D.R. Horton Does Land, Cattle Deals With Sons of Top Executives

(Bloomberg) -- D.R. Horton Inc. plows billions of dollars a year into land for tens of thousands of homes across the U.S. But a smattering of its development deals go to some top executives’ family members, who could profit handsomely.

The nation’s largest homebuilder spent more than $8 million buying property in the past two years from companies that are led by children of its chairman and its CEO. It has agreements to buy as much as $114 million more from them.

For one of those deals, the company’s billionaire chairman lent tens of millions of dollars to his two adult sons to finance a land purchase in Arizona. The publicly traded company also paid the chairman’s sons for more than 200 head of cattle.

Those transactions are disclosed in recent federal securities filings by the Arlington, Texas, company, which note that its compliance officer and independent directors reviewed several of them. The company says its disclosures were appropriate.

The documents leave some points unclear, however, including whether the Arizona deal got any such review. They don’t disclose two smaller loans the chairman made to his sons to acquire land to sell to the company. Also not addressed in the filings is how D.R. Horton negotiated those agreements and whether it secured the best terms for its shareholders.

Those are important details, said Nell Minow, the vice chairwoman of ValueEdge Advisors, which specializes in corporate governance. Before a public company approves a deal with fathers, sons or other related parties, it should obtain independent asset valuations and appoint an independent board committee to conduct a review, she said.

“The gold standard is for the people involved to bend over backwards to show transactions are arm’s length -- especially when insiders are involved,” said Minow, a former president of Institutional Shareholder Services, a proxy advisory firm. Although the precise lines can be blurry, a failure to address the process in securities filings, she said, “is an enormous red flag.”

Those concerns may be amplified in the case of D.R. Horton, because the same handful of longtime members make up the company board as well as its committees, an arrangement that has received low marks from shareholder advocates.

The company says it disclosed significant related-party transactions, gave them the appropriate review and determined they were in the interest of shareholders, according to a spokeswoman, Jessica Hansen. In a written response to questions to D.R. Horton, its chairman and its CEO, she said the company was open to feedback from shareholders about its board.

Arizona Deal

Horton’s 69-year-old chairman and founder, Donald R. Horton, personally lent his two adult sons money to buy land that his company has agreed to buy later. The biggest of those three transactions is related to 119 acres in an upscale area northeast of downtown Phoenix, described in a single paragraph of the company’s April 30 quarterly report to the U.S. Securities and Exchange Commission.

It says Donald Horton lent $77.5 million, at an annual interest rate of 2.55%, to a company owned by the sons, Ryan and Reagan Horton, to finance the land purchase. The homebuilding company then agreed to pay the sons’ firm, R&R Riverview, an annualized return of 16% for an option to buy the land.

The company says it plans to close on some of the land in October and will buy the rest at a later, undisclosed date. Based on that timeline, the sons’ firm would take in an estimated $7 million through October, and more on whatever they hold for longer.

Ryan and Reagan Horton didn’t respond to requests for comment made to an office telephone number provided by their father.

Appropriate Disclosures

D.R. Horton’s securities disclosures on the Arizona deal were appropriate, Hansen wrote. The board’s independent directors deemed it to be in the company’s best interest after comparing it with what other intermediaries had charged in the past, she said.

“The significant size of the transaction meant there were limited parties with the financial capacity to provide land-banking services for it while giving the company timing flexibility,” Hansen said.

Donald Horton, in a telephone interview, said of the Arizona deal that his sons “did it cheaper than other people would.”

Donald Horton provided another $8.9 million in loans so his sons could buy property in Louisiana and Texas that the company agreed to buy at a later date, the homebuilder said in response to inquiries from Bloomberg News. The company didn’t disclose this financing, though it did alert shareholders to the larger Arizona deal “due to the significant size,” Hansen wrote.

Corporate governance experts say that there’s no bright line for disclosing such transactions and that it’s generally up to the board to determine whether the deal was material to investors.

Land Banks

It’s not unusual for builders to turn to middlemen -- known as land banks -- to hold onto sites until they develop them. The benefits are manifold, letting builders keep debt off their books, free up cash and record higher returns on assets than if they were sitting on vast tracts of land. Builders can also renegotiate, or even walk away, from a land-bank deal if the market softens.

For taking on that risk, land banks often earn handsome returns from big builders, starting in the low teens and going up for riskier deals, people familiar with the industry say.

D.R. Horton says R&R Riverview’s risk was high because the builder put down a 3% deposit on the Phoenix deal, which is low by company and industry standards. By another token, the risk for the land bank could be lower than otherwise because D.R. Horton would have to back out of a deal with the sons of its chairman, financed with the chairman’s cash.

In general, it’s important for builders to be able to walk away, said Larry Sorsby, the chief financial officer of Hovnanian Enterprises Inc., a New Jersey-based builder. “Anytime you have a related-party transaction you have to be extra cautious,” he said, while acknowledging that there are probably a limited number of land banks that could handle large deals like the one in Arizona.

Hansen, the D.R. Horton spokeswoman, said that “based on past experience, the R&R land-banking fees compared favorably” to previous deals with the other land bankers it uses.

“Typically, the company would pay a land-banking fee until closing on the land, or walking away from the transaction,” she said. “With R&R, the company will not pay a fee should it choose to not close on the land.”

R&R would, however, be entitled to keep D.R. Horton’s 3% deposit, she said.

Sunbelt Homes

Since Donald Horton borrowed $30,000 to put up his first home in Fort Worth in 1978, his company has emphasized starter homes for the masses in the sunbelt. Publicly traded for more than two decades, it now puts up more houses each year than any other builder.

Shares of the company, now part of the large-cap S&P 500, have advanced 27% this year, boosting its market value to more than $16 billion. Donald Horton, the two sons and a family trust own a roughly 9% stake worth $1.5 billion.

Over that span, the company’s board of directors has hardly changed. Its five members have served for an average of 15 years. Horton alone makes up the executive committee, with authority to act on behalf of the board when it’s not in session. The other four directors, who are all deemed independent, are also the sole members of the governance, audit and compensation committees.

Institutional Shareholder Services gives D.R. Horton the riskiest possible rating for the structure of its board, flagging related-party transactions and a lack of diversity.

“The company engages regularly with our shareholders and is open to their feedback about its business and performance and its governance practices,” Hansen said.

Undisclosed Financing

In addition to approving the deals with Donald Horton’s sons, the company’s governance committee also gave the go-ahead to purchase $20 million in North Carolina lots from entities whose principals include Andrew Auld, son of Chief Executive Officer David Auld. (David Auld doesn’t sit on D.R. Horton’s board.)

The younger Auld is a partner in this venture with Ralph Spano, a Florida real estate investor whose LinkedIn profile says he once worked at D.R. Horton. The company says Spano was never an employee but worked as a land-acquisition consultant in the Orlando area. During that time, David Auld was the division president for that territory.

The Auld-Spano company bought a 240-lot property in Asheville in December for $2.4 million. D.R. Horton provided Auld and Spano with $2.6 million in an “earnest money deposit” on the day of the purchase, according to local records.

D.R. Horton didn’t provide financing for the purchase, it said, explaining that the deposit secured the rights to buy back the lots at a future date. The company will pay $18.3 million, according to a filing. Auld and his partner will make “significant additional investment” to develop the property, the company said, describing the terms as typical for a deal with an outside developer.

Andrew Auld and Ralph Spano didn’t respond to requests for comment.

Cattle Disclosure

As for the cattle, D.R. Horton purchased 233 head from Ryan and Reagan Horton for $279,600, according to filings. The plan, it said, is to raise the livestock on the company’s working Texas ranch -- a 94,000-acre facility used for company retreats and a summer camp for employees’ kids.

Raising cattle on a Texas ranch is a low-overhead business with good potential profits, the company says. Horton’s sons are in the ranch business, too, and it makes sense to move livestock to where the grazing conditions are best, the founder said by telephone.

He said the price -- $1,200 per head -- was in line with sales at local livestock auctions, and added: “They have good cattle.”

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