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D.R. Horton Q2 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Jessica Hansen
    Vice President of Investor Relations and Communications
  • David V. Auld
    President and Chief Executive Officer
  • Michael J. Murray
    Executive Vice President and Co-Chief Operating Officer
  • Paul J. Romanowski
    Executive Vice President and Co-Chief Operating Officer
  • Bill W. Wheat
    Executive Vice President and Chief Financial Officer

Presentation

Operator

Good morning, and welcome to the Second Quarter 2022 Earnings Conference Call for D.R. Horton, America's Builder, the largest builder in the United States. [Operator Instructions]

I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

Thanks, Holly, and good morning. Welcome to our call to discuss our results for the second quarter 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. 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 are based upon information available to D.R. Horton on the date of this conference call and D.R. 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-K in its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q in the next day or two. 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.

David V. Auld
President and Chief Executive Officer at D.R. Horton

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice President and Co-Chief Operating Officers; and Bill Wheat, our Executive Vice President and Chief Financial Officer. D.R. Horton team delivered an outstanding second quarter, highlighted by a 51% increase in earnings to $4.03 per diluted share. Our consolidated pretax income increased 60% to $1.9 billion on a 24% increase in revenues. And our consolidated pretax profit margin of 520 basis points to 23.5%. Our homebuilding return on inventory for the trailing 12 months ended March 31 was 40.3%, and our consolidated return on equity for the same period was 34%. These results reflect our experienced teams the production capabilities and our ability to leverage D.R. Horton scale across our broad geographic footprint. Housing market demand remained strong despite the recent increase in mortgage rates and we are focused on maximizing returns while continuing to aggregate market share. There are still significant challenges in the supply chain, including shortages in certain building materials and a very tight labor market. Our construction cycle times were extended further this quarter, and we continue to work on stabilizing and then reducing our cycle times to historical norms. After starting construction on 24,800 homes this quarter, our homes and inventory increased 30% from a year ago with only 600 unsold completed homes across the nation. With 33,900 homes in backlog, 59,800 homes in inventory, a robust loss supply and strong trade and supplier relationships, we are well positioned for consolidated revenue growth of greater than 25% this year. We believe our strong balance sheet, liquidity and low leverage position us to operate 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 pace and inventory levels to optimize returns.

Mike?

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Earnings for the second quarter of fiscal 2022 increased 59% to $4.03 per diluted share compared to $2.53 per share in the prior year quarter. Net income for the quarter increased 55% to $1.4 billion compared to $930 million. Our second quarter home sales revenues increased 22% to $7.5 billion on 19,828 homes closed, up from $6.2 billion on 19,701 homes closed in the prior year. Our average closing price for the quarter was $378,200, up 21% from the prior year quarter, while the average size of our homes closed was down 1%.

Paul?

Paul J. Romanowski
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Our net sales orders in the second quarter decreased 10% to 24,340 homes, while the value increased 10% from the prior year to $9.7 billion. Our average number of active selling communities increased 1% from the prior year quarter and was up 4% sequentially. The average sales price of net sales orders in the second quarter was $400,600, up 23% from the prior year quarter. The cancellation rate for the second quarter was 16% compared to 15% in the prior year quarter. New home demand remains very strong despite the recent rise in mortgage rates. We are continuing to sell homes later in the construction cycle to better ensure the certainty of the home close date for our homebuyers with virtually no sales occurring prior to the start of home construction. We expect to continue managing our sales pace in the same manner for the rest of the year.

Bill?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Our gross profit margin on home sales revenues in the second quarter was 28.9%, up 150 basis points sequentially from the December quarter. The increase in our gross margin from December to March reflects the broad strength of 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 incentives in most of our communities. On a per square foot basis, home sales revenues were up 4.8% sequentially. While stick and brick cost per square foot increased 2.5% and our lot cost increased 2.8%. We expect our cost will continue to increase. However, with the strength of today's market conditions, we expect most cost pressures to be offset by price increases in the near term. We currently expect our home sales gross margin in the third quarter to be slightly better than the second quarter.

Jessica?

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

In the second quarter, homebuilding SG&A expense as a percentage of revenues was 6.8%, down 80 basis points from 7.6% in the prior year quarter. This quarter, our homebuilding SG&A expense as a percentage of revenues was lower than any quarter in our history, and we remain focused on controlling our SG&A while ensuring that our infrastructure adequately supports our business.

Paul?

Paul J. Romanowski
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

We started 24,800 homes during the quarter, up 5% from the second quarter last year, bringing our trailing 12-month starts to 95,300 homes. We ended the quarter with 59,800 homes in inventory, up 30% from a year ago. 26,000 of our total homes at March 31 were unsold, of which only 600 were completed. Our average construction cycle times for homes closed in the second quarter increased by almost two weeks since our first quarter and over two months from a year ago. Although we have not seen improvement in the supply chain yet, we continue working to stabilize and then reduce our construction cycle times to historical norms.

Mike?

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

At March 31, our homebuilding lot position consisted of approximately 570,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. 23% of our total owned lots are finished and 47% of our controlled lots are or will be finished when we purchase them. Our large capital-efficient lot portfolio is a key to our strong competitive position. Our second quarter homebuilding investments in lots, land and development totaled $2.1 billion, of which $1.2 billion was for finished lots, $630 million was for land development and $260 million was to acquire land.

Paul?

Paul J. Romanowski
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Forestar, our majority-owned residential lot development company continues to execute well. During the second quarter, Forestar reported total revenues of $421.6 million, and pretax income of $63.2 million. For the full year, Forestar expects to deliver 19,500 to 20,000 lots, and generate $1.7 billion of revenues with a pretax profit margin of 14% to 14.5%. At March 31, Forestar's owned and controlled lot position increased 14% from a year ago to 96,500 lines. 57% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $390 million of our finished lots purchased in the second quarter were from Forestar. Forestar is separately capitalized from D.R. Horton, and had approximately $580 million of liquidity at quarter end with a net debt-to-capital ratio of 29.9%. Forestar's strong capitalization, lot supply and relationship with D.R. Horton positions them to continue their profitable growth.

Bill?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Financial services pretax income in the second quarter was $92.8 million with a pretax profit margin of 41.8% compared to $107.7 million and 47.8% in the prior year quarter. For the quarter, 99% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 68% of our homebuyers. FHA and VA loans accounted for 41% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 724 and an average loan-to-value ratio of 88%. First-time homebuyers represented 55% of the closings handled by the mortgage company this quarter.

Mike?

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Our rental operations generated pretax income of $103 million on revenues of $223 million in the second quarter. During the quarter, we sold one multifamily rental property consisting of 126 units for $50 million, and we sold three single-family rental properties totaling 368 homes for $173 million. Our rental property inventory at March 31 was $1.5 billion compared to $544 million a year ago. Rental property inventory at March 31 included approximately $600 million of multifamily rental properties and $900 million of single-family rental properties. 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 segments homes closed revenues or inventories. During the quarter, our rental operations subsidiary, DRH Rental, entered into a four-year $750 million senior unsecured revolving credit facility. Availability under the rental revolving credit facility is subject to a borrowing base calculation based on unrestricted cash and the book value of DRH rental real estate assets. There were no borrowings outstanding on the rental credit facility at quarter end. We now expect our rental operations to generate more than $800 million in revenues during fiscal 2022. Our third quarter rental sales will be lower than the second quarter and fourth quarter sales will be the highest of the year. We also now expect our total rental platform inventories to grow by more than $1.5 billion in fiscal 2022 based on current projects in development and a significant pipeline of our future projects. We are positioning our rental operations to be a significant contributor to our revenues, profits and returns in future years.

Bill?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. At March 31, we had $3.2 billion of homebuilding liquidity, consisting of $1.2 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. Our homebuilding leverage was 16.4% at the end of March, and homebuilding leverage net of cash was 11.3%. Our consolidated leverage at March 31 was 24.9% and consolidated leverage net of cash was 18.9%. At March 31, our stockholders' equity was $16.8 billion, and book value per share was $47.66, up 33% from a year ago. For the trailing 12 months ended March, our return on equity was 34% compared to 27.1% a year ago. During the first six months of the year, our cash used in homebuilding operations was $416 million, which reflects our increased homes and inventory to meet demand and the impact of extended construction cycle times. During the quarter, we paid cash dividends of $79.1 million, and our Board has declared a quarterly dividend at the same level as last quarter to be paid in May. We repurchased 3.1 million shares of common stock for $266 million during the quarter for a total of 5.8 million shares repurchased fiscal year-to-date for $544.2 million, an increase of 30% compared to the same period a year ago. Subsequent to quarter end, our Board authorized the repurchase of up to $1 billion of our common stock, replacing our prior authorization. The new authorization has no expiration date. We now expect to reduce our outstanding share count by 3% during fiscal 2022. We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.

Jessica?

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

As we look forward to the third quarter of fiscal 2022, we expect market conditions to continue to reflect strong demand from homebuyers with continuing supply chain challenges. We expect to generate consolidated revenues in our June quarter of $8.6 billion to $9 billion and homes closed by our homebuilding operations to be in a range between 21,500 and 22,500 homes. We expect our home sales gross margin in the third quarter to be in the range of 29% to 29.5% and homebuilding SG&A as a percentage of revenues in the third quarter to be around 6.6%. We anticipate a financial services pretax profit margin of approximately 40%, and we expect our income tax rate to be roughly 24% in the third quarter. For the full fiscal year, we expect to generate consolidated revenues of $35.3 billion to $36.1 billion and homes closed by our homebuilding operations to be in a range of 88,000 to 90,000 homes. We forecast an income tax rate for fiscal 2022 of roughly 24%, and we now expect that our share repurchases will reduce our outstanding share count by approximately 3% 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, and we will continue to balance our cash flow utilization priorities among our core homebuilding operations, increasing our rental inventories, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend and consistently repurchasing shares.

David?

David V. Auld
President and Chief Executive Officer at D.R. Horton

In closing, our results and positions reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across our multiple brands. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to continue aggregating market share and effectively operating in changing economic conditions. 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 dividends 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 our operations during the remainder of 2022 and in future years.

This concludes our prepared remarks. We will now host questions.


Questions and Answers

Operator

[Operator Instructions] Your first question for today is coming from Carl Reichardt with BTIG. Carl, your line is live.

Carl Reichardt
Analyst at BTIG Research

Thanks very much. Morning everybody. I think at the end of -- or in January, you talked about orders being flat, maybe up slightly in the quarter. They were down 10. Can you talk a little bit about the progression of orders over the course of the quarter? And when I'm assuming you recognize that the production side was not catching up and in fact, was deteriorating and you decided to slow order pace. Or is there a demand component to this as well?

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Carl, I think it was all our decision to slow sales orders based on production capacity. I think we saw and continue to see very good demand and more buyers, qualified buyers out there for our homes today when we release them for sale. But we did see during the quarter that our cycle times continue to extend, and we made the decision in several of our geographies to delay the release of homes until we could give a better delivery date to those customers and provide a better experience for them in the backlog process. So we saw a very strong demand in the quarter, but we did see the cycle times elongate. I think we added two weeks this quarter, unfortunately, and we wanted to make sure we did not create more buyers in backlog with an unhappy experience.

Carl Reichardt
Analyst at BTIG Research

Great. Thanks Mike. And then you didn't discuss the Vidler Water transaction, and I would just like you to sort of an overview of the strategic rationale for that deal and whether or not this is a function of the assets related to water rights or if this is a business that you think potentially could grow? Thanks very much.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

Sure, Carl. We put out pretty much what we're going to say about Vidler in the press release in terms of them owning a portfolio of premium water rights and other water-related assets across several of our Southwest markets that generally lack adequate supply. We mentioned the total value of the transaction is approximately $290 million, and we do expect it to close in the next month or two. But considering it's subject to the successful completion of a tender offer, we don't have much more to say at this time, and I look forward to talking about that in coming quarters after it closes.

Carl Reichardt
Analyst at BTIG Research

Well I tried. Thanks Jess, thanks everybody.

Operator

Your next question is coming from John Lovallo with UBS. John, your line is live.

John Lovallo
Analyst at UBS Group

Good morning guys and thank you for taking my questions. The first one is activity at some point will likely moderate given higher rates and higher prices. And the question I have, and I think the concern that some investors have is that if and when activity does moderate, how does this sort of change, if at all, your thoughts on capital allocation? I mean, will you sort of back off on -- take the foot off the pedal on buying land and maybe switch more towards share buybacks and things of that nature?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Thanks, John. We're always focused on aggregating market share, and we're positioning ourselves to continue to do that through any economic cycle. Certainly, at some point, impact of rates and the impact of affordability will have some impact on demand, and we certainly will adjust our capital allocation at that time. But we believe we're in a strong position to continue to grow. But certainly, those impacts on demand would impact our investment decisions in land at that point in time.

John Lovallo
Analyst at UBS Group

Okay. That's good to hear. And then on the option percentage getting up to 77%, I mean, that's much higher than think anyone thought it when the Forestar acquisition occurred and seeming going back a few years ago, I mean, could this get much closer to, call it, 90%. And that's just a random number, but just 90% plus getting closer to what NBR does? And how does this impact the strategy with Forestar as it's grown and become spread across a lot of your communities? I mean you do have the option to bring that ownership position down pretty significantly and still maintain the favorable contract terms. So just curious how you're thinking about Forestar longer term.

David V. Auld
President and Chief Executive Officer at D.R. Horton

From the overall auction lot percentage, we have been focused on it. We're going to continue to focus on it. There is -- obviously, it's going to be capped at 100%. But our goal is just to continue to get better and more efficient and as to Forestar, very happy with Forestar. I mean -- at some point, yes, it will deconsolidate. But there's still a lot of markets that we think we can help scale Forestar into and if you look at just the earnings we're making, our shareholders are making of Forestar. It's a very good investment and kind of not a bad place to be -- but yes, at some point, it will deconsolidate, but it's more geared toward their platform build-out than it is our desire to liquidate some percentage of our shares.

John Lovallo
Analyst at UBS Group

Thanks guys.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

Thanks John.

Operator

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

Stephen Kim
Analyst at Evercore ISI

Yeah. Thanks very much guys. Congratulations on the strong results. Obviously, with the big rise in rates, everyone's concerned that things are going to slow. I think John mentioned that that's people's expectations. I guess -- two questions with respect to the rise in rates. One is, is there anything that you are planning in terms of the communities, which would likely come online in the next year or two, let's say, the next year, new communities opening. Where you're making adjustments to your planned home sizes, amenity levels or anything like that? And would that have an impact on the gross margin? And then secondly, can you just sort of talk about why do you think we have not seen in your communities despite obviously affordability of being more true. Why do you think we haven't seen it yet in terms of your conversations with customers, do you -- are they -- can you talk about the role of rate locks? Or just anything that would be helpful for understanding why we maybe haven't seen anything yet?

Paul J. Romanowski
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Stephen, I think to your first question, in terms of community design, plan design, I think we are going to continue to focus the affordable range and work towards those buyers. I don't see a significant change in how we build, what we build. But if it continues to be a push on affordability, then we'll put the appropriate homes in place. It may mean some smaller homes, but not a significant shift from where we are today. In terms of -- in our communities and in our sales offices, certainly, there is a concern from the buying public over rates but selling later in the process like we do. We don't have as much exposure as we could if we were selling far out to the shifts in rate conditions. And that's why we've continued to restrict our sales to a later time frame. So that we're putting people in backlog at closer to the rate that they're going to close at.

Stephen Kim
Analyst at Evercore ISI

That makes a lot of sense. In this quarter, can you give us a sense for how many of your closings were done with a rate lock that the closings I'm referring to, not the orders?

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

Yes. So I looked at it actually on a forward-looking basis, and we have essentially -- in our next month, so April, 100% locked. And then as you would expect that percentage ticks down, but it's the majority of the quarter's closings that are locked and you got to get to four-plus months out before that's a more de minimis percentage.

Stephen Kim
Analyst at Evercore ISI

Okay, great. Thanks very much guys.

Operator

Your next question for today is coming from Ivy Zelman with Zelman & Associates. Ivy, your line is live.

Ivy Zelman
Analyst at Zelman & Associates

Thank you. Good morning and congrats on the strong results. Maybe you guys can just give us some perspective on the rental business with both the merchant build single-family rental communities as well as your multifamily projects. Can you talk about how many of them you're developing them are already presold. And have you seen any changes in valuation as it relates to selling with the surge in rates as we hear chatter that values at least within multifamily have really started to be pressured. And just the overall buying appetite that's out there with so much capital still appears to be chasing this asset class?

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Thank you, Ivy. We do see a lot of very strong demand and strong execution on the pricing. We do not sell any of our communities at this point during the development phase. We're selling them at -- in the lease-up phase at stabilization. So we're seeing still very good demand and very good pricing execution on those transactions that we have closed on. So current outlook, you would expect cap rates could be affected by rising interest rates, but we're also seeing very strong leasing demand and very strong rental growth, which certainly affect cap rate outlooks.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

And at a 40% to 50-plus percent margin on these sales if the market were to soften a bit, we still expect to generate very strong profits and returns.

Ivy Zelman
Analyst at Zelman & Associates

Great. And then just secondly, with respect to the delay in and obviously, the industry is impacted. Can you walk us through on the development side with municipalities, like specifically where that -- those components of the overall impact is related to like the difference versus sourcing materials because some materials are not a problem anymore. So everyone talks about it's a whack-a-mole, but what's it like on the development side as well as on the municipality side and how much of that is impacting the two-month year-over-year increase in cycle time?

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Well, I think you've got certainly municipality challenges through the entitlement process in terms of bringing new lots to the market. And we still haven't seen full return of municipalities when you're talking about permitting and/or inspection process. So it certainly is impacting some of that as we work through the supply chain challenges, and then you finally move homes on to the next stage, it is -- we do see some delays in inspections and some of the municipality services that we were seeing. So it's certainly been part of the impact to our cycle time extension.

Ivy Zelman
Analyst at Zelman & Associates

And let me just sneak in one last one, if I could. Just with respect to the inflation that we've seen. Can you be more specific on recognizing your land is predominantly controlled via option. Like what has changed on the pricing to tying up and controlling land? And how much overall or a lot of inflation that you are buying outright? Are you seeing relative to a year ago? And maybe to be just general because it's obviously different by market.

David V. Auld
President and Chief Executive Officer at D.R. Horton

I'd say the overall land market has tracked the sales price of homes. So it is good to be in a position where we control 550,000 lots at prices contracted two years ago, three years ago, four years ago and not be in a position today where we have to go buy something. So we are looking at that. We're monitoring it. I believe liquidity is going to drive market share gains and the ability to not be at risk of credit markets and/or banks is a huge competitive advantage for us. And we're going to protect that. We're going to be conservative in our land searches. I mean, there are good deals out there that we put under contract this year that we will take to close. But we are not in a position where we have to go buy anything. And we're going to, I think, see a significant benefit of that as we proceed through this market.

Ivy Zelman
Analyst at Zelman & Associates

Thank you. Good luck.

David V. Auld
President and Chief Executive Officer at D.R. Horton

Thank you.

Operator

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

Matthew Bouley
Analyst at Barclays

Morning everyone. Thank you for taking the questions. Just another question on what you do from a sort of medium-term perspective from what you can control in a scenario where housing activity were to slow, as we're talking about this morning, what does D.R. Horton do from a supply perspective? To what degree does sort of your own plans for community replenishment or starts kind of flex with these changes in interest rates and demand, just thinking again kind of medium-term sort of annual volume growth? How should we think about how you all are viewing that? Thank you.

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Matt, we're very much a bottom-up community level driven company, and we're going to evaluate demand we see at each individual community and submarket and look for home starts to match that demand that our local operators are seeing. And that couples with community replacement needs in those submarkets based upon demand we see in real time in the field. So in the near term, we'll continue to adjust starts. In the more medium term, we'll look at subdivision openings and phase sizing. And then as well as Paul touched on before, we may be adjusting some product to some smaller sizes, if that's appropriate for the given market.

Matthew Bouley
Analyst at Barclays

Got you. Okay. That's very helpful. And then secondly, just zooming in back to the very near term, I think you've seen maybe in some of the housing data, maybe a little bit in our own survey work, it seems like some trends in the housing market might have become a little more choppy in recent weeks, perhaps not surprising given the move in interest rates. But just anything you're seeing kind of on the leading edge on the margin whether that's any sort of pockets of changes in demand or again, incentives appearing and various markets? Just anything you're kind of seeing later into March and into April? Thank you.

David V. Auld
President and Chief Executive Officer at D.R. Horton

The rate increase is -- it's eliminating some people from the home buying experience. But we still have more people -- qualified buyers trying to buy homes than we can produce today. One of the things that really, I think, has impressed me back in 2018 when you saw a rapid rise in rates, demand just was significantly reduced. And then after the rate shock to -- after the rate shock was kind of mitigated, we saw demand come back and come back strong. But through this cycle, which is in even more rapid rate increases, yes, we've had people that don't qualify anymore, but the demand side is still very strong. So just the desire to own homes, and it may be the fact that prices have escalated very fast and rents are escalating even faster than the price of new homes and all the talk about inflation and then locking in your housing costs for 20 years. I mean it is home ownership is a cherished thing today. And the people coming out of the millennials coming out or even individuals relocating from other markets to kind of where the growth is taking place. I just -- they want to own a home, they want to lock in their housing cost, and they want to get in the neighborhoods that they can raise families in.

Matthew Bouley
Analyst at Barclays

Well, thank you for that David, and thanks everyone, and good luck.

David V. Auld
President and Chief Executive Officer at D.R. Horton

Thank you.

Operator

Your next question is coming from Anthony Pettinari with Citigroup. Anthony, your line is live.

Anthony Pettinari
Analyst at Smith Barney Citigroup

Good morning. Cancellation rates, I guess, picked up a 100 bps, maybe from record low levels. Would you characterize that as more kind of noise or maybe more clearly, customers no longer able to secure mortgages? Would you expect cancellations maybe decline again in 3Q if rates stay at their current level? And I think in the past, you've provided kind of a sensitivity analysis around sort of mid-single digit, high single-digit backlog that potentially could be at risk with 100 bp rise in rates. Any sort of thoughts on how that has shaken out now that we're above 5% now on rates?

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

Sure, Anthony. I mean we look at a 1% change in our cancellation rate is essentially flat. It's still abnormally low -- historically low. We typically run in the high teens to low 20s. And that's a can rate we're very comfortable running at. The main reason continues to be that buyers can't ultimately qualify for the home purchase. So that 15%, 16%, 17% wherever it falls out each quarter, really no concerns from us on that end. In terms of the rate sensitivity analysis, we did run the same sensitivity as we've talked to each of the last few quarters. I think rates have already kind of run up to where that was run at a couple of weeks ago, as we prepped for this call, but it had only ticked up to, call it, roughly 10% of buyers and backlog today would be at risk. As I mentioned earlier in answer to another question, all of April is already rate locked if we're going through a mortgage company. So that piece wouldn't be at risk. And then we also would work to look to move people from a different loan product or see if they could document additional income. And then to kind of second some things that the guys have already said today, for those buyers that do unfortunately fall out because they can't qualify, there's no shortage of buyers behind them to take their place.

Anthony Pettinari
Analyst at Smith Barney Citigroup

Okay. That's very helpful. And then just with higher rates, are you making any strategic shifts to target a different mix of buyers? Are you seeing buyers that you wouldn't normally talk to kind of moving down market to more affordable offerings and understanding your entire offering is fairly affordable, like which of your buyer types do you think is best positioned to maybe weather rising rates, does it move up? Or any thoughts there?

Paul J. Romanowski
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

We really haven't made any significant shift and don't see a need to as rates rise. It's -- it's going to be more of that shock to payment for folks when they have to reset maybe the size home or price that they can then qualify for. So we're going to catch those people that have been buying up that may fall down the price curve and/or size of home and still be able to pick them up in a majority of our communities. So no real shift in what we're doing with any of our buyer demographics. We're still seeing strong demand, as everyone's mentioned, across the spectrum.

Anthony Pettinari
Analyst at Smith Barney Citigroup

Okay, that's helpful. I'll turn it over.

Operator

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

Mike Rehaut
Analyst at JPMorgan Chase & Co.

Hi thanks. Good morning everyone and thanks for taking my question. I just wanted to revisit the can rate, which I think as you mentioned, Jessica, essentially flat and extremely low. We've kind of thought of it as a key metric to understand the potential impact of the rate move over the last 60, 90 days. And I was curious if you've seen any change throughout the quarter, Obviously, it was up 100 basis points versus a year ago, and I think 100 basis points, I believe, sequentially. But anything throughout the quarter that maybe perhaps you ended the quarter at a higher number than at the beginning. And if there's been any change in April, curious around that.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

It really was relatively flat throughout the quarter, give or take, a 1% change. So sequentially, we were -- I guess we were both a year ago and in the last quarter, we were at 15%. This quarter, we were at 16%, and it was right around that range for the duration of the quarter.

Mike Rehaut
Analyst at JPMorgan Chase & Co.

Okay. Also, throughout the quarter, you kind of said that demand has remained strong, more demand than supply. I would presume then that as a result, your pricing power and the incentives that you've had in the marketplace really haven't changed at all. Obviously, your gross margins continue to improve. And you expect further margin improvement in the third quarter. Just wanted to make sure that was the case as well and if that was the case for yourselves as well as if you witnessed any changes in the broader marketplace.

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Mike, we have seen consistent ability to raise prices through the quarter, seeing consistent increases in our sales order pricing that then flow through our backlog and through our closing pricing. That's what gives us the confidence to say that our margins are going to be slightly better next quarter because we can see those sales prices coming through in our closings in the next quarter. So to date, we have not seen a change in our ability to raise prices. I think naturally as we look for a little bit longer term with the impact of rates and impact of overall price increases. At some point, we would expect that to moderate. But at this point, we have not seen any signs of that as of yet.

Mike Rehaut
Analyst at JPMorgan Chase & Co.

Okay. One last quick one, if I could. Just the 3% reduction of year-end share count versus 2% previously. Sorry if I missed this earlier, but I just want to make sure, is that a function of a greater amount of dollars dedicated to share repurchase or in part driven by the recent reduction in share price in the market over the last couple of months?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

A little bit of both, Mike. As we look at our capital allocation for the year, our expectations for how much we would utilize -- I mean dollars we would utilize on share repurchase has gone up versus our prior estimates. But then certainly, the current valuation of our stock does allow us to buy more shares per dollar as well. And so it's a little bit of both, and that's allowed us to increase our estimate from 2% reduction to a 3% reduction.

Mike Rehaut
Analyst at JPMorgan Chase & Co.

Great. Thanks so much. Appreciate it.

Operator

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

Truman Patterson
Analyst at Wolfe Research

Hey, good morning everyone. Thanks for taking my questions. Just wanted to follow up on one of John's questions previously. I realize that cycle times have been extended, you have 60,000 homes under construction, which ties up net working capital. But we're now halfway through the year. I'm just hoping you can give an update or possibly a number around your 2022 operating cash flow expectation. And then just on the capital allocation decision based on rates increasing, it seems like you're going to be a bit more -- or you're going to continue with programmatic share repurchase. But how do you balance this with potentially even increasing liquidity given all the commentary from the Fed and possibly having a rainy day fund, if you will?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Yes. It is a constant balance, Truman. We're not giving specific dollar guidance regarding our operating cash flow other than we do expect to generate positive cash flow from our homebuilding operations. On a consolidated basis, our operating cash flow also includes the investments we're making in our rental platform, which obviously are significant, increasing those by $1.5 billion this year. And then certainly one factor today that is tying up some of our capital is the extension of our build times being longer than two months longer than a year ago, certainly does tie up a significant amount of capital. But certainly, we are working towards stabilizing that and improving those cycle times, which we would expect to start to bring that cash back some towards the end of fiscal '22 and then certainly into fiscal '23. So it is a balance -- and as we plan our capital allocation, we plan our liquidity targets. We are just seeking to make sure we stay in as a strong and flexible position as possible to handle the -- what we see in the market today and position ourselves for further growth, aggregation and market share and generating returns to our shareholders.

Truman Patterson
Analyst at Wolfe Research

Okay. Thanks for that. And then one final one on just current market conditions. Just are you seeing any metros that are maybe a little bit slower than the others? And then for the buyers purchasing today, I realize this might be somewhat of an unfair question, but how long have they been in the market? Were they really searching before rates started to move -- or are we seeing incremental buyers continuing to come in after the higher rate environment that are kind of more recently entered, if you will.

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Truman, I think on the markets, we see markets have varying levels of performance and demand, but they're all very strong. relative to where they've been. I mean certainly, the migration patterns within the country and the areas that are gaining population have incredibly strong demand but markets across our footprint, we still see more buyer demand than we have production capacity for today. And so we're still very encouraged by that. Some of those buyers have been in the marketplace for quite a while. Others are more recent entries, but we don't have any hard data we could share with you on how exactly long they've been conducting their search.

Truman Patterson
Analyst at Wolfe Research

Okay. Thank you. And good luck in the upcoming year.

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

Thanks.

Operator

Your next question for today is coming from Deepa Raghavan with Wells Fargo. Deepa, your line is live.

Deepa Raghavan
Analyst at Wells Fargo & Company

Thanks everyone for taking the question. Good morning. Of the supply chain incremental headwinds, is there a way to think about how much we're Omicron-related? I'm assuming that should be probably behind us now and how much is kind of carry forward? I think where I'm going with it is, are you baking in any sequential improvement off of that two weeks elongated cycle time assuming there must have been some relief from Omicron.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

Yes, I think we would agree with you on the Omicron front. I mean there's certainly still labor challenges in labor and manufacturing facilities, distribution centers, it's still harder to come by, but it does seem to be slightly improving. Drivers continue to be a really big area of need to be able to get products to job sites. In terms of if we're baking in any incremental improvement in our build times, I think I would tell you for us to achieve the high end of our guidance range. And certainly to do any more of that, we would need to see improvement in our build times from what we've seen today. But we do feel like we're maybe in the early stages of that to where we felt comfortable still, although we lowered our closings guide. We did leave 90 in the range of closing 88 to 90 because we have the houses. It's just a matter of getting them completed and across the finish line with the buyer.

Deepa Raghavan
Analyst at Wells Fargo & Company

Got it. Staying on the topic of the guide. I don't think you guided for the full year gross margins unless I missed it, but it does definitely look like you have some good tailwinds that can extend into Q4 and give you some good gross margin visibility. Do you want to provide any color on that for Q4?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Yes, we do only guide one quarter out on gross margin, but I would agree with you that currently, we do have some tailwinds with the average prices that have been in our backlog and in our recent sales orders that some of which will be homes that would close into Q4. I think we do have some tailwinds. But as we've said many times, our true visibility to margin really doesn't go far beyond the quarter. So we only guide specifically to Q3. But we do feel like we're still going to see very good gross margins through Q4 as well.

Deepa Raghavan
Analyst at Wells Fargo & Company

That's very helpful color. Thanks very much and good luck.

Operator

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

Susan Maklari
Analyst at The Goldman Sachs Group

Thank you. Good morning. My first question is on the SG&A. I mean, obviously, the gross margin has been impressive, but so has your SG&A performance this year. You continue to come in well below where we are modeled and where you've guided to, can you talk to the potential to continue to see that coming down now that we're solidly in that 6% range? And maybe where we can get to over time there?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

Thank you, Sue. Obviously, an important part of our culture and our business model. We are very focused on ensuring that we stay very efficient with our overhead while still making sure we're building our overhead and our infrastructure to support the growth. But with the price appreciation that we've seen alongside that, that has certainly aided in dropping the SG&A percentage as a percentage of revenue a bit faster. And then honestly, than we would have modeled as well. And so we've been very pleased with that. Certainly, we want to make sure we continue to position ourselves adequately there. But with the prices that we have seen and that we see coming over the next quarter or so, we do expect to still see very good SG&A leverage with the guidance that we're providing for Q3, that assumes another 50 basis point year-over-year improvement in SG&A. So yes, we do see ourselves with an SG&A rate getting down into the 6s and for at least the near term staying there.

Susan Maklari
Analyst at The Goldman Sachs Group

Okay. All right. Thank you. And then my second question is a bit longer term. David made the comment earlier around consumer confidence. And overall, the sort of desirability around homeownership today and how that perhaps is very different relative to where we were, certainly, coming out of the last cycle. Can you talk to what sustains that level of confidence in home ownership? And what that perhaps could mean even as rates do rise in terms of keeping that demand pool there and peoples willingness to sort of continue to extend and really try and make that effort to get into the home.

David V. Auld
President and Chief Executive Officer at D.R. Horton

I just -- I've been doing this for a long time. And the desire to own a home is, I think, kind of an American or part of the American culture. It gives you a sense of safety and a nest to build your family. So I think the downturn in '08, '09, '10 where home values were just decimated, that put a big pause on the desire to own homes. I think as this cycle continues, and I think it's going to continue to elongate the housing formation, the desire to get close to neighborhood schools, all those things, it kind of returned home ownership to kind of the American dream again. So it's -- getting in a home today is harder. But it's not nearly as hard as it was when I bought my first home. So it's -- it feels like it's almost a cultural shift from -- or a return to family community and I think the demand is significantly higher than the homes that can be produced. So.

Susan Maklari
Analyst at The Goldman Sachs Group

Okay, well thank you for those thoughts and good luck with everything.

David V. Auld
President and Chief Executive Officer at D.R. Horton

Thank you.

Operator

Your next question for today is coming from Jay McCanless with Wedbush. Jay, your line is live.

Jay McCanless
Analyst at Wedbush

Hey, thanks for taking my questions. Just wanted to clarify, I think you've discussed this already, but the reduction in the closing guidance for the full year, that's not a shift to homes into the rental operation. That's just you guys slowing down production in the -- or slowing down orders in the field to keep up with production.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

It's -- when our homes are going to be completed and the ability to close those in what quarter, yes, there's no transition to build for rent in those numbers. We've kept our homebuilding for sale completely separate from what we're reporting on a rental basis.

Michael J. Murray
Executive Vice President and Co-Chief Operating Officer at D.R. Horton

We have a plan for both businesses. One for the for-sale side of the business and one for the rent side of the business. And the change in the guidance has nothing to do with transitioning communities from one to another. It's solely dealing with completion of homes, putting the buyer into a completed good-looking house when that house is ready.

Jay McCanless
Analyst at Wedbush

Got it. Okay. Thank you for clarifying that. And then my second question, I think David earlier was talking about liquidity being the competitive advantage, especially with land prices moving up. I mean when does this lack of liquidity, I think, especially for some of the smaller private builders, when does that really force a bigger wave of M&A than what we've seen so far in post COVID?

David V. Auld
President and Chief Executive Officer at D.R. Horton

I don't know that it's going to force a larger M&A program. I do think that their inability to secure financing to move forward on different projects or even to start houses is going to open up market opportunity for us, both in our ability to aggregate market share on the home sale side and the ability to control longer and longer land positions at very favorable numbers. So it's a -- when you look at the impact of a two-plus month expansion of our cycle time and what that's done to our liquidity and then I understand that we are still building houses much faster than anybody else, and we started at -- and are going to continue to protect a very strong liquidity position. It's -- I got to believe there's tremendous pressure on the -- especially the private builders. And at some point, these guys have made a lot of money over their careers. And they're guaranteeing loans. And at some point, you're just not going to put everything at risk. So I do think that's going to open up market share gains for us. And we are very well positioned to take those -- that market when it does open.

Jay McCanless
Analyst at Wedbush

Got it. That's great. And if I could sneak one more in. Bill was encouraged to hear that community count was up year-on-year sequentially. How are you guys feeling about that for the full year just on a percentage change basis?

Bill W. Wheat
Executive Vice President and Chief Financial Officer at D.R. Horton

We're still looking at the low single-digit increase, but we -- yes, it has been good to see more communities get opened, starting to basically replenish our communities from -- we ran them down a bit early a year or 18 months ago. So still see a solid incremental increase in communities.

Jessica Hansen
Vice President of Investor Relations and Communications at D.R. Horton

And organic growth in our core markets is still going to be the biggest driver, but we did add a few more new markets to our market count this quarter. We're now in 104 markets and have another list of markets behind that, that we're planning to expand into as well.

Jay McCanless
Analyst at Wedbush

That's great. Thanks for taking my questions.

Operator

Your next question for today is coming from Dan Oppenheim with Credit Suisse. Dan, your line is live.

Dan Oppenheim
Analyst at Credit Suisse Group

Thanks very much. Just a quick question. Given the success that you've had in terms of Express Homes taking share generally, what you're seeing in terms of buyers coming in from competition now and sort of just potentially market share for Express in this environment and how are you seeing that going out?

David V. Auld
President and Chief Executive Officer at D.R. Horton

We cut out a little bit, Dan.

Dan Oppenheim
Analyst at Credit Suisse Group

Sorry, in terms of the gains for Express in terms of market share, given the efficiency of affordability there, how you're seeing that in terms of the -- what's happening to the consumer right now?

David V. Auld
President and Chief Executive Officer at D.R. Horton

I think the ability to produce great value at the lower end is a tremendous advantage that we have. The bar pool significantly deeper, their qualification may be a little tougher. But as kind of referenced before, people really want to buy home and especially their first home. So I see that segment of our business just continue to get stronger. And whereas somebody may have pushed up and priced at a very low rate. We have a lot of first-time homebuyers buying in the Horton brand ultimately, it comes down a payment. And if their desires on the home in a very, very nice community location, our competitive advantage just gets better and better.

Dan Oppenheim
Analyst at Credit Suisse Group

Great. Thank you.

Operator

Ladies and gentlemen, that's all the time we have for questions. I would now like to turn the floor back over to David for closing remarks.

David V. Auld
President and Chief Executive Officer at D.R. Horton

Thank you, Holly. We appreciate everybody's time on the call today and look forward to speaking with you again to share our third quarter results in July. And to the D.R. Horton family, Don Horton and the entire executive team, thank you and congratulate you on delivering an outstanding second quarter. We are incredibly well positioned today. You once again have proven you are the best of the best in this industry. Thank you.

Operator

[Operator Closing Remarks]

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