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From Seeking Alpha's D.R. Horton, Inc. F3Q08 (Qtr. End 06/30/08) Earnings Call Transcript:


On the Down Payment Assistance program:

Donald J. Tomnitz - Vice-Chairman, President and CEO: “There is a higher risk in the existing mortgage portfolio just because people don't have the down payment… Our federal housing program is a disaster. We have spent billions of dollars over the years funding all these HUD programs on the inter city which has been a dismal failure… I think the fact that the DPA loans have a higher default ratio than the non-DPA loans, they are not a 100% default and we're putting people in homes that typically would be living in an inner-city HUD project into a single family home and a good environment where they can send their kids to school, and associate with people of all economic backgrounds. So, that's sort of my social statement… While the temporary tax credit is certainly a positive for buyers who purchase a home before July 2009, the tax credit does not offset the elimination of the DPA program which our industry so vitally needs.”
Stacey H. Dwyer - EVP and Treasurer: “We're running about 21% on the down payment assistance year-to-date. And that compares to about 7% for the prior fiscal year… third quarter was closer to 29%.”
On gas:

DJT: “[Don] Horton used to say, ‘there's a bridge too far in a couple of these areas where we went out seeking profitability’ …Some of those outlying areas been adversely affected by gas prices… [But] I think over the course of the next twelve to eighteen months, that's going to be a less of a drain on the typical consumer.”

On mortgages:

DJT: “Our Financial Services operations remained profitable… 90% of our mortgage company's business was captive during the quarter, reflecting our continued focus on supporting the homebuilder's business. In Q3, our company wide capture rate was approximately 59%. Our average FICO score was 707 and our average cumulative loan-to-value, LTV, was 92%. Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 65% of our volume.”

On inventory levels:

DJT: “Our overall inventory decreased by approximately $340 million excluding impairments during the quarter. Our 15,400 homes in inventory is consistent with the prior quarter as is our spec home inventory of 7400 homes. Our completed unsold homes decreased to 2900 at the end of June from 3200 at the end of March. We plan to continue to adjust both our total number of homes in inventory and our number of speculative homes in the coming quarters to match current demand.”

Bill W. Wheat - EVP and CFO: Our supply of land and lots at June 30, 2008 was approximately 169,000 lots owned and controlled, down 61,000 lots from the beginning of the fiscal year. 79% of these lots are owned and 21% are optioned. Our 169,000 lots now represent a 5.4 year supply based on trailing 12 months closings… In total, around 40% of our total communities have been impaired. Of course, as you look across the country, there is a wide disparity as far as that percentage. For instance, in California, about 90% of our communities have been impaired. Nevada, it's north of 80%.”

On the impact of foreclosures on sales:

DJT: “The product that's coming out of Las Vegas that's in foreclosure now, as I understand it, is probably anywhere from $2-$3/sf, less than what our new homes are… I think what clearly contributes to the majority of our cans are contracts where we have written a buyer who wants to buy and that we just can't get them qualified with the changing mortgage environment… Very, very few of our cans are coming from someone saying, gee, I can buy a foreclosed home for less than a new home… In the past [downturns] it seems like the foreclosures have come to market more quickly and so as a result I think it's a slower process and that's why we believe the industry will be clouded for the rest of this year and perhaps most of next year with the foreclosures that are coming in the market.”

On land purchases:

Stacey H. Dwyer – EVP and Treasurer:  Our land and lot acquisition spending remains limited... We now expect our land and lot acquisition and land development expenditures to total less than $750 million in F2008. We also expect to spend less than $750 million in F2009.”

On profitability and land sales:

Chris Hussey - Goldman Sachs & Company Inc.: You talk about profitability. There is accounting profitability, but from a debt repayment, we really only care about cash. You are cash profitable now, sizably cash profitable. And so as you go forward, what are the levers that you can push that would increase that cash profitability?”

DJT: “…We are focused on selling our land and lot positions to the local developers and investors because I believe they appreciate and can do the diligence and understand the value in those projects been at the higher level then someone who is sitting New York or San Francisco or Boston… If you look at the percentage we gotten our land sales, they have been significantly higher than our competition.”

On the balance sheet:

SHD: “During the quarter, we amended our revolving credit facility. The primary changes included reducing the facility from $2.25 billion to $1.65B, increasing the interest rate spread on borrowing, reducing the minimum tangible net worth covenant to $2B, increasing the maximum land and lot to tangible net worth ratio and adjusting the calculation of leverage to allow us to net all cash in excess of $50 million against our debt.”

BWW: “We have a total of $1.4 billion of maturities over the next three years… We expect that we will be able to generate sufficient liquidity to more than meet those maturities and provide cash to reinvest in our business.”

DJT: “That is a strong, strong statement. I don't know how many companies could say and look at their next three years worth of debt maturities and say with a high degree of confidence based upon our historic free cash flow and our projected future free cash flows that we can pay off 100% of that debt that's going to mature in next three years, if we choose to do so. [Also]… we have a $519 million deferred tax asset, and that represents what we expect to get back in the form of refunds over the next two years on taxes. And then additionally as we return to profitability, when we return to profitability, we will not actually be paying taxes on that for sometime because we do have carry forwards of net operating losses as well. So there will be more cash flow out of our profitability in future years than we've seen in the past simply because we won't be paying taxes.”

On how markets are faring

DJT: “There are communities in the Carolinas where, surprisingly enough, we have raised our prices ever so little. But that was very encouraging... I think Texas is still positive… I think California is positive from the perspective… that we have impaired 90% of the projects in California. I still don't see very much pricing power in California and I still see continued weakness in the state of Florida.”

On resizing: 

DJT: “We are consistently consolidating multiple division markets into a single division as we have done in San Francisco, San Diego, LA, Denver you name it and most recently Phoenix, where we had three divisions and now as of yesterday we have one division in Phoenix. So as result, we are decreasing our SG&A significantly by doing those consolidations.”


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Source: Gleanings From D.R. Horton's FQ3'08 Conference Call