霍頓房屋 (DHI) 2004 Q1 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Tanya, and I will be your conference facilitator today.

  • At this time, I would like to welcome everyone to the first quarter earnings release for D.R.

  • Horton, America's Builder.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers' remarks there will be a question-and-answer period.

  • If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad.

  • If you would like to withdraw your question, press the pound key.

  • Thank you.

  • Mr. Tomnitz, you may begin your conference.

  • - Vice Chairman, President & CEO

  • Thank you.

  • Joining me this morning is Sam Fuller, our Senior Executive Vice President;

  • Stacey Dwyer, Executive Vice President and Treasurer; and Bill Wheat, Executive Vice President and CFO.

  • Before we get started, Stacey?

  • - EVP & Treasurer

  • Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Act Litigation Reform Act of 1995.

  • Although D.R.

  • Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

  • All forward-looking statements are based upon information available to D.R.

  • Horton at the date of this call.

  • D.R.

  • Horton does not undertake any obligation to publicly update or otherwise revise any forward-looking statements.

  • Additional information about issues that could lead to material changes in performance is contained in D.R.

  • Horton's annual report on Form 10-K, and most recent quarterly reports on Form 10-Q, which are filed with the Securities and Exchange Commission.

  • Don?

  • - Vice Chairman, President & CEO

  • Thank you, Stacey.

  • D.R.

  • Horton, America's Builder, the largest builder in America, continues to close more homes in America than any other builder based on the latest data reported on a trading 12-month basis.

  • It was another record quarter for us, as always growing the bottom line faster than the top line.

  • And we are proud to announce the following highlights:

  • Home sales increased 20% to $2 billion on 8,234 homes sold.

  • Sales contract backlog, our future revenue, increased 24% to a December 31 record of $3.6 billion, 14,480 homes.

  • Homes closed increased 23% to 9,242 homes.

  • Consolidated revenue increased 26% to $2.2 billion. homebuilding pretax income increased 78% to $283.1 million.

  • Consolidated net income increased 66% to $185.6 million.

  • Diluted earnings per share increased 56% to 78 cents. homebuilding debt to total capitalization net of cash improved to 42.9% from 51.5% a year ago.

  • Approximately $851 million in dry powder existed at December 31, 2003.

  • Net sales orders for the quarter increased 20% to $2 billion or 8,234 homes.

  • Our strong sales contributed to our record December 31 sales contract backlog of 14,480 homes with a sales value totaling $3.6 billion, a 24% increase over last year.

  • We are focused on delivering this backlog while continuing our strong sales performance to ensure another record year in fiscal 2004.

  • Our asset concentration corresponds with our top five homebuilding states.

  • The percentages of our assets in these states are as follows: California with 25% of our assets, Texas with 17% of our assets, Colorado with 12% of our assets, Arizona with 10% of our assets, and Florida with 5% of our assets.

  • Our first quarter fiscal year 2004 sales dollar increases in our top five homebuilding states are: California, where D.R.

  • Horton is the No. 1 builder, up 17%;

  • Texas, where D.R.

  • Horton is the No. 1 builder, up 16%;

  • Colorado, where D.R.

  • Horton is the No. 1 1 builder, up 27%;

  • Arizona, where D.R.

  • Horton is the No. 1 builder, up 25%; and Florida, where we're one of the top five builders and growing, up 67%.

  • Stacey?

  • - EVP & Treasurer

  • We would also like to mention a few markets where we saw exceptional sales performance.

  • In sales dollars increases, in South Florida we saw in a increase of 163%; in Orlando, an increase of 101%;

  • San Antonio, an increase of 67%.

  • And one thing we're really excited about is based on the preliminary sales reports that we're seeing in the San Antonio market, after the great sales we had this year, D.R.

  • Horton is now the largest builder in San Antonio.

  • In Charlotte our sales dollars increased 61%, and in the D.C. area our sales increased 59%.

  • And this reflects the focus that the company has to continue to penetrate the D.C. market.

  • In San Antonio our sales increased -- I'm sorry.

  • In Sacramento our sales increased 55%, in Las Vegas 31%, Seattle 28%, in Denver 27%, in Phoenix 27%, Chicago 23%, and in Houston, Texas, 22%.

  • Sam?

  • - Sr. EVP

  • Thank you, Stacey.

  • Our first quarter homebuilding revenues increased 27% to $2.2 billion, from $1.7 billion in the year ago quarter.

  • Home sales revenues increased 28% with homes closed increasing 23% to 9,242 homes, and the average closing price increased 4% to $231,000.

  • Our gross margin on home sales revenues in the first quarter of fiscal 2004 was 22.5%, compared to 20% in the year ago quarter.

  • This reflects our continued pricing power in many markets and our increasing economies of scale which are driving continued reductions in our construction costs.

  • Homebuilding SG&A expense for the quarter was 9.8%, compared to 10.5% last year.

  • We continue to focus on controlling our costs, and we expect our fiscal 2004 SG&A rate to remain around the 9.6% we reported in fiscal year 2003.

  • Even though the Shuler [ph] acquisition has been fully integrated for some time, we continue to see cost savings associated with the "Hortonization" of the former Shuler divisions.

  • Bill?

  • - EVP & CFO

  • Thank you, Sam.

  • Our financial services revenue increased 7% to $40.9 million from $38.2 million in the prior year.

  • The revenue increase is driven primarily by an increase in loan volume from the homebuilders' volume.

  • Financial services pretax income was $18.7 million, compared to $20.1 million in the year ago quarter, due primarily to costs associated with the start-up of mortgage operations in California, where we expect to see increases in mortgage revenues and income late in fiscal 2004 and into fiscal 2005.

  • For the quarter, our consolidated net income increased 66%, to $185.6 million from $111.8 million in the year ago quarter.

  • Our diluted earnings per share of 78 cents for the quarter represents a 56% increase from the 50 cents reported last year.

  • On our balance sheet, we would like to highlight our lot and land position and our homebuilding leverage.

  • Our lot and land position is approximately 193,000 lots owned and controlled. 48% are owned and 52% are optioned as compared to a year ago when 53% of our lots were owned.

  • Assuming a 15% growth rate in homes closed, this is approximately a 3.4 year supply of land.

  • We are committed to keeping our land supply in the three- to four-year range and to improving our inventory turns.

  • As a reminder we have fully implemented FIN 46 as of both December 31 and September 30, 2003.

  • Our homebuilding leverage ratio, net of unrestricted cash, improved 860 basis points to 42.9% from 51.5% a year ago.

  • Our goal for fiscal 2004 is to end the year with a homebuilding debt-to-cap ratio net of cash in the low 40s.

  • To do this, we will continue to focus on disciplined internal growth, although we will continue to evaluate acquisition opportunities as they arise.

  • At December 31, 2003, we had approximately $851 million in dry powder with approximately $138 million in cash and $713 million available on our homebuilding revolver.

  • Stacey?

  • - EVP & Treasurer

  • The company expects diluted earnings per share for the quarter ended March 31, 2004, to be in the range of 65 to 70 cents.

  • This estimate is based on approximately 237 million diluted shares for the second quarter.

  • The company is raising its fiscal year 2004 guidance to a range of $3.15 to $3.25, based on 237 million diluted shares.

  • The fiscal year guidance represents a 15% to 19% increase in earnings per share over the $2.73 reported in fiscal year 2003.

  • Our goal for the entire fiscal year is is to achieve $9.6 to $9.8 billion in consolidated revenue on approximately 41,000 to 42,000 homes closed.

  • We expect to earn approximately 45% of our earnings in the first half of the year, and that's earnings per share, and approximately 55% in the second half.

  • Don?

  • - Vice Chairman, President & CEO

  • Our fiscal year '04 goals continue to be revenue growth of 10% to 15%, earnings per share growth of 15% to 20%, debt-to-cap net of cash at fiscal year-end in the low 40s, dry powder of a billion dollars or greater at fiscal year-end, generate free cash flow, and to repurchase approximately 2% to 5% of our outstanding shares.

  • Most importantly, our goal is to continue to distance ourselves from the others in our industry and ensure that D.R.

  • Horton, America's Builder, is recognized as truly America's Builder.

  • Thank you.

  • This concludes our presentation.

  • If you have any questions, we'll entertain those at this time.

  • Operator

  • [OPERATOR INSTRUCTIONS] Your first question comes from the line of Margaret Whelan with UBS Warburg.

  • Good morning, guys.

  • - Vice Chairman, President & CEO

  • Good morning.

  • Nice job on the quarter.

  • And a couple of things.

  • I guess the first thing is your gross margin has improved steadily over the last four quarters, which is very impressive especially as you were slowing down your acquisitions and focusing on core growth.

  • Can you give us just an idea of where the improvement is coming from and how sustainable it is?

  • - Vice Chairman, President & CEO

  • Well, it's coming from two areas, pricing power and purchasing power, really.

  • As we continue to achieve greater scale, we're achieving greater economies of scale, especially on national purchasing but also on regional purchasing.

  • And also on pricing power.

  • And if you take a look at from Florida to Las Vegas to Phoenix to Hawaii to California, we have camp-outs in those markets and extensive waiting lists of prequalified buyers.

  • And as Horton and I were talking this morning, if we can't make money in that kind of environment and increase our margins we probably ought to get out of the business.

  • What about the other markets, though, like Texas and Colorado where it's more competitive?

  • - Vice Chairman, President & CEO

  • Our margins are increasing in Texas, as you can tell.

  • Our sales are up all over the State of Texas, as compared to some of our competitors.

  • Our sales are up in Colorado, and our margins are improving in Colorado also.

  • So we feel very good about all of our markets with the exception, as I've told you before, Salt Lake City is a little slow.

  • But we had some weakness in the inner Carolinas, but you can see that our Charlotte sales were up substantially in the 50%-60% range, so we feel very good about that also.

  • So basically most of the margin improvement is based on improving sales price, you think, or is --

  • - Vice Chairman, President & CEO

  • I clearly believe, Margaret, it's about half pricing power and the other half is just economies of scale associated with national and regional purchasing.

  • And then in terms of lumber, did that impact you at all in the quarter?

  • - Vice Chairman, President & CEO

  • Not significantly.

  • The way I answer the question, we've got prices going up, we have prices going down, and our job is to manage all those various costs.

  • And it did not impact us significantly in the quarter.

  • Okay.

  • Do you think your strategy will change away from the organic growth focus in the event the demand is slow for the industry?

  • - Vice Chairman, President & CEO

  • Our focus is to grow organically for the next ten years and achieve that 10% to 15% EPS growth, or 10% to 15% revenue growth and 15% to 20% EPS growth based upon organic growth solely.

  • We're looking at acquisitions, but we don't need to do any acquisitions to achieve the target.

  • To meet your target, sure.

  • And finally, the rate of growth in earnings is going to slow in the back half of the year.

  • Is that just conservativism or is that what you're expecting?

  • - Vice Chairman, President & CEO

  • Well, Stacey's sitting here so I'll -- since she's here, I'll let her answer the question.

  • - EVP & Treasurer

  • I would say right now, Margaret, there's probably a little conservativism baked into the numbers.

  • But again, we're nine months out from the end of the fiscal year, and I think I may have mentioned to you earlier, one thing we never want to do is put a number out there we're not confident we can hit.

  • Sure.

  • Okay.

  • Thanks very much, guys.

  • - Vice Chairman, President & CEO

  • Thank you.

  • Operator

  • Your next question comes from the line of Michael Rehaut of JP Morgan.

  • Hi, good morning.

  • Nice quarter.

  • - Vice Chairman, President & CEO

  • Thank you.

  • I guess my questions on gross margin were answered.

  • Just curious on the financial services that you mentioned the profit was down because of start-up costs in California.

  • If you were to back those out do you think you would have up profits year-over-year?

  • And I guess the question, why isn't that growing as quickly as the unit volume?

  • - Vice Chairman, President & CEO

  • Well, let me back -- I'll answer the second half of that question and let Bill answer the first half of the question.

  • We clearly told everyone that in California that we would have start-up costs with our mortgage operation; that it takes us a while to build the book of business.

  • Secondly -- and thirdly, if you take a look at California where our average sales price is higher than in most other markets, the capture rate on those higher-priced homes or higher average sales price homes, is typically less than what it is on the lower-priced homes.

  • So it's going to take a year for us to build our book of business out there.

  • We won't see significant earnings out of our investment in the California mortgage business until, as we have said all along, until the very, very, very late part of this fiscal year and certainly into '05.

  • - EVP & CFO

  • Mike that's consistent with our history.

  • You recall a couple years ago, too, we had the same difficulties when we added the Chicago and Atlanta markets.

  • It took us a while to get up to speed in those markets.

  • And we foresee the same thing happening in California.

  • Right.

  • And you have relatively low exposure to refi-ing that channel, correct?

  • In that --

  • - Vice Chairman, President & CEO

  • Why don't you give him the exact percentages.

  • - EVP & CFO

  • Right.

  • For the the quarter our refi activity was only 2% of our mortgage business.

  • A year ago it was 10%.

  • So it's never been a large part of our business, but it's down from 10 to 2.

  • Okay.

  • And during the quarter, if you would just comment on order trends and how you saw that, either accelerating or slowing during the quarter, given sort of some fluctuations in rates and employment in different areas?

  • - Vice Chairman, President & CEO

  • I can tell you that our sales are very typical in this quarter as they are with most other quarters.

  • We have increasing sales in each month of the quarter, and typically the third month, Mike, of every quarter is a higher sales pace than what the previous two months are.

  • Okay.

  • - Vice Chairman, President & CEO

  • We don't track the job growth in that sort of thing.

  • One of the things that I will say is, is that we're not depending on job growth to hit our numbers.

  • One thing I'd like to see in the market and the economy in particular is some job stability.

  • And when you listen to Eastman Kodak laying off 10,000 people or something this morning, I think if we ever get to the point where we have some job stability our business will even be better than what it is today.

  • And just a couple of housekeeping questions and I'll get off the line here.

  • Capture rate for the quarter versus a year ago?

  • And if you did any share repurchasing?

  • - Vice Chairman, President & CEO

  • Bill?

  • - EVP & CFO

  • The capture rate for the quarter was 65%, basically flat with a year ago; and we did no stock repurchases this quarter.

  • Okay.

  • I'm sorry, I didn't mean capture rate, I meant -- that's helpful -- but also cancellation rate.

  • I'm sorry.

  • - EVP & CFO

  • Cancellation rate was within our historic range of 17% to 19%.

  • Okay.

  • Thank you so much, really appreciate it.

  • - Vice Chairman, President & CEO

  • You're welcome.

  • Operator

  • Your next question comes from the line of Joseph Sroka with Merrill Lynch.

  • Good morning everyone.

  • - Vice Chairman, President & CEO

  • Good morning.

  • Bill, this might be for you, it's a mortgage question.

  • Can you just kind of remind us if you think about mortgage and title insurance, I guess relative to your -- however you want to do it -- markets or home sales.

  • What percentage of your homebuilding markets or homebuilding sales are you currently capable of serving with mortgage and title insurance right now?

  • And where do you think that gets to over the next year or so?

  • - EVP & CFO

  • Stacey might be able to -- she sits on our mortgage board.

  • She might be able to handle that equally as well.

  • - EVP & Treasurer

  • On the mortgage side, we have the mortgage operations in 18 of the 20 that states we serve.

  • And of our homebuilder volume that's probably between 90% and 95%.

  • That does include California so, of course, as Don mentioned that's something that we're looking to ramp up there.

  • On the title side, we have title operations in probably about 30% of our markets, primarily in the Florida, Texas and Arizona markets.

  • Okay.

  • Because I think there's a change coming up in some of the RESPA regulations this year.

  • It may not go into effect until next year as far as aggregating some of these closing services and giving better disclosure for the homebuyers.

  • I was wondering if that was something that you were going to try to sort of get greater coverage of in all your markets?

  • - Vice Chairman, President & CEO

  • First of all, let me say to you that we are ruling at that out wherever it makes economic sense for us and wherever a division is doing enough volume for us to support the mortgage and the title operation.

  • And we're looking for additional penetration wherever that makes sense.

  • Okay.

  • And then just lastly, I think in answering someone's question there was a comment that on some of the much higher-priced homes you're not capturing as much of the mortgage business.

  • Is that same -- is that a consideration just you don't want to go into some of the very fancy hybrid products because that's such a small part of your business, the million-dollar home category?

  • - Vice Chairman, President & CEO

  • Not really.

  • To be quite frank with you, most of the higher average sales priced buyers are a little bit more sophisticated.

  • It's not their first home.

  • They realize they have a number of different alternatives, and they are just more, I guess, more adept at reviewing what's available on the marketplace.

  • - EVP & Treasurer

  • The other thing we find is sometimes if they're move-up buyers they have an existing relationship with a mortgage company.

  • But as far as where your operating mortgage, you're offering more than just 30 and 15 fixed.

  • You're offering other products as well?

  • - Vice Chairman, President & CEO

  • Yes, we are.

  • Okay.

  • Fair enough.

  • Thanks.

  • - Vice Chairman, President & CEO

  • You're welcome.

  • Operator

  • Your next question comes from the line of Stephen Kim with Salomon Smith Barney.

  • Hello?

  • - Vice Chairman, President & CEO

  • Steve.

  • Hi, how are you?

  • - Vice Chairman, President & CEO

  • How you doing?

  • Good.

  • Great quarter, congratulations.

  • I applaud you on your balanced approach that you initiated a little over a year ago.

  • It's really working out.

  • - Vice Chairman, President & CEO

  • Thank you.

  • I guess I had a question related to what 90% of my meetings seem to center on with new money or potential new money, and that's obviously what's going to happen when interest rates rise.

  • What I'd like to do is not so much pose it to you in the frame of an interest rate question but rather say, over the last five years there have been numerous markets that for whatever reason you've decided to exit.

  • There have been I'm sure many times that you've encountered a diminishing demand relative to the supply in the marketplace, and you've had to react accordingly.

  • Can you give us a sense for, at the community level or the division level, what specifically you look for?

  • What matrix you track closely on the margin that provide the impetus for you to take some sort of action to counteract that weakness?

  • Can you give us a sense for how reactive you are and what exactly triggers that reaction?

  • - Vice Chairman, President & CEO

  • Well, I would say first of all, as you know, we are a decentralized company because we know the homebuilding business is a local business.

  • Division presidents trying in a budget to us at the beginning of the year and they revise it six months later.

  • And they are to hit certain revenue growth targets and certain SG&A percentages, gross margin percentages, and return on inventory percentages.

  • And as I've told people before, somewhere in D.R.

  • Horton land we're offering an incentive every day.

  • Some more, some less, some none, it just all depends.

  • But the division president has a budget that he or she is expected to meet, and they have the wherewithal in their local markets to address the market demand changes.

  • We track, as I told you the other day, and I've said many times, on a daily basis what our gross margin is in every home that we sell because every one of our homes has a budget in the computer.

  • We don't do anything on a project basis, so we know what the gross margins are.

  • So I guess to answer your question, it's up to the division presidents.

  • We're tracking gross margin on a daily basis as they sell those homes, but they have to adapt their product and their pricing to the local market to hit the budgets that we want them to hit.

  • Clearly from a capital allocation standpoint, however, in particular that's the part that's the furthest out there that I would think you would need adjust the quickest in order for a downturn of any sort not to impact you for a longer period with a more severe consequences.

  • So my question would be, can you talk about what corporate -- how corporate is involved in the land purchasing decisions?

  • - Vice Chairman, President & CEO

  • Well, we have two committees in our company.

  • We're not big on committees, but one committee is very important.

  • We have an asset allocation committee which we call operating committee.

  • We get the executive officers and regional presidents together every quarter and we review the returns on our various markets.

  • Sam does a beautiful spreadsheet for us that shows on a regional and divisional basis what our LTM-ROI is on a year-over-year basis, on a month-over-month basis.

  • And we get together as a group to determine where we have the best opportunities to invest capital on a going-forward basis to get the best returns that we can get.

  • And a lot of that just is a function of -- it gets back to something that you and I were talking about the other day and you called it an intangible -- but it really gets back to the people that we have in the division.

  • One of the things that I'm absolutely convinced of is that wherever we put our money, as long as we have the right people we can get the kind of returns we're looking for.

  • So that operating committee, in essence, gets together every quarter and we make both tangible and intangible decisions based upon where our capital needs to go, where we can get the best return.

  • Great.

  • - EVP & CFO

  • And Steve, as you know, every week formally approved here every dollar spent on land purchases.

  • - Vice Chairman, President & CEO

  • A division cannot close a $25,000 lot in Jacksonville, Florida, without our permission.

  • It has to be approved by one of the executive officers.

  • Great.

  • Two quick follow-ups to the final question and then I'll get off: One is to the extent you rely on people.

  • Obviously, I would think -- the question that comes to mind, things have been pretty darn good for the last 12 years around the country.

  • How confident are you that your personnel are equipped and have experience navigating a market that is not as robust?

  • - Vice Chairman, President & CEO

  • Well, let me back up.

  • I know you're aware of this, but it's not just the last 12 years for us but it's the last 27 years through various economic interest rate scenarios.

  • And I would suggest to you that based upon our historical performance that we certainly have the right people in place to continue to outperform the industry.

  • And I draw on a couple of specific markets, as you and I talked about the other day, and I just look at San Antonio specifically.

  • And you asked what kind of level of people we have.

  • Our division president down there has gone from 12% to 25% of the market, while our major competitor has gone from 40% to less than 25% of the market based upon preliminary estimates.

  • I call that the right type of person in the right job.

  • And I tell you, we've got those people throughout the country.

  • And lastly, can you talk about the markets that you have chosen to exit or significantly de-emphasize over the last several years?

  • What specifically precipitated those actions?

  • - Vice Chairman, President & CEO

  • Well, first of all, as we talked, we got out of Kansas City, St. Louis, Nashville, Pensacola, Florida, and a couple other smaller markets throughout the Midwest.

  • We got out of those markets for really two reasons: One reason, we never got the right person in the right job in those markets.

  • Fortunately for us they were smaller markets.

  • But also we decided that even in a market like Pensacola where we did have a good operator, by the way, and we were making a decent return, we concluded that even if we got 15%, 25%, 30% of that market it was going to be such a small percentage of our earnings on a going-forward basis that it was not worth the commitment from the corporate staff and the company to support that small market.

  • And the other markets are basically, if you have small Midwestern markets you ask yourself -- Shannon has a deal that shows where most of the permits are pulled in the country.

  • And I think she says 78% of the permits are pulled in the South, Southwest and the West, and that's where we want to be with most of our assets.

  • Okay.

  • Thanks.

  • - Vice Chairman, President & CEO

  • Yes, sir.

  • Operator

  • Your next question comes from the line of Larry Horan with Parker Hunter.

  • Great quarter, fellows.

  • Just one question: How much was your community count up? [LAUGHTER]

  • - Vice Chairman, President & CEO

  • A trick question, right?

  • A trick question.

  • - Vice Chairman, President & CEO

  • Our community count was up. [LAUGHTER]

  • So you're not going to change your policy on talking about how many open selling communities you got?

  • - Vice Chairman, President & CEO

  • Only because it just doesn't -- we have typically more communities than other builders because, obviously, with a 9.8% SG&A this quarter and 9.6% for all of fiscal year-end last year, we can be in smaller communities.

  • And we are in smaller communities simply because our overhead structure is so low.

  • So --

  • I don't really need to know the number, just the delta, if you --

  • - Vice Chairman, President & CEO

  • I tell you what, I will let Stacey Dwyer think about that and let her call you if she decides to disclose that information.

  • Okay.

  • Well, under Regulation FD don't you have to put out a note then?

  • - Vice Chairman, President & CEO

  • That's probably why you -- [LAUGHTER]

  • Okay, thanks a lot.

  • You're doing a great job.

  • - Vice Chairman, President & CEO

  • Thank you.

  • Operator

  • Your next question comes from the line of Carlos Ribeiro with Credit Suisse First Boston.

  • Good morning.

  • Congratulations on a great quarter.

  • - Vice Chairman, President & CEO

  • Thank you.

  • Good morning, Carlos.

  • Don, I know you guys normally don't give us interquarter updates, but can you give us any since in terms of how January to date, anecdotally, if the trends that you saw in December have continued into January?

  • - Vice Chairman, President & CEO

  • Are you talking about sales?

  • Yes.

  • - Vice Chairman, President & CEO

  • Yes.

  • Our sales for January are trending pretty much like they were last quarter.

  • Okay.

  • With respect to your Midwest market, and particularly your new orders and dollar value in the Midwest, is there a mixed shift there or is that just purely a reflection of maybe Chicago having some good pricing power?

  • - Vice Chairman, President & CEO

  • Stacey?

  • - EVP & Treasurer

  • A little bit of both.

  • Really more emphasis on the mixed shift.

  • Okay.

  • Is there any other region that's also experiencing a mixed shift that may have resulted in new order prices being up?

  • - Vice Chairman, President & CEO

  • Not really.

  • The main region or market where we're having a mixed shift, which we've visited with everyone about is California, and they're moving to more attached than detached this year based upon their entitlements over last couple, three years.

  • And, therefore, we've indicated that our average sales price in California will probably trend downward, although our profits are going to trend significantly upward.

  • Okay.

  • And, Stacey, just to clarify, when you say mixed shift in the Midwest, are you kind of going away a little bit from the entry level maybe to a little bit more move-up product?

  • - EVP & Treasurer

  • Yeah.

  • It changes all the time.

  • One thing that's interesting for us in the Midwest is we have two markets, so you see a change in an individual market a little more in that region than you would in other regions.

  • You open these subdivisions and close out of other subdivisions, there's always a little bit of a mixed shift.

  • - Vice Chairman, President & CEO

  • I would say in Chicago we are doing two mid-rise condo buildings in a couple of the suburbs out there.

  • And that is a major departure from us in Chicago in terms of entering a new niche in the marketplace.

  • Okay.

  • And just lastly, I know you guys didn't repurchase any shares this quarter, but can you just refresh my memory in terms of what your authorization is currently?

  • - EVP & CFO

  • 176 million.

  • - Vice Chairman, President & CEO

  • And as we indicated at the beginning of the year, we'll most likely buy most of our stock back in Q3 and Q4 simply because, Carlos, that's where we generate a lot more cash flow.

  • Okay.

  • Great, guys, Congratulations again.

  • - Vice Chairman, President & CEO

  • Thank you.

  • Operator

  • Your next question comes from the line of Tony Campbell with Knot.

  • Good morning and let me add my congratulations.

  • I'm wondering if for a moment since everybody sort of -- people are sort of negative on this group, tend to always look at the demand side.

  • I'm wondering if you could spend a moment with us and go over what's going on in the supply side.

  • And, in particular, the lengthening of the permitting process, which I gather ex-Texas there's been a fairly substantial lengthening of the process.

  • - Vice Chairman, President & CEO

  • Well, Tony, this is Don.

  • As you know I spend a lot of time in our operating divisions -- came out of Minneapolis-St.

  • Paul about a month ago.

  • And just to give you one example, we are going into a small community, small suburb of Minneapolis, and we are in the process of entitling about 2,000 lots on the river.

  • We thought that because of the ragged state of the property, a lot of torn down buildings and so forth that the city themselves were trying to get rid of and have redeveloped, that we thought we could get the property entitled in a very short period of time, maybe less than a year.

  • We're now into our second year.

  • We think it's going to take our third year, and we've got everybody from the Sierra Club to the Save the River Foundation opposing us.

  • Where, in essence, although the city wants the property, they're dealing with these outside agencies.

  • I came out of Miami, down in Dade County, just two weeks ago and we're experiencing the same difficulties down there.

  • But those types of entitlement issues, i.e., the lengthening of the entitlement, are definitely benefitting large builders like D.R.

  • Horton because it's really making it almost impossible for the small-, medium-sized builder to entitle the property simply because they don't have the people, the time and most importantly the capital to get the land entitled.

  • So I don't see it improving significantly anywhere.

  • As a matter of fact, what I do see is that it's lengthening to the extent -- I hope it doesn't get like New Jersey where basically it takes us almost five years to entitle a piece of land.

  • But in most parts of the country it's taking us at least two years, sometimes three and four years.

  • Okay.

  • So then it's fair to say if you wanted to look at a major change versus, say, the '80s and maybe part of the '90s, this is quite a change?

  • - Vice Chairman, President & CEO

  • No question about it.

  • Huge change.

  • To give you some example, I've been with Don Horton for 20 years.

  • When we first went into business together I had the franchise of being the land development arm of the Horton companies at that point in time.

  • And back then you could go get virtually anything entitled in Phoenix or Atlanta or Florida and you could get it -- farmers planting corn on it and six months later we could be planting houses on it.

  • That's not the case.

  • That's a fundamental change in the industry, yes.

  • Thank you very much.

  • Good luck.

  • - Vice Chairman, President & CEO

  • Yes, sir.

  • Operator

  • Your next question comes from the line of Jim Wilson with JMP Securities.

  • Good morning.

  • - Vice Chairman, President & CEO

  • Good morning.

  • Don, could you go over maybe -- obviously things sound great in most of your markets.

  • Is there a list of those that have been tougher markets of late?

  • I'm sort of interested in that list.

  • - Vice Chairman, President & CEO

  • Actually, we're down to what I consider to be three or two markets that are good.

  • They were weaker last year, but they've improved this year for us.

  • And that is Salt Lake City which, by the way, we have less than $20 million in assets in Salt Lake City.

  • And Raleigh continues to be weak because of all the technology layoffs associated with the research triangle.

  • But our market is coming back in Raleigh.

  • Both those markets are slow for us.

  • Other than that, we really don't have any weak markets.

  • Okay.

  • I was wondering, I know the weather's been a little different from a closing timing standpoint, December quarter versus now the very bad weather particularly in the East, and you're heavily sun belted.

  • Is there any little bit of shift or anything you might have seen or think you might have gotten with some closings that might have come in December quarter versus what you might have pencilled out as coming in the March quarter?

  • - Vice Chairman, President & CEO

  • No.

  • And as you know we don't let our division presidents give us weather reports, so I don't really care whether it's snowing and ice in the Northeast or whatever.

  • They have a budget to hit and they figure out how to hit their budget it.

  • So we don't have any weather-reported issues, and I'll never give you a weather-reported excuse.

  • Okay.

  • And just finally, number of losses [ph] currently under control?

  • - Vice Chairman, President & CEO

  • I think the number is right at 193,000.

  • It's about a 3.4 year supply, 48% owned and 52% optioned.

  • At the end of the fiscal year that was 49% owned and 51% optioned.

  • So we're continuing, as we indicated to you before, to drive down our percentage of owned lots based upon the way we are compensating our division presidents for inventory turns.

  • I felt like that it would go from about 53% down to somewhere around 45% owned, and it's definitely trending in that direction.

  • Okay.

  • Very good.

  • - Vice Chairman, President & CEO

  • Thank you.

  • Operator

  • Your next question comes from the line of David Jarrett, independent.

  • Hi.

  • Terrific quarter, guys.

  • - Vice Chairman, President & CEO

  • Thanks, David.

  • Good morning.

  • Good morning.

  • I have a question.

  • More and more I see that you're going into high-rise condos, mid-, high-rise condos which obviously involves tear down.

  • I wonder if you can discuss your whole approach here.

  • And also, isn't this an area that you do not have expertise?

  • And also, how do you account for that since the closings are a little bit more difficult or different from a single-family house?

  • - Vice Chairman, President & CEO

  • Well, let's be real clear about one thing, we're not going into any high-rises.

  • The tallest building that we have built is six stories, and that's because it had four over two, two underground parking and four stories of residential.

  • We are going into those in select markets where we can provide an affordable alternative to a single-family detached house.

  • And it's typically in higher average sales priced markets like San Diego, Chicago.

  • We're looking at doing one in Miami.

  • But the bottom line is our expertise is in that market to the extent that we're -- In Miami we have building three-story townhouses and now we're going to a four-story condominium.

  • We're still building those units the traditional way, stick- and brick-type construction or block wall-type construction.

  • So I don't see that as anything significantly different than what we're doing.

  • - EVP & Treasurer

  • And the accounting for those, David, is the same as any of our single-family housing.

  • It's specific cost [inaudible] by unit.

  • We're not doing any percentage of completion accounting.

  • Oh, you're not.

  • Okay.

  • Well, that's good.

  • Excellent.

  • - EVP & Treasurer

  • Same standard accounting for us.

  • Okay.

  • A couple of other housekeeping questions.

  • I notice your other income increased from $200,000 to $2.6 million.

  • What was the reason for that?

  • - EVP & Treasurer

  • Bill?

  • - EVP & CFO

  • The primary reason, our -- the market value of our swaps was adjusted in the quarter, and that was $3.3 million in income.

  • That was the primary reason for it.

  • Okay.

  • And the last question: What was your mortgage capture rate in areas where you have mortgage operations?

  • - EVP & Treasurer

  • Actually, that's going to be consistent with our company-wide capture rate now at 65% since we do have mortgage operations in the majority of our markets.

  • Okay.

  • Now that's below a lot of your competitors, no?

  • - EVP & Treasurer

  • That's correct.

  • And actually a part of that is because we just entered California and we do want to increase the capture rate to bring it up at a level equivalent to our competitors.

  • Okay.

  • Very good.

  • Thank you.

  • - Vice Chairman, President & CEO

  • Sure.

  • Operator

  • Your next question comes from the line of Timothy Jones with Wasserman & Associates.

  • Good morning.

  • - Vice Chairman, President & CEO

  • Good morning, Mr. Jones.

  • How are you?

  • First of all, those breakdowns -- percentage breakdowns in market that you gave, was that dollars, values or units on order?

  • - EVP & Treasurer

  • Those were dollars, Tim.

  • Dollar value of orders?

  • - EVP & Treasurer

  • Yes.

  • Okay.

  • Secondly, I see you added another market to the camp-outs.

  • You've got five now.

  • You added Phoenix also?

  • - Vice Chairman, President & CEO

  • Yes, we have selected camp-outs in the Phoenix market also.

  • Give me a rough -- let's go down those five markets because it is kind of -- can you give me roughly -- I don't know if you can -- a percentage of the market or the number of community?

  • I mean, is it one or two or is it more?

  • I mean, what is it in those four -- five markets?

  • - Vice Chairman, President & CEO

  • It's one or two, Tim.

  • One or two in each one of them?

  • - Vice Chairman, President & CEO

  • We don't have camp-outs in every subdivision --

  • Yeah, I understand that.

  • But I didn't know if it was -- especially like in South Florida or Hawaii was getting to be quite common?

  • - Vice Chairman, President & CEO

  • Well, I can tell you the one project that you might want to drive by down there is on Jog and Southern Road, right at the Palm Beach International Airport flight path.

  • And what's ironic about that is that I wasn't really hot on that project last year when I was walking and as I stood there with the division president, regional president, I saw these 757s landing overhead.

  • But we were outside the noise cone, and they convinced me to do the project.

  • So it shows you what I know about the homebuilding business.

  • Sure.

  • How far are you from the airport?

  • - Vice Chairman, President & CEO

  • We're just right there on Job Road, right at Job and Southern, so we're outside the noise cone.

  • I don't know how many miles we are from the end of the runway.

  • We're not in the noise zone, so that doesn't impact our --

  • Are you west of 75 or east?

  • - Vice Chairman, President & CEO

  • Let me think about that for a second.

  • We are going to be -- I don't know, wherever Jog and Southern --

  • I'll talk to you later about it.

  • One last question.

  • And that is for -- ever since you've been public and Don has been adamant on staying at three years of land and not going a day above it, now you're talking three to four.

  • Is this just because this entitlement situation has gotten so out of hand that you just got to cover your bases?

  • - Vice Chairman, President & CEO

  • No, sir.

  • What we've always said -- just to be clear we've always said we'll keep our land somewhere between three and four years.

  • We don't want to get over four years.

  • So we vacillate back and forth over the last two years.

  • We've been as high as 3.8 -- 3.7 as Stacey corrects me here.

  • And then we've been as low as 3.2 at the end of --

  • But you are -- in that number you were assuming a very aggressive 15% increase in deliveries?

  • - Vice Chairman, President & CEO

  • I wouldn't call -- I would call 15% respectable, not aggressive relative to what we've done in the past.

  • I know, but most people I think are not protecting 15% growth in deliveries, but that's fine.

  • - EVP & CFO

  • Well -- Tim, I would point out --

  • - Vice Chairman, President & CEO

  • You probably don't want to get me going there this morning.

  • Yeah, I know that.

  • We don't want to touch a couple of hot buttons.

  • I'm interested, it seems, I'm a simple country boy but that you're looking to have your EPS go up 15% to 19%, and your first quarter is up 54.

  • It seems something's strange about that.

  • - Vice Chairman, President & CEO

  • Well, I can tell you what Stacey Dwyer told me about a month ago, and I'm going to say it for her because I now agree with her.

  • We're never going to apologize -- Stacey.

  • - EVP & Treasurer

  • -- for having conservative guidance.

  • - Vice Chairman, President & CEO

  • We're just not going there.

  • When we give you a number, Mr. Jones, we want to make certain that we have the capability of hitting it.

  • I did not fall off a Christmas tree. [LAUGHTER]

  • - Vice Chairman, President & CEO

  • You know what?

  • We can tell you what we know and what --

  • All right.

  • All right.

  • I'll let you off the hook.

  • - Vice Chairman, President & CEO

  • Thank you.

  • [LAUGHTER]

  • Operator

  • Your next question comes from the line of Rich Cross [ph] with Wachovia Securities.

  • Hi guys.

  • Just one last question regarding -- I want to find out about move-up product.

  • Are you seeing any discernible changes in demand for move-up product across your markets?

  • - Vice Chairman, President & CEO

  • Slightly, yes.

  • And I think you see that in our average sales price.

  • One of the things that we visited with with you and Carl before is that on -- for the last couple, three years about 40% to 45% of our sales have been first-time homebuyers, and about 40% to 45% second-time homebuyers.

  • I think what clearly happens is as the economy begins to improve, all of a sudden our average sales price goes up and some of those buyers who were in that first-time homebuyer market are all of a sudden technically second-homebuyers simply because of where our average sales price falls.

  • So yes, [inaudible] average sales price working its way up, I think that we clearly are beginning to see some improvement in that second-time homebuyer.

  • Any particular markets that show more strength than others?

  • - Vice Chairman, President & CEO

  • I don't pay a lot of attention to that, Rich.

  • I can tell you in California -- and markets like California and Chicago, in particular, and even Denver, I think you see a lot more second-time homebuyers.

  • The improvement in the second-time homebuyer portion of our business, getting stronger in those three respective markets.

  • So that's kind of interesting, Denver though has picked up.

  • Because that's been obviously a weak market our last couple of years.

  • So the move-up product there's doing better?

  • - Vice Chairman, President & CEO

  • To be clear, Denver has not been a weak market for us over the past three years.

  • I know it has been for other builders, but it is getting stronger even for us there.

  • And I believe that our operators in Denver have done a darn good job in a tough market up there so, yes.

  • And a lot of it is just a function of the average sales price up there.

  • One of the things that I was visiting with last night with with one of our Denver division presidents who runs our attached division up there, is the fact that we're moving into -- that division's growing and it's focus is strictly on condos and townhouses largely because the average sales prices as the market recovers in Denver starts is to exclude people from that first-time homebuyer market.

  • Thank you so much!

  • - Vice Chairman, President & CEO

  • Yes.

  • Operator

  • Your next question comes from the line of Mike Kinder with Citigroup.

  • One quick question.

  • I was wondering given the improvement in results if you've had any further discussions with the rating agencies?

  • Your ratings have been pretty stable for a while and the numbers keep going up.

  • - Vice Chairman, President & CEO

  • We have, and I believe that old Sam is going to be calling the rating agencies today, aren't you, Sam?

  • - Sr. EVP

  • Oh, you bet.

  • As a matter of fact, I've already communicated with them some of the results that you see that we announced yesterday.

  • Obviously, they're on the side of the fence that's legal for me to do that.

  • And they know already, all three of them, where we stand with respect to our improved metrics over a year ago.

  • We are confident, or we hope, certainly that we'll take the next step up here pretty soon.

  • Great, thank you.

  • - Vice Chairman, President & CEO

  • Thank you, Mike.

  • Operator

  • Your next question comes from the line of Fred Taylor with Fleet.

  • Yes, basically the same question.

  • But have they given you any sort of hurdle rates?

  • Or why have they sort of waited so long when, in fact, a few of the homebuilders with investment grade ratings at the senior level, your ratios are actually superior to some of theirs.

  • - Vice Chairman, President & CEO

  • Fred, I'm not going to answer that question because I don't think it would be appropriate on the phone, so I'll let Sam answer that question.

  • Okay.

  • - Sr. EVP

  • I kind of share DT's reaction to that.

  • We have preached that message for the last several years in meetings with the agencies, which have become almost quarterly.

  • And we're there.

  • We're past there.

  • You're exactly right.

  • Our leverage is better than some of our investment grade rated peers, our EBITDA coverage ratios, our EBITDA margins, almost every metric that you can think of that has anything to do with debt service capability has improved substantially in the last three years and is now at or better than investment grade levels.

  • You might recall our last public debt offering we did in January was priced at investment grade levels, and, in fact, from the subscription list that we saw, at least half of the purchasers of that issue were investment grade buyers.

  • Right.

  • Right.

  • Okay, I think we both agree.

  • So thank you.

  • - Sr. EVP

  • Thank you.

  • Operator

  • Your next question comes from the line of Stephanie [sic] Kim with Smith Barney Barney.

  • - EVP & Treasurer

  • Steve?

  • Operator

  • Stephanie [sic] Kim, your line is now open.

  • At this time, the question has been withdrawn.

  • Your next question comes from the line of Trey Oglesby [ph] with Freeze [ph] Associates.

  • Hi guys, great quarter.

  • - Vice Chairman, President & CEO

  • Thank you.

  • Was it Tony who let you off the hook on guidance a moment ago?

  • - EVP & Treasurer

  • No, that was Tim.

  • Tim.

  • Okay, I'm sorry.

  • I just wanted to follow up a little bit on his line of questioning and just speaking specifically to your commentary for the second quarter versus the first quarter.

  • Is there anything that you can point to that makes you think earnings will be down sequentially?

  • Looking over the past several years you've seen increases.

  • Weather's not an excuse and I don't remember any lumpiness in orders going back six or nine months.

  • Is it just conservative guidance?

  • - EVP & Treasurer

  • One thing we had in the second quarter last year was an unusual level of land sales.

  • Historically, if you look at our first and second quarters -- I think it would take two years to do it -- the second quarter is generally slightly less than the first quarter.

  • Okay.

  • Very good, thank you.

  • - EVP & Treasurer

  • Thank you .

  • Operator

  • At this time there are no further questions.

  • - Vice Chairman, President & CEO

  • All right.

  • This concludes the first quarter conference call.

  • Thank you very much for listening; and that's all from D.R.

  • Horton, America's Builder.

  • Operator

  • Thank you.

  • This concludes today's conference, you may now disconnect.