarter. We are now in the slowest seasonal sales period of the year, so our next good read on sales demand will be after the traditional spring selling season begins in February. We believe the housing market remains in a period of recovery. And our expectation continues to be that the pace of the recovery will vary across our local operating markets and will be closely tied to improvements in each market’s economy, as measured by growth in jobs, household incomes, household formations and increases in consumer confidence. We have seen a significant increase in housing demand during the past 2 years, but demand still remains below normal historical levels across most of our markets, which leaves opportunity for further improvement. Pricing has recovered sharply in certain markets, but still has room to increase in many other markets. ”

” Borrowers originating loans with our mortgage company during the quarter had an average FICO score of 723 and an average loan-to-value ratio of 89%. First-time homebuyers represented 43% of the closings handled by our mortgage company this quarter compared to 53% in the year-ago quarter.”

“We had 17,000 homes in inventory at the end of September, of which 1,300 of our homes were models, 9,000 were speculative homes and 3,000 of the specs were completed.”

“In general, most of our markets’ inventory levels are either low or imbalanced and to the extent that inventory levels are not out of line or higher than where demand is I think you’ll see builders adjust their production schedules, to match demand, which then would not require as much incentives.”

“I think one of the factors that we are dealing with, quite frankly, is most analysts and most young buyers, especially first-time homebuyers in the market today, are — have been accustomed to low rates for all their lives. So I do know one thing: Rates are going to go up and we’re going to have to deal with those on a go-forward basis. But I think rates going up will indicate that the economy is doing better. We’re creating jobs, and I think that will be good for the economy and that will be good for us.”

“something driving that 53%, 44% relationship in terms of first-time buyers being down is that, as we expand that higher price point, you’re dealing with a more second- or third-time buyer, and they’re a little bit more familiar with the financial system”

“historically, our normal percentage of our business that was first-time buyers was around 40%, 35% to 40% range.”

“land prices continue to go down very slowly and go up very rapidly. And as we have adjusted our land purchases, I believe the same is happening in the rest of the industry. And we’re beginning to see somewhat more cooperation from our land seller today than what we were getting 6, 9, 12 months ago just simply because there’s less demand in the marketplace today.”

“We’re still dealing with increased costs right for this quarter. And for the fiscal year, we’ve been able to increase our sales prices faster than what we have experienced our cost increases. But we still have good, strong cost increases from our subs and our manufacturers, and that we think that will continue into calendar year 2014.”

” Horton has always had slightly higher specs than other builders largely because we focus on doing a lot of business with realtors as opposed to spending advertising dollars. And as I’ve said many times before, realtors have one thing in common. They like to collect their commission as quickly as they possibly can.”

“The normal seasonality would be you’d see your strongest sales in March and April. And then you’d begin to see just a slow decline throughout the rest of the calendar year, with acceleration into January and February. So October is a seasonally slower time of the year. It’s typically lower than September. We’ve also seen this pattern before that we actually saw it last year. So our October comp was a very tough comp because last year, we saw the same thing with October being higher than September.”

“No, not really [seeing anyone acting irrationally] Clearly, as builders approach their fiscal year end, certain builders, they begin to offer incentives to hit their expected or desired closings or sales for the year. And so you always have that, Alex, and it all depends upon what month their fiscal year ends. So yes, we experienced some of that in a couple of months ago. But generally speaking, I think people are acting rational. And frankly over the course of the past 18 months or so, most of us have been, I wouldn’t call struggling, but we’ve been striving to meet the demand in the marketplace and been experiencing good pricing. I think everybody in the industry should be glad to be back to decent demand and decent margin and decent pretax income possibilities on a go-forward basis. So right now, everybody’s playing in the sandbox pretty well.”

“Right now, the banks are reluctant to lend on a very favorable basis to private developers to the extent that many of them are requiring 50% equity in the deal to develop the lots. So for a large builder like ourselves, well capitalized, we’re in a preeminent position to be able to be a developer and provide ourselves lots at a cost-effective and timely basis.”

“there’s a lot of capacity in the market origination business right now. Refis have dwindled as rates moved up. And so there’s more competition for the business that’s still available.”