D.R. Horton Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2023

Key Takeaways

  • Company reported strong Q1 results with earnings of $2.76 per share, revenues up 3% to $7.3 billion and a 17.5% pretax margin.
  • Closed 17,340 homes in Q1 while net sales orders fell 38% year-over-year to 13,382 homes and cancellations improved to 27%.
  • Homebuilding gross margin declined 440 bps sequentially to 23.9% due to higher building costs and incentives; Q2 margin is guided at 20–21% with SG&A around 8–8.3%.
  • Inventory of 43,200 homes is down 21% from last year, supported by 13,900 starts and a 551,000-lot portfolio (25% owned) to maintain production flexibility.
  • Balance sheet strength is highlighted by $4 billion in liquidity, low net leverage (4.4% homebuilding), book value per share of $58.71 (+33%), and Q2 guidance of $6.3–6.7 billion revenue and 16,000–17,000 home closings.
AI Generated. May Contain Errors.
Earnings Conference Call
D.R. Horton Q1 2023
00:00 / 00:00

There are 17 speakers on the call.

Operator

Good morning, and welcome to the First Quarter 2023 Earnings Conference Call for D. R. Horton, America's Builder, the largest builder in the United States. There will be an opportunity to ask questions on today's call. At any time to enter the Q and A queue.

Operator

During today's Q and A, we ask that participants limit themselves to one question and one follow-up. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton.

Speaker 1

Thank you, Paul, and good morning. Welcome to our call to discuss our results for the Q1 of fiscal 2023. 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 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.

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.dralorton.com, and we plan to file our 10 Q tomorrow.

Speaker 1

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 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. L. Horton team delivered a solid first quarter highlighted by earnings of $2.76 per diluted share.

Speaker 2

Our consolidated pre tax income was $1,300,000,000 won a 3% increase in revenue with a pre tax profit margin of 17.5%. Our homebuilding return on inventory for the trailing 12 months ended December 31 was 39.5% And our consolidated return on equity for the same period was 31.5%. Beginning in June Continuing through today, we have seen a moderation in housing demand due to affordability challenges caused by the significant rise in mortgage rates coupled with high inflation and general economic uncertainty. Despite these pressures, we still closed over 17,000 homes and sold more than 13,000 homes in what is typically It's seasonally slowest quarter of the year. We have seen increased sales activity in the 1st few weeks of January, While higher mortgage rates and economic uncertainty may persist for some time, the supply of both new and resale homes at affordable price points remains limited And the demographics supporting housing demand remain favorable.

Speaker 2

We are well positioned to navigate the Current challenging market conditions with our experienced operators, affordable product offerings, flexible lot supply and great trade and supplier relationships. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility. We will continue to focus on turning our inventory and managing our product offerings, incentives, home pricing, sales base And inventory levels to meet market, optimize returns, consolidate market share and generate increased cash flow from our homebuilding operations. Mike?

Speaker 3

Earnings for the Q1 of fiscal 2023 decreased 13% to $2.76 per diluted share compared to $3.17 per share in the prior year quarter. Net income for the quarter decreased 16% to $958,700,000 On a 3% increase in consolidated revenues to $7,300,000,000 Our first quarter home sales revenues were $6,700,000,000 on 17,340 homes closed compared to $6,700,000,000 on 18,396 homes closed in the prior year. Our average closing price for the quarter was $386,900 up 7% from the prior year quarter and down 4% sequentially. Paul?

Speaker 4

During the quarter, we continued to sell homes later in the construction cycle to better ensure the certainty of the home close date And mortgage rate for our home buyers with almost no sales occurring prior to start of home construction. Our cancellation rate for the Q1 was 27%, down from 32% sequentially, but still elevated from our typical levels. Our net sales orders in the Q1 decreased 38% 13,382 homes and our order value decreased 40% from the prior year to $4,900,000,000 Our average number of active selling communities increased 4% from the prior year quarter and was down 1% sequentially. The average sales price of net sales orders in the Q1 was $367,900 down 4% from the prior year quarter. We are continuing to offer mortgage interest rate locks and buy downs and other incentives to drive traffic to our communities And we are reducing home prices where necessary to optimize the returns on our inventory investments.

Speaker 4

Our 2nd quarter sales volume will depend on the strength of the spring selling season. And we currently expect significantly higher levels of net sales orders in the 2nd quarter as compared to the 1st quarter Based on historical seasonal trends, current market conditions and our inventory of completed homes available for sale. Bill?

Speaker 5

Our gross profit margin on home sales revenues in the Q1 was 23.9%, down 440 basis points sequentially from the September quarter. On a per square foot basis, home sales revenues were down 4% sequentially, stick and brick costs per square foot increased 2% and lot costs were flat. The decrease in our gross margin from September to December was in line with our expectations and reflects the increased construction costs we incurred during 2022 along with higher sales incentives and home price reductions. We expect both our average sales price and home sales gross margin to decrease further in our Q2 of fiscal 2023. We are continuing to work with our trade partners and suppliers to reduce our construction costs on new home starts.

Speaker 5

We are making progress in these efforts, But we do not expect to see much benefit from lower costs on homes closed in fiscal 2023. Jessica?

Speaker 1

In the Q1, our homebuilding SG and A expenses increased by 6% from last year and homebuilding SG and A expense as a percentage of revenues was 7.8%, up 30 basis points from the same quarter in the prior year. We are controlling our SG and A during this market transition, while ensuring our platform adequately supports our business. Paul?

Speaker 4

We slightly increased our home starts from the last quarter to 13,900 homes and ended the quarter with 43,200 homes in inventory, down 21% from a year ago and down 7% sequentially. 27,800 of our homes at December 31 were unsold, of which 7,100 were completed. We are focused on improving our housing inventory turnover. With more completed homes now available for sale, We expect our mix of homes sold and closed in the same quarter to increase back toward our normal historical levels. For homes we closed this quarter, our construction cycle time only increased by a few days compared to Q4, which reflects lingering supply chain issues.

Speaker 4

However, we are seeing some stabilization in cycle times on homes we have recently started and we expect our cycle times to improve during fiscal 2023. We will continue to evaluate demand and adjust our homes and inventory and starts pace based on current market conditions. Mike?

Speaker 3

Our homebuilding lot position at December 31 consisted of approximately 551,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. Our total homebuilding lot position decreased by 22,000 lots From September to December, 32% of our total owned lots are finished and 53% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. We continually underwrite all of our lot and land purchases Based on future expected home prices and costs, we are actively managing our investments in lots, land and development based on current market conditions. During the quarter, our homebuilding segment incurred $4,800,000,000 of inventory impairments and wrote off $19,400,000 of option deposits due diligence costs related to land and lot purchase contracts.

Speaker 3

We expect our level of option cost write offs to remain elevated in fiscal 2023 As we manage our lot portfolio, our first quarter homebuilding investments in lots, land and development totaled $1,700,000,000 down 21% from the prior year quarter and up 16% sequentially. Our current quarter investments consisted of $900,000,000 for finished lots, $690,000,000 for land development and $130,000,000 to acquire land. Bill?

Speaker 5

Financial Services pretax income in the Q1 was $18,200,000 on $137,000,000 of revenues with a pre tax profit margin of 13.3%. The lower profitability of our financial services business this quarter was Primarily due to lower gains on sales of mortgages, increased competitive conditions and a lower volume of interest rate locks by homebuyers during the December quarter. We expect our Financial Services pre tax profit margin for fiscal 2023 to be higher than the Q1 but lower than the full year of fiscal 2022. During the Q1, 99% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 77% of our homebuyers. FHA and VA loans accounted for 45% of the mortgage company's volume.

Speaker 5

Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 722 and an average loan to value ratio of 88%. First time homebuyers represented 55% of the closings handled by our mortgage company this quarter. Mike?

Speaker 3

Our rental operations generated $328,000,000 of revenues during the Q1 from the sale of 6 94 single family rental homes and 300 multifamily rental units earning pre tax income of $110,000,000 Our rental property inventory at December 31st was $2,900,000,000 which included approximately $1,900,000,000 of single family rental properties and $1,000,000,000 of multifamily rental properties. We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 As our platform matures and expands across more markets, for the Q2, we currently expect no multifamily rental sales and to close Fewer single family rental homes than in the Q1. Paul?

Speaker 4

4 Star, our majority owned residential lot development company Reported total revenues of $216,700,000 on 2,263 lots sold And pre tax income of $27,900,000 for the Q1. Forestar's owned and controlled lot position at December 31 was 82,000 300 lots. 57 percent of Forestar's own lots are under contract with or subject to a right of first offer to D. R. Horton.

Speaker 4

$190,000,000 of our finished lots purchased in the Q1 were from Forestar. Forestar is separately capitalized from Doctor Horton and had more than $580,000,000 of liquidity at quarter end with a net debt to capital ratio of 28.7%. Forestar is well positioned to meet the current challenging market conditions with its strong capitalization, lot supply and relationship with D. R. Horton.

Speaker 4

Bill?

Speaker 5

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. We are committed to maintaining a strong balance sheet With low leverage and significant liquidity to provide a firm foundation for our operating platforms during changes in market conditions And to support our ability to provide consistent returns to our shareholders. During the 1st 3 months of the year, Our cash provided by homebuilding operations was $313,900,000 and our consolidated cash provided by operations was $829,100,000 At December 31, we had $4,000,000,000 of homebuilding liquidity consisting of $2,000,000,000 of unrestricted homebuilding cash and $2,000,000,000 of available capacity on our homebuilding revolving credit facility. Our liquidity provides significant flexibility to adjust to changing market conditions. Our homebuilding leverage was 12.8% at the end of December and homebuilding leverage net of cash was 4.4%.

Speaker 5

Our consolidated leverage at December 31st was 22% and consolidated leverage net of cash was 13.3%. At December 31, our stockholders' equity was $20,200,000,000 and book value per share was $58.71 up 33% from a year ago. For the trailing 12 months ended December, our return on equity was 31.5%. During the quarter, we paid cash dividends of $86,100,000 and our Board has declared a quarterly dividend at the same level as last quarter To be paid in February. During the quarter, we repurchased 1,400,000 shares of common stock for $118,100,000 Jessica?

Speaker 1

As we look forward, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates, The capital markets and general economic conditions that may significantly impact our business. We are providing detailed guidance For the Q2 as is our standard practice, but it is still too early to know what housing market conditions will be during the height of the spring selling season, So we are not providing specific guidance for the full year yet. We currently expect to generate consolidated revenues in our March quarter of 6.3 to $6,700,000,000 and homes closed by our homebuilding operations to be in the range of 16,000 to 17,000 homes. We expect our home sales gross margin in the 2nd quarter to be approximately 20% to 21% and homebuilding SG and A as a percentage of revenues in the second to be approximately 8% to 8.3%. We anticipate a financial services pre tax profit margin of around 20% And we expect our income tax rate to be approximately 23.5% to 24% in the second quarter.

Speaker 1

We are well positioned to aggregate market in both our homebuilding and rental operations. Our goal remains to generate consolidated revenues in fiscal 2023 are slightly higher than fiscal 2022. However, it is realistic to expect that our full year revenues will decline year over year given the environment and pricing actions we are taking. The low end of our current range of expectations includes consolidated revenues down from fiscal 2022 by mid teens percentage, which is unchanged from last quarter. We forecast an income tax rate for the year of approximately 23.5% to 24%.

Speaker 1

We expect to generate increased cash flow from our homebuilding operations and on a consolidated basis in fiscal 2023 compared to fiscal 2022. We also plan to repurchase shares at a similar dollar amount As last year, to reduce our share count during this year, with the volume of our repurchases dependent on cash flow, Liquidity, market conditions and our investment opportunities. We have $700,000,000 of senior notes that mature during the remainder of fiscal 2023, which we are currently preparing to repay from cash. We plan to continue to balance our cash flow utilization priorities among our core homebuilding operations, our rental operations, Maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend and consistently repurchasing shares. David?

Speaker 1

In closing, our results and position reflect our experienced teams, industry leading market share, broad geographic

Speaker 2

Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility To effectively operate in changing economic conditions and continue aggregating market share, 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 improving our operations and providing homeownership opportunities to more American families.

Speaker 2

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

Operator

Thank you. The floor is now open for And the first question is coming from Carl Reichardt from BTIG. Carl, your line is live. You may go ahead.

Speaker 6

Thanks. Good morning, everybody. I just want to ask about Inventory, unsold inventory. So about 2 thirds of the inventory that you've got now is unsold. I think normally it's about half when I went back and looked.

Speaker 6

I just want to make sure, should we be optimistic because you've got product ready to go for the spring And then the supply chain perhaps is normalizing a little, which is allowing you to get that ready? Or should we be more pessimistic because you haven't necessarily priced that inventory to move yet? That's

Operator

my first question.

Speaker 2

Well, Karl, as you know, I'm always optimistic. We feel very good about our inventory position. And through the last 3, 4 quarters, we limited sales To better align inventory cost demand and our ability to deliver, we are now positioned more And what I would consider a normalized inventory position. And again, I feel very good about our position and where we're heading into this quarter.

Speaker 3

Normally coming into the Spring selling season would be a little heavier than our normal 50% spec ratio, but feel really good about what we have in front of us right now For demand.

Speaker 6

Okay. And then, I was looking at the market count now, we're about 109 markets and Say 4 years ago, I think you were about 80 or so. That's a lot. And obviously, you all benefited Post COVID by entering a lot of smaller markets that saw a fair amount of demand post the pandemic. Now that that wave is Potentially Crested, can you talk about how some of the new, especially the smaller, what I call the tertiary city markets Are performing over the course of the last 6 months?

Speaker 6

Are they better than some of the major markets, less competitors? Or is that growth beginning to wane now that we've seen a little more return to office back to the large cities? Thanks guys.

Speaker 4

Carl, we've seen these newer markets and secondary markets performing well for us due to limited competition in those markets. We certainly saw a strong push to all of the secondary markets with the pandemic moving people, making them more mobile. But we've been happy with the progression in those secondary markets and glad that we entered them.

Speaker 2

Even before the pandemic, we did very well in the small markets. And ultimately, it comes back to SG and A and control and the ability to deliver houses Incrementally had a competitive advantage to what anybody else out there is able to do. So That's been a part of our program and I think you're going to see it continue to be a part of our program.

Speaker 6

Thanks, David.

Operator

Thank you. And the next question is coming from Matthew Bouley from Barclays. Matthew, your line is live.

Speaker 7

Good morning, everyone. Thank you for taking the questions. Want to ask about the construction cost environment. I think I heard you say at the top that you were making some progress, but I'm paraphrasing, but perhaps not expecting to see as much benefit on the construction cost side on homes closed through fiscal 2023. Obviously, some of your peers have sort of quantified some of the benefits they might already be seeing on the construction cost side.

Speaker 7

So just Curious if you can parse that out a little bit as you guys sort of aggregate market share, how should we think about your ability to press on costs here? Thank you.

Speaker 3

We've been really successful working with a lot of our trade partners in lowering our cost and we've gotten a little bit of tailwind Certainly from the lumber price reductions that have occurred, but it just takes a while for those cost changes on the front end to actually show up in the closing, Especially with the more recently prolonged build times. So it's just a function of the calendar working those new cost structures through the pipeline. So the deliveries we see in 2023 were largely all first half of the year especially started in fiscal 2022 in a different cost environment.

Speaker 1

And typically lumber prices go up as we move throughout the spring. So although we're seeing a benefit from lumber today, if typical seasonality holds, lumber would Actually be a headwind against the cost reductions that we are seeing, on those new home starts that Mike just alluded to.

Speaker 8

Okay, got you.

Speaker 7

Thank you for that color. And then second one, just kind of following up around the pricing environment. As you've seen sort of some of your peers have enacted, I guess, different strategies around pricing versus pace here and Perhaps as we get into the spring, we might expect to see some builders on the ground react more aggressively on the pricing side versus I would argue you guys have been leading that first, I guess. So as we get into the spring, sort of what are Expectations or perhaps what are you seeing on the ground right now around your competition and price reductions? And Would you expect to see sort of another leg lower on the pricing and margin side through all that?

Speaker 7

Thank

Speaker 4

We have still addressed our incentives with a balance of Rate buydowns, financial incentives along with adjusting price community by community to drive the returns that we're looking for. As we enter into the spring selling season, we're seeing some seasonality that we're happy with as the market starts to lead and we'll continue to adjust to drive the absorptions by community.

Speaker 7

All right. Thank you very much and good luck.

Operator

Thank you. And the next question is coming from John Lovallo from UBS. John, your line is live.

Speaker 9

Good morning, guys. Thanks for taking my questions. The first one is you mentioned the 1st few weeks of January saw increased activity. Can you maybe just elaborate a little bit on that and maybe frame it sequentially or year over year? And how were incentives in the 1st few weeks of January relative to December?

Speaker 1

Yes. So we talked about on the call that we do expect to see normal seasonality, in terms of the move from Q1 to Q2 sales. And so what we saw in terms of the increased sales activity in the 1st few weeks of January, was a positive early indicator. It is still Too early to ultimately say what's going to happen this spring, but it gave us the confidence to say that we could see normal seasonality, which typically would be about 50% up From Q1 to Q2 in terms of net sales orders. We also did see a slight improvement.

Speaker 1

It's only a few weeks, which doesn't make But we've seen a slight improvement in our cancellation rate in January as well, which also helped give us the confidence to say, an increased level of net sales orders in Q2 versus Q1.

Speaker 9

Got it. That's helpful. And then maybe could we talk just about cash flow expectations? It Seems like it's going to be pretty robust here. I mean, you're buying back stock, paying dividends, paying down $700,000,000 in debt.

Speaker 9

So maybe just your expectations for cash flow and what The expectation for rental investment might be?

Speaker 5

Yes, we still expect increased cash flow from our homebuilding operations in fiscal '23 versus fiscal 'twenty two. We saw our inventory step down slightly this quarter. We will be increasing our starts pace As we move into the spring and then adjusting that to what we see in market demand, so we may not continue to see the same pace Of cash generation as we did in our Q1, but we do still expect to see robust cash. And then we're going to continue to take our balanced approach to deploying that 1st and foremost to the homebuilding business. Next to the rental business, we will still see a Substantial increase in our assets in the rental business this year.

Speaker 5

We were not guiding to a specific growth number there quite yet for fiscal 23 because we're still evaluating the market and evaluating investments as we move through the year, but we do expect that level of inventory to increase, While we see a significant increase in revenues in that business. And then past that, we will continue to pay dividends and continue to repurchase shares. We expect To repurchase shares at a similar dollar volume as last year, which would indicate greater than $1,000,000,000 of share repurchases for fiscal 2023. And then finally on the balance sheet front, while we're very pleased with our leverage level, we do have $700,000,000 of senior notes that mature In fiscal 2023, dollars 300,000,000 in February, dollars 400,000,000 in August. And currently, just given the overall environment and our cash flow We're preparing to pay those debt maturities off with from cash, but obviously we'll evaluate capital markets along the way to determine whether we want to refinance But right now preparing to pay those from cash.

Speaker 9

Great. Very helpful. Thank you.

Operator

Thank you. And the next question is coming from Stephen Kim from Evercore ISI. Stephen, your line is live.

Speaker 8

Great. Thanks very much guys. Lots of good information. I wanted to follow-up on, I think, Matt's question regarding the cost negotiations though. I think last quarter you had suggested that you could see the benefit starting to certainly from repositioning your product at least to benefit you by your Fiscal Q3, I was just wondering whether or not that process is maybe taking a little longer or if

Speaker 10

that was sort of separate

Speaker 8

from your comments on The labor and product negotiations. And then in your answer to him, I think you also sort of mentioned or volunteered that you were sort of assuming lumber costs And I just wanted to get a sense, how much of an assumption are you how much of an increase are you assuming you might see in lumber? Are you sort of just conservatively modeling it might go like halfway back to where it was last year? Just give us a sense for What you're incorporating in your outlook for lumber, knowing that you don't know yet obviously?

Speaker 3

Most importantly, we don't know. And we're taking a Probably a conservative stance in looking at the fact that seasonally in a normal seasonal environment, we do see lumber costs increase through the spring. And if we do are seeing some normalized demands coming back with spring selling season seasonality, we'd expect that to drive lumber prices higher, Which would offset some of the efforts we've made on like for like cost reductions. We have been able to get New product starts out, new home starts out that are more reflected to today's environment, smaller homes, more affordable homes that should help. But on terms of a like for like cost benefit increase, it's going to take a little while for that product to move through the system in a material way.

Speaker 8

I didn't hear a number there. I think I was getting ready to write a number down. I didn't hear a number. You want to give us a sense or sort of like how much of the way back You're just sort of thinking lumber might increase? Yes.

Speaker 3

We don't have a sense for a number, Steve. I'm sorry. We're not that good at predicting. We're just taking a conservative approach that seasonally lumber tends to go up in the spring and that's probably going to have an impact on our cost and our deliveries later in the year.

Speaker 2

It does feel, Stephen, like there is some normalcy returning to the market. And so you go back pre pandemic and you look at what happened, did cost get inflated during the Last year, 18 months, yes. Are we fighting to get that back? Yes. A commodity price like lumber may go up, may go down, may stay the same.

Speaker 2

But are we going to be conservative in our guidance? Absolutely, we are.

Speaker 8

Yes. No complaints here. And I'll say that if lumber goes up because of normalization, I think everyone will take it. In regards to your lot count, I noticed that your owned lot count in numbers of lots It went up a little bit, I think, quarter on quarter. It had declined, I believe, in the last two quarters preceding that.

Speaker 8

So I'm curious, Are you or at least in the last yes, sorry, the last two quarters preceding that. Are you do you feel like your lot cost Sorry, your lots owned will increase from here? Or do you think we might actually see a Further reduction in your actual number of owned lots. Just try to give us a sense for what that number might be, not in your supply, but more like in absolute units.

Speaker 4

Yes, Stephen. We have worked hard for the lot position that we have and the relationships that we've built and with those developer relationships and We're continuing to it's still hard to get a lot on the ground. And so our lot count Tonnage of owned and total numbers we expect to continue to increase and some of that will depend on what we see with the spring selling season and through the rest of fiscal 2023, but we don't expect that to go down. And we expect to see potentially our own lot supply as a percent Increase marginally through this market.

Speaker 1

And as a reference again, our owned lot finished percentage is only 32%, which is roughly 43,000 lots. So we're by no means oversupplied from a finished lot perspective, which is what we're trying to continue to position ourselves for community by community.

Speaker 8

Got you. Thanks so much guys.

Operator

Thank you. The next question is coming from Mike Rehaut from JPMorgan. Mike, your line is live.

Speaker 11

Thanks. Good morning, everyone. Thanks for taking my questions. I just wanted to circle back to more recent trend and demand comments. Obviously, you mentioned that the 1st few weeks of January saw some increased activity, and that you could see A typical 50% improvement in orders in 2Q versus 1Q, that would imply, I mean, if we were to take that just On a straightforward basis, an order decline of only roughly 20% down year over year.

Speaker 11

So I'm curious around if that's kind of and I know you haven't given hard guidance or a range, but Directionally, if that's how we should be thinking about things. And also to this point around the improvement that So in January, I was curious also if you could kind of give any color around trends intra quarter During the past Q1, if that improvement in January was a continuation of perhaps a change in trend that you saw During your December quarter?

Speaker 1

I would say during the December quarter, as we mentioned on the call, as you know, Mike is the Seasonally slowest quarter of the year, so we generally don't extrapolate anything that happens in October, November December. And we don't generally give a whole lot of monthly color, but we felt like based on current market conditions that warranted talking about the 1st few weeks of January. And that's what we're pleased with as we've seen what we would typically expect to see as we move through these 1st few weeks.

Speaker 5

In terms of the math That you laid out, if we do see that normal seasonality, yes, it still would result in net sales down year over year, but up very nicely sequentially.

Speaker 11

Right. And secondly, I know there's been a couple of questions around the Construction costs and the impact there, I think that's kind of been covered pretty well. Obviously, another big part Is the gross margin guidance for the 2nd quarter, you're expecting further declines. I wanted to also focus So on pricing trends in the market and if you could kind of give us a sense of On a total basis, how much net pricing has come down from June of last year to today and how much of that has occurred in the last month or 2?

Speaker 5

In terms of just pricing, really our net sales orders in the quarter and the average sales price on that is the best indication. Our Net sales order price this quarter is around $367,000 I believe and of course we peaked last year a little over $400,000 So You're already looking at roughly a 10% decline in our net sales orders. And as then we look at our margin guide Going forward, we're taking recent pricing into effect. We're hopeful that if we See some normal seasonality and normal demand during the spring that further significant pricing reductions It would not be necessary, but we're going to assess that week to week and month to month as we go through the spring. But our Our gross margin guide takes into account recent pricing along with the cost trends that we've already been discussing.

Speaker 2

Just to add, it is very hard to put a lot on the ground. It's very hard to build houses. And the overall market is still undersupplied. So long term, I think we've got a great outlook. What happens in the next quarter?

Speaker 2

We're going to deal with the market as it comes.

Speaker 11

Great. Thanks so much.

Operator

Thank you. The next question is coming from Truman Patterson from Wolfe Research. Truman, your line is live.

Speaker 12

Hey, good morning, everyone. Thanks for taking my questions. So first, has the land market started to Pitulate it all on takedown pricing with your all's ASPs down kind of 8% quarter over quarter. Are you actually starting to see the land market Correct at all with more meaningful price declines or is it still just too early to tell?

Speaker 3

I think generally it's still a little too early, Truman. Land is typically one of the stickier parts of the process. And as David And Paul both mentioned earlier in the call, it is increasingly difficult to get a lot entitled and on the ground. And so that is something that has held up Pretty well. But anecdotally, there are situations where we're able to make some progress on the land residual with some of our land sellers, But not broad trends yet for sure.

Speaker 12

Okay. Okay. Thanks for that. And then, you all made a recent acquisition in Arkansas. Could you all just kind of walk through the drivers of that purchase?

Speaker 12

And are you seeing more small privates, Their willingness to sell it relatively attractive valuation kind of pop up given the market slowdown?

Speaker 4

Yes. The acquisition of Riggins in Northwest Arkansas gave us Now I won't say an entrance into the market. We were in there with a couple of communities, but gave us a solid position in a market that has remained strong with good employment growth And limited housing supply, again to the earlier question of these secondary markets, a solid market that we are happy to be in. It was a good Acquisition and tuck in for us with a well established community with a great lot supply and so gave us immediate Inventory and homes in progress, well respected builder in

Speaker 3

the market that we're happy to have as part of

Speaker 4

the family. As far as other acquisitions, we continue to look at those. And where we have tuck in opportunities similar to this, we have things that we would Laura, but no broad based change in how we look at builders in the market.

Speaker 12

All right. Thank you all. Appreciate it.

Operator

Thank you. The next question is coming from Eric Bosshard from Cleveland Research. Eric, your line is live.

Speaker 13

Good morning. Two things. First of all, the 40% reduction in starts, I'm curious if there's What the discipline or logic is in what you're not starting, if there's buckets of this? You mentioned Trying to change the product a bit to fit a price point, but curious if there's something to learn from how you're making those decisions of Where are you reducing starts?

Speaker 3

A lot of our starts decisions are made within the quarter on the basis What the sales trends are occurring at that point in time and certainly through late summer and into fall, our Q1 mortgage rates spiking up, cancellations increasing, Looking at our current inventory positions neighborhood by neighborhood relative to recent sales basis, certainly led us to slow down our starts. Coming into this fiscal this calendar year into the second quarter, Seeing some improvement in our cycle time and supply chain issues, unsnarling and we feel like we'll be able to start homes And complete them in a more timely fashion this year. So we didn't we are trying to meter our starts out a little bit to more closely match our sales demand right now.

Speaker 2

And Eric? I think it's just indicative of the entire industry and lessons learned in the last downturn. I mean, I do believe that there is a discipline around the industry and it's not just Short term chase every market, every day. So we're trying to align inventory levels with demand And ultimately, it comes back to if you look at the long term position of the industry, There aren't enough lots or houses for the population and demand that We see taking place over the next 3 to 5 years.

Speaker 13

Okay. And then related to this, The inventory per community number looks like it's up and I guess the follow on would be the path forward with starts From here is down 40 a pace you maintain for another quarter and then lift your heads up or how do you think about the pace of managing The supply path going forward?

Speaker 3

I think we saw that the starts kind of align with our sales pace in the quarter. And I think we're going to look to try to maintain that relationship through this time of year as we're seeing good sales demand in the Early spring selling season, we'll be replacing those homes with new starts, to continue having inventory in the shelf available to sell. We are certainly seeing more homes selling later in this construction process, certainty of delivery date, certainty of mortgage rate and payment Our big important factors for our buyers, and we're also focusing very heavily on recovering Our housing inventory turnover metrics and getting more efficient with those inventory dollars. We've got to get our turns back up on our housing inventory.

Speaker 1

And so as with everything, our starts are managed community by community, market by market, by our local operators to focus on not piling up excess completed homes It had been sitting there for an extended period of time.

Speaker 13

Okay. That's helpful. Thank you.

Operator

Thank you. And the next question is coming from Anthony Pettinari from Citi. Anthony, your line is live.

Speaker 14

Good morning. Can you talk about the tenure of buyers who canceled this quarter? Were those contracts that were signed in fiscal 4Q or maybe even earlier, is there a larger cohort of buyers who maybe placed orders in the fall, but are Still at risk of cancellation with rates rising. Just wondering if you can give any color around kind of cancellation trends there?

Speaker 4

I think as you've seen our cancellation trend moderate and cancellation rate moderate, We have younger backlog that have signed contracts more recently. As Mike spoke to, certainty of home close date and mortgage rate It's very important. So as we have cycled through and we're improving our housing inventory turns, I think that's where you're seeing our reduction in cancellation

Speaker 14

Okay. That's helpful. And then just in terms of renegotiating prices for homes and backlog, has that sort of Normalized or died down now that rates have stopped rising and to your point cancellations have come down?

Speaker 3

Hopefully with the rate stabilization, we've We'll see stabilization and incentives and pricing environment going forward.

Speaker 13

Okay. That's helpful. I'll turn it over.

Operator

Thank you. The next question is coming from Buck Horne from Raymond James. Buck, your line is live.

Speaker 15

Hey, thanks. Good morning, guys. I wonder if I could dive in a little bit more on the incentives that are out there, the tools that you're using out in the field. It sounds like A lot of builders are having some success with a mortgage rate buy down program, where you're Buying down or fixing the mortgage rate below market for sounds like for the life of the loan, it seems to be popular out there. I'm wondering if you could Maybe elaborate on are you using mortgage rate buy downs?

Speaker 15

How does that mechanically work? And kind of what does that cost you in terms of upfront margin hit or as a percentage of sales?

Speaker 5

Yes, Buck. We do as an ordinary course Used mortgage rate buy downs and many of those are for the life of the loan. That's been a program we've had in place For quite some time, the costs do vary from time to time depending on market conditions and timing of when you tie up Those positions, but that's something that we try to make sure that we have in the toolbox for our salespeople is to be able Offer an attractive mortgage rate to buyers who come in.

Speaker 15

Okay. Would you say that's The most effective sales tool at the moment is a buy down or are you using some other level of incentives?

Speaker 3

It's going to vary community by community and over time As to what the most attractive incentive is and we try to put a lot of tools in our division operators' hands to make the best decisions about what's going to motivate And drive their realtor and buyer traffic in their communities and excite our sales agents with a reason to call and a reason to drive some traffic this week. It might be a little bit of pricing adjustment on a few homes. It might be the rate buy downs, the mortgage financing incentives have been very popular, very heavily utilized. And it might be that supply chains working back out that we're back to a washer dryer Wednesdays. I mean there's plenty of incentives out there that we're going to use To drive a pace to hit a return we need to hit at every given neighborhood.

Speaker 15

Okay. Thank you. And one quick separate topic on single family rentals and The it sounds like the guidance quarter over quarter is slightly lower in terms of projected sales of single family rental homes. I'm wondering if that's strategic And to kind of hold back the pace of those sales and just curious what the demand is like in the marketplace for And or the pricing for stabilized SFR homes these days?

Speaker 5

It's just timing of projects and when they'll be ready completed and ready and through a sale We'll just have fewer this quarter ready to close than we had this past quarter.

Speaker 3

The Q1 benefited from a few projects That were lined up to close in the Q4 of fiscal 2022 had some storm impact and delayed some timing of a few closings there. So that 1Q number was probably a little higher than the original production sales schedule was set up for.

Speaker 1

The business model is still complete lease up market and sell. And you're starting to see some level of closings each and every quarter, but it is still choppy, here in the earlier stages and we would expect that to

Operator

Thank you. The next question is coming from Alan Ratner from Zelman and Associates. Alan, your line is live.

Speaker 10

Hey, guys. Good morning. Thanks for taking my questions. First, I was hoping maybe you could just help me a little bit reconciling Kind of the closings results versus the orders, the closings for this quarter came in well above your guidance. The orders were a bit lighter This is what you signaled in mid November.

Speaker 10

And I thought I heard you say that cycle times have been relatively stable, maybe even ticked up a little bit. So How did you drive the upside to closings without stronger order activity? Was it just that much of a greater mix of Completed sales versus homes that were a month or 2 out from completion than you were anticipating. And I'm sure that ties into the 2Q guidance as well with Your delivery guidance above your beginning backlog. So I'm just maybe looking for a little bit more color to understand what's going on there.

Speaker 4

Yes. As we see marginal improvement in our inventory turns and home construction times, you're starting to see and you see that in our numbers, a larger A percentage of our inventory homes on the completed side, which allows us to meet the market, which quite frankly is Available to us today, which is a shorter term close. And so we're seeing more homes sell and close in the quarter, getting back more towards historical norms and we expect See that on a go forward basis with the maturity of the home inventory that we have.

Operator

Got

Speaker 10

it. Okay. No, that's helpful. Second question kind of related, but tying in maybe the margin conversation as well. So when you look at your 7,000 completed specs, Are you able to provide a little bit more detail on how many of those are maybe less than 30 days completed?

Speaker 10

What's more than 30? And How is your pricing strategy differ on completed specs as it hits kind of certain thresholds? Is there a level or a point where you get more aggressive on price adjustments or do you kind of just look at it more holistically?

Speaker 3

So generally, we talk about a completed spec. We have a pretty aggressive definition of what's completed. It's when it gets into the final flooring stage. So typically from a home hitting that completion milestone for us, normal conditions, it's probably going to take between 2 weeks to 4 weeks For that home actually to be move in ready and more likely to the 4 week side of that. So if we look at how many houses we have out there that are kind of aging in the buckets, we have About 190 houses that have been past our completion date, by more than 6 months, by 6 months or more.

Speaker 3

So we're still feel very comfortable about the Freshness of that spec inventory and this is the exact right time of the year to have that inventory, especially with the backdrop of very Existing home sale inventory available in the marketplace.

Speaker 5

And that's something we manage very closely. Obviously, we've been building specs for a very long time. We have a lot of Around that and so we do watch those completed specs as they start to age and they get longer, if they get longer than 90 days then yes, we will start to Step up the efforts to ensure that we move them. But right now, we still have a very fresh batch of completed specs out there for spring sun season.

Speaker 10

Great. I appreciate that. Thanks, guys.

Operator

Thank you. The next question is coming from Mike Dahl from RBC Capital Markets. Mike, your line is live.

Speaker 16

Great. Thanks for taking my questions. So the first one, just to follow-up on the margin discussion. I understand there's Not a lot

Speaker 13

of forward guidance you're going

Speaker 16

to give beyond this next quarter and a level of uncertainty. I'm wondering just Yes. As you see it today, as you look at your current orders, as you look at what you're expecting to sell in the quarter versus Kind of the timing of some backlog still coming through in that gross margin that will be reported in fiscal 2Q. How should we be thinking about the likely cadence Margin beyond 2Q, is it still barring some quick improvement in the market going to be Lower as you cycle off your backlog into the recent sales as you get into fiscal 3Q or any color on that?

Speaker 5

Yes, Mike. We're only guiding to Q2 margin. And the reason we're only guiding to Q2 margin is we don't know what margins or what the environment will be Beyond Q2. The spring selling season, obviously, we've got some early encouraging signs, But we don't know what the conditions will be at the height of the spring selling season. So we have visibility to where our margins and our sales and our backlog and our pricing and our costs are today Heading into the quarter, but even Q2 has some level of uncertainty to it.

Speaker 5

We would expect to sell and close 40% of our closings in the same quarter In the coming quarters. So while we believe that there's some possibility of some stability in the market with mortgage rates stable, That could change this afternoon. And so right now, we're giving you what we get what we have. So our guidance for margins of 20% to 21% What we can see today for Q2, there is some risk both upside and downside there. I would say it's possible we could beat that range, But it's certainly possible that we might not.

Speaker 5

But past Q2, we simply don't have visibility right now.

Speaker 1

We're going to continue to meet the market and do what we need to do to Nice returns community by community.

Speaker 16

Okay, fair enough. Then my second question, There's been a lot in the press around Arizona, in particular, tightening up on some of the water Right and kind of permitting or lack of issuing permits in certain parts of the Phoenix metro area, Given some of their requirements around water usage, you guys obviously had your Fiddler acquisition last year. I think they do have some projects in Last year, I think they do have some projects in Arizona. Can you give us a sense of If the counties or municipalities are just outright refusing to issue permits to certain areas, Does your ownership of Biddler and the projects in those regions exempt you from that? Are you able to still get permits For your planned projects or any color on what you're seeing there would be, I think, interesting in light of some of the press that's been out there.

Speaker 4

Well, yes, I think there has been a lot in the press on water and water is and will continue to be a headwind throughout the West, Not just in Arizona. And certainly, our acquisition and integration of Viddler has helped our Positioning and that's really some benefit to the short term, but mostly a long term strategic decision on our part Knowing that we're going to head these facing these headwinds for the foreseeable future. I don't think there's been a significant change on a local basis. It's Still difficult to get lots on the ground to get entitlements through the process and to get those permits. It has been for a while and that continues.

Speaker 4

So We feel good about our position, the lot positions we have in the Phoenix market, and we've got a great team on board there that continues to navigate through that environment.

Speaker 13

Okay, great. Thank you.

Operator

Thank you. The next question is coming from Jay McCanless from Wedbush. Jay, your line is live.

Speaker 12

Hey, good morning, everyone. So Bill, going back

Speaker 13

to what you talked about looking to close 40% or sell and close 40% of the 2Q closings, I guess how In say pre COVID times, what would that percentage have been in normal Q2?

Speaker 1

Sure, Jay. Our typical percentage ranges pretty consistently up until the last year or 2 in the 35% to 40% range. A quarter ago, we were in the high teens. A year ago, it was even lower than that. And this quarter, we were roughly 34%.

Speaker 1

So when we talk about reverting to normal, we started to see that reversion in the Q1, but we expect that to continue to So whether it's actually 40 or closer to the 35, 36, we don't know, but typically 35 to 40 would be a pretty consistent range for us.

Speaker 12

Okay. And then

Speaker 13

the second question I had, assuming you pay down the $1,000,000,000 in debt like you've talked about, Any idea of what benefit that might be to gross margin since it's going to be less amortized interest or interest being amortized?

Speaker 5

Yes, Jay. We have $700,000,000 of homebuilding notes that mature this year and right now we plan To pay those off with cash, that's out of just under $3,000,000,000 of homebuilding debt. So roughly 25% Of the balance would be paid down. But if we do not replace that debt, that would reduce our interest carry in time. That benefit would really primarily be Probably noticed in fiscal 2024 and beyond because it takes time for the interest to be capitalized and move through inventory.

Speaker 5

But it would take our interest carry down probably 20, 30 basis points as a percentage of margin over time, longer term benefit.

Speaker 12

Okay, great.

Speaker 13

Thanks for taking my questions. Thanks, Jay.

Operator

Thank you. And in the interest of time today, the last question will be coming from Rafe Chantasich from Bank of America. Rafe, your line is live.

Speaker 13

Hi, good morning. Thanks for taking the question. I just wanted to ask on the rental side. What are you seeing in terms of demand? And margins have been really strong last year and obviously this quarter.

Speaker 13

Do you anticipate any type of normalization Going forward or do you think you'll have to hold those properties longer if demand comes down?

Speaker 3

I think we're still seeing demand for the properties. I think the pricing and the margins we realized on our early project sales benefited from construction and lower construction cost environments, Coupled with a very attractive rate environment when we sold those and that continued to some degree into our Q1 deliveries, We would expect to see some kind of a more normalized reversion to demand to a mean and I think we'll see our margins come back in line to be closer to slightly above On what we're seeing on the for sale side, the traditional for sale side, but our business model is to develop the communities and sell them into the marketplace. That's what we do best. Finding the land, building the homes and bringing people to those communities Is what we've been very successful with so far. So still learning, still going to get better, but we do like that business.

Speaker 13

And then just one more on the in terms of the improvement in demand that you're Seeing in the quarter and quarter outlook for orders in the Q2 relative to the Q1, can you talk about What you think is driving the stronger demand? Is it the fact that mortgage rates have

Speaker 8

come down a little bit?

Speaker 13

Is there anything happening with consumer confidence? What's sort of giving you that confidence in supporting the view that we're going to get back to normal seasonality After what's been sort of a very tough housing market at the end of 2022?

Speaker 2

I do think the credit markets have stabilized somewhat. Consumer confidence improved a little bit. Job growth continues to be very good. So overall, if you look at pent up demand and just a generalized Economy becoming less bad, very good signs for housing. And We monitor sales and monitor cancellations week to week to week to week.

Speaker 2

And so when we see That trend returning to more of a normalized market, it's hard not to be optimistic that we're We're going to have a good spring. And so that's the way we're positioned and we get up every day and respond to what Happens out there in the field.

Speaker 1

Yes. Specific to Horton, those are all the industry reasons, right? Specific to Horton, our inventory position puts us in a more confident place to be able to say we're going to see that pickup with the level of completed Homes we have and the stage of construction, the homes behind those are at because what we're seeing the most success in today is buyers who do want a home quickly They can get that certainty of not only close date, but most importantly interest rate. And so that is the majority of our buyers today and that's why we feel very confident and are very happy with our inventory position right now.

Speaker 13

Great. I appreciate all the color. Thank you.

Operator

Thank you. I would now like to hand the call over to David Auld for some closing remarks.

Speaker 2

Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our 2nd quarter results And finally, congratulations to the entire Doctor Horton team on producing a solid first quarter while navigating

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