The change in Horton's ratings outlook reflects the company's steady and successful execution of its strategy of buying less land, foregoing an active acquisition policy, and using the excess cash flow for debt repayment and share purchases. As a result, debt leverage has improved from the highest in its peer group to one that compares favorably with those within its peer group.

The ratings also acknowledge the company's enviable operating performance (105 consecutive quarters of year-over-year earnings growth), success at integrating prior acquisitions, strong equity base, geographic diversity, and tight cost controls.

At the same time, the ratings continue to incorporate Horton's somewhat higher than average business risk profile given its previously healthy appetite for acquisitions, which its current strategy does not totally disavow. In addition, capacity under its large bank credit facility ($1 billion, with a $250 million accordion) gives the company ample dry powder to releverage the balance sheet on short notice. The ratings also consider that the company has a sizable proportion of its earnings coming from California.

The ratings confirmed are listed as follows:

Ba1 senior implied rating

Ba1 senior unsecured issuer rating

Ba1 on $150 million of 8.375% senior notes, due 6/15/04

Ba1 on $200 million of 10.5% senior notes, due 4/1/05

Ba1 on $215 million of 7.5% senior notes, due 12/01/07

Ba1 on $385 million of 8% senior notes, due 2/1/09

Ba1 on $244 million of 9.375% senior notes, due 7/15/09 (issued by Schuler Homes and assumed by D.R. Horton in the merger of February 2002)

Ba1 on $200 million of 7.875% senior notes, due 8/15/11

Ba1 on $250 million of 8.5% senior notes due 4/5/12

Ba1 on $200 million of 6.875% senior notes due 5/1/13

Ba1 on $100 million of 5.875% senior notes due 7/1/13

Ba2 on $150 million of 9.75% senior sub notes, due 9/15/10

Ba2 on $200 million of 9.375% senior sub notes, due 3/15/11

Ba2 on $145 million of 10.5% senior sub notes, due 7/15/11 (issued by Schuler Homes and assumed by D.R. Horton in the merger of February 2002)

SGL-2 Speculative Grade Liquidity rating

All of D.R. Horton's note issues are guaranteed by the company's subsidiaries.

Horton's financial profile has shown substantial improvement since the company adopted in 2002 its current strategy of eschewing most acquisition opportunities, shifting its lot supply mix to one that relies more heavily on options and less on ownership, generating significant free cash flow, and devoting the excess cash flow both to debt repayment and to moderate share repurchases. As a result, Horton has reduced debt leverage from a peer group high of 57.5% (debt/cap) and 3.1x (debt/EBITDA) at fiscal year end 2001 to 44.7% and 2.0x, respectively, at fiscal year-end 2003. These ratios are expected to continue to improve.

The company has an operating track record that is enviable. It has generated 105 consecutive quarterly year-over-year earnings gains, with no near-term end to this streak in sight. It has seamlessly integrated its numerous acquisitions, including that of its largest, Schuler Homes, which was completed in 2002. It has one of the largest equity bases in the homebuilding industry, $3.2 billion as of December 31, 2003. It has diversified into 44 markets in 20 states across the U.S., and it has one of the leanest corporate overheads among homebuilders, with its SG&A/revenues typically running at or near the lowest in the industry.

At the same time, the ratings consider that Horton, while pursuing a new strategy, has not renounced making additional acquisitions, and that its large, essentially untapped bank credit facility gives it substantial borrowing capacity to move quickly on a potentially large acquisition opportunity. Given its history as a very aggressive consolidator within the homebuilding industry and the ongoing trend towards consolidation within the industry, there may be opportunities that challenge Horton's recently-adopted capital structure discipline. Finally, although the company has diversified geographically into numerous large and attractive markets, the Schuler acquisition, together with the ongoing robustness of the California housing market, has driven up Horton's California concentration levels to approximately 30% with regard to revenues and to a larger proportion of its profits.

Going forward, the ratings will depend on Horton's maintaining its fiscal restraint. Moody's would view positively the company's continuing reduction in its debt leverage. Any action or transaction that had a significantly adverse effect on debt leverage would be viewed negatively.

Headquartered in Arlington, Texas, D.R. Horton, Inc. is engaged in the construction and sale of homes designed principally for the entry-level and first time move-up markets. The company currently builds and sells homes in 21 states and 51 markets, with a geographic presence in the Midwest, Mid-Atlantic, Southeast, Southwest, and Western regions of the United States. Revenues and net income for the fiscal year that ended September 30, 2003 were $8.7 billion and $626 million, respectively.

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