霍頓房屋 (DHI) 2011 Q3 法說會逐字稿

Good morning, and welcome to the DR Horton, America's builder, the largest builder in the United State, third quarter 2011 earnings release conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Donald Tomnitz. Thank you, Mr. Tomnitz, you may begin.

Thank you and good morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO, Stacey Dwyer, Executive Vice President and Treasurer, and Mike Murray, Vice President and Controller. As usual, before we get started, Stacey?

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although DR 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 DR Horton on the date of this conference call, and DR Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in DR Horton's annual report on Form 10-K and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

Don?

We have made many adjustments throughout our Company to be competitive and profitable in the current housing environment. Our June results compared to the March quarter demonstrate the progress we are making. Our home closings and gross margin increased, SG&A and interest expense decreased, and financial services pre-tax income increased, resulting in net income of $28.7 million for the quarter. Our balance sheet and liquidity remain strong, with cash and marketable securities of $1.1 billion, and net homebuilding leverage under 20%.

We have also seen normal seasonality return to our business this fiscal year. Sales in the March quarter reflected a significant sequential increase to mark the start of the selling season. Our sales orders in the June quarter were comparable to the March quarter. Our sales order backlog grew throughout the selling season, increasing in March to 5,300 homes, and further in June to 5,600 homes. Closings in the third quarter were greater than the first and second quarters, and we expect fourth quarter closings to be greater than the third.

We are now solidly in a position to be profitable for the full fiscal year. Given the weak macroeconomic and housing conditions, we remain realistic on our expectations and will continue to manage our business to compete in the current and future market. We plan to continue to adjust our price points and product offerings to the demand we see in each of our individual markets.

Bill?

Our homebuilding operations generated pre-tax income of $22.2 million for the quarter, which included $9.9 million of inventory impairment and lot option charges as well as a $6.5 million loss on early retirement of debt. Financial services pre-tax income was $6.7 million, which included $3.5 million of recourse expense. Our net income for the quarter was $28.7 million, or $0.09 per diluted share, compared to $50.5 million, or $0.16 per diluted share in the prior year quarter.

Mike?

Our third quarter home sales revenues decreased 29% to $975 million on 4,555 homes closed, from $1.4 billion on 6,805 homes closed in the year-ago quarter. Our average closing price for the quarter was up 6% compared to the prior year, and up 3% sequentially to $213,900. These increases are due to slight changes in both our product and geographic mix.

Homes closed in the June quarter represented 86% of the beginning backlog compared to 91% in the March quarter. We expect that our backlog conversion rate going forward will continue to average below 90%.

Don?

Net sales orders for the third quarter were 4,874 homes, down only 1% sequentially, reflecting a typical spring selling season pattern. Net sales orders were also down 1% from the same period last year. However, the average sales price on net sales orders was up 5% year-over-year to $219,000, resulting in a 4% year-over-year increase in the value of our quarterly net sales orders. Our cancellation rate was 27%, and our active selling communities were essentially flat sequentially. Our sales backlog increased 26% from the prior year, and 6% sequentially, to 5,600 homes or $1.2 billion.

Bill?

Our gross profit margin on home sales revenues in the quarter was 16.5%, down 70 basis points from the year-ago period. However, our margin increased 30 basis points sequentially, primarily due to improvement in our core margin, resulting from continuing efforts to improve our construction costs, manage our homes in inventory efficiently and add new communities with higher margins.

Stacey?

In our third quarter impairment analysis, we reviewed all projects in the Company and determined that projects with a pre-impairment carrying value of $28.1 million were impaired, which resulted in a $7.8 million impairment charges, the majority of which were in Florida and California. We refer to our projects which have indicators of potential impairment, but were not impaired, as our watch list, which represent those projects deemed to be at the highest risk for future impairment. After this quarter's impairments, our watch list now totals $377 million, down from $432 million at March, with the largest concentrations in California, Illinois, and Arizona. Our inventory impairment process in future quarters will incorporate any changes in market conditions and any adjustments we make in our business.

Mike?

In the third quarter, we reduced our homebuilding SG&A expense, which includes all corporate overhead, to $113.7 million, from $143.5 million in the year-ago quarter. As a percentage of homebuilding revenues, SG&A expense increased to 11.7%, compared to 10.4% in the year-ago quarter. Sequentially, our homebuilding SG&A expense decreased $9.5 million and improved to 11.7% as a percentage of homebuilding revenues, compared to 16.8% in the March quarter. We continue to actively manage our SG&A levels relative to our expected number of homes closed.

Stacey?

Homebuilding interest expense was $10.1 million for the quarter, which represented 32% of our homebuilding interest incurred, compared to $19.6 million, or 47% of our interest incurred in the year-ago quarter. We directly expense a portion of our interest incurred when our homebuilding debt level exceeds our active inventory. Our third quarter homebuilding interest incurred of $31.4 million decreased 24% compared to the prior year, due to our significant debt reductions in fiscal 2010 and 2011.

Bill?

Financial services revenue for the quarter was $23.8 million, a decrease of 14% compared to the year-ago quarter. Financial services pre-tax income was $6.7 million this quarter, compared to $8.9 million in the year-ago quarter. 86% of our mortgage company's loan originations during the quarter related to homes closed by our homebuilding operations. Our mortgage company handled the financing for 61% of our home buyers this quarter, with virtually all loans meeting eligibility requirements for sale to Fannie Mae, Freddie Mac or Ginnie Mae. Government loans accounted for 62% of our mortgage company's volume this quarter. Our mortgage company's new borrowers during the quarter had an average FICO score of 700 and an average loan to value ratio of 92%.

Don?

Our total inventory increased sequentially by $61 million, excluding non-cash items, reflecting seasonal growth. We increased our homes in inventory by $100 million to support our higher sales backlog. This increase was offset by a reduction in residential land and lot inventory of $39 million. Our homes in inventory at the end of June totaled 11,400, up 900 homes from March. As of June 30, 1,200 of our homes were models, 5,800 were speculative homes and 2,500 of the specs were completed. We continue to manage our total homes in inventory relative to our expectations of sales demand, and we offer spec homes primarily to accommodate our first-time relocation buyers.

Mike?

In our third fiscal quarter, our investments in land, lots and development costs totaled $210 million, which was primarily in finished lots. Future investments in finished lots will remain largely dependent on our sales pace, while our spending on land and development costs will continue to be at relatively low levels. At June 30, 2011 we owned approximately 86,000 lots, of which 22,000 are finished. We controlled an additional 29,000 lots through option contracts with a net earnest money deposit balance for these lots of $14.8 million. We are focused on managing our supply of owned, finished lots in line with our sales demand in a low risk, capital efficient manner.

Bill?

We ended the quarter with $1.1 billion of homebuilding unrestricted cash and marketable securities. Cash used in operations for the June quarter totaled $54.2 million, primarily due to increased homes in inventory, in response to seasonal demand, and an increase in mortgage loans held for sale, due to our sequential increase in volume. During the quarter, we repaid at maturity the remaining $70.1 million of our 6% notes, and redeemed the remaining $112.3 million of our 5 3/8% notes due 2012, which resulted in a $6.3 million loss on early retirement of debt. Our remaining debt repurchase authorization at June 30, 2011 was $241.7 million. The balance of our public notes outstanding at June 30 was $1.8 billion, of which $106 million matures on August 15. After that, our next debt maturity is in May of 2013.

Stacey?

During the quarter, we purchased approximately 3.5 million shares of our common stock at an average price of $10.88 for a total cost of $38.6 million. At June 30, 2011, we had $61.4 million remaining on our stock repurchase authorization. At June 30, our homebuilding leverage ratio, net of cash and marketable securities, was 19.9%. Gross homebuilding leverage improved 510 basis points from a year ago, to 40.5%, primarily due to our lower debt balance.

Don?

We continue to focus on the fundamentals of our business, bringing homes and communities to the market with a product for both move-up and entry level buyers at the right price points, controlling finished lots, closely monitoring our home and spec inventory in relation to our sales, controlling our construction and SG&A costs, and maintaining our strong balance sheet with a significant cash balance.

The specific points which we are particularly proud of this quarter include our gross margins up 30 basis points sequentially. Notwithstanding all of our previous substantial improvements in our SG&A over the last four years, our homebuilding SG&A was down 510 basis points sequentially, a major improvement. Our strong backlog of 5,600 homes at June 30, which positions us for fiscal 2011 profitability.

Thank you to all of our DR Horton teammates for continuing to work hard and navigate through a difficult homebuilding environment. We are very proud of your efforts, which have led to our solid profitability for the quarter. Our goal is to continue to aggregate our national market share, market by market. As we do so, we must remember one thing as we pursue this market aggregation. Nothing happens at DR Horton until we sell and close a home.

This concludes our prepared remarks. We'll host any questions you may have.

Thank you. We will now be conducting a question-and-answer session. In the interest of time, and to allow as many callers as possible to ask questions, please limit yourself to one question and one follow-up. (Operator Instructions) Thank you.

Our first question is coming from the line of Adam Rudiger with Wells Fargo Securities. Please state your question.

Good morning. Thank you. I have two questions.

The first, if you could talk about the SG&A. Actually, I thought the operating leverage you got on a sequential basis was pretty strong, but it looks like last quarter SG&A bumped up a bit versus the first quarter, and I can't quite recall why. So could you remind me of that?

And then also just talk about what percent of your spending should be variable now versus fixed, as we go into the fourth quarter where you said we should see some higher closings?

Yes, Adam.

If we go back to last quarter, the first quarter by calendar year, we see some additional costs on payroll taxes, as the year rolls over on employees that are over the FICA limit. We are also seeing advertising expenses for the spring selling season which had increased. So clearly as we move sequentially, some of those advertising costs -- we don't spend as much on advertising as we get later in the year. And as we talked about last quarter, we are making a lot of adjustments, market by market, subdivision by subdivision, in order to be profitable throughout our Company. And so the decrease this quarter really reflects the progress we're making in those efforts.

Okay. Thank you.

And then also wanted -- my second question was, can you talk about your profitability by region, beyond just reporting regions, more towards some of your sub markets, and if you -- what percentage of -- rough percentage would you guess that of your markets are profitable or breakeven? And also talk about Texas versus outside of Texas, and is Texas responsible for the bulk of the profits, or are you getting a nice contribution from some other places as well?

Well, as I said last quarter when someone asked me this question, and we used to get into a rankings of our various markets, especially during the peak. And one of our competitors does, I think, a much better job of grading his communities than we're capable of.

But to be frank, most all of our markets are soft, softer and softest, as I said last quarter. And the reality of life is that Texas continues to be a strong market for us, although it's not as good a market as it was a year ago with the tax credit, because we had quite a few spec homes out there for our buyers who bought homes in our Texas market during the tax credit. But in general, Texas is one of our stronger markets and the Pacific Northwest is a good market for us. The rest of the markets -- to rank the markets would be like herding cats. It's just a very difficult thing to do. Nothing's really strong out there.

And I would reiterate that most of our markets continue to still be soft, softer and softest, as we continue to aggregate market share in each one of those, in order to make them stronger markets.

And Adam, as you could look at our previous filings, where we file our profitability by region, you can see that certainly the majority of our profits have been coming from our South Central region this year-to-date. We would expect that to still be the majority of our profits here in the short-term, but the remainder of our markets continue to progress. Certainly some are around breakeven or slight profits, and we certainly still have some at a loss as well. But our focus is to improve and to be profitable really across our Company. We're making progress on that. But we're not quite there yet.

Great. Thanks very much.

Thank you. Our next question is coming from the line of Josh Levin with Citigroup. Please state your question.

Good morning.

Good morning.

So as we head into the back half of 2012 and you start to -- excuse me, 2011, and you start to plan for 2012, how are you going to position the Company for 2012 in terms of the sales environment? Are you expecting flat sales, up sales, down sales, on a year-over-year basis?

Well, we're anticipating to be able to grow the Company in 2012. I will say to you that based upon what I see macroeconomically, and certainly with what's going on in Washington, DC today, and most frankly, the lack of jobs being created in this country, the high unemployment rate, I would anticipate that 2012 will be better than 2011, but I don't expect it to be significantly better in 2012 than 2011. Our goals to grow the Company continue to be how do we aggregate market share in each one of our respective markets.

We're well positioned for that, Josh. We have adequate finished lots that we own, and we also control many more finished lots under an option contract. So we've got a lot of flexibility in our business to meet an increase in demand if we see that in our markets.

My second question is about mortgage availability. Over the past three or four months, would you say it's gotten easier, harder, or has there been no change, in terms of your buyers being able to get mortgages?

I think there's been really very little change. I will say one thing, that when you look at our average FICO scores this quarter, I was surprised to see that they had moved downward to 700 versus what they had been in the past of 703, 704, 705. I don't know whether that's an anomaly or somewhat of a relaxation in some of the underwriting guidelines. I really don't think that's the case. But nevertheless, I think that right now most of our buyers are able to find mortgages out there. And it's not as if we are not able to sell homes because of lack of mortgage availability.

Okay. Thank you.

Thank you. Our next question is from the line of Michael Rehaut with JPMorgan. Please state your question.

Thanks. Good morning, everyone.

Good morning.

First question, I was wondering if you could just discuss the trends during the quarter in terms of pricing and incentive levels, how you saw them throughout the quarter. And as far as we've been able to tell, they've been plus or minus kind of steady year-to-date, so just wanted your thoughts there.

I think you're right. We saw sequential improvement in our gross margin. A lot of that was product mix and our continued focus on cost control, rather than any real price appreciation or a change in incentives that we're seeing in the market. So you know, consistent and also a little more predictable than what we've seen in the past.

I also believe that as we begin, as we told you last quarter, to focus a little bit more on the move-up part of the market, I think that we have a little bit better pricing and a little bit better margin in those units. And we continue to explore and develop that portion of our business.

Great. Thank you.

Second question, I guess as we've kind of been thinking about the land market remaining relatively tough, but still I guess some opportunities here or there on a selective basis. You mentioned that you anticipate growing the Company primarily more from market share gains. But I was wondering if you could kind of give us a sense of how that translates from a community count perspective, and I know that sometimes that's -- some companies like to refer to community count more than others, but just getting a sense from a land investment in active communities, how are we to think about 2012?

Well, we continue to aggressively pursue every deal that makes sense in every one of our markets. We're not big on land ownership or finished lot ownership. We still are trying to be an asset-light homebuilding company, and most of our deals that we're entered into, the vast majority of them, are rolling option deals. We continue to be, I think, the preferred buyer in most of these markets, simply because of the fact that in many of our markets we are the largest builder. And if not, we're working our way toward being the largest builder.

And we also, as I've said before, we have a different business model than the rest of our competitors, and that is that we do maintain specs for the move-up and relocation buyers. So as a result, we are continuing to pursue every deal that makes sense out there in the marketplace. And if that ends up with us increasing our community count next year, so be it. But at the same time, we are also culling our existing communities and if they're not performing for us, we're trying to retrade the deal. And if they won't be retraded to a lower lot price then we are dropping those communities.

So it's a constant battle of adding new communities and culling poorly performing communities. So as a result, I would hope our community count would go up, but we don't know until we work our way through all those deals.

We would also like to see our absorption per community going up. So we actually think there's probably some room for growth without an absolute increase in our community count.

Great. Thanks very much.

Thank you.

Thank you. Our next question is from the line of Jade Rahmani with KBW. Please state your question.

Hello. Thanks for taking the question.

I wanted to see if you could discuss your thinking on capital and cash flow. For example, what drove the decision to repurchase shares in the quarter, which I think was the first repurchase you guys have done since 2006.

And then secondly, based on current planned debt repurchases and cash flow, where do you think the net debt capital ratio ends?

Thanks a lot.

I'll start with the stock repurchases, and then defer to Mike or Bill on the ending capital.

The stock repurchase this quarter was really opportunistic for us. There was a time period of a couple of weeks where our stock price dropped quite a bit from where we had been trading. We've really been focused on reducing our debt over the last two years. And if you look at our total debt balance, we're down about 50% from where we were in June of 2009. So we've done a lot to restructure, where we're now down to just over 40% gross leverage, just under 20% net leverage. We still have an adequate cash balance, and so we opportunistically took some dollars and hedged a little bit of the potential dilution from our convertible bond that's outstanding.

So the shares we bought this quarter represent a little less than 10% of the potential dilution. And the shares under the convert would be issued at a price of $13.06, compared to the $10.88 that we paid this quarter.

In terms of our approach to our cash balances, we do still plan to maintain a significant cash balance. We're at $1.1 billion of cash and securities this quarter. Next quarter, as we close more homes and we move into the, traditionally the seasonally slower period, we would expect to generate some cash next quarter, and so we would expect our cash balance to be higher than it is here at June 30.

As we look at debt repurchases, as Stacey said, we have made significant strides and reduced our debt significantly, and our leverage is around the lowest points that it's ever been in our Company. So we feel like we're in a good position on debt. And, frankly, the remaining debt outstanding that we have, there's a lot less float on that debt now, as well. So there is less debt available for us to repurchase going forward. We'll still look at it. As there's good opportunities to utilize our cash for debt repurchases, we will. But we would expect the level of debt repurchases to be significantly slower than we've seen the last two years.

One other thing on our repurchases. This is a use of cash that we have on the balance sheet. It doesn't mean that we're choosing to do this and foregoing another opportunity. We have enough cash to pursue opportunities in our business. We invested more than $200 million into land and finished lots this quarter.

Thanks.

And then secondly, just on the mortgage repurchase expense in the quarter, it was a modest increase sequentially. Have you seen any change in behavior on the part of banks? And can you give the level of mortgage repurchase reserve that you have?

Thanks.

Our mortgage repurchase activity has been somewhat consistent. Our repurchase requests have been in line with our expectations and we continually look at that every quarter, based upon what we've seen coming in, and we project forward. And we're projecting that this activity will continue as we have been projecting through 2012. We continually adjust the reserves. I believe the balance is right now --

about $30 million.

$30 million all in, all our mortgage reserves, which is consistent with where it was at the beginning of the quarter.

Thank you. Our next question is from the line of David Goldberg of UBS. Please state your question.

Thanks. Good morning, everybody.

Good morning.

Good morning.

First question, I want to ask a little bit more theoretical question on the share repurchases. I think it's great that you guys are allocating capital and trying to minimize the impact from the dilution from the convertible, but I want to get an idea of how you decide what the right cash number is, why is it $1.1 billion or $1.2 billion or wherever you're going to end the year? And as you look forward, how do you think about capital budgeting, given plans to grow the business, and be able to continue to gain share and grow the business as we go forward, in what might be a flat environment. How much cash do you need to do that?

Good question, David.

And that's something we spend a lot of time looking at. What we do is we take a look at what our -- first, what our working capital needs are on an annual basis. And this is a seasonal business. Certain periods of the year we flow cash and certain periods of the year we invest cash in our business. Right now, with the size of our business today, the difference between the peak and the valley in our working capital cash flows can be several hundred million dollars. So today, if we were to end this year at, say, $1.2 billion of cash and cash equivalents, and at the end of the year we would expect that to be our high cash balance, we would invest several hundred million dollars in the business throughout the year. And that would still leave us in the, say, $700 million or $800 million range, at the low point of our cash in the spring selling season.

Today, without a homebuilding revolving credit facility in place, we feel like we need to and we want to keep a significant cushion in our cash. And we feel like that level is adequate for us, and also still provides us the opportunity and the flexibility to invest further cash if we see more growth opportunities in the business. Obviously, going forward if we see even more growth opportunities, we have a lot of flexibility on our balance sheet to add further leverage, add further debt, if we need to and we need additional growth capital from there.

But today we feel like we're in a very good, flexible position with our low leverage, strong balance sheet, and high cash balance and that gives us the flexibility to really do whatever we need to in terms of investing in the business or continuing to reduce our debt balances.

We just hope the business gets back to a point where we would have to re-lever.

Absolutely.

That would be a good problem for us.

Right. Thanks.

So my second question, we've seen one public builder put together a buy to rent program, buying foreclosures and then renting them out. It would seem like with the big capital balance, the big cash balance, the efficiency you guys have in the building process, you're probably the most efficient builder in the country, it would seem like that's a great business for you. And I'm wondering if you thought about kind of thinking about starting sort of buy to rent, maybe a JV, maybe something from that, bringing in a financial partner too and running that as part of what you do.

Well, David, with all due respect, we've entered into a few ancillary businesses during my 29 years here with DR Horton. And I know one thing that DR and I are not confused about, and that is what our business is and what our business is going to be. And we know we are a new home builder. And our goal is to build, sell, close homes and make money on houses. And the ancillary businesses, we're going to leave to our competitors.

Fair enough.

Thank you. Our next question is from the line of Nishu Sood with Deutsche Bank. Please state your question.

Thanks. I wanted to ask about the backlog conversion ratio, coming in below 90% in the third quarter. It was over 90% in pretty much every quarter last fiscal year, and in the second half of the fiscal year before that as well. And you mentioned that it's going to stay below 90% going forward. I was just wondering, what's the kind of headline read on that? Was that just basically a function of the tax credit and having a higher inventory position to take advantage of that and now we're returning to normal? Is that the way to look at it? How should we think about that?

The tax credit certainly had an impact on our conversion rate, because especially looking at the year-ago quarter last year in June, people had to close by a certain date, so we expensed a very high conversion rate in our June quarter last year. Throughout the downturn, our conversion rate has been higher than our historical levels.

If you go back pre-downturn, we would typically average somewhere around a 60% backlog conversion, and it would typically be higher in our fourth quarter as we delivered more homes right at the end of our fiscal year. Throughout the downturn, we had more specs available. There was less of a planning period for people buying houses, because more of the buyers were first-time home buyers, existing homes weren't selling and so our backlog turned more quickly.

We're now seeing that slow down a little bit. We're seeing a few more build to orders come in, pre sales, and our spec balance is down from where we were last year. We're just over 50% now, instead of mid-50s.

So those are a few of the factors that are leading us to believe that our backlog conversion rate is going to stay, on average, below 90%. There will probably still be some quarters where we're above 90%, but we think that we're probably going to return more to our long-term run rate on the backlog diversion.

In addition, on average, our buyers are staying in backlog perhaps a little bit longer, as they work through some of the mortgage qualification underwriting processes. That process has elongated by several days, a few weeks, and that will generally push our conversion rate down a little bit as well, all things being equal.

Got it. Got it. Very, very helpful.

And second question I wanted to ask was on your land strategy. You folks have been very, very flexible about pursuing smaller land deals, smaller certainly than you would have in 2005 and 2006. And as you were mentioning, in terms of the rolling lot option deals, which would obviously limit the size of your take as well. Now, that's shown up and I think Stacey mentioned this in terms of lower absorption rates, that certainly we've seen in our data as well. How will that evolve going forward? Your backlog has stabilized here. The low point seems to have been two quarters ago. So will you begin to get a bit bigger, in terms of some of these deals? Will you begin to be kind of more open, in terms of the terms you are considering? How will that evolve going forward, and what effect might that have on absorptions?

I think that's a good question. And clearly, our focus is to move through this next up cycle on an asset-light basis, i.e., that we really don't want to own land for any period greater than two years. And to the extent that it takes us longer than two years to work our way through a land position, then we're going to be seeking other investors or whomever to lay off the land to or basically have an option on the second half of that land.

But there's one thing that I know that we were not good at, and I'm not sure very many of our competitors, if any, were good at. And that is trying to adjust our land position as the market began to decline. So as a result, our focus is to continue to be a land-light company, and to focus on rolling options and protect our balance sheet from the impairments that we've had from the past.

So clearly, there are a number of opportunities where we're going to have to step up some and we're doing that in some of our markets today. Typically, we have an underwriting guideline as we put cash out for a deal today, we like to have that cash back in 12 months or less. And we've expanded that horizon to 15, 18, 19 months in some instances, in some markets. But clearly still under our goal to keep it less than two years.

Great. Thanks a lot.

Thank you. Our next question is from the line of Ken Zener of KeyBanc. Please state your question.

Good morning.

Good morning.

Don, you make the comments about being profitable this year, some of it's from a tax benefit. But can you talk about your thoughts about recovering it to your DTA, given that you're the first home builder, it looks like, to be posting positive EPS in two sequential years.

Well, I would say to you that we have a very good staff here, and we're -- and they're very conservative. And I would say to you, as I've said before, we probably will be very conservative in terms of taking that DTA back onto our balance sheet. We're focused on being profitable. And once we -- clearly once our staff realizes that they have confidence that we're going to be profitable in the go ahead, the future, I'm sure they'll bring that back on.

But I'll let Bill speak more specifically to that. But that's my general conclusion.

Obviously, DT's in jest. At least I hope he is.

And Ken, what we are most focused on is earning back the DTA in terms of profitability, and earning that back in terms of not having to pay taxes because of the NOLs that we're carrying forward and utilizing our NOLs. In terms of ultimately how that gets treated on the balance sheet, obviously we're -- I'm glad that we're now in the position we can talk about it, because we have a profitable quarter, and we're looking at having a profitable year this year, without any benefit from tax credit or anything else.

We will certainly be looking at our level of profitability and our consistency of profitability and our forward visibility to profitability. And if we can build on what we've started here this year and build onto it into next year, then those conversations will get more serious. It's very difficult to predict the exact timing of when it will be appropriate to bring it on, but if we can build on this, then it will happen.

Just seems -- sorry. It just seems interesting, relative to your capital allocation, with your debt to cap already in that low 40, obviously that would have an impact there relative to how you're treating capital.

I guess the other question I have is, and I apologize if I missed it initially, how many of your closings came from land bought in the last four or six quarters? How many of your lots are still moth balled? What's the cash carry cost of those lots? And just refresh us on how that goes through the income statement.

Thank you.

In terms of closings on new communities, I think we've talked about the last couple of quarters, it's now certainly the majority of our business. The majority of our closings are coming from that. It's just really kind of ongoing operations now, as far as our closings coming from newer communities.

And for us, the newer communities are 2009 and later, which may be beyond your horizon of four to six months -- or excuse me, four to six quarters.

In terms of the carrying costs on land, I don't know that any of us can give you an exact number. If the land is inactive, all the carrying costs are flowed through as SG&A, just carrying cost from that inventory.

If land is not active, and we're not in the active efforts of construction or development, then those costs are not capitalized inventory and they are in our SG&A today.

Would that be fair to say 4% or 5% of that stated cost on your balance sheet?

No.

No.

No, carrying costs are not that high.

No, on average, just rough numbers, in the 1% range annually. When we sold land back at the end of 2008, one of the criteria that we looked at was what the carrying costs were on that land. And we certainly sold some of the land that had higher carrying costs. So today, those carrying costs are not anywhere near 4% to 5% for us.

And then, land held for development on our balance sheet is probably about a third of our owned lots right now, maybe a little bit less.

Thank you.

Thank you.

Thank you. Our next question is from the line of Bob Wetenhall with RBC Capital Markets. Please state your question.

Hello. Good morning. Nice job on cost control on the SG&A line.

Just curious, headed into the September quarter, you have a really easy comparison and just trying to put a baseline. Should we expect new orders to come in at above 4,000? Are you looking for pretty strong growth year-over-year?

What we would typically see in our September quarter is a seasonal slowing compared to where we've been in the June quarter. We don't have a lot of visibility into exactly what sales trends are going to be right now. So I think all of us would be hesitant to give you any strong guidance in terms of saying that last year is an easy sales comp.

I would say to you --

Last year you were down 20% in the quarter, so I think that this year even flat you have a pretty easy starting point.

When you look back two years ago, there was a tax credit in effect. And the expiration date on that for closing was November 30. And so we had very, very strong sales in that September quarter. The past year, we didn't have that. So it's hard to go back and say that it's an easy comp, because it was down compared to two years ago.

That makes sense. I hear what you're saying.

And just, I think to DT's comments about gaining market share, what are the other levers that you feel like comfortable in terms of creating incremental gross margin expansion?

Well, one of the things that we continue to do in our business is to continue to control and work our hard costs down in all of or divisions. One of the things that helps us do that, clearly, is by being the largest builder in the US, and being the largest builder in most all of our markets. And, frankly, having the most starts in most of those markets. Because clearly what our subs are trying to do, they're trying to keep their crews working, and because we're starting more homes than the other builders, we clearly are getting more competitive pricing.

That's not to say that we're happy with that competitive pricing, because we're constantly on a release by release by release in every one of our markets, trying to re-bid and try to create more efficiencies and asking our subcontractors and our vendors to create more efficiencies in their business. So clearly, that's one of our goals in terms of trying to increase our profitability and increase our margins.

Our profitability also clearly is going to be enhanced by our continued decrease and improvement in our SG&A. And I would say, again, no one probably would have thought that we could have decreased our SG&A 510 basis points sequentially. I know Don Horton believed that. I'm not sure I completely believed that. But clearly we moved down the road to accomplish that.

It's amazing to me, both the efficiencies on the construction side of our business in terms of labor and materials, as well as the efficiencies that we're purchasing lots from our developers and our banks, as well as our continuing ability to find more efficiencies in a business that has been wrung out over the last four years. And as much as our business has been wrung out over the last four years, again, to achieve a 510 basis point increase in SG&A sequentially was a heck of an accomplishment for our people.

So I say to you that we have the strongest balance sheet, we have the best position in the industry, we have the best people in the industry, and I think that we can continue to have improvements in both gross margins and SG&A and profitability on a year-over-year basis. The quarters are going to differ, based upon the time of year and the volume of business that's hitting our business at that particular time.

That makes sense. Thanks very much.

Our next question is from the line of Joshua Pollard with Goldman Sachs. Please state your question.

Hello. How are you all?

Great. How are you?

Great, Josh. Yourself?

I am doing quite okay.

Quick question is -- my quick question, first one is on California. There are a number of builders citing weak or weaker, let me characterize that properly, demand and your watch list continues to be tilted there. I don't want to read too much into that, because it just may be a function of higher priced land and a bigger proportion of numbers. But if you could characterize what you're seeing in the California market sort of over the last two quarters and what your expectations are, that would be extremely helpful.

California, we are down to two divisions in California. And at one point in time, I think that number was close to eight. Eight divisions. And so we've done a lot of consolidation. As a matter of fact, we had three divisions in California. We now have two divisions in California, as recently as the last 30 days.

I think the California market struggles. Primarily, they had a huge run-up during the good years. And they've had a huge drop in the last four or five years, in terms of selling prices. Frankly, also with the state of the California economy, there are just a lot of people moving out of California into other states, of which we're benefiting. But I think until California gets its economy fixed out there, it's just not a place where businesses want to go and establish businesses. And I think the existing businesses in California are looking for more profitable areas, more cost efficient areas to operate.

So as a result, I expect California to continue to be weak. That doesn't mean we aren't going to be successful in California, and we are being successful in California, and both of our divisions there are profitable and will continue, I believe, to be profitable. But we struggle to control our costs and be able to control our operating expenses in those markets. And the demand is just not what it needs to be. So we've continued to right-size our operation in California.

It's a very important state to us during the upturn and it's still a good state for us today.

Where are people moving? It doesn't seem like it's Arizona. ( Laughter ).

No, I would agree with that, Josh.

And it doesn't seem like it's Vegas, either. So I don't have too many friends out on the West Coast that are willing to make the trip to New York. So I'm interested where you guys are seeing that -- where you guys are seeing what would be California strength actually showing up.

I think a number of people are focusing on the Southwest, in particular, Texas. I think there's some moving into New Mexico, and also when we were up in Portland and Seattle recently, there's been some in-migration in those markets. Certainly Portland's been an in-migration area for quite some time, for Californians.

But a lot of people are moving into the state of Texas, simply because this is a no state income tax, right to work state, and it's centrally located. So as a result, I think that a number of those companies are contemplating moving to Texas.

And I'm guessing the NBA championship didn't help at all. (Laughter).

One last question. One might assume that the recent deals between Bank of America, Countrywide and their large semipublic and private mortgage investors should lead to fewer specific repurchase requests from those investors, and hence lower requests from the banks to you. What would your thoughts be on that?

Frankly, I don't really want to get into a discussion on any kind of relationship with B of A or Countrywide. I think generally speaking, we know the tale on our mortgage business that was the mortgages that were underwritten and sold during the peak is getting shorter and shorter. And I think that's probably the biggest driver in terms of our future exposure on our mortgage company is that there just are not a lot of loans out there with a little bit of hair on them that could be possible put backs to us. So I think the tale is the best thing working for us today.

Okay. And then I guess if I could just ask one last one on that same vein.

Are there any stresses or cracks that you guys are seeing as you analyze your portfolio that was outside of what I'll call the extreme danger zone which was sort of 2006, 2007 and maybe including 2008? Are you seeing any stress as far as put backs from late 2008, maybe 2009, 2010? Are you starting to see any of that?

No, we're not seeing anything that late.

Okay. Thank you.

Thank you. Our next question is coming from the line of Alex Barron of Housing Research Center. Please state your question.

Hello, guys. How you doing?

Very well, Alex.

Good, good. I wanted to ask you a couple questions.

The first one related to your SG&A. I too was surprised at the operating leverage you got and was hoping you could expand your commentary on what you did. Did you lay off any people? Are you paying people less, or where did you find the cuts?

To answer your question on both of those, yes. We did decrease our level of employment, and we have adjusted compensation in several of our divisions and other areas. But yes, we have done both.

And most substantially and sequentially, we reduced a lot of our advertising activities. Coming in, preparing for the spring selling season, we had more advertising activities, promotions going on and we made a conscious decision early in the season to pull back on that and to focus on our positioning in the marketplaces and our projects that are out there and let those folks sell, as opposed to driving it through the advertising as much. That made a big impact for us.

Okay. Sounds good.

My second question is, one of your competitors said that all the easy pickings are gone from distressed lot deals and that they're having a hard time finding some. Can you guys comment on what you guys are seeing and finding, and of the amount of money that you spent on land this quarter, how much of that is going into new land deals and how much of that are you guys having to start to develop your own land again.

I'd answer your question on all the distressed deals or most of the distressed deals are gone, by reminding people that in the late 1980s when we first expanded out to Phoenix, the Phoenix developers didn't know what a Texas rolling option contract was, and we introduced that to them.

I don't believe the distressed lot deals are -- certainly they're decreasing, but there's still a number of them out there that affording us the opportunity to take a look at our own finished lots and option finished lots. We're still sitting on over a two and a half year inventory, based upon our trailing 12 month sales of lots. So we feel like that we're still in a good position.

We also have a number of deals that continue to come through our corporate office from the region on new deals on a daily and a weekly basis. So I don't see the lack of distressed lot deals out there.

In terms of the breakdown of our overall spending, the $210 million we invested this quarter, the majority of that continues to be in finished lot purchases, with very little land that needs development, with the minority being in development costs. And the breakdown and the trend in those categories really hasn't changed significantly at all over the last several quarters.

And frankly, as the distressed lot deals do disappear on a go-forward basis, which we work through the good A lots, that will mean a good thing. We should be able to take some of the land that we have on our books today that we're holding for development and be able to develop those -- that raw land and the lots and move that off of our balance sheet.

So I think that's a positive, because if there's a shortage of distressed lots, that means that we are going to have to start developing lots. And one of the issues is today is that a lot of the land that's out there is not worth much by the time you develop it. So theoretically, that would imply that there's going to be some appreciation in finished lots and/or raw land, if there is a lack of distressed lots out there for sale and there's housing demand out there.

Got it.

If I could squeeze one last one. Can you talk a little bit about, other than your stock price drop relative to the trading range, I mean, what is the criteria for what's going to cause you to step in and buy the stock?

There's really no specific criteria, Alex. It's going to be opportunistic. And it's not just the stock price, it's also going to be the amount of cash we have versus the other opportunities that we see.

Okay. Thanks, guys. Take care.

Thanks.

Thank you.

Thank you. Our next question is coming from the line of Michael Smith of JMP Securities. Please state your question.

Good morning, guys. Most of my questions have been answered. But just a couple quick follow-ups.

I just want to be clear. We shouldn't take the stock repurchase as an indication that you're not able to find as many land deals as would you like, correct?

Absolutely correct.

Okay. I assumed so. I thought I knew the answer, but I wanted to, I don't know, get you on the record, I guess.

And then, just to expand on Alex's question a little bit. Aside from the distressed deals, what are you guys seeing in the land market generally. We know there hasn't been much development activity over the last four or five years. Are you starting to see a lack of deals out there, distressed or not, that look appealing to you and if so, can you kind of give a regional breakdown on that and can you also give why you think that might be? Is it -- are banks holding a lot of stuff off the market, hoping for better pricing, and I guess developer as well? Or is it that there's just not supply available period, and that until there's more development activity you're just not going to see much more stuff come to market, whatever pricing, whatever happens with pricing?

Clearly, I think the banks that are being supported by all of us are still holding their land for future sale, a lot of it. And so as a result, I think as the prices begin to move up, they will begin to sell some of those lots. But let's be factual about one thing. We're in the process of culling some of our communities, as I mentioned earlier in the call, because we don't have enough absorptions per community. So as a result, to the extent that the demand picks up, then those communities we would not be culling. So right now, we're culling communities because the demand's not there on a net sale per month basis.

So I still say to you there are plenty of distressed deals out there. And the deals we're culling, we wish we weren't culling, but we don't have the demand that we thought we were going to have, so there are many opportunities out there yet to be taken advantage of. If the demand will recover slightly.

As far as availability of good land deals that you guys are seeing out there, whether they be distressed or not, can you give sort of a regional breakdown or metro breakdown. Are there any that are particularly better or worse than others, as far as availability?

I'm not going to try to mis-answer your question or not answer your questions. But again, these land deals and these markets, I will say one more time, it's like herding cats. It's hard to differentiate between one that's significantly better than the other. We see good deals in Florida and we see good deals in Las Vegas. We see good deals in Texas and we see good deals in New Jersey. It's just a function of how well a job we're doing out there on a land acquisition basis and a due diligence basis in each one of our markets. And to the extent that we continue to do a good job in that aspect of our business, we're going to find the deals out there to support our business.

But again, one of the most beautiful things that could happen to us is that the demand picks up, the finished lot inventory declines and then all of a sudden we have to start developing lots. That would be a wonderful thing for our business, because that would mean that there's meaningful, profitable demand out there.

Okay. Appreciate it, guys. Thanks.

Thanks.

Thank you. As a reminder, ladies and gentlemen, to allow as many callers as possible to ask questions, please limit yourself to one question and one follow-up.

Our next question will be coming from the line of Megan McGrath with MKM Partners. Please state your question.

Good morning.

Just a quick question on your customer mix. I think there was a concern for you specifically this year, as you were lapping out the tax credit, that you could lag a little because first time buyers were going to exit the market. And you managed to have basically flat orders, year-over-year. So could you talk a little bit about your mix? Did you proactively change any of your sort of product lines as we moved into this year, or are you seeing kind of a -- you're just seeing the move-up buyer naturally come back to the market? What have you kind of seen happen and what have you done to offset the impact of the tax credit from last year?

I can say that clearly, as we said last quarter, we've dominated nationally the first-time home buyer market. And a couple quarters ago, Don Horton was in one of our communities and noticed that some of our competitors were at a higher price point than we, and he asked the Division President, why aren't we competing with that particular builder. Clearly, the Division President had a good answer and he said, we will be.

So as a result, there are move-up markets and move-up product that we've expanded into across the country, and I think that's one of the things that's helped our sales and our profitability over the last quarter. It has still not become a significant portion of our business, but we're going to continue to pursue it because clearly there's no reason for someone like DR Horton to let any small, medium size private builder have a niche in the marketplace that we can do better in than they. And that's what we're focused on, and we think we can continue to expand that portion of the business.

And quite frankly, if you look back during the peak in the homebuilding business between 2000 and 2006, we had a lot of move-up business in our portfolio. So all we're doing is going back and doing what we already have executed on before very effectively, but the niche just didn't exist in our mind. And I'm not sure how big the niche is, but it's certainly worth exploiting and taking away from those small, medium sized and under capitalized builders.

Great. Thanks.

And then, you talked a couple of times about increasing your market share in each of the regions. Are you still happy -- it sounds like with the opportunities for small lot purchases, are any acquisitions looking more attractive these days of small private builders to increase that a little bit more aggressively?

You know, we still see good opportunities in our core markets. We've always been very active in acquisitions in our formative years, really from 1992 up til 2002. And our last large acquisition was Shuler Homes in 2002.

There will be opportunities, I think, on the acquisition side. But right now we do continue to find just the single lot deals. And so then rather than taking all of someone's operation, which is going to include some land that you don't want, we're continuing just to select the individual deals right now. But we don't want to take anything off the table going forward.

The other thing on acquisitions is we certainly don't want to add to our SG&A by doing an acquisition we would. And most importantly, we don't want to take the land they have and put it on our books. Because even though we do due diligence on it, we have enough land on our books to work our way through. So unless they have some really great lot rolling option positions with low earnest money up, it would not be accretive to us I don't believe, to even pursue that sort of thing, when we have the opportunity to mine those land and option deals without taking on the overhead associated with the transaction, nor the risk.

Great. Thank you.

Thank you. Our next question is from the line of Dan Oppenheim of Credit Suisse Group. Please state your question.

Thanks very much.

Just wanted to think about or hear what your thoughts are in terms of goals looking forward in this environment where the orders are stable clearly at very low levels, but if we go back to days long ago that we all wish will return, you had goals in terms of the volumes and such, then more recently in terms of getting back to profitability. Now that you have that, what are you thinking about in terms of what you're reaching for in term of 2012, 2013, in terms of the key goals?

Clearly, on 2012 and 2013, we're focused on increasing our profitability and growing the Company in 2012 and 2013. My own personal goal is to be here when we get back to 2006, when we closed 53,000 units. And I know Stacey's laughing and everyone else is laughing, but I'm staying here until -- with Don Horton until we can get back to closing over 50,000 units. I know that's a big number, but I think as we continue to aggregate our market share, and I think we're somewhere close to 7% on a national basis of all the closings last year, a little less than 7%, our goal would be to try to get to 10% of all the closings in the US, and as we continue to aggregate market share.

But this company's focused on one thing when we get up every day, and I say shower and shave and put our makeup on, and that is, how do we have consistent, increasing profitability.

Great. Okay. Perfect.

That's all. Thanks very much.

Thank you. Our next question is from Stephen East of Ticonderoga Securities. Please state your question.

Thank you. Good morning, everybody.

Good morning.

DT, one thing I'm glad you're not going to be knocking on my door, collecting rent, so -- (Laughter) -- a little bit happy there.

If you look -- you talked about your gross margin and your product mix, et cetera. Are you having any material headwinds, the pricing on the materials, is that an issue for you that you have to overcome? Or have you been able to offset with gives and takes there?

The latter. Certainly we're getting pushed. Just like we're pushing to make profit, we have vendors and suppliers that are pushing to get back to profitability or higher levels of profitability. So our national sales manager and each one of our regional -- excuse me, our national purchasing manager, Brad Conlon, and each one of our regional purchasing managers as well as the division purchasing managers out there are working on a daily basis to keep those increases at a minimum level, because our goal is to continue to improve our profitability.

Okay. And then, the only other issues that I've got, on your product mix, your move-up, do you get better gross margins on that or is it just better gross margin dollars?

And then on your land deals, if you look at the last couple years where you primarily invested, where would that be? And where do you think over the next couple of years and are there any markets you want to enter or exit, if you will, and obviously I know you're not going to give specific markets, but do you see any of that?

Well, on the gross margin, let's be clear about one thing. When we underwrite a deal, we demand whether it be an entry level or whether it be a move-up house, we're still shooting for a 20% gross margin. Clearly, we're still falling short of that, but that's our goal. So we don't change the underwriting guideline on the gross margin percentage. Obviously, on a higher sales price on a move-up price home, we're generating more gross dollars to the gross margin line by virtue of the higher average sales price, like I said.

As I look at the country, clearly as you look at places that are friendly to business, and it's not because we're here, but it's a fact that it is a fact, and that is in Texas it's a great climate for businesses here. And Texas continues to have positive job growth, despite everything on that's going on in the US. Clearly, we're a strong force in each one of our Texas markets. As an example, in Dallas, we're three, four times larger than the second largest builder in the Dallas market. Same in Austin, San Antonio and Houston, where we're the largest builder in those markets, not three times the number two builder. But nevertheless, those are strong markets for us. And we're going to continue to grow those markets simply because of the fact that businesses are moving into Texas and that's going to provide opportunity for us.

I clearly look at the state of Florida, and irrespective of what's happened over the last four or five years, and the last two harsh winters that happened in the northeast, I believe as people reach retirement age, they're either moving as they call them halfbacks, where they move to Florida and move halfway back to the Carolinas. I look at the Carolinas as a good potential market for us in the future. And I look at Florida and the Atlanta area, as well as the coastal part of Florida.

So those are the places where I say are a good potential markets for us on a go-forward basis and where we're looking to do new land deals in every market that makes sense to us economically and profitability wise. But those are markets that on the top of my head that I think are -- as we look forward, those are going to be growth areas for us.

Okay. Thanks a lot.

Thank you. Our next question is from Jay McCanless of Guggenheim Partners. Please state your question.

Good morning, everyone.

First question's housekeeping. What was the DTA quarter end?

Looking it up here real quick. 849.

$849 million. And that was fully reserved.

Thank you.

Next question. On the sequential decrease in the watch list, is that a function of the markets that you're in improving in terms of price, or is that a function of just the mix of what's in the watch list and rolling through some of those older neighborhoods?

It's probably a little bit of everything. Part of it is some of the communities that we took impairments on this quarter, were probably on the watch list in the prior quarter. So once they've been impaired and written to their fair value, they're no longer on the watch list. Secondly, we've had some communities where we've seen some profit performance improvement. That could be from our execution or from the market itself getting better, but they may have come off the watch list, and others would have been we just completed out some of those communities as well. So it's a few factors all in. The biggest single piece would have been some of those communities that we impaired that came off.

Okay. And then, final question, just wanted to get your thoughts on what effect if the loan limits are not increased with the bills or maintained, with the bills that are pending in Congress, what effect is that going to have on DR Horton's business, and how are you looking at fiscal 2012 if those loan limits actually go back down?

We've looked at, by market, where we've closed homes that would be subject to that, and that was a very small number of closings in the first six months of the fiscal year. So we're not expecting a significant impact to us on those loan limit changes.

Okay. Thanks, everyone.

Thank you. Our final question today is coming from the line of Joel Locker with FBN Securities. Please state your question.

Buyback. How aggressive would you have to get before you affected a DTA, or could you buy back as much shares as you wanted?

The measurement on the DTA is generally over a three year rolling period, so there's going to be a different answer each quarter end in terms of what we can buy back. We'd essentially have to have a 50% change in our ownership. So under just the 50%, without looking at underlying other changes in our ownership, there's a lot of room. I wouldn't set your expectations that high, though.

Right. Got you.

And then what percent of your owned lots are finished, actually?

It's about 25%, a little bit less are finished of what we own right now.

Right.

All right. That's all I have. Thanks a lot.

Thank you.

Thank you.

There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Thank you.

Once again I'd like to express my appreciation to all of our DR Horton teammates for an exceptional quarter in a difficult economic environment, both nationally and as well as the housing industry. Our focus clearly is to increase our absorptions per community, on a go forward basis, and to focus on what I referred to over the years as BSCM, build, sell, close homes and make money. And when we get up every day, that's our focus.

Thank you very much, and we look forward to a profitable fiscal year 2011.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.