D.R. Horton Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 19 speakers on the call.

Operator

Good morning, and welcome to the Second Quarter 2023 Earnings Conference Call for D. R. Horton, America's Builder, the Largest Builder in the United States. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for Doctor. Horton.

Speaker 1

Thank you, Holly, and good morning. Welcome to our call to discuss our results for the Q2 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. L.

Speaker 1

Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward looking statements are based upon information available to D. L. Horton on the date of this conference call and D. L.

Speaker 1

Horton does not undertake any obligation to publicly update 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 and 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.

Speaker 1

Dealhorton.com and we plan to file our 10 Q early next week. 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 am pleased You'll 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. We are excited to announce that we recently closed our 1,000,000th home, A first for any homebuilder. We are both humbled and proud to have been a part of a 1000000 families achieving their dream of homeownership over the past 45 years. For the Q2, the D.

Speaker 2

L. Horton team delivered solid results, highlighted by earnings of $2.73 per diluted share. Our consolidated pretax income was $1,200,000,000 on $8,000,000,000 in revenues with a pre tax profit margin of 15.6%. Our homebuilding return on inventory for the trailing 12 months ended March 31 was 35.1% And our consolidated return on equity for the same period was 27.2%. Spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the Q1.

Speaker 2

Despite higher mortgage rates and inflationary pressures, Demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions. Although higher interest rates and economic uncertainty may persist for some time, The supply of both new and existing homes at affordable price points remains limited and demographics supporting housing demand remain favorable. We are well positioned to navigate changing market conditions with our experienced operators, affordable product offerings, Flexible lots 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 managing our product offerings, Incentives, home prices, sales pace and inventory levels to meet the market, consolidate market share, optimize returns And generate increased operating cash flow.

Speaker 2

Mike?

Speaker 3

Earnings for the Q2 of fiscal 2023 decreased 32% to $2.73 per diluted share compared to $4.03 per share in the prior year quarter. Net income for the quarter decreased 34% to $942,000,000 on consolidated revenues of $8,000,000,000 Our 2nd quarter home sales revenues were $7,400,000,000 on 19,000 664 homes closed compared to $7,500,000,000 on 19,828 homes closed in the prior year. Our average closing price for the quarter was $378,800 down 2% sequentially and essentially flat with the prior year quarter. Paul?

Speaker 4

Our net sales orders in the 2nd quarter decreased 5% to 23,142 Homes and order value decreased 11% from the prior year to $8,600,000,000 Our cancellation rate for the quarter was 18%, up from 16% in the prior year quarter, but down 27% sequentially. Our average number of active selling communities was up 3% both sequentially and year over year. The average sales price of net sales orders in the 2nd quarter was $372,900 down 7% from the prior year quarter and up 1% sequentially. To adjust to changing market conditions and higher mortgage rates, we have continued offering incentives And reducing the prices and sizes of our homes where necessary to provide better affordability to homebuyers and to optimize the returns on our inventory investments. We expect to continue offering a similar level incentives throughout 2023 And we are seeing indications that our average sales price and incentive levels are beginning to stabilize.

Speaker 4

Our sales volume in the Q3 and for the rest of the year Will depend on the continued strength of the spring selling season and general market conditions, which can be significantly affected by changes in mortgage rates and other economic factors. We will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Bill?

Speaker 5

Our gross profit margin on home sales revenues in the 2nd quarter was 21.6%, down 230 basis points sequentially from the December quarter. The decrease in our gross margin from December to March reflects the impact of higher sales incentives and home price reductions. On a per square foot basis, home sales revenues were down 1% sequentially, stick and brick costs per square foot increased 1% And lot costs were up 5%. We are continuing to work with our trade partners and suppliers to reduce our construction costs on new home starts. We are making some limited progress in these efforts, but are also still experiencing some cost increases due to the overall inflationary environment.

Speaker 5

However, with the benefits of lower lumber costs, the average cost of our homes closed is beginning to stabilize and we see indications That our home sales gross margin is also starting to stabilize around current levels. Chesca?

Speaker 1

In the second quarter, our homebuilding SG and A up 50 basis points from the same quarter in the prior year. We are controlling our SG and A while ensuring our platform adequately supports our business. Paul?

Speaker 4

We started 19,900 homes this quarter and ended the quarter with 43,600 homes in inventory, down 27% from a year ago and up 1% sequentially. 24,800 of our homes at March 31 were unsold, of which 6,400 were completed. For homes we closed this quarter, our construction cycle time decreased 12 days from the Q1, Reflecting our efforts to improve our cycle times and improvements in the supply chain, we will continue to evaluate demand and adjust our homes and inventory And starts pace based on current market conditions. Mike? Our homebuilding lot position

Speaker 3

at March 31 consisted 547,000 lots of which 25% were owned and 75% were controlled through purchase contracts. 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 are actively managing our investments in lots, Land and development based on current market conditions. During the quarter, our homebuilding segment incurred $900,000 Of inventory impairments and wrote off $13,000,000 of option deposits and due diligence cost related to land and lot purchase contracts.

Speaker 3

We expect our level of option cost write offs to remain somewhat elevated in fiscal 2023 as we continue to manage our lot Our 2nd quarter homebuilding investments in lots, land and development totaled $1,700,000,000 down 19% from the prior year quarter and flat sequentially. Our current quarter investments consisted of $980,000,000 for finished lots, $590,000,000 for land development and $150,000,000 for land acquisition. Bill?

Speaker 5

Financial Services pretax income in the 2nd quarter was $86,000,000 on $216,000,000 of revenues with a pre tax profit margin of 39.6%. During the Q2, 99% of our mortgage company's loan originations related to homes closed by our home building operations and our mortgage company handled the financing for 76% of our buyers. FHA and VA loans accounted for 46% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 723 and an average loan to value ratio of 88%. First time homebuyers represented 55 The closings handled by our mortgage company this quarter.

Speaker 5

Mike?

Speaker 3

Our rental operations generated $224,000,000 of revenues during the 2nd quarter From the sale of 7 21 single family rental homes, earning pre tax income of $35,000,000 Our rental property inventory at March 31st was $3,300,000,000 which included approximately $2,100,000,000 of single family rental properties and $1,200,000,000 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 Q3, we expect our rental revenues to be similar to our first and second quarters. Paul?

Speaker 4

Forestar, our majority owned residential lot development company reported total revenues of $302,000,000 On 2,979 lots sold and pretax income of $36,000,000 for the 2nd quarter. Forestar's owned and controlled lot position at March 31 was 76,400 lots. 4% of Forestar's owned lots are under contract with or subject to a right of first offer to D. R. Horton.

Speaker 4

$220,000,000 of our finished lots purchased in the 2nd quarter were from Forestar. Forestar is separately capitalized from D. R. Horton and had more than $650,000,000 of liquidity at quarter end with a net debt to capital ratio of 25.2%. Forestar is well positioned to meet changing market conditions with its strong capitalization, lot supply and relationship with D.

Speaker 4

R. Horton. 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, which provides us with flexibility to adjust to changing market conditions. During the 1st 6 months of the year, our cash provided by both our consolidated and homebuilding operations was $1,500,000,000 At March 31, We had $4,400,000,000 of homebuilding liquidity consisting of $2,400,000,000 of unrestricted homebuilding cash and $2,000,000,000 of available capacity on our homebuilding revolving credit facility. We repaid $300,000,000 of 4.75 percent Senior notes in February at maturity and we have $400,000,000 of senior notes that will mature in August. Our homebuilding leverage was 11.5% at the end of March and homebuilding leverage net of cash was 1.5%.

Speaker 5

Our consolidated leverage at March 31 was 22.4% and consolidated leverage net of cash was 12.3%. At March 31, our stockholders' equity was $20,700,000,000 and book value per share was $60.73 up 27% from a year ago. For the trailing 12 months ended March, our return on equity was 27.2%. During the quarter, we paid cash dividends of $85,600,000 and our board has declared a quarterly dividend at the same level as last quarter to be paid in May. We repurchased 3,200,000 shares of common stock for $303,000,000 during the quarter For a total of 4,500,000 shares repurchased fiscal year to date for $421,000,000 Subsequent to quarter end, our Board authorized the repurchase of up to $1,000,000,000 of our common stock replacing our prior authorization.

Speaker 5

The new authorization has no expiration Jessica?

Speaker 1

As we look forward, we expect current market conditions to continue with uncertainty regarding mortgage rates, The capital markets and general economic conditions that may significantly impact our business. We are providing detailed guidance for the Q3 as is our standard practice. We are also providing incremental guidance for the full year now that we have seen the beginning of the spring selling season with good homebuyer demand and signs of stabilization in pricing, Incentives and cost trends. We currently expect to generate consolidated revenues in our June quarter of $8,000,000,000 to $8,500,000,000 and homes closed by our homebuilding operations to be in the range of 20000 to 21000 homes. We expect our home sales gross margin in the 2nd quarter to be approximately 21% to 22% and homebuilding SG and A as a percentage of revenues in the 3rd quarter to be in the range of 7.2% to 7.5%.

Speaker 1

We anticipate a financial services pretax profit margin of around 30% And we expect our income tax rate to be approximately 24% to 24.5% in the 3rd quarter. We are well positioned to continue aggregating market share in both our homebuilding and rental operations. For the full year, we currently expect to closed between 7,780,000 homes in our homebuilding operations and between 4,005,000 homes and units in our rental operations. We expect our consolidated revenues for fiscal 2023 to be in a range of $31,500,000,000 to $33,000,000,000 We forecast an income tax rate for the year of approximately 24%. We expect to generate increased cash flow from our Humboldtings operations and on a consolidated basis in fiscal 2023 compared to fiscal 2022.

Speaker 1

We also plan to repurchase shares And a similar dollar amount as last year to reduce our share count with the volume of our repurchases dependent on cash flow, liquidity, Market conditions and our investment opportunities. We have $400,000,000 of senior notes to mature during the remainder of the year, which we are positioned to repay from cash.

Speaker 2

We will 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? In closing, our results and position reflect our experienced teams, industry leading market share, Broad geographic footprint and diverse product offerings. 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 invest in 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.

Speaker 2

Thank you to the entire D. R. Horton team for your continued focus and hard work. And a special thank you from Don Horton, Our Founder and Executive Chairman to the countless D. R.

Speaker 2

Horton employees and trade partners over the past 45 years We participated in the and contributed to our journey to build, sell and close 1,000,000 homes. This concludes our prepared remarks. We will now host questions.

Operator

At this time, we will be conducting a question and answer session. One moment while we poll for questions. Your first question for today is coming from John Lovallo at UBS.

Speaker 6

Good morning guys and thank you for taking my questions. The first one is, to the extent you can comment on April I mean, it sounds like from what we can gather from our checks that April has trended along pretty nicely. And along those same lines, If we think about the Q3, typical absorption declining, call it 10% sequentially. Is that a reasonable way to as starting point as we move into the Q3 here or how are you thinking about that?

Speaker 1

Sure. We continue to be pleased with our sales place in April. So you heard us say stabilize a lot on the call and we really feel like we've seen signs of that and everything's continued into April, As we would like to see in terms of what our Q3 sales look like versus our Q2 sales, typically it can go either way. A lot of times It's dead on within a few houses. So we could be slightly up, we could be slightly down.

Speaker 1

Sales wise sequentially, It's going to be dependent though on the continued strength of the spring, what happens with mortgage rates and anything else obviously economic that could drive that. But right now, it feels pretty good.

Speaker 6

Makes sense. And then just given the demand is holding up reasonably well, Do you think there could be somewhat of an industry, I don't want to say land grab, but more of a push towards Companies going out and trying to buy more land as maybe expectations reset a bit more positively, so you hit looking into 2024?

Speaker 3

I think you can look across the board and see that most builders have a pretty good lot portfolio out in front of them. I know we We're over 500 roughly 550,000 lots controlled and were owned. So we feel really good about the positioning we have for Handling increased demand as well as if we needed if demand moderates, we've got flexibility in that portfolio. We will look to continue to add on to our portfolio where it makes sense on a deal by deal, market by market basis. Haven't seen evidence of a big land grab yet.

Speaker 6

Got it. Thanks very much guys.

Operator

Your next question is coming from Stephen Kim at Evercore ISI.

Speaker 7

Thanks very much guys. I got

Speaker 8

to start off with a comment, which is that if you do the high end of your guide for closings this year, effectively you'll have had pretty stable closings In 2021, 2022 and 2023, which is a pretty remarkable achievement given the volatility and the adverse environment we saw late last year. So congrats to you guys on that. Now regarding the I want to talk about market share. One of the things that we've seen as I see as an emerging trend is that Builders such as yourselves are going to be able to gain share, particularly from some of your private guys who are more dependent upon regional and local banks. So I wanted to ask you whether you think that a lot of the strength that you've been seeing recently is can be attributed to market share gains.

Speaker 8

And if so, does that mean that you can continue to see your volumes to rebound without seeing a commensurate rise in overall costs, which was a theme that people were wrestling with over the last few months.

Speaker 2

Yes. Stephen, in Markets where we have our largest market share control the largest market share, we see much more stability in both cost And demand and deliveries and margin. So it's our expectation as we continue to consolidate markets. There's going to be a kind of a new norm and stability of margin and cost Structure, to be honest with you. It allows as we get more efficient and more efficient in delivering houses, we can Hit the affordability requirement, it still maintain margin.

Speaker 2

So While we focus on it, it's not just about the number of houses, but controlling a percentage of the market that gives us More access to trades, materials and a stronger relationship with developers and 3rd party realtors, which all drive our business.

Speaker 8

Great. That's encouraging. Appreciate that. 2nd question relates to what degree you're able to ratchet back incentives Looking ahead, I know you sort of talked about a stable environment and I get that. But I also know that you are Probably going to be adjusting what sort of product you put out to market.

Speaker 8

I would guess that probably has a little bit more of a value orientation. And I'm curious as to whether you anticipate over the medium term that you will be able to, ratchet back your incentives as you Roll out some more inherently affordable product by design.

Speaker 4

Stephen, as we see stability in the market, it Certainly allows us to pull back on incentives and where we have the opportunity and we have some pricing power we're taking advantage of that. We aren't seeing a significant change in what we offer in the market. We have some smaller homes that we've been able to put out and where it makes sense we're taking advantage of that. So we do see an opportunity to continue to peel back on incentives and take advantage of pricing power on a go forward basis.

Speaker 1

And as with everything, we're not directing anything globally nationwide, community by community, market by market. Our local operators are making those decisions to maximize returns at the local level.

Speaker 8

Great. Thanks a lot guys.

Operator

Your next question for today is coming from Carl Reichardt at BTIG.

Speaker 9

Hi, everybody. Good morning. Thanks for the time. Last couple of quarters, there's been sort of a mixed bag in terms of geographic performance For builders, with the Southeast Texas feel pretty good and the West weak. I'm curious in 1 quarter and I know we're going to see some of this information when you guys put Step up on the site, but was there any sort of significant recovery in some of the markets that have been weaker, David, in the Q1, especially in the West In terms of orders?

Speaker 2

No, Collis, it's less it's about positioning. We like the way we're positioned out there And then driving stability. So consistency, stability, Flag count, I'm not sure that we saw significant improvement. But Again, it's part of the overall and a contributor. Yes, most

Speaker 1

of our pickup really was Absorption versus community count, our overall community count was only up 3% sequentially. We saw 3 of our regions up Better than normal seasonality, but call it still less than 60%. And then we have the Southeast, East and North that were much higher. The North is a lot of new New markets, but the Southeast and the East are just showing the continued strength, particularly in Florida and the Carolinas.

Speaker 9

Okay. Thanks, Jeff. And then on supply chain, you mentioned or sorry, on the cycle times, you mentioned down 12 days. And I'm curious if that was just really all supply chain improvement or to some extent sort of mix and moving down to quicker homes to turn. And then are you expecting additional improvement in the back half of the year in that metric?

Speaker 9

Yes.

Speaker 3

Carl, that was primarily supply chain improvements, finally getting houses through various stages of construction, Being better organized and prepared with the labor and we saw improvement sequentially throughout the quarter and we're continuing to see improvement in early Construction stage movements of homes more recently started. So yes, we expect to see better cycle times as we progress through the year.

Speaker 9

I appreciate it all. Thanks so much.

Operator

Your next question is coming from Mike Rehaut at JPMorgan.

Speaker 10

Thanks. Good morning, everyone. First question, I wanted to get a sense, You mentioned that incentives have stabilized or recently stabilized. And based on our conversations Certain privates, there has been somewhat of an improvement in net pricing throughout the March Quarter. I'm curious if you saw that as well.

Speaker 10

In other words, that net pricing By March end was better than the beginning of the year. And if so, All else equal, would that point your 3Q gross margin towards the higher end of the range or even a little bit above,

Speaker 11

If you're expecting

Speaker 10

stabilization from here on in, particularly in this metric.

Speaker 5

Yes, Mike. I think the key word we keep using here is stabilization. We've started to see pricing and incentive levels stabilize during the quarter. Naturally as that stabilization remains in place a bit longer, you are able to tighten things up a bit. And as we've been able to move through the spring selling season Community by community, we see strength, we see good turns.

Speaker 5

We're able to tighten those things up. So that's certainly Overall, an expectation, but it's community by community. So there are still places where we are seeing pricing Still slightly declined, some places where we're seeing it stabilize, some places where we're able to start pushing it up a little bit. So on a net basis as we look forward, We expect our margins to stabilize around current levels. So that's why our guidance range anticipates Perhaps slightly below this quarter, perhaps a little above this quarter and it's too early to know for sure how that will play out over the remainder of the coming quarter.

Speaker 10

Okay. I appreciate that, Bill. I guess secondly, maybe building on another question around ASP. How should we think about directionally ASPs, not just For the back half of this year, but into fiscal 2024, is it something where you feel like at current levels, There's been most of the adjustment has been made or I guess more specifically, I'm even thinking about potential product mix changes to continue to address affordability if You wouldn't want to try and drive ASP maybe a little bit lower in fiscal 2024 just to More fully address perhaps the market or affordability challenges, etcetera?

Speaker 3

Yes, Mike. I think

Speaker 5

that's just all part of the mix here, slightly reductions in the size of our homes, trying to address the affordability equation. That's Ongoing effort for us and that's why we leave a little room around current levels there because we were always going to try to be as affordable as we can. But at the same time, if we have a good market and we're able to take advantage of some pricing power, we will do that also community by community. So Stabilization is the word for the day and obviously we don't guide sales prices very far out. And it's largely going to be Ultimately on market conditions over the remainder of the year and what happens in the rate environment.

Speaker 11

Great. Thank you.

Operator

Your next question for today is coming from Matthew Bouley at Barclays.

Speaker 7

Hey, good morning, everyone. Thanks for taking the questions. I wanted to follow-up on Steve's question from earlier around sort of what's happening with Credit tightening from regional banks and of course the smaller private builders generally leveraging the regional banking system. Are you actually seeing any changes Competitively yet from those smaller builders in terms of land acquisition starts, How are you guys sort of reacting to any changing conditions from those builders? Thank you.

Speaker 4

We haven't really seen any significant And shift in how they're operating in the market. A lot of builders certainly have come out of the end of this calendar year And had inventory that they may have gone through cancellations. They've been working through that product, not seeing significant starts On a go forward basis for most of the smaller privates or regional and we certainly have picked up a few land positions, lot positions here and there, but no significant Shift and how they're addressing the market.

Speaker 7

Got it. Okay. Thank you for that. And then secondly, It looks like you started less homes than you sold during the quarter. I think you guys had previously spoken about sort of aligning starts and sales pace.

Speaker 7

How are you guys thinking about that going forward? Is there any room to kind of push a little harder on starts here going forward given some of these improving demand trends?

Speaker 1

Yes. We were in a transition the last couple of quarters. It was more closely to sales, but really our focus is tied to closings in our search space. And if you look at that, we were kind of neck and neck this quarter. And so with our guide for next quarter and what we're trying to do Market by market, community by community to build back our production capabilities, we would expect our starts to increase.

Speaker 1

The extent to which will be dependent on a lot of different factors, We do expect our starts to increase next quarter.

Speaker 7

All right. Thanks, Jessica. Thanks, everyone. Good luck.

Speaker 1

Thanks, Matt.

Operator

Your next question is coming from Truman Patterson at Wolfe Research.

Speaker 12

Hey, good morning, everyone. Thanks for taking my questions. First, hoping to get an update on your mortgage business and the overall Environment, are you seeing any distress in the market from mid tier banks, tightening of mortgage warehouse financing or Tightening in consumer credit or lending standards for agency, non agency loans. We've heard that it's been kind of business as usual, but wanted to get your thoughts.

Speaker 5

Yes, obviously with all the headlines that we've had this quarter, we have watching that market very closely, having a lot of conversation with our banking relationships. But I would echo what you heard. At the moment, it's still business As usual, but obviously that's something we'll continue to monitor. We just redoed our mortgage warehouse facility This quarter and we kept basically the same bank group in place and so that market is still functioning And working as normal, but obviously if we see further distress in that market that's something we'll need to be prepared to adjust to.

Speaker 12

Bill that relates to both D. R. Horton and kind of the broader market those comments?

Speaker 5

Yes, absolutely. We all see the same headlines there and depending on what happens in the rate environment and across the spectrum of banks, there could be Further in the headlines obviously, but today, no, we have not seen a significant impact.

Speaker 12

Okay, perfect. And then Just an update on construction costs outside of lumber. It seems like they've been relatively sticky. And Bill, I think you even mentioned Some costs might be increasing a little bit, but could you just give us an update on how you're viewing the magnitude of potential Cost savings moving through the year really into 2024. Should we really see an improvement outside of lumber or are things just Pretty stable at this point?

Speaker 3

I think we're seeing a lot of stability. A lot of the Increases that we were taking over the past year have stopped, but we're seeing the effects of those increases coming through. More recent starts would be at the more stable cost benefiting from the lumber commodity price declines. But we're getting to the point where we're starting to anniversary Well into some normalized lumber market pricing. So I'm not expecting to see huge changes in our cost inputs, But they certainly have been increases have been a little bit sticky.

Speaker 12

All right. Thank you all and good luck on the upcoming quarter.

Speaker 13

Thanks, Truman.

Operator

Your next question is coming from Anthony Pettinari at Citi.

Speaker 14

Good morning. Your net order ASP was up, I think, 1% Quarter over quarter, which is a little bit better than we were expecting. Just wondering if there's any kind of mix effects that you'd call out there, whether regionally or product type, Kind of given the commentary around incentives stabilizing.

Speaker 3

I think it's pretty much like for like. We saw a stabilizing market through the quarter. And in fact about half of the homes we delivered this quarter were sold in the quarter. And so we feel pretty good about market conditions right now. We've seen good stabilization in pricing and incentive levels.

Speaker 3

And when we see that and we're hitting absorptions in the communities at a community by community level, we're looking to adjust incentive levels and pricing.

Speaker 14

Okay. That's helpful. And then just on the full year outlook, does that assume kind of mortgage rates Around current levels and if rates were to moderate a bit, do you have maybe some room to flex up production or should we think about that 80,000 to Sort of an upper limit of

Speaker 4

where you could go for the year?

Speaker 5

I think the range we provided for the year is a realistic range given current conditions And our homes that we currently have in inventory and in production as we've already stated, we do expect to incrementally increase our starts in the coming quarters. We saw a nice step up in Starts this quarter and would expect that to incrementally improve from here. But in terms of significant upside to the deliveries this year, I think we would say that So our current range is a realistic one under all circumstances.

Speaker 14

Okay. And the mortgage rate assumptions around the full year guidance

Speaker 4

are just Kind of around where we are or anything you'd call out there?

Speaker 3

Yes, current conditions.

Speaker 5

We guide based on current conditions. If things change that obviously could affect our outlook.

Speaker 14

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

Operator

Your next question for today is coming from Susan Maklari at Goldman Sachs.

Speaker 15

Thank you. Good morning. My first question is, can you talk a little bit about what you're seeing on the rental side of the business? As we've seen the for sale So I'd get a little better in the quarter. Are you seeing any shifts there?

Speaker 15

And how are you thinking about the outlook on the rentals?

Speaker 4

We have seen good pace on our ability to rent up both our apartments And single family for rents, we have seen stability in rent rates. They've been increasing quite a bit over the prior 12 months We've seen stability there. On the purchase side, we still see activity in the market. We have certainly Some units that we pushed out and sold consistent this quarter really would last in terms of number of units. And although we have seen the number of buyers Back off some and a little bit of tightening in credit in terms of their ability to get these financed, but we still see Pretty solid demand for the communities that we have out to market.

Speaker 15

Okay. That's helpful. And then given the outlook and the trajectory of demand, the way it seems to be coming together, Can you talk a bit about your appetite for land acquisitions? The land spend, I believe you said was about flat sequentially. How are you thinking about that as we go through the next couple of quarters?

Speaker 5

We're really just continuing to look at replenishing the supply Market by market, we've got a good lot position, a good flexible lot position. So we'll continue to incrementally just replenish it. I don't necessarily Significant moves one way or the other, but as our volume of sales and closings increase, then we'll need to be replenishing a little bit more to match that.

Speaker 15

Okay. Okay. Thank you and good luck.

Operator

Your next question for today is coming from Eric Bosshard at Cleveland Research.

Speaker 16

Good morning.

Speaker 13

2 things. First of all, I think the gross margin in the quarter was a bit better than you had targeted. What was different That drove the relative better gross margin performance?

Speaker 5

I think the main difference was our Pricing stabilized at a slightly higher level than we were projecting. We were not seeing signs of stabilization at the end of the Q1. But once we've gotten into the spring, we've been able to see that really start to stabilize. I think that I think we've seen that stabilization a little sooner, a little earlier than we would have Projected a quarter ago.

Speaker 3

We definitely saw a strong start to the spring selling season in the March quarter. And as I mentioned before, half the homes we closed were sold in the quarter, so they benefited from some of those stabilizing and improving price environment. So we carried a fair number of completed specs into the quarter.

Speaker 13

Okay. And then secondly, in regards to incentives or pricing, I'm curious If you can help with what the average rate on closings is. I'm just trying to get a sense of where rate buy downs are part of the effort, The magnitude of what that looks like, what the I guess, in other words, what the magic number of rates or the bull's eye that you need to get rates to, to Again, consumers comfortable closing on homes.

Speaker 1

Yes. So, our average general buy down is typically a point on the loan value. So I would say there's been a lot of headlines out there, I think talking about 5.5%. It fluctuates probably A little bit, but 5.5% is relatively reasonable

Speaker 2

in terms of what a consumer

Speaker 1

is okay with at this point.

Speaker 5

Yes. And that is roughly 60%, 65% of our buyers are utilizing that buy down through our mortgage company. And so they're getting That benefit of that point, Martin.

Speaker 13

And then regarding the trend within that, has there been any Change within that or is that kind of the bull's eye that works? And obviously, the mortgage market moves around, but is that 5.5, The 60 to 65, has there been any variability in the trend around either of those?

Speaker 4

It's been pretty consistent certainly throughout Quarter and rates have stayed relatively consistent. And we will fluctuate our rate to the market based on what we see in the overall Market rates. So for the last quarter, it's hovered right around that 5.5% and seems to be accepted by our homebuyers.

Speaker 16

Great. Thank you.

Operator

Your next question is coming from Alan Ratner at Zelman and Associates.

Speaker 13

Hey guys, good morning. Thanks for taking my question. Nice quarter. First question, obviously, you guys are an entry level builder, but you do have exposure at different price points and segments as well. So I'm curious if you're seeing any notable differences In terms of demand trends across your price points and similar to that effect, We had heard in recent quarters that and I think you guys mentioned this as well that there was a reluctance of buyers to kind of sit in backlog for a long period of time given the volatility in rates and you guys were holding specs off until they were further along in the construction process.

Speaker 13

Has that changed at all? Are you seeing with the stability now, are you seeing more willingness to maybe sit in backlog for a longer period of time?

Speaker 3

I think we are seeing some buyers willing to buy earlier in the production process. There's been a little bit of stability in market rates and they feel good about that. But the better thing for us is we're seeing Cycle times improved, so we're still able to give them sort of a shorter period of time In backlog than they would have had 6 months or certainly a year ago. And so there's a confidence level that we're able to sell from that helps that buyer quite a bit.

Speaker 13

Got it. And on the price point question, any notable differences in move up and active adult recognizing it's a smaller part of your business?

Speaker 4

No, Alan. We really haven't seen market to market a significant difference in terms of levels of demand as we go up and down the price curve. Even where we are at the higher end of the price market in any given market, we're still at the value price point for that price. So we're still seeing that demand. And for us, if they've come off of a $700,000 price that means they may be looking 6 or 5.

Speaker 4

And so we are catching those people I think as they move down the curve.

Speaker 1

And what still hasn't changed is the amount of existing home inventory out there and available. That remains very limited. So if somebody does want a home at a higher price point or a lower price point, new construction is where they can find it right now.

Speaker 2

And you also have the Trend of migration from high cost states to lower cost states and what seems like a high price point in Florida To our Florida operators is a relatively low price point for somebody coming from New York or California.

Speaker 13

Understood. If I can squeeze in a follow-up on the rental segment. If I look at the average order price of your SFR homes, it's come down Quite significantly, and I'm sure there might be some mix involved there since we're talking about a relatively small number of homes. But is that 25%, 30% decline in a Per unit price, I think this quarter's average was in the low 300s. Is that representative of what's going on in the market today or have the trends mirrored the for sale

Speaker 3

I think we've seen certainly through the fall with the disruption in the capital markets Increases in cap rates for disposition of those properties, but largely what we saw this quarter was a change in mix Geographies of where those homes were being delivered and related rental rates and NOIs on those projects. So still feel good about the overall platform for sure. Very excited about the opportunities that are in front of us with that And excited that the capital markets have been stabilizing a little bit, which is going to help execution for sure on the disposition of those properties.

Speaker 4

And also expect on a go forward basis to see a little more variability in our rental platform just because we're selling whole communities at a time and they could be townhomes or smaller homes Geographic location can cause that to move around a little more than our for sale business.

Speaker 5

And Until the volume and the number of projects closing in a quarter gets up to a larger level in a steady state, you're going to see a little bit more lumpiness in the quarter to quarter

Speaker 2

And I will say it's very difficult to put a lot on the ground and to get a house built, Very little inventory out there and a lot of money chasing investment properties. So we think we have high hopes for this Got it.

Speaker 16

Appreciate the color. Thanks guys.

Operator

Your next question for today is coming from Rafi Jadrosik at Bank of America.

Speaker 13

Hi, good morning. Thanks for taking my question. I wanted to ask, how do you think about how your ability to offer rate buydowns Impacts demand and sort of a volatile mortgage rate environment. Do you see volatility in weekly traffic and demand as mortgage rates move around? Or is your ability to offer rate buy downs to prevent that?

Speaker 4

I think you could certainly see as rates shift in traffic, You're going to see that change either up or down, but the sales cycle time isn't immediate. And so our agents and our realtor partners Do a good job of maintaining those buyer relationships and our ability to offer some stability And that rate helps us really at the close.

Speaker 2

And just certainty of payment gives confidence to the buyer At a 5.5% rate, we have more qualified buyers than we do at a 6.5% rate. So it opens up, ownership to more people if you're able to present that.

Speaker 1

Much easier to manage to the interest rate environment when now you're talking about 20 to 50 basis point moves in rates versus what we were experiencing in the back half of last I mean, it's just not as impactful as what we had to manage through last year.

Speaker 13

Thank you. And then just following up on an earlier question on how the gross margin came in versus your initial guidance for the quarter. It sounded like the pricing stability was higher than projected. Is it did you start to raise prices at all during the quarter and then the gross margin improved Throughout the quarter or was there better elasticity where you didn't have to lower prices as much as you anticipated to sell homes that had the current rate?

Speaker 5

Versus the guidance we gave, it was the latter. We did not have to lower as much as we had been projecting necessarily. But in terms of how we're Managing community by community, that's a mixed bag. As we got into the spring, we did as Mike said, we sold about half our homes that we closed this quarter in the quarter. So as we started hitting our pace seeing solid demand into the spring, definitely in certain communities we are starting to push pricing But carefully, but are pushing it up.

Speaker 13

Thank you. Very helpful.

Operator

Your next question is coming from Buck Horne at Raymond James.

Speaker 16

Hey, thanks. Good morning. Before we leave the rental segment altogether, I wanted to just maybe drill down a little bit further in terms of Breaking apart your expectations for single family rental versus multifamily for the remainder of the year. You mentioned that there's been some backing up of cap rate expectations, I guess, with higher cost of capital and disruptions in the capital market. Is that more pronounced on multifamily versus SFR or vice versa?

Speaker 16

Or kind of what are you seeing in terms of Buyer expectations for stabilized cap rates in either segment. What are we

Speaker 3

other than saying higher than they were a year ago, on a go forward basis, it does seem to have Stabilized. I don't think it has been changing between the multifamily and the single family rental. The relative gap that's there has not changed. Generally, the multifamily projects underwrite at slightly lower cap rate Like for like, it's a more established market. It's a more known market, but still very pleased with the performance we're getting From that segment and the disposition opportunities ahead of us over the next several quarters.

Speaker 16

Okay. That's helpful. Appreciate that. And maybe just kind of hypothetically, just thinking ahead here with challenges in the regional banking environment and maybe more capital constraints for Particularly for smaller and your regional private competition, homebuilding competition that is, Would you think that it's possible that more M and A opportunities might open up either later this year or in the next year if there's just More capital constraints on some of your small private competition out there?

Speaker 2

Well, we do believe that The capital constraints for the privates and smaller builders is going to be impactful. And we see opportunities. We evaluate the opportunities. And based upon positioning people and market That they have, whether it's a home or not. But irregardless, it's going to help us aggregate markets, Whether it's via acquisition or picking up lots or just providing more inventory Availability then that can be done by a private or small regional.

Speaker 2

So It's an opportunity for us.

Operator

Your next question for today is coming from Alex Barron at Housing Research Center.

Speaker 17

Yes, thank you.

Speaker 18

I was hoping we could think a big talk big picture. At the end of 2020, there was a lot of demand and everybody just took a lot of orders and then Suddenly ran into supply chain issues the following year. As demand is pretty good here at 6%, 6.5% rates. If rates were to go down, say below 6 or towards 5 in the next year or something, What do you guys think you could do differently this time around to be able to capture and deliver on those homes? Meaning, have you guys thought of doing warehousing of materials or hiring crews to some level Of the deliveries or some type of vertical integration, any thoughts around anything you do different to be able to grow And not just kind of keep your deliveries limited?

Speaker 2

Alex, I think there is just a built in capacity issue in the industry. And even when you think you've got everything solved, then something else happens. I mean, the transformers that bring some of these to life could be a huge issue in getting lots delivered Within the next 12 to 15 months. And so you're constantly looking at how are you positioned, where can we pick up incremental Capacity both in trade and in lots. And from a division level Push, that is really kind of what we've been focused on simplifying our operations, Consolidating markets consolidating tray capacity and How do we improve our logistics of getting materials to communities?

Speaker 2

But it's Just within the entire industry, if we had 100% of the trade material capacity, it would still be in strength. It's just very difficult with lots on the ground, very difficult to get house built. And I do think that's why we're gaining market share Because we are 100% focused on controlling capacity throughout the supply chain.

Speaker 18

Okay. And in terms of the land supply, I mean, you guys have shifted materially in the last few years, what percentage of your lots you own versus How many you option and you obviously acquired Forestar to kind of help in that process, but Is there anything else that you could do to, I guess, grow 4 Star or do something To shift your ability to increase that ratio of owned to option even more?

Speaker 2

Let's just continue work. I mean, it's day in, day out, developing trade or development partners And then building a trust relationship with them where they know when we bring them a deal or they bring us a deal There's going to be the highest level execution from a housing standpoint of anybody in the industry. And it is hard work. It's to build relationships over time and maintain trust through any kind of market. So but we're just going to continue to work on it, try to get a little better next year.

Speaker 2

There's no magic wand to make all that happen. It's hard work, it's trust, it's transparency, it's building relationships.

Speaker 18

All right. Well, best of luck on your road back to 100,000.

Operator

Your next question for today is coming from Mike Dahl at RBC Capital Markets.

Speaker 17

Good morning. Thanks for taking my question. Just to follow-up on the lot side, a couple of comments already on the call, but You note the flexibility in your current portfolio, not necessarily getting too aggressive on offense Yes, I'm still expecting somewhat elevated option write offs. I guess I'm wondering, clearly as the markets improved, probably some deals that you Have in your existing book, maybe you didn't think they would pencil a quarter or 2 ago and now they might be. And any way that you could kind of ballpark Quantify what deals you think have kind of come back into the underwriting box on what makes sense today Versus things you might have thought you would walk from prior?

Speaker 3

We have so many deals Under contract and evaluation at any point in time, it would be really hard for us to have any sense of what fell out or what's falling out and leading of Our local operation teams to think this deal doesn't work anymore and now it might. I can tell you as David said, anytime we have an opportunity to get Finished lots that are increasingly difficult to get produced these days. We are aggressively looking for ways to work with our development partners, the landowners To make the deals work and to find ways to bring those lots to market. So it's a constant Evaluation process and the transparency and the relationships we've built over 45 years of doing this Really help us achieve that.

Speaker 4

Got it.

Speaker 17

Okay. And then second question just on capital allocation. With the buyback based on dollar figure in terms of the guide, obviously, you're moving the stock That doesn't necessarily buy as much as it would have a quarter or 2 ago. So when we're thinking about incremental capital allocation and the balance sheet and the cash flow I guess, what's do you think you'll keep targeting more of that dollar figure? Or should we expect as the year goes on that you move back to more targeting a certain level of either dilution offset or net share count reduction?

Speaker 5

Yes. It's always obviously, we're looking at both the dollars invested as well as the impact on the share count. And you will never hear me complain about a higher stock price for sure and with respect to our repurchase activity. So, but end of the day, it's Dollars that we're investing and so we look at our cash flow, we look at our earnings, we look at our liquidity levels, we look at our projections going forward To the extent that our projections are improving and our cash flow prospects are improving versus what we had previously You thought that increases the chance of increasing share repurchase levels. But as of right now and as Looking at the rest of the year and our positioning there and our needs for our capital to invest in the business, Guiding to around the same level of dollar investment as last year is still where we expect to be, but that's something we'll be constantly reevaluating.

Speaker 16

Okay. Thank you.

Operator

Your next question is coming from Jay McCanless at Wedbush.

Speaker 11

Hey, good morning. Thanks for taking my questions. So if my math's Right. I think this is the 5th quarter in a row where your average selling communities have been up year over year. I guess, and I think you talked a little bit about It's really David.

Speaker 11

What are the headwinds remaining to continuing that kind of growth streak? And I'm presuming But the lock count you have right now could support further growth, but maybe just talk about that trajectory?

Speaker 2

It's going to be Market to market, I can tell you kind of what Mike said earlier, where we have an opportunity to pick up finished lots On some kind of role or take, we're going to pursue that aggressively. Consolidating it's like controlling the lumber yard. If you control the lots, You control the capacity, the ability to meet capacity. So I would anticipate the community count continue to decline. When it was declining, it was because every time we opened a community, it Sold out immediately, which is a good thing.

Speaker 2

But the market is normalizing. There's much more stability From the much better ability to kind of look at the market, understand the absorption, set a start pace And kind of drive an efficient production operation. So I guess, That's a long way of saying yes. I do think you're going to see our community count continue to move on.

Speaker 11

Okay, great. Yes, it is a high class problem to have. And I guess the other question I have, pre COVID, could you remind us for the 2nd fiscal Q3, historically, what was the percentage of homes that you would sell and close intra quarter?

Speaker 1

That really bounces around quite a bit, and it doesn't really have a whole lot of seasonality. It's just kind of dependent on our inventory position at the time, which is why we were able to sell and close 50% of our homes this quarter, intra quarter sold and closed at the same quarter, Which is very high. A more normalized range would be somewhere between 30% 40%. So when we think about Q3, it could still be elevated, But we don't necessarily expect to replicate the 50%.

Speaker 2

Our backlog going into this quarter is much better position. Yes.

Speaker 11

Great. Appreciate it. Thank you.

Speaker 2

Yes. Things just feel to be normalizing.

Operator

We have reached the end of the question and answer session. And I will now I'll turn the call over to David Auld for closing remarks.

Speaker 2

Thank you, Holly. We appreciate everyone's time on the call today and look forward to And producing a solid second quarter, continue to compete and continue to win every day.

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Earnings Conference Call
D.R. Horton Q2 2023
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