Franz Kafka wrote about it, Conan the Barbarian lived it, and D.R. Horton is testing it in the marketplace: the belief that anything that doesn’t kill you makes you stronger.
Fort Worth-based Horton could have been a poster child for the great housing bust, given its humble beginnings and meteoric rise. The company got its start in 1978, when Don Horton built a single home in Fort Worth, and then it grew—organically, acquisitively, geographically, relentlessly—into the nation’s biggest homebuilder.
The housing bubble sealed the deal. From 2000 to 2006, Horton’s annual revenue quadrupled, topping $15 billion. It closed 53,000 home sales in 2006, up from 19,000 at the start of the decade. The most stunning number was on the bottom line: Net income soared from $192 million in 2000 to $1.47 billion five years later.
Companies that grow like that and fall into the abyss don’t usually survive. In North Texas, nearly half of the 79 production builders that were active three years ago are no longer around, according to research firm Residential Strategies Inc. Among the five largest builders, Centex was acquired by Pulte, and Choice Homes was shut down.
Horton not only avoided that fate, the company increased its dominance during the downturn. In mid-2006, when Dallas-Fort Worth home starts were peaking, Horton was the top producer, according to Residential Strategies. Four years later, Horton started a little more than half as many homes, but it picked up five points in market share.
For the 12 months ended June 2010, Horton alone accounted for 19 percent of all housing starts in North Texas—more than the next three largest players combined.
“Horton was King Kong, growing unlike any other builder,” says Ted Wilson, principal of Dallas-based Residential Strategies. “It had to cut back like everybody else. But after the market hit bottom, the company knew where the cycle was. When the sun started rising again in the spring of 2009, it leaped in and made some deals.”
Two other builders, First Texas Homes and Grand Homes, had the deep pockets and wherewithal to shoot up the local charts, too, Wilson says. But Horton has a long history of taking advantage of downturns, and it’s not bashful about throwing its weight around. When times get tough, it gobbles up smaller builders, reworks land options, and adds finished lots at a discount. Then it hammers vendors, suppliers, and subcontractors.
Four years ago, as the bust was just starting, Horton CEO Don Tomnitz quickly retrenched. The company would close a record number of homes in fiscal 2006, but sales plunged in June. “It is better to overreact and over-cut than it is to under-react and under-cut,” Tomnitz told analysts the following month. “Every time we’ve gone into a downturn in the home-building industry, they’ve always been longer and deeper than we’ve all imagined, so we’re preparing for the worst.”
Nine months later, at an investor conference, he was more blunt: “I don’t want to be too sophisticated here,” he said. “But ’07’s going to suck, all 12 months of the calendar year.”
Tomnitz was right, giving him more leverage and urgency with plumbers, electricians, carpenters, and land developers. Last fall, when Horton recorded its first annual profit since 2006, Tomnitz was still singing the same tune.
“We were frank with our vendors,” he said in November. Although the company appreciated their cooperation in the past couple of years,
“We’re going to be expecting better pricing and more concessions.”
Horton is even more demanding in its own house. From 2005 to 2009, it cut two-thirds of its work force—nearly 6,000 employees. In the past four years, net debt was slashed 91 percent. That includes redeeming $1 billion in debt last year, most of it bought back early.
Horton cut overhead by $2 million in fiscal 2010. At the same time, it sold 25 percent more homes, generated $742 million more in revenue, and turned a $550 million loss into a $245 million profit.
Tomnitz expects sales to fall in 2011, because unemployment remains high and consumer confidence shaky. He’s prepared for additional cuts at the company, just in case.
Most builders are doing the same. What makes Horton stand apart is its aggressiveness—and opportunism—in almost any economy. Builders usually cut back on speculative homes in slow times, fearful of the carrying costs and price markdowns.
Horton has always been a big believer in specs, and it even beefed up inventories a year ago. It bet that federal tax credits would resonate big-time, and when they brought in customers, Horton was ready to seize the day.
The company also cut home prices to lure first-time buyers and compete with the flood of foreclosures. Horton’s average selling price was $206,000 last year, nearly $70,000 less than four years earlier.
Lower costs, lower prices, and a bigger selection are Horton’s foundation. Then it sells up a storm. Wilson says the company has been courting Realtors for a decade, paying among the highest commissions in the business. It’s also a big player online and on local TV home shows.
Horton operates in 72 markets in 26 states and, as Tomnitz travels the country, he urges sales people to push hard with every prospect.
“If they’re warm and they have a pulse, write them [a contract], and then we’ll worry about qualifying them,” Tomnitz said in November.
Inevitably, there’s some fallout. Last year, 26 percent of Horton’s home contracts were cancelled. That’s a big improvement from 40 percent two years earlier, but most businesses would be crushed if a quarter of their buyers reneged.
Toll Bros., a high-end rival, had a cancellation rate of less than 7 percent in 2010.
But Horton has a way of turning lemons into lemonade. Today’s bust-outs become tomorrow’s specs, more fuel for a company that always seems to find a way to thrive.
Mitchell Schnurman is a business columnist for the Fort Worth Star-Telegram. For the past five years, his column has been named the “Best in Business” by the Society of American Business Editors and Writers.
