DR Horton Earnings Call Nuggets: Land Development and Land Pricing

DR Horton (NYSE:DHI) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Land Development

Dan Oppenheim – Credit Suisse: You were talking about the land investment there saying this could be more interest development. There’s so much in terms of the purchases during the fourth calendar quarter of last year, some tax related sales I think that sort of benefited you on the purchasing side. How much do you think about in terms of just adding more land here versus just developing what you currently have?

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Donald J. Tomnitz – VC, President and CEO: Well we’re focused on clearly, Dan, developing what we have. Obviously, our goal is to bring what we purchased especially in the last calendar year into production, so as we say build, sell, close homes and make money on those units. We are continuing to add land deals and anticipate obviously developing those in markets where the option lots are becoming shorter and shorter in supply. Clearly, based upon the number of option lots that we added to our portfolio, we’re able to still find option lots that were finished and finding also developed lots on an option basis but there are markets where we’re going to have to supplement the third-party developers, as well as the finished option lots with land that we have to develop for ourselves and of course we’ve been very adept at that over the years given the sales pace we’re seeing, the demand we’re seeing, the pricing and dynamics we’re seeing, we would expect to still be investing strongly in finished lot, land and development in the coming quarters as we have been so far this year.

Dan Oppenheim – Credit Suisse: And then in terms of just the margins, I think you talked about then doing – pushing pricing with the – return on price up. How are you – we’ve heard lots of different thoughts from the course of actually this week here in terms of the earnings releases from different builders in terms of the thoughts on pushing price versus continuing to increase absorption at this point. How are you balancing the two right now?

Donald J. Tomnitz – VC, President and CEO: Well, clearly you can see that we increased our sales and our closings this quarter dramatically all the while, while dramatically improving our margins. We think we’re in a wonderful position. There is a shortage of finished homes in the marketplace. So not only with our good inventory of specs that we consistently have maintained in this Company. We will continue to push price as well as volume. Clearly, we’ve said before, our goal is to improve the bottom line better than we improve the top line, but nevertheless we’re in a position where we can do both.

Land Pricing

Stephen East – ISI Group: Great results; pretty impressive.

Donald J. Tomnitz – VC, President and CEO: Great quote, by the way this morning, I think it’s my favorite all-time quote.

Stephen East – ISI Group: Well, I think that was truly the case. To follow on what Dan was talking about on the land side, maybe a little bit more, what are you all seeing in the pricing of land and are there any markets that it’s just very difficult to make land pencil? And then if you look at your communities that you’re opening right now and that you’ve got opened, what percentage of that is previously mothballed or that either you’re RDN or will be opening?

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Donald J. Tomnitz – VC, President and CEO: Actually I was on the phone with one of our regional presidents this morning, David Auld and we were talking about how we are very fortunate that we were early mover in terms of finding land positions a year ago and two years ago, because our basis on that land – to answer your question directly, is very attractive, relative to where pricing is on land today. Specifically, land prices have escalated in most markets rather dramatically over the last six to 12 months. We’re very conservative in terms of our approach because we don’t need to buy that much new land to support what we see over the next two years as our net sales and our net closings. But clearly, land prices have (indiscernible). As far as mothballed assets, Bill?

Bill W. Wheat – EVP and CFO: In terms of deliveries on mothballed assets, that’s still a very small amount of our overall deliveries but we are – certainly with the improved pricing environment, improved demand, we are bringing – starting to bring more mothballed communities into our production. So we will see some impact from that and that’s certainly a very good source of capital for us as we will not have to purchase the land, we’ll just have to put the development cost in. You will see that on our balance sheet; our land held for development balance declined this quarter down to $602 million as compared to $630 million last quarter, and we would expect to bring even more projects out of mothball over the coming quarters as things continue to improve.

Dan Oppenheim – Credit Suisse: And then if we go back to – you talked about the majority of your pricing, what was true pricing power; not mix shift. Could you give us a little more color on that and just what you’re seeing on the cost side, so we can understand what type of magnitude you have on pricing power versus the cost inflation?

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Donald J. Tomnitz – VC, President and CEO: Certainly, there is cost inflation out there. One of the things that we’ve been able to do clearly is raise prices faster than what our costs have been going up. We control our costs both on a national, regional, and then also on a division by division basis. At this point, we are still clearly the largest builder in the clubhouse, and by virtue of that, we have more purchasing power than most of our competitors and it’s been a focus of this Company for years to focus on our sticks and brick which is what we’re doing.

Bill W. Wheat – EVP and CFO: In terms of specifics on the pricing power versus mix shift, our average selling price per square foot year-over-year for this quarter increased 7.6%. The average square footage of the homes that we closed this quarter increased 3.7% from last year, so that’s mix between pricing and size of the home. In terms of our cost increases, those were up on a per square foot basis, 3.8% year-over-year. So, we still have a very good gap between our selling price increases versus our cost increases.

A Closer Look: DR Horton Earnings Cheat Sheet>>