Q4 2019 Earnings Call
Good morning, and welcome to the fourth quarter 2019 earnings conference call for D.R. Horton America's builder, the largest builder in the United States.
At this time all participants are in listen only mode and interactive question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
After this conference is being recorded.
I would now like to turn the conference over to your host Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Thank you you may begin.
Thank you Melissa and good morning, welcome to recall to discuss our fourth quarter in fiscal 2019 financial results.
Before we get started today's call may include comments constitute forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
Although deal Britney leaves any such statements are based on reasonable assumptions. There was no assurance that actual outcomes will not be materially different all forward looking statements are based upon information available to be overcome the data. This conference call, India wouldn't does not undertake any obligation to publicly update or revise any forward looking statements.
Additional information about issues that could lead to material changes in performance is contained in D.R. Horton annual report on Form 10-K , and or subsequent quarterly reports on Form 10-Q , all of which are filed with the Securities Exchange Commission.
This morning's earnings release can be found on our website and investor ideal Britain Dotcom and we plan to file our 10-K next week. After this call we will cause updated investor in supplementary data presentations trying investor relations site on the presentation section under news and events to your reference.
Now I will turn the call over to David Auld, our president and CEO . Thank.
Thank you Justin good morning.
In addition to Jessica I'm pleased to be joined on the coal caught my memory.
Second the vice President and Chief operating Officer.
And bill weight, our executive Vice President and Chief Financial Officer.
How do you all wouldn't team finished the year strong pre tax income for the fourth quarter increased 9% to $660 million on $5 billion of revenue.
Pre tax operating margin was 13.1 person.
For the year.
Yes increased 13% to $4.29 per diluted share in consolidated pre tax income increased $2.1 billion on $17.6 billion revenues.
Consolidated pre tax margin for the year was 12.1%.
We closed 56975 homes this year, an increase of over 5000 homes or 10% from last year.
Oh somebody return on inventory was 18.1%.
Return on equity was 17.2 questions.
These results reflect the strength of our operational teams.
Ability to leverage D.R. Horton scale across a broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Hey building cash flow from operations in 2019 was $1.4 billion over.
Over the past five years, we have generated approximately $4 billion of cash flow from homebuilding operations, while growing our homebuilding revenues by more than $9 billion, well 117 personnel and our earnings per share by 186%.
During these five years in addition to organically grow into business, we'd have invested approximately $1 billion than acquisitions had returned over $1.4 billion to shareholders through dividends and share repurchases, while reducing homebuilding debt by $1.3 billion.
As a result, our return on equity increased by 540 basis points, well, our homebuilding debt to capital ratio decreased by less than half of its level five years ago.
Our strategic focus is to continue consolidating marketshare, well going both our revenues and pre tax profits generating strong cash flows on returns and maintaining a flexible financial position with a conservative balance sheet that includes an ample supply of homes lots and land to support growth and a good October .
Sales pace, we're well positioned us well beyond 2020 might.
Diluted earnings per share for the fourth quarter fiscal 2019 increased 11% to $1.35 cents per share compared to $1.22 cents per share in the prior year quarter net income for the quarter increased 8% to $505 million compared to $466 million, our consolidated pre tax income.
Increased 9% to $660 million in the fourth quarter from $608 million and homebuilding pre tax income increased 3% to $594 million for $578 million, our fourth quarter home sales revenues increased 10% to $4.8 billion 16000.
24 homes closed up from $4.4 billion on 14674 homes closed in the year ago poor.
Average closing price for the quarter was $299500 flat with the prior year Bill.
Net sales orders in the fourth quarter increased 14% to 13130 homes and the value of those orders was $4 billion up 16% from $3.4 billion in the prior year.
Our average number of active selling communities increased 9% from the prior year and was flat sequentially.
Excluding the builders, we acquired earlier this year, our fourth quarter net sales orders were up 11% and our average number of active selling communities increased 2%.
Our average sales price on net sales orders in the fourth quarter was $302300 up 1% from the prior year.
The cancellation rate for the fourth quarter was 23% down from 26% have a same quarter last year, just got a gross profit margin on home sales revenue in the fourth quarter was 21% up 70 basis points sequentially from the June quarter. The sequential increase in our gross margin from June to September exceeded our expectations.
And was primarily due to lower sales isn't it.
Based on today's market conditions. We currently expect her home sales gross margin in the first quarter to be consistent with the fourth quarter subject possible fluctuations due to product and geographic mix. It slows the relative impact of warranty litigation in purchase accounting Phil.
In the fourth quarter SGN egg sets as a percentage of homebuilding revenues was 8.5% compared to 8.4% for the prior year quarter. The increase in our fourth quarter as she had a year over year was primarily due to compensation accruals related to increases in our stock price.
For the full year homebuilding yesterday was 8.7 per cent compared to 8.6% in 2018, we did not achieve SGN a leverage this year. After we lowered our revenue growth expectations and our fiscal first quarter and works to align our inventory levels and operations with our revised expectations throughout the year we were.
Remain focused on controlling Christianity, while ensuring our infrastructure adequately supports our growth and we expect to improve Irish DNA rate in 2020, Jessica financial services pre tax income in the fourth quarter was $61 million in a pre tax operating margin was 44.8% for the year financial services preach.
I think it was $166 million on $442 million of revenues, representing a 37.6% pre tax operating margin.
97% ever mortgage companies one originations during the quarter related to comes close by our homebuilding operations and our mortgage company handled the financing for 63% of our home buyers and vishay in Villans accounted for 48% at the mortgage companies volume borrowers originating loans with D.J. mortgage this quarter had an average.
Like the score of 720, and an average loan to value ratio of 89%.
First time homebuyers represented 50% of closings handled by our mortgage company, that's sort of 49% in the prior quarter, reflecting our continued focus on offering homes at affordable price points for entry level buyers. Mike. We ended the year with 27700 homes in inventory essentially flat with last year 16000.
Our total homes were unsold of which 5200 work completed.
Our fourth quarter homebuilding investments in lots land and development totaled $990 million of which $610 million was to replenish finished lots and land and $380 million was for land development.
For the year, we invested $3.7 billion in lot of land and development David <unk>.
At September Thirtyth, our homebuilding lot position consisted of approximately 307000 lots of which 40% were owned up 60% well controlled.
30% of our total own lots are finished and at least 54% of our controlled lots are or will be finished when we purchased some.
We continue working to increase our lot position being developed by third parties supporting the growth of four stars National lot manufacturing platform.
And expanding our relationships with lot developers across the country. Our thought blood portfolio includes an ample supply of lots for homes at affordable price points and continues to provide a strong competitive advantage Mike Forestar. Our majority owned subsidiary is a publicly traded residential lot manufacturer now operating at 51.
In markets across 20 states at September Thirtyth Forestar is a lot position consisted of 38300 lots of which 29700 her own and 8600 or controlled through purchase contracts, 79% forestar. Its own lots all are already under contract with the or Horton were subject to a.
Right of first offer under the Master supply agreement.
Forestar exceeded its guidance for the year by delivering 4132 lots and generating $428 million revenue for its fiscal year ended September thirtyth.
Forestar expects to deliver 10000 lots and generate $750 million to $850 million of revenue in fiscal 2020.
And to deliver 12000 lots and generate 900 million $1 billion of revenue in fiscal 2021, these expectations Forestar Standalone results.
Four stores, making steady progress in building its operational platform and capital structure supported significant growth plans.
During the quarter Forestar issued approximately 6 million shares of its common stock in a public offering net proceeds from this offering were approximately $100 million, which will help ports, which will help support for starz future growth.
After the issue and the or Hortons ownership percentage or forestar decreased from 35% to approximately 66% forced our plans to opportunistically access the capital markets as necessary provide additional capital for long term growth Forestar is separately capitalized from D.R. Horton and is targeting a long term net debt to cap.
Capital ratio of 40% or less.
We are excited about four stars growing operating platform and the value. This relationship will create over the long term for both the R. Horton enforced our shareholders David.
Yes, Hi communities is our multifamily rental company focused on suburban garden style apartments with operations, primarily in Texas, Arizona and Florida.
Do you as Jack communities currently has four projects under active controlled construction and twos projects that were substantially complete at the end of the quarter, one of which was under contract to sell at September Thirtyth.
During 2019 DHR community. So two multifamily rental properties for 133, maybe 400000.
And recorded a gain on sale of $51.9 million.
The H.I. communities total assets were $204 million at the end of the year.
We expect DHR community assets to increased significantly in 2020 as this pipeline or multifamily rental projects grows. We also expect to sell to rental properties in 2020 Bill.
Our balanced capital approach focuses on being flexible opportunistic and discipline, our balance sheet strength and operating results have increased our flexibility and we're utilizing our strong position to enhance the long term value of the company [noise].
During fiscal 2019 cash generated by homebuilding operations was $1.4 billion, bringing our cumulative cash generated from homebuilding operations for the past five years to approximately $4 billion.
At September Thirtyth, we had $2.2 billion of homebuilding liquidity, consisting of $1 billion of unrestricted homebuilding cash and $1.2 billion of available capacity on our revolving credit facility.
Our consolidated leverage improved 100 basis points from a year ago to 25.3% and homebuilding leverage improved 440 basis points to 17%.
The balance of our homebuilding public notes outstanding at fiscal year end was $1.9 billion and we have $500 million of senior note maturities due in the next 12 months.
Subsequent to year end, we issued $500 million of 2.5% senior notes due in 2024.
We also extended the maturity date of our revolving credit facility by just over a year and increase its capacity to $1.59 billion.
At September Thirtyth, our stockholders equity was $10 billion and book value per share was $27 20 sets up 14% from year ago.
During the quarter, we paid cash dividends, a $55.5 billion and repurchased 2.1 million shares of common stock for $104.3 million.
For the year, we paid cash dividends of $223.4 million and repurchased 11.9 million shares of common stock for $479.8 billion.
As a result of our share repurchases. This year, we reduced our outstanding share count by 2% compared to a year ago.
The company's remaining stock repurchase authorization at September Thirtyth was $895.7 million with no expiration date [noise].
Just on our financial position at outlook for fiscal 2020, our board of directors increased our quarterly cash dividend by 17% to 17.5 cents per share.
We currently expect to pay dividends of approximately $250 million in fiscal 2020.
Looking forward to the first quarter fiscal 2020, we expect to generate consolidated revenues of $3.7 billion to $3.8 billion and our homes close to being a range between 12000 112400 homes. We expect your home sales gross margin in the first quarter to be approximately.
21% and homebuilding S. DNA in the first quarter to be around 9.5% as homebuilding revenues.
Based on today's market conditions are expected growth for fiscal 2020 is still in mid to high single digit percentage range for best consolidated revenues and homes closed. We currently expect you generate consolidated revenues for the full year of $18.5 billion to $19 billion and to close between 60000.
And 61000 homes.
We forecast an income tax rate for fiscal 2020 of approximately 25% and we expect to reduce your outstanding share count by approximately 2% at the end of fiscal 2020 compared to the into fiscal 2019. We also expect to generate homebuilding cash flow from operations in excess of $1 billion again.
And during fiscal 2020, David.
In closing our results reflect the strength of our well established operating platform across the country.
We are focused on consolidating market share, while growing our revenues and profits and generating strong annual cash flows and returns while maintaining a flexible financial position.
We are well positioned to do so with our conservative balance sheet broad geographic footprint affordable product offerings across multiple brands attractive finished lot and land position at most importantly, our outstanding experienced team across the country. We congratulate the entire D.R. Horton team on closing the most homes and a year.
In company history, and we thank you for your hard work at accomplishments were incredibly well positioned to continue growing in improving our operations in 2020.
This concludes our prepared remarks, we will now Whos question.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one under telephone keypad, a confirmation tonal indicate your line is in the question can you maybe first start to if we'd like to remove your question from the Q for participants you think speaker equipment, it may be necessary to pick up your handset.
We're pressing the starkey.
And the interest of time, we ask that you limit yourself to one question and one follow up.
Our first question comes from the line of John Lovallo with Bank of America. Please proceed with your question.
Hey, guys. Thank you for taking my question I guess first of all the cash flow from operations target of greater than a billion.
Could be could be interpreted as being somewhat conservative given the 2090 performance a 1.4 billion and what appears to be a set up here for improved profitability in fiscal year 20.
What do you see kind of is the biggest variables here and there is there any is there any reason that you can point to why cash flow would be lower on a year over year basis.
John we expect to generate a consistently strong cash flow in excess of a billion a year to year that number can move around a little bit just depending on timing of investments and homebuilding and given that we're early in the year and ER and we want to see how demand goes through the year that could input impact our investment levels in the business. So a greater.
In a billion dollars is certainly a solid range.
And that gives us flexibility that as we move through the year and we'll update that estimate as we need to.
Okay that makes sense and then last year I think you guys outlined.
Actual acquisition target range, you've got the 400 600 million how do you guys thinking about that heading into 2020 and what is the pipeline look like.
We're still we're still actively looking at some opportunities John but a you know, we're we're very selective and wanting to be very targeted and what we're doing there. So what we're looking at some they're very hard to predict when they're actually going to happen. This year. We don't have that same level of clarity to a number that we had at this time last.
This year.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of Alan Ratner with Zelman Associates. Please proceed with your question.
Hi, guys. Good morning, how congrats on a strong close to the year.
My first question you know I've always kind of thought about the at homes in inventory data point that you guys provided a little bit of a leading indicator in terms of how you see the business growing over over the next few quarters and I think this is the first quarter in a while where you've actually been down a bit on a year over year basis and I'm. Just curious you think about that mid to high single digit.
Growth target in a in 2020 should we start to see that number move higher or is there any kind of changing the way you're thinking about you haven't specs on the ground and homes and inventory and maybe any shifts in demand for to be built homes versus specs that that would be potentially driving that number lower than it then I would suspect.
Good.
I think Alan is we're seeing similar break down between our two rebuilds and our available homes.
That we have an inventory, but we're excited.
Looking at going into this year with a good demand environment and an opportunity to improve continue improving our returns and part of the way we've talked about last quarter of improving returns is to focus on improving our home inventory turnover and so that's something we're excited about the opportunity to deliver on in fiscal <unk>.
Great and then I guess, just a follow up on that but yeah implied there I guess is you're still confident that you can maintain the very high backlog conversion rates that youve delivered in the past and while keeping a lower inventory level in total is another way to interpret that.
I think I think you will see our inventory level increase from where we are at this point of the year, we're looking to be more efficient with the capital. So we look to see higher overall turnover rate.
Okay. That's helpful and if I could just ask one more you know investors. Obviously you have been very focused on on the 10 year Treasury yield which is climbing off of recent lows the blade and still it incredibly low levels from an absolute standpoint, but yeah. You mentioned the strong sales environment in October , which obviously coincides with that that move up we've seen in recent weeks.
Where do you see the rate environment today, I mean is there any what you see maybe pull forward from buyers that are trying to jump in before rates continue to move higher is it not concerned at all of yours and in the marketplace. Any commentary you can give just in terms of what what you're thinking about are seeing on the ground from from the rate environment would be helpful.
No I think anything that impacts affordability is always going to be a concern.
I will say when you looked at.
What drives homebuilding, which as job growth and overall economic.
The overall economy.
We feel very very good about what's happening there.
And homes.
That's.
There are affordable as a as they're going to get so.
I do think yes, the there maybe a little bit of pull forward demand.
But right now a market fills really really good and Alan if one positive came out as last year at this time in what we experienced it was a renewed focus in the field for us to stay and make sure. We have those affordable product offerings kind of regardless of what interest rates are doing so we've continued to see our average.
Square footage come down slightly it was down about 3% on a year over year basis, again, and we proactively gotten the houses out there that we believe our affordable in today's market will continue to adjust as necessary to whatever rate environment. We find ourselves then, but clearly today the little bit better rate environment than it was last year at this time.
Appreciate that guys. Thanks a lot.
Thank you. Our next question comes from the line of Carl Reichardt with BTG. Please proceed with your question.
Good morning, all.
I wanted to ask David a little bit about competition, especially for entry level a into lots in particular number of your peers and making a move in a direction that you made some time ago, a and you've had a couple of smaller peers talk about how it's been harder to find a assets where they'd like to two to build a smaller homes.
Can you talk a little bit about what you're seeing competitively obviously a lot supply is what it isn't it strong, but you'll be looking for more there'll be more looking.
And the same areas you ours I, just curious as to your thoughts there.
You know car, we wait complete everyday and yes, I do think that you're seeing more people attempt to get lower end price point and drive.
Better affordability.
But again, you know like we've talked about in the past.
Our positions are very long very deep and.
No, we don't intend to give up marketshare and that.
So thats servicing that bar.
I will say demand.
As is still very very deep.
And I think from my travels that.
Uh huh supply still tight, especially as you as you achieved through affordability. So.
But you know what take a lot of comfort and the fact that.
We got a long runway and very affordable positions deepened along so.
Thanks, David and then Bill I, just I'm going to follow up on Alans question about inventories I think he made a few reclassifications to what what's in the unsold versus we move models, I think but but I'm looked thinking back to I think three years ago or so where are you entered the year feeling like you were short a little bit of inventory in it and they are hurt you from it.
Liberty perspective, just want to make sure you're not feeling that way now you feel comfortable the inventory that you got in the ground because your head into this first quarter is comp is is there and you're not feeling the same way that you did three years ago.
Carl This is Mike and I would say it's different from three years ago that not just we feel really good about the focus we've had on housing turns and how to improve that as well as having the lots on the ground to support the starts that will need to be making over this quarter to support what we hope to be really robust spring selling season, so three years ago.
So we were struggling not just with the inventory levels of housing, but also with our finished lot positions by that.
So we feel very comfortable with its 60 to 61000 annual target, but the reason we right now wouldn't say, we're comfortable moving higher than that for this next fiscal year is because of where we're starting from from the homes perspective say 60 to 61, we feel very comfortable it.
Alright, great. Thanks, Jessica Thanks all.
Thank you. Our next question comes on line of Truman Patterson with Wells Fargo. Please proceed with your question.
Hi, good morning, everybody and a nice results.
First wanted to touch on last year. They you know it came in a little bit above your guidance could you just walk us through the drivers of this and you know how we should think about incremental opportunity going forward, you know where I'm really thinking about 2020, you mentioned some leverage but you guys are guiding the mid to high single digit revenue growth, which is pretty much.
What you all did in 2019 and your history and I was kind of flattish could you just kind of Oh.
Break it out why you know 2021 improve while 2019 didn't necessarily take down.
Sure sure German this is bill specifically in the fourth quarter, when we missed our guidance that was specifically due to.
Some of our compensation accruals are tied to changes in our share price and as our stock price increased pretty sharply in the fourth quarter, we had to increase the number of those accruals and that that entirely accounts for the miss versus our guidance for the Q4 as DNA right. As you look back over the full year of 19 and as we look forward to 20.
Though it's a little bit of a broader.
Broader discussion as you recall in fiscal 2019 at the start of the year, we had expectations to grow more than double digit pace, but then very early in the year as we saw a softer market in first and the first quarter, we lowered our our revenue expectations.
And what we were you had our infrastructure in place and homes in place homes and inventory, obviously to support a higher revenue number so really throughout this year, we've been working to adjust their inventory levels and our operations to kind of fit that that lower revenue expectation and we've been running.
Typically about 10 basis points higher than the prior year all year long.
As we go into fiscal 2020, while we have the same revenue expectations that we ultimately achieved 19, we feel like our positioning is appropriate for that revenue and with a mid to high single digit revenue growth, we should see as DNA leverage and so we do expect to improve on our DNA rate versus 2019, as we go into fiscal 2020.
Okay. Thanks for that and then on the financial services side.
I think it's the best result, you guys have had in history.
Could you just walk us through the drivers of this and possibly how sustainable is going forward.
Sorry, I'm sure I mean, it was mainly due to favorable market conditions, just because it low interest rate environment. So that was by far the strongest driver and our mortgage company. Though has also done a fantastic job working on becoming more efficient a they've improved their capture rate and I think 63%. This quarter was one of the highest we've seen in quite some.
The time, and but a normal historical operating margin is more in that 30% range. The low thirtys and we do anticipate that's what they are ultimately going to return to but no. No question. This year was with a very strong performance for that business.
Okay. Thank you all.
Thank you. Our next question comes from the line up there ballpark with Cleveland Research. Please proceed with your question.
Good morning.
Question on gross margin as you look at price and incentives and gross margin curious how you would compare.
Your thinking for the coming here relative to the are you just completed.
I think we're going to see frankly are more the same we see a lower level of incentives than where we we've been sequentially through the year.
And so come up nicely as we walk from the second quarter low that we've had.
We've been very intentional about trying to manage that to drive the best returns and looking into fiscal 20 as clear as our clapping ball shows us we're expecting margins to be about flat, where we've been in the fourth quarter.
[noise] and then secondly in terms of Forestar an option can you talk about the progress you've made and and where that number is going and how how its going how you would characterize how its going.
Overall, we feel really really well about the progress we've made to get to 60% I know, that's a little bit bouncy quarter to quarter and we've talked about its a dynamic number that measured in any quarter end, it's going to move a little bit Directionally I.
I hope, we get a little more progress on that this year and that trend continues forestar continues to add to their operating platform add their team, which is a great first source of for us for a third party developer and at the same time, you know we work really hard developing relationships with other the third party developers as well and continuing to it.
Span those relationships that we have in various markets and getting people in markets. We have not historically been able to get developers to step in to step in and complete walk for us.
It's an ongoing that's that long term process.
And that the destination that ultimately the 60%, where where would you like a number to get to an over what timeframe.
Hard to say, an ultimate number higher than where it is today, but it's something we'll probably be working at very hard for you know our entire careers here or D.R. Horton.
Okay. Thank you.
Thank you. Our next question comes from line Stephen Kim.
With Evercore ISI. Please proceed with your question.
Yeah. Thanks, very much guys. Mike just wanted to clarify one thing you just said I think with respect to margins and in 2020 that you're thinking you can probably be flat with where you were in Fourq. You 19. So in other words kind of around that 21% gross margin in 2020.
He is kind of what you're thinking right.
Yes, Sir.
Okay, Great just wanted to clarify that that's great.
The second question relates to SGN a.
So.
I believe Bill you were talking about the impact of the stock based compensation in for Q on your September quarter, you made adjustments your accruals for the higher stock price.
I was wondering if there they weren't shouldn't be any lingering impact from that lets say if your stock price would remain flat a into next year should there and the reason I'm asking is because your once you got on that's DNA as for flat, even though your closings are up about 7% you know just kinda like what you're thinking for the year. So just trying to figure out.
Why we wouldn't seem a little more leverage and once you like you were expecting to see for the full of here.
Right, yes, the the change in the accrual should not have any lingering effect you're correct in that assumption as we look at our absolute level of SGN I spend going into the first quarter along with our revenue guide we believe the not in a half percent is is the level that we feel like we will be yet if you do go back a year ago.
Those you're comparing year over year in the first quarter.
We had some yes, I hate to say benefit, but we did have some benefited from a reduction in our stock price last year and so some of those accruals were pulled down a year ago. The first quarter. So it simply timing on on the on that basis, but it does move the needle up that you can make a move at 10 to 20 basis points.
Got it yet that's that's very clear and then lastly, I think I'm in your opening remarks, you talked about October off to a strong start with just wondering if you could give us a little bit more color you are we seeing anyway an acceleration.
In into October in any way and either in terms of being able to reduce incentives at a more aggressive pace or or any other kind of color you can provide around the demand environment a in October .
Oh, Okay. This October feel so much better than last October , but a culture I know, it's hard not to be up a little bit excited about what the year brings.
I can tell you. They Oh you know we're not we're not thinking that we cannot see a margin expansion because I do believe there's going to be more competition, but.
Where we where are we see the business right now today.
Yes, so very very solid and feel comfortable.
At least today with Oh.
Well sharing that the you know we were looking for.
Pretty flat margins going forward.
Which is as you know we're not typically the most optimistic group after.
[laughter] right, but does the just the hardest working.
I appreciate it guys.
Yes, our.
Thank you. Our next question comes from line of massive delay with Barclays. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
I want to start with a question or Q1 gross margin guide.
For this kind of go through some of the sequential puts and takes a map I guess, what do you guys assuming around club or up cost.
So if there was any purchase accounting, but that's still rolling off thank you.
Oh, it's really just looking at kind of our core lot level gross margin and assuming all else remains equal so really no impact one way or another from warranty and litigation and or interest or property taxes now those can move the needle quarter to quarter, but they're really hard to project. So right now there are approximately 20.
1% would assume those are relatively the same range as they were in Q4, and then we're able to maintain you know a ed at flat and pricing environment or pricing environment that is increased at the same level as our cost. So that's what we saw this quarter and sequentially I'm actually sequentially, we founded.
Please note the kids are they continue to pull back on incentives, which we think we're through the most says I'm better revenues per square foot, we're at about 2% or stick and brick costs were at about 1%.
Okay. Thank you for that color Jessica and.
I wanted to ask about some of the regional focus while.
It looks like the south central really accelerated so no elaboration. If you guys are small eating into Texas again, you guys. It seemingly pulled back a bit there the past couple of quarters, and then I guess and any color on the wealth and California as well.
So I think looking thing second part of your question first you know, California in the West were seeing good sales friends out there we've got a refocused ourselves on maintaining affordability.
And at the price points were offering our teams out there doing a great job executing for those buyers and we're seeing the buyers respond.
Yes in Texas.
Its home, we've we've been dominating here for a long time and we'll continue to do so.
And those communities are performing exceptionally well great teams on those projects.
And the economy is strong here and you know the interest rate adjustments as David mentioned before helps affordability, but we've always always been focused on meeting that that affordable need in the state of Texas and we're seeing great response.
Yeah, I'll, just add that a lot of its positioning.
And I think coming into this year, we feel very good about the way will position.
And both really California, with the price that we've been able to drive down too.
And in Texas with a lots out in front of our own milling operation.
[noise] alright appreciate the color. Thank you.
Thank you. Our next question comes from line of Michael Rehaut with JP Morgan. Please proceed with your question.
[laughter] hi, Thanks, good morning, everyone.
First question I had was on you know how you're thinking about you know growth next year and what I mean by that obviously you gave the guidance a much appreciated and.
Inline with your prior expectations, but.
You know if you go back over the last 510 years, you know you've had a couple of different initiatives.
That I think I've really been extremely helpful and and and driving the growth in taking share you know around the horn and express in around the Emerald.
You know I think you've talked in the past about you know other strategic goals to two you know allow for a consistent growth going forward, including you know the freedom homes. The active adult you know, maybe even getting deeper in the east a footprint as areas of opportunity you know I was curious as you look over the next.
You know year or two how prominent those [noise].
Yeah, those areas of strategic focus will be or the role that it'll play and allowing you to continue that to retire heights you know obviously getting the 60000, you're you're up you know now consistently for the last three or four years, you're going up.
Four or five 6000 closings per year. So just curious you know as you look at the next year or two.
No. It's keeping the next you know ladders up of growth is that going to be more broad based you know just kind of market driven or do you see specific gains since some of those.
Strategic initiatives that you've talked about in the past.
Yeah I.
Like all the last couple Bill talked about.
Oh, the fact that we're only top five then.
Oh, yes, tough, but number one and 35 in 30 30 or 30 32 markets.
So so we've got a lot of a lot of the runway and those markets and as to the brand you know we're trying to drive.
Optionality for the for the buyers and to create a focus and.
Product.
The meat.
Everybody's needs in the market so.
Oh, I guess I feel like we've got a we've got all with all kinds of runway that get better end markets that were not.
Doing as good as we should be in.
And Oh.
Offer products that everybody's going to want to buy so we heard in addition to product positioning and our current footprint and deepening our market share in our current footprint. We have continued to expand where we operate and our market count this quarter actually near term 87 markets up to 90, and they said we continue to assess where there's good karma.
I'd say in jobs in areas that there isn't an affordable housing on the ground, which honestly is honest every market across an entire U.S. well, let's say continue to expand our footprint as well and then you did mention how the east of the Midwest It with our acquisitions a year ago in the Midwest, We're working with those teams and they are growing their platforms, there's opportunity for that to be.
Stronger contributor for growth for us going forward and then we've talked about the northeast and we continue to day by day improve our operations there and in our teams are working hard and we think that's going to going to be an increasing driver of our continued growth as well.
Oh, that's great I appreciate all the color there I guess secondly.
As you think about you know order growth or closings growth next year. You know this year you kind of move from.
No sales pace.
You know being you know maybe.
You know flattish or you know slightly up to flat and then this quarter. Excluding acquisitions. You had you know more about high single digit type of growth and that's consistent with a lot of the builders that have seen an improved.
You know market as well as an easier comp.
Yeah as you get into next year, a you know how should we expect the balance of community count.
And sales pace to influence a you know the overall you know unit volume growth.
And Mike after we cycled through this next quarter. It really that's when we acquired the three companies, we did and it really what has been putting our community count growth in that high single digit range. So without those acquisitions. We then trending in a pretty low single digit range, only <unk> percent or too I'm on a year over year basis, and I think we really.
Kind of anticipate more the saying in fiscal 20, so community count slightly up and it can be a little choppy along the way, but we are seeing as with our refocus on all affordability and ensuring that we're driving that it everywhere that we can we are seeing improved absorption per community and so with our guide of mid to high single digit growth on.
Community Count up low single digit we're assuming further improvement in per community sales base.
Right great very helpful. Thanks, a lot guys. Appreciate it good good luck for the <unk> for fiscal 2000.
You might like.
Thank you. Our next question comes from line of Megan Mcgrath with Buckingham Research Group. Please proceed with your question.
Thanks, Good morning.
I wanted to ask if you think this fiscal year 2019, we went through a lot of movements in interest rates, that's up and down and.
Picking back up a little bit.
That could you tell us that anything surprised you in terms of the reaction of your buyer group to those rate man.
Which had been degraded for awhile, what would happen and if rates continue to pick up is there anything you would do differently or just your strategy as we move forward.
Megan we saw the buyers every time that affordability is constrained the buyers have to readjust and there's certainly a pause in the marketplace and interest rates are a big driver of affordability at the same time that as Jessica mentioned earlier that gave us the real focus to get back.
Into our product and thinking about what we're offering and try to.
Bring.
Housing prices down for our customers at away that provided so provided a good margin for the company.
And we did that and we'll continue to adjust to the marketplace for whatever the interest rate environment gives us yeah. I do think one of the things that we are saying is that there's continued job growth in the economy and there's some continued wage growth and that's very helpful for households, and that large population that large demographic is aging one year further down in there.
Having life events that often drive them to to prefer single family housing as their their housing choice and we're well positioned to provide them with a whole to that.
Great. Thanks, and then just to follow up on gross margin and you talked about flattish from the fourth quarter could you maybe walk us through how you're thinking about the headwinds and tailwinds of the big component. That's gross margin as we look into next year generally labor materials.
And pricing.
It's really just more of the same Megan so what we're saying in that guide is that we don't have the same level to pull back on incentives is we did this year will pretty much have cycled through that the higher incentives that we had to institute last year at this time to drive a sale space and so we continue to have since been limited cost pressures and on the labor Frank.
It's consistently Ben you know somewhat of a headwind and that we've worked to offset in other categories and generally now that we've lost a cycle into higher lumber cost our material costs are our net neutral our purchasing team's doing a great job of when we do have a category that they cost is going up they find a category, where we can look to offset it so I think our base.
Base case would be just can be able to keep those costs in line with whatever type of pricing power or lack of pricing power. We might have as a reminder, that really that fiscal 20 gross margin is gonna be dependent on the strength of the spring selling season and said this is where we sit today, we feel good about maintaining our gross margin on <unk>.
Around the range. It is right now, but it's really going it'd be dependent on the strength.
As you know, we're focused first and foremost on returns and so we're going to balance margin pricing incentives and pace to generate the best return for community right now we see a good market in front of us and so that that would indicate we should be able to maintain margins.
Great. Thank you very much.
Thank you. Our next question comes on line of Jack Thank go without saying Gee. Please proceed with your question.
Hi, good morning.
Bill wanted to revisit the cash flow comment I think from maybe the first lead off question on the call you know billion for this year.
North of 1 billion next year.
The October issue very nice Rifai of the February 2020 coming due.
As anything around the cash flow guide contemplating the December 2020, I know, that's a 2% that's a pretty attractive yield it's going to be probably hard to beat that but.
This is any of that in the in the guide for cash flow for next year.
No that would be beyond our fiscal years. So we're kind of looking at that as a fiscal 2001 of that so naturally with the with the 2.5% five year notes. We issued in October that does essentially provide the funds to re Fi and pay off the a maturity that we have in the spring the 500 million, we haven't spring. So it gives us flexibility in our in our.
Liquidity as we go into the year or two to invest further or be able to be opportunistic as we need to.
Okay, Great and then.
On the chart communities.
You know can you can you maybe help us size.
What those gains obviously, it's a market transaction deal so not looking for ZIP code that maybe area code around.
To be games timing and then.
To be able to question.
Thoughts on single family rental you know there are some going that way in a among your peers someone said that's not really for US just curious as you're growing the rental business overall, where where your current thinking is on the single family side. Thanks.
So do you check communities. We mentioned, we do expect to sell another two projects in fiscal 2021 of which is under contract to sell as of September Thirtyth. So we would expect the first a project to close in our first fiscal quarter.
And then.
One more over the over the course of the year, a little hard to comment on individual transactions around the size of potential gains until they close.
But but our projects are ranging in size from deal to high 200 units up to 350 to 400 units in general and so they're in a fairly tight range in terms of size I would expect significant variations versus the the ones. We saw this past year.
And then in terms of single family rental we're continuing to look at that business, Jack we think it so.
We have an opportunity to provide some value in that space and we're looking to the best ways. We can do that right now.
All right. Thank you.
Thank you. Our next question comes from line as Mark Weintraub with Seaport Global. Please proceed with your question.
Thank you good morning, I I, certainly understand you with the strong backlog you've got a good visibility on next six months whatever margins et cetera.
I guess, that's a little surprised that when talking about our labor and materials, you wouldn't potentially be anticipating more pressure as we got to later into next year, given the order growth that we've been saying and given some of the inventory dynamics, which you know affected you.
This year, and probably industry as well, which would suggest there's gonna be more stress on the home building complex and so more more stress on labor in particular any further thoughts on how you are thinking about that and your ability to I'd be in a position because it sounded like it wasn't so much that you'd be raising prices, but she thought that those wouldn't be.
Material impacts to to your your year had.
So they are part of the part of the confidence we have looked at our cost outlook is looking a lot of a national contracts, we have from our scale.
Secondarily at a local level that scale, we have certainly supports great labor relationships that we've had over the years and our ability to continue to source adequate labor to build our homes.
On a timely fashion.
It is very constructive for us and you know there is.
Cost pressure because the market is strong we would also expect that there's potentially a lower level of incentives that would help us mitigate any of those.
Cost leakage that we had come through.
Well I'll just add that to you know we've worked very very hard over the years.
To drive a process that has allowed us to drive more square footage what the same labor hours.
And that that gives us a lot of comfort and confidence that Oh.
Labour does get tight again, which I I anticipate it will and this spring.
The the.
We're going to command the greatest.
The greatest percentage of it.
And maybe just as a follow on did do you think your local market scale acts as an even bigger advantage and that type of market, then and what we've been thinking and how does that play out it so.
Well, absolutely I think it's a local market scale I think it's also our commitment to drive.
Consistent production at each flag.
So you know, we'll get the trade base into the communities.
We are absorption in our typical community is very very high.
And so we keep on there and they're not at the looking.
Looking for work a wall.
They're waiting on a start houses. So it's just a process fits its oh, something we've been working on for a long long long time.
And I think we did have a although I will try basin.
Hi, good markets bad markets, I know, they're going to get paid so.
That that is a.
Competitive advantage for us.
Thank you.
Thank you. Our next question comes from line of tens on her with Keybanc capital markets. Please [noise].
Good morning, everybody.
Good morning.
All right second there.
[laughter] I know I know.
Let's start with intra quarter order closings. Please.
And are set of closings were intra quarter.
Order phrasing it.
It was right, where we typically expect it in a call. It 30, 536% range it fluctuates anywhere from 30% to 40% on average with whatever the seasonality sometimes.
Right. So if I do that calculation first what I believe was 34% last year what that shows is your closings.
We're up about 7% out your backlog, that's nice cadence, but really spiked in the spec homes.
Year over year. If you just look at it units I asked that odd to get an understanding of how the margins for your spec first backlog.
Our trending with a third of your.
[noise] closings being spec in an environment where pricing became.
Firmer, it's kinda talk about that a little bit.
We saw.
[noise] spec margins.
Compress four or get closer to backlog margin. So they came up relative to backlog margins that difference strong.
In the quarter.
<unk>.
And what would you attribute that to.
What you said is if it was a firmer pricing environment, a lower incentive environment and the our fiscal fourth quarter than it was saying the fiscal second quarter.
Uh huh.
Now the guidance you gave for revenue you talked about you know feeling good in October it's nice.
It seems like.
It seems like you guys it except for the first quarter.
You guys have really been kind of following what I would consider normal seasonal trends and then bill I think you said you expect pace to actually.
Increase in F White 20 with I'm mistaken.
We do we're expecting our community count to be up low single digit, but our overall pace to be up mid to high single digit yes.
Why is that.
What gives you that confidence is what I'm asking to expect.
No seasonality to accelerate on an order pace basis.
Nothing going on out here just just in general we would expect that on an annual basis as we've seen that you know as were.
Refocusing on providing attainable housing for people that were able to.
You know see communities perform at a higher sales per flag per week.
Nice.
Then then other communities I mean, so it's something that we've consistently.
For the past several years is that as these communities open we're positioning them with the right inventory to get going out of the gates wrong and run it very high absorption rates.
And I would agree with you can't we're not saying anything different than normal seasonality, though necessarily we do expect we can run a little bit tighter on our housing inventory in fiscal 20 than we did a nice team. We started we started strong and then as we adjusted our revenue expectations. We've kind of spent the you're adjusting to the alignment, but we thought were very well aligned.
Going into fiscal 20.
Yeah, I'll just add.
Our confidence level is really driven by what we're saying out in a failed.
You know we can we talk a lot about our people we talk a lot about trying to get better.
Year over year quarter over quarter day over they really.
And I'll, just say we are getting better.
So even though our absorption for flag has been very high through this whole cycle.
We are a better company today than we were your bill.
Better positioned.
And our people got another years experience.
[noise] understanding it.
Peers that way for your results can you talk about how you're trying to control youre.
Use your size vis-a-vis vendors.
And if you are seeing.
Whether it's a lumber appliances or its these types that other things you know, perhaps what you've learned over the last year at any changes that you're implementing for.
Why 20, thank you very much.
Yes, I think we're continuing to do what we have done with a lot of our national supply partners in that.
Getting a good relationship for us and for them, providing a lot of consistent volume demand and potential halo effect into a given marketplace by by bringing their product into the trade base.
There's some follow on benefit and we participate in that and they certainly benefit from it as well.
Thank you.
Thank you. Our next question comes from the line of Alex Barron with housing Research Center. Please proceed with your question.
Yeah. Thanks, I was curious whether you guys feel the growth in the overall industry is gonna be pretty much in line with the growth do you guys are guiding to.
Yes, Alex I would think we would continue to expect to take market share and as we'd like to say outperform the market.
A year in Europe .
Do better.
Okay. So.
Does that mean you expect your.
Affordable percentage of homes to I guess keep growing.
He may you may not see it from a pure brands perspective in our business that what we've been in or do you seen it really over the last years, though is more and more entry level type and houses in our Porton brand as well. So the answer is yes, but you may not see our express the percentage of that business climb from the mid Thirtys, where.
It is today.
Got it and then in your financial services segment.
You guys got pretty nice a leverage this quarter do you expect that to continue in 2020.
Yes, yes, we certainly have seen some and some improvement efficiencies or cost per loan is down a they've increased their their capturing which give provides efficiencies on overhead as well, but a large part of the expansion margin is due to very favorable market conditions as rates drop for this year. The service release premiums are very healthy.
And that sort of market and there is less competition from a because there's more revive business out there. So we wouldn't expect to sustain the same level of margins they should come down a bit but we are pleased with the.
Continued efficiencies who are we are building into that business and I'll just said our mortgage company did I.
Talk to her job this year.
Not only are driving efficiency through their process, but in aligning with our homebuilding operations to make the overall.
Transaction better for our customers.
Okay, and one last one if I may on the Forestar as you guys are now incurring interest due to the debt you raise is that going to be capitalized or is that going to be showing up in expenses. You know in your in what you guys report.
Yes, four stars there, they're active inventory is greater than their debt. So they are capitalizing 100% of their interest into into their inventory at forestar.
Okay. Thanks appreciate it best of luck.
Thank you.
Thank you ladies and gentlemen, our final question. This morning will come from the line Macdonald with RBC capital markets. Please proceed with your question.
Hi, This is actually Chris on for Mike. Thanks for squeezing me in here and my first questions. Just on the M&A are you embedding any M&A in your 2020 guidance and given the recent activity in this space could just gets an update how you're thinking about public versus private opportunities.
We are not embedding any M&A activity into our Oh, our growth guidance.
With regard to our outlook for M&A that for whats right for Horton.
Typically it's been the the private builders in the the add on builders that give us new capabilities new teams in various markets. So that's where we're continue to have our focused right now.
But we're always open in are always evaluating whatever is right gonna be right for us.
Got it thanks for that and secondly.
He will provide the percentage of communities that raised price this quarter and any regional color or commentary provide on pricing power you saw in Fourq you. Thanks.
So that communities live right price on isn't something we've we've typically disclose and we clearly still don't have broad based pricing power across the board, but I would say at this point, we've had an ability to pull back on incentives, which is a different function of price across most of our footprint at this point, maybe a little bit less so at the higher.
Our price points, and where incentives and remained elevated.
Got it thanks appreciate that.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. old for any final comments.
Thank you Melissa.
We appreciate everyone's time on a call today and look forward to talking to you again in January to share our first quarter results and to the D.R. Horton team.
Our escalations on finishing number one for the 18th consecutive year.
Our truly the best of the best and this industry.
Mike Bill, Jessica and I are honored and humbled to breakfast lunch on these calls thank you.
Thank you. This concludes todays teleconference. You may disconnect your lines at this time. Thank you for your participation.