D.R. Horton Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2022

There are 19 speakers on the call.

Operator

Good morning, and welcome to the Q1 2022 Earnings Conference Call for D. R. Horton, America's the largest builder in the United States. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R.

Operator

Horton.

Speaker 1

Thank you, Holly, and good morning. Welcome to our call to discuss our results for the Q1 of fiscal 2022. Before we get started, today's call includes forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D. R.

Speaker 1

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 Based upon information available to D. R. Horton on the date of this conference call and D. R.

Speaker 1

Horton does not undertake any obligation to publicly update or revise any forward looking statements. Additional information about factors that could lead to material changes in performance is contained in D. R. Horton's Annual Report on Form 10 ks, which is filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.

Speaker 1

Drhorton.com, and we plan to file our 10 Q later today or tomorrow. After this call, We will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now, I will turn the call over to David Auld, our President and CEO.

Speaker 2

Thank you, Jessica, and good morning. I'm pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice Presidents and Co Chief Operating Officers and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D. R. Horton team delivered an outstanding Q1, highlighted By a 48% increase in earnings to $3.17 per diluted share.

Speaker 2

Our consolidated pretax income Up. Increased 45 percent to $1,500,000,000 on a 19% increase in revenues and our consolidated pre tax profit margin improved 380 basis points to 21.2%. Our homebody return on inventory for the trailing 12 months ended December 31st Was 38.5 percent and our consolidated return on equity for the same period was 32.4%. These results reflect our experienced teams, their production capabilities and our ability to leverage D. R.

Speaker 2

Horton's scale across Our broad geographic footprint. Even with the recent rise in mortgage rates, housing market conditions remain very robust, And we are focused on maximizing returns while continuing to increase our market share. There are still significant challenges in the supply chain, Own. Including shortages in certain building materials and a very tight labor market. We are focused on building the infrastructure and processes to support A higher level of home starts while working to stabilize and then reduce construction cycle times to our historical norms.

Speaker 2

After starting construction on 25,500 homes this quarter, our homes in inventory increased 30% From a year ago to 54,800 homes with only 1,000 unsold completed homes across the nation. Our January home starts and desk sales orders were in line with our targets, and we are well positioned to achieve double digit volume growth We believe our strong balance sheet, liquidity and low leverage position us very well to operate Own. Effectively through changing economic conditions, we plan to maintain our flexible operational and financial position By generating strong cash flows from our homebuilding operations, while managing our product offerings, incentives, home pricing, sales base And inventory levels to optimize returns. Mike?

Speaker 3

Earnings for the Q1 of fiscal 2022 Our year quarter. Net income for the quarter increased 44 percent to $1,100,000,000 compared to $792,000,000 Our first quarter home sales revenues increased 17 percent to $6,700,000,000 on 18,396 Homes Closed, Up from $5,700,000,000 on 18,739 homes closed in the prior year. Our average closing price for the quarter was $361,800 up 19% from the prior year quarter, while the average size of our homes closed Up was down 1%. Paul?

Speaker 4

Our net sales orders in the Q1 increased 5% to 21,522 Homes, While the value increased 29% from the prior year to $8,300,000,000 A year ago, our Q1 net sales orders were up 56% Due to the surge in housing demand during the 1st year of the pandemic when we had significantly more completed homes available to sell and prior to the significant And was up 3% sequentially. Our average sales price on net sales orders in the first quarter was Own. $600 up 22% from the prior year quarter. The cancellation rate for the Q1 was 15%, Up, down from 18% in the prior year quarter. New home demand remains very strong despite the recent rise in mortgage rates.

Speaker 4

Our local teams are continuing to sell homes later in the construction cycle, so we can better ensure the certainty of the home close date for our homebuyers, with virtually no sales occurring prior to start of home construction. We plan to continue managing our sales pace In the same manner during the spring, and we expect our number of net sales orders in our Q2 to be equal to the same quarter in the prior year We're up by no more than a low single digit percentage. Our January home sales and net sales order volume were in line with our plans, And we are well positioned to deliver double digit volume growth in fiscal 2022 with 29,300 homes in backlog, 54,800 homes in inventory, a robust lot supply and strong trade and supplier relationships. Bill? Our gross profit margin on home sales revenues in the Q1 was 27.4%, Up 50 basis points sequentially from the September quarter.

Speaker 4

The increase in our gross margin from September to December reflects the broad strength of

Speaker 5

the housing market. The strong demand for homes combined with a limited supply has allowed us to continue to raise prices and maintain a very low level of sales in most of our communities. On a per square foot basis, our home sales revenues were up 3.4% sequentially, While our cost of sales per square foot increased 2.9%, we expect our construction and lot costs will continue to increase. However, with the strength of today's market conditions, we expect to offset most cost pressures with price increases in the near term. We currently expect our home sales gross margin in the 2nd quarter to be similar to or slightly better than the Q1.

Speaker 5

Jessica? In the

Speaker 1

Q1, homebuilding SG and A expense as a percentage of revenues was 7.5%, down 40 basis points from 7.9 Owned in the prior year quarter. Our homebuilding SG and A expense as a percentage of revenues was lower than any Q1 in our history, and we remain focused On controlling our SG and A while ensuring that our infrastructure adequately supports our business. Paul?

Speaker 4

We have increased our housing inventory in response to the strength of demand and are focused on expanding our production capabilities further. We started 25,500 homes during the quarter, up 12% from the Q1 last year, bringing our trailing 12 month starts to 94,200 homes. We ended the quarter with 54,800 homes in inventory, up 30% from a year ago. 25,600 of our total homes at December 31 were unsold, of which only 1,000 Own were completed. Our average cycle our average construction cycle time for homes closed in the Q1 has increased by almost 2 weeks Since our Q4 and 2 months from a year ago.

Speaker 4

Although we have not seen much improvement in the supply chain yet, we are focused on working to stabilize And then reduce our construction cycle times to historical norms. Mike?

Speaker 3

At December 31, Our homebuilding lot position consisted of approximately 550,000 lots, of which 24% were owned And 76% were controlled through purchase contracts. 23% of our total owned lots are finished, and at least 47% of our controlled lots Are or will be finished when we purchase them. Our growing and capital efficient lot portfolio is a key to our strong competitive position And is supporting our efforts to increase our production volume to meet demand. Our first quarter homebuilding investments in lots, Land and development totaled $2,200,000,000 of which $1,200,000,000 was for finished lots, dollars 570,000,000 It was for land development and $390,000,000 was to acquire land. Paul?

Speaker 4

Forestar, our majority owned residential lot manufacturer, Operates in 55 markets across 23 states. Forestar continues to execute extremely well and now expects to grow its lot deliveries this year to a range of 19,500 to 20,000 lots with a pre tax profit margin of 13.5 To 14%. At December 31, Forestar's owned and controlled lot position increased 33 percent from a year ago to 103,300 lots. 58% of Forestar's own lots are under contract with D. R.

Speaker 4

Horton or subject to a right of first offer based on executed purchase and sale agreements. $330,000,000 of our finished lots purchased in the Q1 were from Forestar. Forestar is separately capitalized from D. R. Horton and had approximately $500,000,000 of liquidity at quarter end With a net debt to capital ratio of 33.9 percent.

Speaker 4

With its current capitalization, strong lot supply and relationship with D. R. Horton, Four Star plans to continue profitably growing their business. Bill? Financial Services pretax income in the Q1 was $67,100,000

Speaker 5

With a pre tax profit margin of 36.4 percent compared to $84,100,000 44.9% In the prior year quarter, for the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations, And our mortgage company handled the financing for 66% of our homebuyers. FHA and VA loans accounted for 44% The mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 721 And an average loan to value ratio of 88%. First time homebuyers represented 55% of the closings

Speaker 3

Our rental operations generated pretax income of $70,100,000 Up. On revenues of $156,500,000 in the Q1 compared to $8,600,000 of pretax income On revenues of $31,800,000 in the same quarter of fiscal 2021. Our rental property inventory December 31 was $1,200,000,000 compared to $386,000,000 a year ago. We sold 1 multifamily rental property of 3 50 For $76,200,000 during the quarter, there were no sales of multifamily rental properties during the prior year quarter. We sold 2 single family rental properties totaling 225 homes during the quarter for $80,300,000 compared to 1 property sold in the prior year quarter for $31,800,000 At December 31, Our rental property inventory included $519,000,000 of multifamily rental properties and $642,000,000 of single family rental properties.

Speaker 3

As a reminder, our multifamily and single family rental sales and inventories are reported in our rental segment and are not included in our homebuilding segment's homes closed, revenues or inventories. In fiscal 2022, We continue to expect our rental operations to generate more than $700,000,000 in revenues. We also expect to grow the inventory investment in our rental Order by more than $1,000,000,000 this year based on our current projects in development and our significant pipeline of future projects. We are positioning our rental operations to be a significant contributor to our revenues, profits and returns in future years. Bill?

Speaker 5

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. During the 3 months ended December, our Cash used in homebuilding operations was $115,000,000 as we invested significant operating capital to increase our homes and inventory to meet the current strong demand. At December 31, we had $4,100,000,000 of homebuilding liquidity, consisting of $2,100,000,000 of unrestricted homebuilding cash and $2,000,000,000 of available capacity on our homebuilding revolving credit facility. We believe this level of homebuilding cash and liquidity is appropriate to support the scale and activity of our business and to provide flexibility to adjust up was 6.9%. Our consolidated leverage at December 31 was 25.1% and consolidated leverage net of cash was 15.2%.

Speaker 5

Edge. At December 31, our stockholders' equity was $15,700,000,000 and book value per share was $44.25 up 29% from a year ago. For the trailing 12 months ended December, our return on equity was 32.4% compared to 24.4 percent a year ago. During the quarter, we paid cash dividends of $80,100,000 And our Board has declared a quarterly dividend at the same level as last quarter to be paid in February. We repurchased 2,700,000 shares of common stock for $278,200,000 during the quarter.

Speaker 5

Our remaining share repurchase authorization at December 31 was $268,000,000 We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and and to reducing our outstanding share count each fiscal year. Jessica?

Speaker 1

As we look forward to the Q2 of fiscal 2022, We are expecting market conditions to remain similar with strong demand from homebuyers, but continuing supply chain challenges. We expect to generate consolidated revenues in our March quarter of $7,300,000,000 to $7,700,000,000 and homes closed by our homebuilding operations to be in a range between 1920,200,000 homes. We expect our home sales gross margin in the 2nd quarter To be approximately 27.5 percent and homebuilding SG and A as a percentage of revenues in the 2nd quarter to be approximately 7.5%. We anticipate the Financial Services pretax profit margin in the range of 30% to 35%, and we Our income tax rate to be approximately 24% in the 2nd quarter. For the full fiscal year, we We continue to expect to close between 9,092,000 homes, while we now expect to generate consolidated revenues of 34.5 to $35,500,000,000 We forecast an income tax rate for fiscal 2022 of approximately 24%.

Speaker 1

And we also continue to expect that our share repurchases will reduce our outstanding share count by approximately 2% at the end of fiscal 2022 compared to the end of fiscal 2021. We still expect to generate positive cash flow from our homebuilding operations this year After our investments in homebuilding inventories to support double digit growth, we will then continue to balance our cash flow utilization priorities Among increasing the investment in our rental operations, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend and consistently repurchasing shares. David? In closing, our results reflect our experienced teams And production capabilities, industry leading market share, broad geographic footprint, and diverse product offerings across multiple brands. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to capitalize builder.

Speaker 2

We plan to maintain our disciplined approach to investing capital To enhance the long term value of the company, which includes returning capital to our shareholders through both dividend and share repurchases on a consistent basis. Thank you to the entire D. R. Horton team for your focus and hard work. We are incredibly well positioned to continue growing and improving

Speaker 1

Holly, can you open the line for questions, please?

Operator

Time. From John Lovallo with UBS. John, your line is live.

Speaker 6

Good morning, everyone, and thank you for taking my questions. The first one, gross margins across the industry have risen to levels that are probably not sustainable over the longer term. I guess the question is, it. Do you believe that this kind of mid to high 20% margin range could persist at DHI for maybe a couple of years? And then As we move forward, what has structurally changed in your opinion that would allow you to have trend margins that are maybe 100 to 200 basis points above the historical average?

Speaker 1

Sure, John. We are very pleased with where our gross margins have gotten to this cycle and certainly the Strength in the market has been a large driver of that. We probably would never sit here today and say that those are sustainable at these levels through cycles. Typically gross margin does get somewhat competed away when markets soften. That being said, we are at extremely strong levels today and can Still generate very strong returns even with the margin compression, and we'll continue to meet the market over time.

Speaker 1

In terms of what we believe is Sustainable though compared to our historical averages, certainly we're carrying less interest in our cost of sales today. And with what we've done from a deleveraging and our balance We would expect that to be a sustainable cost advantage and then there's scale advantages with where we've gotten in terms of our volume And our building efficiencies with our labor trades and our material suppliers, we would expect some component of the scale advantages to be sustainable as well.

Speaker 2

And John, we talk a little bit about this. Internally, we talk a lot about it. The industry is changing. It's just a much more disciplined Industry than it was through the last cycle. As we gain in market share, as the other publics gain in market share, There's just less at least in my mind, my expectation is there'll be less volatility at this cycle up and down.

Speaker 2

It's just they're real businesses today, not speculators.

Speaker 6

Yes, that makes a lot of sense. Okay. And then my second question, in an environment where rates are likely to rise here, what do you view as the strategic advantages of implementing a predominantly spec focused building model and targeting entry level buyers, perhaps maybe versus a built to order model targeting better financed buyers.

Speaker 3

First of all, John, what we would say is that we're able to more closely, time the application for the mortgage, the qualification for builder. For the mortgage and the closing of that mortgage, so the buyer is spending less time in backlog when they're buying a house that has already started the production process. That allows us to have Fewer bad things happen to their potential credit profile where then they fall out of backlog and no longer qualify. Less interest rate risk while they're in that cycle. And then Finally, just a continued focus on affordability.

Speaker 3

I mean, we're going to continue to seek to be affordable for our homebuyers and our margins.

Operator

Your next question is coming from Stephen Kim with Evercore ISI. Stephen, your line is live.

Speaker 7

Yes. Thanks very much, guys. I appreciate all the color here. I was particularly intrigued by your comment about The number of homes you have under construction, 56,600 I think. And I think you also mentioned that your cycle time About 2 weeks.

Speaker 7

So correct me if I'm wrong, but that would imply, I think, that your time from start up. To close is about 7.5 months, first

Speaker 8

of all, is that correct?

Operator

Roughly, yes. Yes.

Speaker 7

Yes. So if I think about Your 56,600 homes and assume that you'll assume it's basically a 7.5 month Cycle time, that would imply that you should be able to close 45,280 over the next two quarters. Your guidance for the 2nd quarter this next quarter is I think for 19,000 to 20,000 homes, so Up. So considerably less than half of that amount. And so I'm curious as to is there anything wrong with the way I'm thinking about how your homes under construction should ultimately result and closings over the next two quarters, given your cycle time is 7.5 months.

Speaker 7

And if therefore we should be thinking that there might be an acceleration in 3Q up. R. Horton:] Closing on that basis or if you're if this represents some conservatism about extending cycle times?

Speaker 3

Thank you, Steve. I think one of the things you need to look at is how long those houses have been in production. We started a substantial number of those homes In the most recent quarter, I think we stepped up our starts from Q4 to Q1 by about 3,000 homes. So So those homes are obviously going to take a little longer to deliver in the process.

Speaker 5

And as we're looking at the remainder of the year, the guidance we're providing for Q2 It's based on where the homes are in construction today. But yes, as we look at the full year, based on when we started the homes, We look at where our guidance is for the full year. We are a bit more back end loaded in terms of our closings in Q3 and Q4 than historically we are. Part of that is because of the elongated construction A. Sometimes that we have not seen improve yet, and it's based on where our homes in construction currently sit in terms of the construction cycle.

Speaker 7

Yes, great. That's very helpful. My second question relates to your initiatives in the rental area, which I think is you You talked about growing that inventory and therefore I would assume the associated revenues pretty significantly On a longer term basis, my question is twofold. One, is there a rule of thumb that we could think What, let's say, every $1,000,000,000 of inventory on a steady state basis might yield in terms of a level of revenues that we could be forecasting? And then secondly, conceptually, do you think that the demand for selling Your rental properties is likely to be more resilient in the face of a rising rate environment Then perhaps sales to folks who would be looking to actually move in.

Speaker 7

I know that's your core business, but nevertheless, There is so much concern that many people have about rising rates and the impact on the entry level buyer that I I was curious as to whether you felt like there was a backstop behind that buyer for rental operators That are sort of getting in line and would love to buy the big homes that you're building for rent.

Speaker 5

Well, I'll start, Steve. I guess Up. First, we're still growing this business and learning this business. Still a little bit early for us to be able to generalize Up. On averages in terms of what level of revenue we might see per unit, we're building across our entire homebuilding footprint.

Speaker 5

So Every property is unique in terms of size and the product and the market in which it's in. So we're individually underwriting each one relative to Whether it's better for a for rent community versus a for sale community, obviously we've been very pleased with the value that we've been able to generate thus far And very excited about the opportunity of growing this business and adding value over time and been very pleased with the demand that there has been For our communities thus far and the execution that we've seen in terms of our sales thus far.

Speaker 4

Yes. And Stephen, we see such strong demand today for this product in this low interest rate environment. And I think to your question of if we see rates tick up, Do we see that shift? We like the ability to be in the market with this rental platform and be able to adjust to those shifts in market conditions. We do believe that we're going to continue to see strong demand, maybe not as strong as it is today with such a new category, But we feel good about our position and the number of communities we're planning.

Speaker 8

Sounds good. Thanks very much guys.

Operator

Your next question is coming from Mike Rehaut with JPMorgan. Mike, your line is live.

Speaker 9

First question I had was on the SG and A side. You came in nice below your prior guidance at 7.5% versus 8% before versus your 8% guidance And down 40 bps year over year. You're also Guiding for, I guess, 2Q guidance to be down only builder. 10 bps year over year. So I was just curious around what were the sources of the significantly better than Expected results in the Q1 and why you don't expect further leverage In the Q2, similar to the first.

Speaker 5

Sure. Thanks, Mike. In the current environment where we're seeing such Significant average selling price increases, that's certainly one driver of the SG and A leverage on P and L. A little difficult to predict exactly where the average ASP may fall in a particular quarter. The Trend over time has been upward over the last several quarters though and that's certainly a contributor to it.

Speaker 5

So I would say we're probably a little bit conservative in projecting out The level of increases in our ASPs. We are very actively building infrastructure to support the significant increase in scale that we have We've seen across our business over the last year and that we're projecting for the rest of the coming year. And so we are anticipating significant increases in Own. Our SG and A spend to support that. And so we're just basically balancing that versus our expectations for our closings.

Speaker 5

And with our closings expectations essentially roughly flat with last year in Q2 based on our guidance. We're not getting the volume leverage, but we are still seeing the leverage from selling price increases.

Speaker 9

Okay, Bill. So before I just hit on the second question, just to make sure I understand, given the expectation for the Stronger revenue growth on a full year basis, it seems like it's safe to assume Maybe more than like a 10 bps SG and A leverage for the full year, if I'm thinking about that right, Given you have the higher confidence, let's say, around an ASP for the full year at least, if If you could comment on that, that would be helpful. And then secondly, just on the rental income side, that was a source of upside, I believe, relative to Our expectations, I believe, relative to guidance as well, if I'm not mistaken, 45% Of a margin, is that the right that 45%, just any guidance or thoughts around how to think about The remainder of the year relative to the revenue generation you continue to expect.

Speaker 5

Okay. Well, first to wrap up the SG and A question. We're not guiding specifically to the full year on SG and A. However, with the kind of Heavier volume expected in our annual guidance in Q3 and Q4. We would expect to see more leverage on SG and A probably than 10 basis points In Q3 and Q4 versus Q2.

Speaker 5

With respect to the rental expectations, we've guided annually To more than $700,000,000 of revenue, we've been very pleased with the margins and the executions we've seen on the sales Recently, the margin this quarter obviously was very strong. Some projects will continue to generate those margins, others could certainly be short of that. We haven't specifically guided to the margin on that business as of yet because each project is unique. In terms of volume in the coming quarter, we would expect Q2 volume to be relatively similar to Q1 Own. In which we closed 2 single family properties and 1 multifamily property.

Speaker 5

And then for the year basically lining that out to the $700,000,000 of

Speaker 9

Thanks so much.

Operator

Your next question is coming from Alan Ratner with Zelman. Alan, your line is live.

Speaker 10

I think you guys said earlier that you expect to offset most cost increases with price increases. And Obviously, up to this point, it's based on the margin trajectory, you've been able to offset more than the cost increases. So I'm just curious if that's a change Day. And you're thinking whether you're going to be maybe a little bit less aggressive pushing prices as 'twenty two progresses or am I reading too much into that comment?

Speaker 2

I guess, Alan, as we continue to increase our starts for

Speaker 3

Demand, I

Speaker 2

would say at some point, there's going to be more of an equilibrium. And at that point, margins up and ASPs should Mitigate somewhat. We don't know. Again, we're Return base, absorption targets, start targets, being able to Sustain a level of starts drives efficiencies through the entire process. We don't know what the future And we do know that we can operate within that future and maximize the results, both returns And market share gains.

Speaker 1

And part of that thought process also, Alan, is our continued focus on affordability. And so although the market is really strong today and we continue to take Price, we're probably not out there like some other builders trying to take every last dollar of price. We're doing what we can To meet the market and try to stay affordable in spite of rising cost conditions.

Speaker 10

Got it. Both of that makes a lot of sense. And Jessica, your Follow on comment there was actually something I was going to ask next and that's that your price increases especially on the order side have been very strong and we're starting to hear from Some builders talking about their desire to actually bring that average price back down a little bit over the next year or 2 as they introduce Building. Communities and maybe they're a little bit further out or maybe the floor plans are a bit smaller. So should we think about that similarly with you guys?

Speaker 10

Are you actually kind of looking at that average price and And kind of your standing in the marketplace and trying to actually bring that down on at least an absolute basis going forward?

Speaker 2

Alan, we're always focused on affordability. And we talk internally About a sustainable run rate in these communities, and that involves not Over pricing at any point in time. So, but yes, we're looking at product, we're looking at Communities, land, how do we drive more and more efficiency into the process, so that we can maintain A more affordable level of cost. And that's to me, that's market scale, that's consistency of starts. It's As we continue to drive market share gains, consolidate labor, We're in a better position to acquire land and it's just an ongoing continuous effort to get a little bit better every

Speaker 10

Makes a lot of sense. If I can sneak in one last one just on January, up. You and others have obviously highlighted very strong demand continue in January. I'm curious if you've seen any notable shifts Up. In sentiment or activity across your price points, given the uptick here in rates, are you seeing maybe the more discretionary buyers Jumping in because they're concerned rates are going to continue climbing, so like in your active adult business or Emerald?

Speaker 10

Or has the strength Up. It's been pretty consistent with what you've seen prior to this move.

Speaker 4

Alan, I don't think we've seen in the last month A real discernible difference. We still have more buyers in all of our markets than we have homes available. And so we are continuing to release those homes at Later stage of construction. And so meeting that demand with the inventory as it gets to that point in its construction cycle. So Hard to gauge whether there's been significant shift of any sort and we still are seeing strong demand across all of our markets and across All demand basis.

Speaker 4

All price points.

Speaker 1

Thanks, Alan.

Operator

Your next question is coming from Karl Reichardt with BTIG. Carl, your line is live.

Speaker 11

Thanks. Hey, everybody. I think you You're the one who said this, that you're working to stabilize and then reduce cycle times. Pragmatically, what Specifically, do you do to make that happen given that builders are outsourcers effectively? And why and how do you do that Better at Horton than, say, up here would.

Speaker 2

Carl, I think a lot of The things at Horton is just because we just work harder. I know everybody works hard. But our people are just phenomenal Problem solvers and it's a part of the culture, the decentralized nature. I mean, they take ownership and they solve problems. What we have tried to do is guide the divisions to Understand the capacity within communities and consistently start homes to meet that capacity.

Speaker 2

And when they do that, the capacity increases because the people in those communities get a little better at building those homes. And we're seeing that. And I don't know what the industry average is, but I got to believe We are completing homes even though it is not to our historical norm Still more rapidly than our peers, Hunter. But it's a consistent start, limited product, limited options, builder. Making it easier for these trades to get in and get out, reducing the SKUs that we're asking our suppliers to hold And in some cases, ordering early, in some cases, stockpiles.

Speaker 2

I mean, anything, everything that we can do to eliminate Or break a bottleneck, the people in the field are doing. And I can tell you 100 stories, but I'm not going to.

Speaker 11

Fair enough. Thanks, David. And then I wanted to ask about lot count. You're over Up. 550,000 under control now.

Speaker 11

And the buildup spread is significant, right? I mean, I think it was up 40% last year. So at some point, these lots got to come So market, so if you think about how they might, is this you could have bigger communities going forward, you could have more communities going forward in existing markets, You could have new markets. Can you sort of break out as you look at your lot position now, sort of as you grow, Where those different elements fit into the long term puzzle here, kind of bigger communities, More communities in existing markets, I. E.

Speaker 11

Potentially more share or new markets? Thanks.

Speaker 3

Yes, D, all of the above. It will be some market.

Speaker 11

There's one already. But in terms of sort of the long term split is kind of what I'm asking.

Speaker 9

I don't know that we'd see a

Speaker 3

big Change in our long term split, we are continually evaluating new markets. And at the same time, the mandate is to the teams in the field, aggregate your market share. We feel that local scale drives a lot of value in the business for us, and the lot supply is a key part of it. I will tell you the frustration, it takes longer just like it does to build a house. It takes longer to get a neighborhood approved.

Speaker 3

It takes longer to get lots built today Than it did a year or 2 years ago. And so we're continuing to challenge that. So just like our housing supply has increased relative to our current delivery levels, Up. Our lot controlled lot position has increased to support those lots coming on just taking longer to get into the finish line.

Speaker 1

And our market count has continued to expand. So we're in 102 markets today. That's up just 4 markets sequentially. We continue to fill out kind of the more Midwestern Ohio Valley part of our footprint and continue to look at additional markets that would make sense to End into it as

Speaker 11

well. Thanks everybody. Thank you.

Operator

Your next question is coming from Matthew Bouley with Barclays. Matthew, your line is live.

Speaker 8

Good morning, everyone. Thank you for taking the questions. So I have a question on cancellations and interest rates, just given how low cancellations are at this point. I know you do those stress tests on the backlog and have talked about sort of flexing 100 basis points increase in mortgage rates. But I guess to what degree does the Speed of rates rising, coupled with these extended cycle times play into all that?

Speaker 8

I mean, we had a 50 basis point rise in just 4 weeks. You got buyers and backlog that may have to wait several months at this point. So how do we think about risk to an uptick in cancellations here? Thank you.

Speaker 4

Well, I think as you look at those stress tests that we do, and we've run it again and seen a slight uptick In it, but still nominal. And the interest rate increase we've seen today have spurred further demand, Much more so than not people out of qualification and ability to qualify.

Speaker 1

And I think Mike mentioned earlier, but that's also part of the key to selling homes later in the construction cycle is they're not up. It seems to lock for longer or be worried about what an interest rate move does. So if we're selling closer to the time of completion Own. And home closing, there's less risk in that regard as well.

Speaker 8

Yes. Got it. Okay, good. That makes sense. And then so second one on the cycle times Again, maybe they improve at some point, maybe they don't, but assuming there's not a significant amount of new builder.

Speaker 8

Building products capacity coming online this year, are there any structural changes you're making to the supply chain, even if it's not possible in every single building material? Is there anything you can do with more prefab packages, for example, I heard you say earlier, simplification of SKUs. And any of these changes you're making today, are they Structural in nature or is it simply adjusting to whatever the market is at any point?

Speaker 3

I think what David mentioned before, It's everything, everywhere. We definitely empower our local business leaders To solve the bottlenecks that are unique to their market. And there are some that are broader in nature, and our national purchasing team and regional purchasing teams did a great job of Partnering with those manufacturers and our trade partners to give them more forward visibility to our expected demands and then help to understand How that product gets from point of manufacturer through distribution, kind of get the product that's being earmarked for us into the distribution chain through it Onto our job sites when we need it. Not always a perfect process. We would certainly like it to be faster, but it's Increased communication, simplification of product and a lot of anything we need to do market by market.

Operator

Your next question is coming from Susan Maklari with Goldman Sachs. Susan, your line is live.

Speaker 12

Thank you. Good morning, everyone.

Speaker 2

Good morning.

Speaker 12

My first question is, is thinking about the potential use Up. For more incentives in the market, given the fact that the inventory is so low, do you think that the likelihood of us seeing any Real meaningful increase there is actually much lower than it has been in the past. Do you think that we would need to see just a lot more on the ground in order for anything to meaningfully change?

Speaker 2

I don't see any change in the incentives coming. It's I'm sure at some point, inventory will catch up with demand. It is still significantly out of balance, especially If you're looking at the areas where the Florida, the Texas, the Arizona's, even across the Midwest, We have job growth and influx of people. You never say never, but the difficulty of getting lots on the ground and then getting houses built It's going to be very difficult to catch up with demand anytime in the next couple of years.

Speaker 3

Look, of inventory out there, the use of incentives, I think you'd have to see a significant increase in the level of unsold inventories, Especially unsold completed inventories. And today, we're at 1,000 unsold completed homes at the end of December, Very low for us this time of year to be carrying that few homes.

Speaker 12

Right. Okay. Thank you for that. And then my follow-up is Thinking about the operational pressures in the industry, even if the supply chain on the material side does eventually and Construction relative to where we were before COVID? And if so, how do you think about your ability to overcome that and continue to increase the level of production that you can deliver?

Speaker 2

It goes back to market scale and even within submarkets, being able to control the labor base and keeping them busy, keeping them in the same location. I just can't oversell that advantage, where you've got a program where you're releasing 15, 20, 30 houses every month, month after month after month after month. The aggregation of labor in those kinds of communities It's very advantageous in today's world. And it also gives you the ability to kind of direct some of that labor through the 2 or 3 or 4 or 5 a month of Fortune Communities. So it's market scale.

Speaker 2

It's Again, everything that we've done, simplifying the product, trying to maintain affordability and then having well located communities with long run Well, long run times.

Speaker 12

Okay. That's very helpful. Thank you and good luck.

Operator

Search. Eric, your line is live.

Speaker 13

Good morning.

Speaker 2

Good morning.

Speaker 13

A couple of things. First of

Speaker 9

all, the outlook on costs, if

Speaker 13

you could just provide some clarity on where that goes and Especially trying to figure out the movement in lumber, how that is flowing through, where we're at trough lumber and where the lumber impact goes Going forward, especially on the cost side?

Speaker 1

Sure. So, I'll start with lumber and then somebody else can Simon, on the rest of our cost structure. Lumber costs have remained really volatile, as I know you're aware, Eric. We have had some opportunities to purchase at Costs that were well below the peaks we saw, I guess, last spring and into the summer. However, those reductions in prices lasted a shorter period of time Than we really expected and really probably hoped, and lumber has been on the rise again for the last few months.

Speaker 1

So there's been other supply chain delays that So, cause the volatility in lumber prices, we do hope that we will see a mix that leans towards slightly lower cost in Q2, which is baked into our Q2 gross margin guide for flat to slightly up gross margins, but then we do expect our lumber costs to trend back up in our closings starting in Q3. And other costs?

Speaker 3

It's kind of a mixed bag, but we would generally be seeing slight cost pressures in most places. And so that's been offset by price increases. I think some of the lumber relief we should see in Q2, Early Q3 will help with some of that as well. But as Jessica mentioned, lumber prices have gone back up, and so those will be flowing through closings later this fiscal year.

Speaker 1

And really with home prices continuing to increase, I mean, generally all costs typically follow. And so we really wouldn't Expect to see much in the way of cost relief until you see some sort of slowdown in home price appreciation.

Speaker 13

Okay. And then secondly, it seems like just a math equation, but I know there's more to it than that. But the incremental The modest increase in the revenue guide for the year with the same deliveries, it appears that it's just looking at price and extrapolating that out. But What else were the considerations in taking a bit more optimistic position on the full year revenue growth, especially in front of the selling season?

Speaker 14

Yes, Eric.

Speaker 5

It really is just an extrapolation of where we see prices now. We've got a few more months of visibility into our selling prices And where our closing prices moved up to in Q1 and what our visibility is going into Q2 that we feel like with Up. The sales prices that are baked in and that we have visibility to, that justified increasing, a pretty nice increase in our annual revenue guide. But obviously with the continued challenges on the supply chain and construction cycle times elongating, we didn't really feel like we had any more room on the volume side As of yet. So it's really solely price and we feel good about that guidance for the year.

Speaker 15

Okay. That makes sense. Thank you.

Operator

Your next Question is coming from Rafe Judasich with Bank of America. Rafe, your line is live.

Speaker 16

Builder. I wanted to start on the rental business. Can you talk a little bit about the returns you're targeting in the rental business and how that could compare to homebuilding longer term? And then will you be targeting different markets in the rental business compared to the homebuilding segment?

Speaker 3

So, Rafe, what we're seeing is We're growing that business pretty aggressively, and we've been very pleased with actually the returns that, that business has produced on a trailing 12 month basis. Yes, the profits that segment has generated relative to its inventory investment have been about 20%, and that's in a heavy growth ramp. So we would expect to see that Continue to increase, especially when we get to have more of the projects delivering on a more consistent basis. And I would say that in the markets we seek to serve with that, It's going to line up very well with our homebuilding for sale footprint as well. We've seen a lot of markets We accept the product very well and the investor base very excited about those projects as well.

Speaker 16

And then in terms of the pace of your home starts, obviously, the average ticked up a lot In the Q1 compared to the Q4, I think about $1,000 a month. What's allowing you to Increase that pace sequentially? And then how should we think about that going forward?

Speaker 4

Yes, I think that that's in line with our plans and what we have set forth across all of our divisions and communities. We target an absorption pace per community plan well ahead to make sure that we have those permits in hand and lots in front of us. Own. It's not easier today to put lots on the ground any more than it is easier to build a home, but we have incredible operators in the field who Stay ahead of this and it's allowed us to continually, sequentially, quarter over quarter increase our start pace and that's a cadence that we hope to continue.

Speaker 5

The real key to our ability to do that is our lot position. Having that long lot position controlled and strong supplier Relationships on the developer side puts our operators in positions to continue to start and increase our start space.

Speaker 13

Great. Thank

Operator

you. Your next question for today It's coming from Mike Dahl with RBC Capital Markets. Mike, your line is live.

Speaker 15

Good morning. Thanks for taking my questions. Up. Just a couple of follow ups here and maybe the first one ties into the last one a little bit. But the order guidance For your fiscal 2Q being flat to low single digits, it seems like you've been pretty successful getting some inventory rebuilt Both sequentially and year on year, your comps get a little easier in 2Q versus 1Q.

Speaker 15

So can you just talk about the moving pieces On that order guide and why there can be some upside there?

Speaker 3

I think we're still seeing a restriction on sales up relative to where the inventory is getting to in production. So we're still waiting to sell the homes closer to the delivery date. And so that's kind of what's really the real driver is on our sales expectation. Our comp is still up against a 35% increase Last year in Q2. It does only get to be a much easier comp in Q3 and Q4 this year from a sales perspective.

Speaker 2

Got it.

Speaker 15

Okay. And my second question, I want to follow-up on one of Steve's questions from earlier around Up. Rentals being potentially a backstop for sale and it's kind of an interesting concept, especially as you scale That side of your business and the partnerships you have with buyers of those assets. And so the idea is At some point in time, if for sale demand were to slow, there could be an buyer that would be looking at additional communities that you may have currently built as for sale, but someone may want to Buy wholesale and turn to rentals. Can you talk a little bit more about how you would view opportunities Like that.

Speaker 15

And I know the economics and the returns can look very different. So maybe just even conceptually, What it would have to take in terms of what the moving pieces around the return dynamics if you were to look at Bulk sailing a community that was not intended for bulk sale at some point in the future?

Speaker 2

Yes, Mike, I've always we've always believed that the rental platform when we get it built out We'll de risk our land portfolio because it does give us another lever. Look, from a just a philosophical standpoint, we believe in the for sale business, we believe Homeownership in the country is very important. Today, Our goal is to deliver more homes because the demand is there and it's hard to believe 5 years from now, homes are going to be more affordable than they are today. So every family we get in a home, we feel that is a win for us And for that family. When we look at the risk, I mean, the rental Platform, the ability to scale that up, the segment that's going to create, it's going to be a real business all on its own.

Speaker 2

And because of the geographic platform and the embedded divisions within that geography, our ability to scale that and touch Every market is we see as just great opportunity

Operator

Your next question is coming from Ken Zener with KeyBanc. Ken, your line is live.

Speaker 14

Guard. Good morning, everybody.

Speaker 2

Hey, Ken.

Speaker 14

I thought you guys were better because you paid for your own phone. I have two simple questions. 1, obviously with insatiable demand, how you guys are approaching the cycle time of construction? Basically, it looks like your investments in your inventory units are slowing, right, cycle time about 5% sequentially. You guys rose inventory 14%.

Speaker 14

Is that pretty much the move that you guys will Pursue into the second half if the cycle time continue to compress that you'll just grow more units into the ground To compensate for that slower cycle time?

Speaker 2

Yes. We have start targets, and we talk about builder. Consistent sustainable starts, driving ultimately sales and closings, and it's based upon the Up. Capacity within divisions to deliver those homes.

Speaker 14

Okay. That's fine. I mean, it seems to be that's the way you're approaching it. And I guess realizing this conference call is long already. Dave, could

Speaker 9

you just we spoke about this

Speaker 14

in the past, the interest rate you paid on your first home. You highlighted obviously the very strong demand, strong job growth. Can you guys just comment? I mean, we recently wrote about it, but can you comment on the fact With your perspective about your comfort with real rates being negative now compared to when you took your first mortgage rate, Just as kind of a broad thought, appreciate it.

Speaker 2

It's a great time. Housing is more affordable today than it certainly was in the 1980s. The ability to get into a house, lock down your homeownership or your housing costs for the next 20 years is a Significant driving force in what's going on because as overall cost inflation, up. Interest rates, as those continue to move up, the people that are buying a house today, even if it's set up, The price is 15%, 20% higher than it was last year. I mean, it's just a great thing.

Speaker 2

So

Speaker 8

I guess

Speaker 2

the other thing, Ken, that we really don't talk much about, builder. When I was 20s, I mean that was just that was what was You figured out a way to buy a house. And that became less cool for use of a stupid term. Up. As the millennials came into their 20s, but what I'm seeing and what my Millennial daughter is telling

Speaker 17

me.

Speaker 2

Now it's that's a big part of the narrative on social media is it's People want to own homes again. And it's just I'm amazed sometimes at some of the conversations around housing. And I look at what it was, I look at what it is. I I look at the just the demographic demand that's out there. I look at the wealth effect of everything that's happened over the last 10 years and the American public is, they're in a good place.

Speaker 2

And from an affordability standpoint, Home ownership is better than it was in the '80s. So I'm very optimistic about what's going on. I'm very optimistic about this And I'm just in awe of our people and how what they are accomplishing out there. So

Speaker 3

Thank you.

Speaker 15

I don't

Speaker 2

know if I answered your question, but I told you what I think.

Speaker 14

Always clear. Thank you.

Operator

Your next question is coming from Truman Patterson with Wolfe Research. Truman, your line is live.

Speaker 18

Hey, good morning, everyone. Thanks for taking my questions here. So David, just want to follow-up on one of your prior comments about the public's gaining Market share and I know it might be difficult to generalize, but I'm hoping to understand what you're hearing on the ground from local operators Regarding some of your private builder competitors, are they expecting their home inventory to jump significantly Through 2022 expecting strong activity or a strong active land or community count growth? Or are You know expecting more of the same of a pretty constrained environment for your private builder peers. And I'm also asking this in light that you all make up 10% plus Of the market, you all had really nice order growth in the quarter.

Speaker 18

But when you look at new home sales In the Q4, it was down more than 20% plus. So I'm really hoping you can help us think through this as we move through 'twenty

Speaker 2

builder. We actually were talking about this and getting ready for the call. The Private builders and even some of the smaller public builders are going to have very difficult time delivering houses. I mean, we're having it is hard for us. I mean, it's probably harder to complete and finish a house today As it's been in my career in homebuilding.

Speaker 2

And as these private guys who don't have our scale, who Don't have our ability to drive a result. Their houses are setting. And that's going to cut off their access to the next house Thanks, Mark. And anecdotally, we are talking to the builders and markets. They're just tired.

Speaker 2

They don't. They've got 6, 7, 8 banks. They're Sideways with 2 of them and they're looking to us to take out their lots of money and they maybe become a developer for us in that market. So it's if the supply chains don't Loosen up. I think you're going to see the consolidation accelerate in the market by the big Because what is the big constraint on the market, on housing, It's the ability to get lots in front of you.

Speaker 2

And the private guys, they don't have that ability, the publics do. And that's So when you look at new home sales decline, that doesn't have anything to do with demand. That has to be built 60% of the homes being built out there are being built by non public. And I think over this cycle, you're going to see That group's ability to start houses continue to deteriorate and that is going to get picked up by the public. Even if the overall housing market, new home housing market declines, I think the Top ten boats are going to pick up market share and they're going to continue to grow.

Speaker 2

So that's what I think.

Speaker 18

Okay. Interesting. There's clearly been a lot of discussion with the Fed Likely raising rates this year, we can debate what sort of impact that might have on demand versus Lack of supply and everything, but hypothetically, let's say demand does soften, which consumer segment Do you all think holds up relatively better between entry level move up luxury, active adult? And are there any geographies that you all think might underperform?

Speaker 1

This is probably, I know, somewhat of a contrarian view to where the market sometimes reacts to entry level builders, but we generally Builders. We continue to think about an entry level buyer as a buyer out of need rather than discretion. So although as prices continue to rise and or rates are The increase in affordability gets negatively impacted. You do lose a subset of entry level buyers that can qualify for a home. We do expect over the long term that to continue to be The lion's share of the demand, which is why we continue to focus on affordability, because as I said, those buyers are buying out of need, whereas builder.

Speaker 1

The price curve you go, that's a more discretionary buyer, maybe a little bit more financially savvy that is more focused on timing of an interest rate versus just an absolute monthly payment.

Operator

In the interest of time, your final question is coming from Deepa Raghavan with Wells Fargo Securities. Vipha, your line is live.

Speaker 17

Hi, thanks very much for squeezing me in. A couple ones from me. So let me ask on the affordability issue. If you look at trends, It just doesn't correlate to the concern that's out there on affordability. And Dave, like you pointed out, rates are philosophically low and looks like we could end up having the whole The industry, the homebuilders could end up having good pricing power this year too.

Speaker 17

My question is, is this a credibility issue being raised Too ahead of its time? Or do you believe 2022 or 2023 can be structurally impaired or impacted From some buyers being priced out in this continually tight imbalance environment?

Speaker 3

As we've seen in our sales offices and demand, we're not seeing people being priced out to builder. R. Horton:] It's a pain you can read today, and we're generally focused at a price point lower than most of our competitors in the markets that we serve. What I would say is that going forward, you see very good household income growth. Inflation is certainly out there.

Speaker 3

It's across the board. And as someone touched on before, we could be at negative real interest rates To own a home. So it's a very powerful, economic decision to go ahead and buy a house today and lock in that interest rate relative to current inflation Expectations. So still feel very good about the demand we're seeing into 'twenty two. Hard to predict much beyond that because you just don't know.

Speaker 3

But we do like what we see in 'twenty two for sure.

Speaker 17

Okay, that's helpful. Dave, when we met you last summer, You mentioned expanding in Ohio Valley and parts of Midwest as newer markets. But can you talk through what's the economic engine that will drive job growth there? It's hard for us to conceive that post COVID People decided to pack their bags and move to Ohio just because they can work remotely?

Speaker 2

Yes, there's a big population base there now. You've got some of the best universities in the country that are there. We're seeing a migration out of what would Historically been the tech areas and or the think tank areas, financial areas into these Incubators, which are these major universities, I guess I'm a big believer that long term, The quality of life, just the access to really smart people is going to drive Companies and growth companies into these markets. You see it in Austin, you see it in Nashville, Columbus, it's just across Indianapolis. There are Brilliant people starting what are going to be great big companies that find that Environment, just a better place to be than some of the what has historically been high-tech, High income markets.

Speaker 2

And the population of the U. S, Those towns, those cities are great cities and they offer a lot. And that's what I'm

Operator

That is all the time we have for questions today. I would like to turn the floor back over to David Ault for any closing comments.

Speaker 2

Thank you, Holly. We appreciate everybody's time on the call today and look forward to speaking with you in our second quarter results in April. And to the D. R. Horton family, outstanding Q1.

Speaker 2

It's amazing what our people are accomplishing out there. And Don Horton and the entire executive team are humbled with the opportunity to represent you. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
D.R. Horton Q1 2022
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