In this special episode recorded at the 2023 Lay of the Land Conference, Founder & Managing Director, Dean Saunders talks candidly with David Auld, President & CEO of D.R. Horton, about the various changes in the residential development market throughout their careers. David also provides key insights on creating and maintaining a positive and competitive company culture over his 40 year career with D.R. Horton.
Below is an excerpt from the interview. Listen above for the full podcast.
How do you incorporate a competitive company culture? We’ve got about 13,000 employees and I think the baseline of the culture of our company is: you hire aggressive, competitive people and you get out of their way. I feel like our corporate office is more of a bank or consulting group than it is a top-down entity. The people that have grown up in our company are self-determining, they're competitive, they're aggressive, and they compete with each other about who's got the best division. Who's growing the fastest and who's driving the best returns. It’s friendly competition. We all root for each other, but just in the state of Florida, you’ve got North Tampa, the western side of the Central Florida market, the eastern side of the Central Florida market, Jacksonville, and others. All these guys get up every day and the first thing they do is look at each others’ sales and try to figure out how to get ahead.
Have you ever tried to become more centralized? Don Horton did put his hands back on the wheel in 2008 to reset how we underwrite the direction that the company should go. That was the beginning of us becoming what I consider a “real company” and a company that can grow, generate cash, and drive returns through cycles. Everything we've done since 2008 has been to get in that position. We'll see how this cycle goes, but my expectation is that we will continue to grow and we'll generate even more cash than we have during the upswing cycles. We might not make as much money, but the returns will be very solid and positioned to improve as we come out of the cycle.
Where do you see the [residential development] industry going long-term? The industry, at least the public companies, they're operating with a discipline that didn't use to exist which I think is going to create stability long-term because it's going to take the big swings out. You're still gonna have Fed-induced recessions or slowdowns and there's going to be a reset in valuations through that process, but with the strength of the industry and a demand that cannot be satisfied, long-term - it’s a great industry. I tell our young guys all the time to be in this industry, at this time, and actually helping people figure out how to get in a home. Whether you're building it, selling it, or entitling land, you're creating that opportunity for somebody to own a home. To me, there is no better job. It's been great for me, it's been great for my family financially, but even more so, it's the hundreds and thousands of people that we put into their first homes. It's a great industry and career.
Is the industry well-heeled enough to work through this economy? In 2006, we had over $6 billion in debt as we were selling and closing 50,000 homes a year. We owned about 70% of the land we had control over for future deliveries. Today, we have $2 billion in debt, we're somewhere between 80,000 and 85,000 deliveries a year. We also have a multifamily branch with a major investment in Forestar and a cash position of over $2 billion. It's just night and day, but I think D.R. Horton is in great shape. I'd like to be able to tell you that I know what every other public voter’s balance sheet looks like, but I don't really don't care. My focus has always been on D.R. Horton, but just looking at how they behave, where they're headed, and what they talk about on these conference calls, it seems like everybody is positioned in relationship to pretty much the same way. They are working very hard to get into that position.
How have you seen consumer demand change in the marketplace? Affordability is driving sales and closings and the further you get away from the major employment centers, the more affordable you can be. It seems like when a city, county, or municipality gets to a certain size, they all of a sudden become experts in land entitlement. Then they want to help everybody that owns a piece of land maximize the absolute cost it takes to deliver that land.
Back in Josephine, Texas, we could buy land for $10,000 to $12,000 an acre. Fast-forward eight years to today and an acre of land out there is $50,000. The cost of producing a lot, just getting it through the engineering and entitlement stage, is probably tripled.
What trends are the industry having to respond to? Again, it's all being driven by affordability. When I first came into the market in 1989, you wouldn’t open a community without redesigning the product, looking at the overall market, and then designing homes that would compete well within that little submarket. Today, if you're not driving efficiency through repetition and simplification, you're gonna get pushed into price points that are very tough to compete in. Our model for about the last 10 years is, “How do we simplify every aspect of what we do?” We try to create efficiency, whether it's in the mortgage application process, the design process, or the size and scale of the community. Everything that allows us to build more houses for less money.
What are some products that D.R. Horton is offering now? The overlying concepts are the same whether you're selling a house for $1,000,000 or you're selling a house for $300,000. You got to try to eliminate as much complexity as you possibly can. When we first started [Emerald Homes], every house that we built was pretty much redesigned or designed from scratch. What we found is that the Emerald buyer is looking for value just like the [Express Homes] buyer is looking for value. We kind of reset some of our older, more efficient Horton plans and redrew them with an eye toward making them more appealing to that luxury buyer.
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