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Contrary to what most people expected when the Fed started rapidly increasing interest rates, a surge in house prices is captivating homeowners, investors, and analysts alike. Zillow anticipates a 6.5% increase in home values from July 2023 to July 2024, even in the face of ongoing affordability challenges.
Similarly, Freddie Mac predicts a 0.8% increase in prices from August 2023 to August 2024, with an additional 0.9% gain in the subsequent 12 months. According to Freddie Mac, part of the rebound in prices is based on a “large cohort of Millennial first-time homebuyers reaching prime home-buying age.”
Given these rather strange dynamics we are experiencing in the housing market, we decided to focus on a home builder for this week’s C-Suite Transitions article.
Welcome to edition 60 of C-Suite Transitions, a weekly series on InsideArbitrage that tracks appointments and departures at publicly traded companies during the prior week. We highlight five appointments and departures each week by picking the largest companies from the full list of management changes.
Sudden Departures
D.R. Horton (DHI): $107.01
Market Cap: $36.35 billion
EV: $39.82 billion
Key Insights
D.R. Horton, a prominent homebuilding company focuses on acquiring and developing land and constructing and selling residential homes as well as multi-family rental properties. It operates in 113 markets spread across 33 states. D.R. Horton also offers mortgage financing, title services, and insurance agency services to assist homebuyers.
Affordable Homes
It is noteworthy that, nearly 70% of the homes sold by D.R. Horton were priced below $400,000.
Management Changes
On September 20, 2023, D.R. Horton (DHI) announced the promotion of Paul J. Romanowski to President and Chief Executive Officer and his appointment to the company’s Board of Directors, both of which will be effective October 1, 2023.
At the same time, David V. Auld will transition from his current role as President and CEO to Executive Vice Chair of the company’s Board of Directors. Michael J. Murray will continue to serve as Chief Operating Officer for the company.
Since October 2014, David V. Auld has held the position of President and CEO within the company. His leadership has been instrumental in driving significant growth in revenues, market share, earnings, cash flow generation, and returns to shareholders.
Paul J. Romanowski assumed the role of Co-Chief Operating Officer in October 2021. Prior to this, he served as Region President, responsible for the management of all D.R. Horton homebuilding divisions in Florida, the Gulf Coast, and five Mid-Atlantic states.
D.R. Horton’s Homebuilding Land and Lot Portfolio
In Q3 2023, D.R. Horton invested $2.2 billion in lots, land, and development, marking a 25% YoY and 27% sequential increase. This substantial inventory primes the company to meet future demand, bolstering sales and home closings in the upcoming quarters.
D.R. Horton’s homebuilding land and lot portfolio totaled 555,100 lots at the end of the quarter, of which 25% were owned and 75% were controlled through land and lot purchase contracts.
As of June 30, 2023, D.R. Horton had 43,800 homes in inventory, of which 25,000 were unsold. 5,700 of the company’s unsold homes were completed at that time.
The company has increased its market share to nearly 14% in the last decade.
Forestar and D.R. Horton
In 2017, D.R. Horton acquired 75% of Forestar (FOR) for $367.1 million. Forestar Group continues to be listed as a separate public company and currently has a market cap of $1.32 billion.
In Q3 2023, Forestar sold 3,812 lots and generated $368.9 million of revenue compared to 3,473 lots and $308.5 million of revenue in the prior-year quarter.
Truland Homes
In June 2023, D.R. Horton acquired Truland Homes’ homebuilding operations in Alabama and Northwest Florida for around $100 million. This deal includes nearly 155 homes, 620 lots, a sales order backlog of 55 homes, and around 660 more lots through land purchase agreements.
Single Family Rental Company Pretium To Acquire $1.5B of D.R. Horton Homes
In June 2023, Bloomberg reported that Pretium Partners is set to acquire a significant number of homes from D.R. Horton. The agreement encompasses both completed and under-construction homes, with a total deal value estimated to surpass $1.5 billion.
Mortgage Rates and Home Prices
As of September 21, the average 30-year fixed mortgage rate remains high at 7.19%, as reported by Freddie Mac.
According to the National Association of Realtors (NAR),
The housing market is grappling with scarcity, marked by a lack of new construction and an increasing disparity between supply and demand. As per the NAR, the United States is presently facing a significant housing shortage, estimated to be in the range of 5.5 to 6.8 million units. This shortage is worsening each year, with the gap between supply and demand steadily increasing, and is in part, attributed to a decrease in new construction and the escalating costs of construction materials, which include lumber, steel, and concrete.
Despite the presence of exceptionally high mortgage rates and soaring home prices, the housing market continues to be intensely competitive. This is primarily due to persistently high demand, which has exceeded the limited supply of available homes. Additionally, many homeowners who secured low interest rates in the past have chosen to stay in their current residences. These combined factors contribute to an ongoing affordability crisis, making it difficult for many prospective homebuyers to enter the market. First-time homebuyers are delaying their purchases, waiting for more favorable mortgage rates before entering the housing market.
Home Builder Confidence Index
The NAHB/Wells Fargo Housing Market Index (HMI) is a monthly survey that gauges the outlook of National Association of Home Builders (NAHB) members, providing valuable insights into the single-family housing market. The survey assesses the participants’ perception of market conditions for the current and future sales of new homes, as well as the level of prospective buyer traffic.
A reading above 50 indicates a favorable outlook on home sales and below that threshold indicates a negative outlook.
The index started rebounding earlier this year, entering positive territory in June for the first time in almost a year. Last month it again dropped below 50.
In our July C-suite edition, Lennar’s Co-CEO Rick Beckwitt Departs The Homebuilder we wrote the following,
In June, single-family production declined due to increased construction costs and higher mortgage rates, resulting in reduced home-building activity. This, in turn, worsened affordability conditions for potential home buyers. Overall, housing starts decreased by 8% in June to a seasonally adjusted annual rate of 1.43 million units, as reported by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
The number of single-family units under construction has decreased by 17% compared to the previous year, totaling 688,000. In contrast, the number of apartments under construction has reached a high of 994,000, marking the highest count since May 1973. On a regional and year-to-date basis, combined single-family and multifamily starts have declined by 13.9% in the Northeast, 19.4% in the Midwest, 11.5% in the South, and 21% in the West.
In June, overall permits decreased by 3.7% to a 1.44 million unit annualized rate. Single-family permits increased by 2.2% to 922,000 units, but are down 21.5% year-to-date. Multifamily permits declined by 12.8% to an annualized pace of 518,000 units, the lowest since October 2020. Regionally, permits are lower year-to-date by 23.4% in the Northeast, 20.8% in the Midwest, 16.2% in the South, and 23.6% in the West.
In July, home prices reached a new peak for the sixth straight month, driven by inventory shortages that intensified competition.
The S&P CoreLogic Case-Shiller National Home Price Index recorded a 0.6% month-over-month increase and a 1% rise over the past year when adjusted for seasonal factors. This growth in July marked a new all-time high for the national home index, surpassing the previous record set in June 2022.
Buffett’s Berkshire Hathaway
Berkshire Hathaway disclosed an investment in three homebuilders D. R Horton, Lennar, and NVR last month in a regulatory filing, with D.R. Horton making up the lion’s share. Berkshire holds nearly 6 million shares, worth over $720 million as of June 30, 2023. Meanwhile, Berkshire’s holdings in NVR are approximately $70 million, and its position in Lennar is valued at around $17 million at the end of the second quarter.
The filing does not specify the specific investments made by Warren Buffett and those made by his portfolio managers, Todd Combs and Ted Weschler.
You can check out the rest of the changes to the Berkshire Hathaway 13F portfolio in our Gurus section here.
Class Action Lawsuit Filed Against D R Horton
In a more than $16.1 million settlement, D.R. Horton and its partners resolved claims from homeowners in an Easley, S.C., subdivision who alleged defects in foundations, concrete, siding, framing, windows, doors and veneers. The class-action suit includes the owners of 220 single-family homes in the Rose Hill subdivision completed by D.R. Horton between 2012 and 2017.
Source: KLFY News 10
Dividends
D.R. Horton pays a quarterly dividend of $0.25 per share and has been increasing this dividend every year for the last eight years. Despite these increases and a potential increase once again next quarter, the dividend yield is a paltry 0.93% and the company pays out just 6.93% of its earnings in dividends, leaving a lot of capital for either higher dividends, buybacks or both.
Share Repurchases
D.R. Horton repurchased 3.1 million shares of common stock for $342.9 million during the third quarter of fiscal 2023, for a total of 7.7 million shares repurchased for $764.2 million during the nine months ended June 30, 2023. The company’s remaining stock repurchase authorization at June 30, 2023, was $657.1 million.
Fiscal 2023 Third Quarter Earnings (Press Release) (Investor Presentation)
Fiscal 2023 Guidance
Conclusion
Due to the prevailing high interest rates, homeowners are refraining from selling their properties. The prospect of moving into a more expensive home with increased financial responsibilities, particularly at higher interest rates, poses a significant challenge.
D.R. Horton, Inc. has been benefiting from the demand for new homes despite the sharp rise in mortgage rates. With its expanded inventory of homebuilding lots and a diverse price range of price points, the company has effectively leveraged the current situation to its advantage. It is not surprising to see that the company is buying back its stock and Berkshire Hathaway has also been buying its stock.
David Auld did a phenomenal job as the CEO of the company with the stock gaining 514% during his nine-year tenure. In typical situations, leadership transitions can raise concerns; however, given his transition to the role of Executive Vice Chair and the fact that the incoming CEO is an internal hire, our concerns are somewhat alleviated.
Appointments
1. 3D Systems (DDD): $4.40
On September 21, 2023, Andrew Johnson, 3D Systems Corporation’s Executive Vice President, Chief Corporate Development Officer, Chief Legal Officer and Secretary, was appointed as Interim Chief Financial Officer, effective October 16, 2023.
| MarketCap: $587.70M | Avg. Daily Volume (30 days): 3,740,321 | Revenue (TTM): $514.42M |
| Net Income Margin (TTM): -23.57% | ROE (TTM): -16.22% | Net Debt: $34.01M |
| P/E: -4.66 | Forward P/E: N/A | EV/EBIDTA (TTM): -6.89 |
| P/S (TTM): 1.10 | P/B (TTM): 0.83 | 52 Week Range: $4.37 – $12.67 |
2. Keurig Dr Pepper (KDP): $31.67
On September 20, 2023, Keurig Dr Pepper announced the appointment of Timothy Cofer to the position of Chief Operating Officer, effective November 6, 2023.
Keurig Dr Pepper Inc. announced it expects that in the second quarter of 2024, Timothy Cofer will succeed Robert Gamgort as Chief Executive Officer of the company.
| MarketCap: $44.25B | Avg. Daily Volume (30 days): 8,516,340 | Revenue (TTM): $14.57B |
| Net Income Margin (TTM): 11.00% | ROE (TTM): 6.32% | Net Debt: $14.10B |
| P/E: 27.85 | Forward P/E: 16.50 | EV/EBIDTA (TTM): 15.60 |
| P/S (TTM): 3.09 | P/B (TTM): 1.75 | 52 Week Range: $30.30 – $38.78 |
3. D.R. Horton (DHI): $107.01
On September 19, 2023, the Board of Directors of D.R. Horton effective October 1, 2023, appointed Paul J. Romanowski as President and Chief Executive Officer.
| MarketCap: $36.20B | Avg. Daily Volume (30 days): 2,714,246 | Revenue (TTM): $34.60B |
| Net Income Margin (TTM): 14.07% | ROE (TTM): 24.28% | Net Debt: $3.04B |
| P/E: 7.60 | Forward P/E: 8.23 | EV/EBIDTA (TTM): 6.13 |
| P/S (TTM): 1.07 | P/B (TTM): 1.67 | 52 Week Range: $65.37 – $132.03 |
4. Autonation (AN): $152.66
On September 18, 2023, the Board of Directors of AutoNation appointed Jeff Parent as Chief Operating Officer, effective October 16, 2023.
| MarketCap: $6.72B | Avg. Daily Volume (30 days): 505,724 | Revenue (TTM): $26.65B |
| Net Income Margin (TTM): 4.50% | ROE (TTM): 54.31% | Net Debt: $7.18B |
| P/E: 6.33 | Forward P/E: 6.93 | EV/EBIDTA (TTM): 6.89 |
| P/S (TTM): 0.28 | P/B (TTM): 3.21 | 52 Week Range: $94.92 – $182.08 |
5. BRC Inc. (BRCC): $3.60
On September 19, 2023, BRC Inc. announced Stephen Kadenacy, Chief Financial Officer, will serve as Principal Accounting Officer following Kristina Braendel’s departure effective September 29, 2023.
| MarketCap: $765.75M | Avg. Daily Volume (30 days): 515,321 | Revenue (TTM): $344.55M |
| Net Income Margin (TTM): -5.30% | ROE (TTM): -68.50% | Net Debt: $93.96M |
| P/E: -9.62 | Forward P/E: N/A | EV/EBIDTA (TTM): -6.15 |
| P/S (TTM): 0.59 | P/B (TTM): 9.93 | 52 Week Range: $3.45 – $8.39 |
1. Central Garden & Pet Co (CENTA): $41.10
On September 18, 2023, Timothy P. Cofer, the Chief Executive Officer of Central Garden & Pet Company announced his intention to resign as Chief Executive Officer effective October 6, 2023.
| MarketCap: $2.26B | Avg. Daily Volume (30 days): 202,409 | Revenue (TTM): $3.27B |
| Net Income Margin (TTM): 3.70% | ROE (TTM): 8.65% | Net Debt: $1.04B |
| P/E: 19.98 | Forward P/E: 14.43 | EV/EBIDTA (TTM): 10.28 |
| P/S (TTM): 0.67 | P/B (TTM): 1.53 | 52 Week Range: $33.69 – $45.93 |
2. Envestnet Inc. (ENV): $44.66
On September 25, 2023, Envestnet announced that Peter D’Arrigo will be stepping down as Chief Financial Officer effective November 15, 2023.
| MarketCap: $2.44B | Avg. Daily Volume (30 days): 552,603 | Revenue (TTM): $1.21B |
| Net Income Margin (TTM): -8.79% | ROE (TTM): -13.49% | Net Debt: $953.98M |
| P/E: -21.11 | Forward P/E: 17.18 | EV/EBIDTA (TTM): 35.81 |
| P/S (TTM): 2.08 | P/B (TTM): 3.37 | 52 Week Range: $41.72 – $69.22 |
3. Axalta Coating Systems (AXTA): $26.46
On September 19, 2023, Brian A. Berube, Senior Vice President, General Counsel, and Corporate Secretary of Axalta Coating Systems informed the company’s Board of Directors of his decision to retire from such positions, effective December 31, 2023.
| MarketCap: $5.87B | Avg. Daily Volume (30 days): 1,805,995 | Revenue (TTM): $5.05B |
| Net Income Margin (TTM): 4.50% | ROE (TTM): 14.95% | Net Debt: $3.05B |
| P/E: 25.72 | Forward P/E: 14.81 | EV/EBIDTA (TTM): 11.13 |
| P/S (TTM): 1.16 | P/B (TTM): 3.57 | 52 Week Range: $20.66 – $33.68 |
4. Pacira BioSciences (PCRX): $31.04
On September 20, 2023, David Stack informed the Board of Directors of Pacira BioSciences that he intends to retire as Chief Executive Officer of the company and as a member of the Board effective immediately following the appointment of his successor.
| MarketCap: $1.44B | Avg. Daily Volume (30 days): 438,864 | Revenue (TTM): $669.23M |
| Net Income Margin (TTM): -0.68% | ROE (TTM): -0.58% | Net Debt: $399.95M |
| P/E: N/A | Forward P/E: 7.39 | EV/EBIDTA (TTM): 11.68 |
| P/S (TTM): 2.13 | P/B (TTM): 1.78 | 52 Week Range: $32.58 – $58.10 |
5. D.R. Horton (DHI): $107.01
On September 19, 2023, the Board of Directors of D.R. Horton effective October 1, 2023, David V. Auld to transition from his role as President and CEO to Executive Vice Chair of the company’s Board.
| MarketCap: $36.20B | Avg. Daily Volume (30 days): 2,714,246 | Revenue (TTM): $34.60B |
| Net Income Margin (TTM): 14.07% | ROE (TTM): 24.28% | Net Debt: $3.04B |
| P/E: 7.60 | Forward P/E: 8.23 | EV/EBIDTA (TTM): 6.13 |
| P/S (TTM): 1.07 | P/B (TTM): 1.67 | 52 Week Range: $65.37 – $132.03 |
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