Q1 2020 Earnings Call
Greetings and welcome to the first quarter 2020, <unk> earnings conference call for D.R. Horton America's builder, the largest builder in the United States at this time to spin certainly listen only mode of question answer session will follow the formal presentation.
If anyone should require operator assistant store the conference. Please press star zero under telephone keypad.
As a reminder, this conference is being recorded.
So my pleasure, it's to show host Jessica Hansen, Vice President Investor Relations for D.R. Horton. Please go ahead.
Thank you Kevin and good morning, welcome to our call to discuss our results for the first quarter fiscal 2020 before we get started today's call may include comments. The constitute forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
Although deal recently 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 deal work on the data This conference call.
And deal what it 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 is in a report on Form 10-K , which as filed with the Securities and Exchange Commission.
This morning's earnings release can be found on our website at Investor Day deal Wirtanen Dotcom and we plan to file our 10-Q in the next day or two.
After this call we will test updated investor and supplementary data presentations try Investor Relations site on the presentation section under news and events for your reference.
Well I will turn the call over to David Auld, our president and CEO .
Thank you Jessica and good morning.
Turning to Jessica I am pleased to be joined on this toll like Mike Morris, Our executive Vice President and Chief operating Officer, and Bill weight, Our executive Vice President and Chief Financial Officer [noise].
The D.R. Horton team started the year off strong our consolidated pretax income for the quarter increased 39 for something to $523 million on a 14% increase in revenue to $4 billion.
A pre tax profit margin improved 230 basis points, 13%.
And our net shareholders increased 19%.
Homebuilding, we've turned on inventory for the trailing 12 months ended December 31st was 18.7%.
And our consolidated return on equity for the same period was 18.2 person.
These results reflect the strength of our operational teams our ability to leverage the oldest scale across our broad geographic footprint and our product positioning to offer olmstead affordable price points across multiple brands.
We continue to see good demand and a limited supply homes at affordable prices across our markets well economic fundamentals and financing availability remains strong solid excuse me [noise].
Our strategic focus is to continue consolidating market share while growing our revenues and profits generating strong annual cash flows and returns and maintaining a flexible financial position.
Well the conservative balance sheet that includes an ample supply of homes lots and land to support growth, we're well positioned for the remainder of 2020 to 20 and future years, Mike diluted earnings per share for the first quarter fiscal 2014 increased 53% to $1.16 cents per share compared to 76.
Centsper share in the prior year quarter net income for the quarter increased 50% to $431 million compared to $287 million.
Our first quarter results included tax benefit of $32.9 billion related to federal energy efficient homes tax credits that were retroactively reinstated our consolidated pre tax income increased 39% to $523 billion in the first quarter at our homebuilding pre tax income increased 30% to 406.
She $2 million [noise].
Our first quarter home sales revenues increased 13% to $3.9 billion on 12959 homes closed up from $3.4 billion on 11500 homes closed in the prior year.
Our average closing price for the quarter was up 1% from last year to $298100 and the average size of our homes closed was down 2%, reflecting our ongoing efforts to keep our homes affordable Bill.
Net sales orders in the first quarter increased 19% 13126 homes and the value of those orders was $3.9 billion up 22% from 3.2 billion in the prior year.
Our significant sales price increase over the prior year quarter reflects the moderation in demand that occurred in late calendar 2018.
Our average number of active selling communities increased 6% from the prior year and was flat sequentially. Our average sales price on that sales orders in the first quarter was $300900 up 3% from the prior year.
Cancellation rate for the first quarter was 20% compared to 24% and the same quarter last year, Jessica our gross profit margin on home sales revenue in the first quarter was 21% flat sequentially from the September quarter up 100 basis points compared to the prior quarter and inline with our expectations.
Based on today's market conditions. We currently expect our home sales gross margin in the second quarter can be consistent with the first quarter subject to possible fluctuations due to product and geographic mix as well as the relative impact of warranty litigation and purchase accounting.
In the first quarter homebuilding SGN a expense as a percentage of revenues was 9.2% down 30 basis points from 9.5% in the prior year quarter.
We remain focused on controlling arrest DNA, while ensuring that our infrastructure adequately supports our growth like we ended the first quarter with 30200 homes inventory 18400 of our total homes were unsold of which 5600 work completed.
Our first quarter homebuilding investments in lot land and development totaled $1.3 billion of which $890 million was for purchases of light ended finished lot while $410 million was for land development, our underwriting criteria and operational expectations for new communities remained consistent at a minimum 20.
Percent annual pretax return on inventory and returned of our initial cash within 24 months David.
At December 31st our homebuilding lot position consisted of approximately 320000 lots of which 39% were owned and 61% or control to purchase contracts.
33% of our total owned lots are finished and at least 56% of our controlled lots are or will be finished when we purchased them.
We continue working to increase our lot position being developed by third parties by supporting the growth of four stars Nash National lot manufacturing platform and expanding our relationship with lot developers across the country. Our current lot portfolio includes an ample supply of loss 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 manufacture operating and 51 markets across 20 States at December 30, Onest Forestar is lot position consisted of 44500 lots of which 32200 our own in 12003.
Our controlled through purchase contracts, 80% of four stars owned lots are already under contract for D.R. Horton were subject to a writer first offer under the vast for supply agreement.
During the first quarter fiscal 2020, Forestar delivered 2422 lots of is on track to deliver 10000 lots in fiscal 2020, and generate $800 million to $850 million or revenue Forestar expects to deliver 12000 lots and Gerry 900 million to $1 billion of revenues in fiscal 2020.
These expectations are for Forestar Standalone results.
Forestar separately capitalize from D.R. Horton and is committed to maintaining a long term net debt to capital ratio of 40% or lower at December 30, Onest Forestar is net debt to capital ratio was 9.7%.
Forestar is approximately $720 million of liquidity to fund its continued growth, which includes $370 million about restricted cash and $350 million of available capacity on its revolving credit facility.
Forestar hosted their quarterly earnings call last Thursday, and has an updated presentation on their investor site at Investor that Forestar Dotcom that describes forestar is unique lot manufacturing model and a significant growth and value creation opportunity Jessica financial services pre tax income in the first quarter increased 29% to 30.5 million.
And the pre tax profit margin was 29.6% up from 27.7% in the prior year, 97% of our cup as our mortgage companies loan originations during the quarter related to homes closed buyer homebuilding operations and our mortgage company handled the financing for 65% of our homebuyers.
Hey, Jay and da lines accounting for 49% of the mortgage companies volume.
Originating loans with DHL mortgage this quarter had an average FICO score of 720, and an average loan to value ratio at 89%.
First time homebuyers represented 50% of the closings handled by our mortgage company, reflecting our continued focus on offering homes at affordable price points for entry level buyers David.
The Jack communities is our multifamily rental company focused on suburban garden style UPOP Hopper apartments with operations, primarily in Texas, Arizona and Florida.
During the quarter DHS community sold its third apartment project located in Phoenix for $61.5 million and recognize the gain on sale of $31.2 million.
Yeah, Jack communities has four projects under active construction and one project that was substantially complete at the end of the quarter.
DHL communities total assets worth $210 million at December 31st Bill.
Our balance capital approach focuses on being flexible opportunistic and discuss.
Our balance sheet strength in operating results are providing increased flexibility and we're utilizing our strong position to enhance long term value of the company.
During the first three months of fiscal 2020, our cash used in homebuilding operations was $178.4 million compared to $396.8 million in the prior year period.
At December 31, we had $2.6 billion of homebuilding liquidity, consisting of $1.2 billion of unrestricted homebuilding cash and $1.4 billion of available capacity on our homebuilding revolving credit facility.
Homebuilding leverage improved 370 basis points to 19.5%.
The balance of our homebuilding public notes outstanding at the end of the quarter was $2.4 billion and we have $500 million of senior notes maturing on February 15th, which we plan to repay utilizing cash on hand, and our revolving credit facility as necessary.
At December 30, Onest, our stockholders equity was $10.2 billion and book value per share was $27.92 up 14% from year ago.
During the quarter, we paid cash dividends of $664.6 million.
We also repurchased 3 million shares of common stock for $163.1 million, resulting in seven $732.6 million remaining on our stock repurchase authorization at December 31 2019.
Our outstanding share count was down 2% year over year, Jessica looking forward to the second quarter fiscal 2020, we expect to generate consolidated revenues in a range of $4.25 billion to $4.4 billion and to close approximately 13800 to 14300 homes.
We expect our home sales gross margin in the second quarter to be approximately 21% and homebuilding shannay in the second quarter to be around 9% as homebuilding revenues.
Based on today's market conditions, and our first quarter results. We now expect to generate consolidated revenues for the full year of $18.5 billion to $19.1 billion into close between 60060 1500 homes. We expect our income tax rate in the second third and fourth quarters to be between 23.
And 24%.
We still expect to generate cash flow from homebuilding operations in excess of $1 billion for the full fiscal year 2020, and we expect our outstanding share count to be down approximately 2% at the ended the year compared to the into fiscal 2019, David.
In closing our results reflect the strength of our well established operating platform across the country.
We are focused on consolidating marketshare, while growing our revenues and profits and generating headstrong annual cash flows and returns while maintaining a flexible financial position.
Our return on equity of 18.2% and our homebuilding return on inventory of 18.7%.
Great our consistent focus and efforts.
We are well positioned to continue this performance with our conservative balance sheet broad geographic footprint.
Portable product offerings across multiple brands attractive finished lot and land position and most importantly.
Outstanding experienced teams across the country.
Thank you to the entire D.R. Horton team for your focus and hard work.
Incredibly well positioned to continue growing and improving our operations. This concludes our prepared remarks, we will now those questions.
Thank you will now be conducting a question and answer session. We ask you. Please ask one question and one follow up then return to the Q. If you like to be placed in the question Q. Please press star one or telephone keypad.
Once again that is star ones be placing the question Q. We ask you. Please ask one question and one follow up the return to the Q.
Our first question today is coming from Carl Reichardt from BTG. Your line is now live.
Thanks, Good morning, everybody.
I wanted to ask Hey, I wanted to ask.
Something you guys often have talked about is the idea of getting your cash back out of your investments in land within two years.
And with some of your peers moving to some of the products and markets that you Sir.
Just curious as to your perspective, David on the on the land market in general for affordable homes, and your ability to continue to to run the model, where you're getting cash out in two years.
Well the cash out in two years is something we stayed with through this from the downturn on and I can tell you that that model has worked very well for us and I don't see that changing.
And as to the overall market for buying land again.
It comes back to the people we have embedded in these markets on relationships I have with the lands owners.
And we feel very good about our.
Opportunity replace what we're building through and through.
Through this process through this this market.
I've seen that happen over and over and over again so.
Great. Thanks, and then on similar lines.
With that looking like start you're going to pick up with with orders strong for lots of folks I'm curious as to your perspective on the labor market subs in particular, and what you're seeing in thinking about in terms of the potential for increases in cost. There. This year as these orders get built out thanks, so much.
I think there's always going to be that pressure on the cost side.
Definitely labor is getting tighter and continues to.
I think is going to restrict a lot of people's ability to deliver houses.
Again, it goes back to the kind of the.
Operating profile, we adopted and continue and that is.
Consistent starts throughout the community expanding the.
Labor base, the efficiency not necessarily just bodies and.
We feel very good about what we've accomplished we have a very loyal base.
I guess on Lascaux iterate you don't have to go chase for patients. So all of that combines to put us in a very position so.
Is it going to be a problem.
I think lesson for us and other people.
Great. Thanks, so much David.
Thank you. Our next question is coming from John Lovallo from Bank of America Merrill Lynch. Your line is alive.
Thank you for taking my questions as well first one on the order SP over a little bit over 300000 in the quarter that was up pretty nicely year over year and I know you mentioned that there's some normalization off of a challenging period last year, but just curious if I'm kind of break down that number is that kind of regional and product mix.
Driven or are you taking pricing on our like for like business.
Part of it is is regionally driven if you look at our orders this year and the south Central was down 2% in terms of just the next the overall next and that's actually our lowest ASP region.
So we continue to expect just not as sales price increases as we move throughout the year and enough to cover our cost increases, but on a like for like basis, you know nothing significant in a way of price.
Okay. That's helpful. And then just curious how you're thinking about the Forestar investment.
The plan is to kind of continue to dilute your stake through issuing equity at Forestar or are you now considering or any plans to potentially.
Sell down your your actual ownership position.
Yes, we're still on track with our plan there John to ultimately Deconsolidate Forestar. We were pleased when they were able to issue there first primary equity offering.
September which diluted our position down from the original 75% here in December we're sitting at 60, 65%, we would expect to additional equity issuances from Forestar overtime that could continue to dilute our position and then as we've also said all along there's the potential that we could sell some of our shares and at the point in time that.
We are ready to do that we will have a plan in place that will that will complement the primary equity issuance and.
And those two things together would.
Result in further dilution our ownership position.
Great. Thanks, very much guys.
Thank you. My next question is coming from Alan Ratner from Zelman <unk> Associates. Your line is now live.
Hey, guys. Good morning next quarter and thanks for taking my questions here.
The first one I think last quarter you guys commented just and when you thought about the full year. Your best guess at that point would be that gross margins would be kind of similar in that 21% range and obviously hit that this quarter and Twoq guide is similar as well so.
Just first off a is there any changing and thinking in terms of the progression in margins through the year, obviously very strong sales environment. So how should we think about as the your progress is what happens to margin.
I think we're going to see consistent margins into the second quarter, and then frankly as usual this time of the year. This spring selling season, we're really dictate where margins go in Q3 in Q4.
Early early returns on the spring selling season has been very positive. So we're confident and giving our guidance of consistent margins into Q2, but we're going after wait and see what happens next several weeks.
Right.
Hi, Good question you know if I look at your homes in inventory that spend at least on a year over year basis been trending lower for the last several quarters I think this quarter, you're down about 10% year over year, and obviously last year was elevated a bad because the sales. This herself environment, but are you seeing a greater component of sales coming from tube.
Bill two or have you changed here you know your thanks for your thought process at all in terms of the optimal.
Number of specs per community that would be translate into that type of of decline were seeing or where are you trying to ramp at higher rates the spring that gets underway.
Yes, a couple of things going on with that number Alan one the comparison to prior year were actually down 5%, we changed the way we report homes and inventory to exclude the model homes. So last year, we were at.
[noise], where we're very last year like a 31.
[noise] 31, a and so this year were at 30200, so were down slightly from last year and last year, maybe in a bit elevated with the softer sales and operating environment. We saw in the fourth calendar quarter of 18.
Another thing we've talked about is getting better at turning our housing inventory.
To drive a higher returns with those investment dollars.
And then we're also seeing the ability to push starts in as we're seeing demand come on.
We're not noticing any kind of a difference in the mix between to be builds versus our spec starts continuing you know probably an 80 20 consistent approach to that.
Got it okay. That's very helpful. Thanks, a lot.
Thank you. My next question is coming from Stephen Kim from Evercore ISI. Your line is alive.
Thanks, very much guys strong quarter. Thanks for all the in so first question I had for you is on the land spend.
The land and was fairly high relative to our expectations. This quarter I'm talking specifically on the acquisition number of 890.
And the percentage of rather that was probably the highest you've seen in six years.
And given your discipline and given.
Your outlook on the business and your intention to.
Basically get a return on that spend within 24 months.
It seems that there's a fair amount of optimism that Tim that's implied by that strong land spend. So I was wondering if you could talk a little bit more about maybe break that down for us at least qualitatively.
In terms of where it was that kind of a strong that strong land spend fairly equally distributed across the country, where there are certain opportunities that emerged and in particular region or a particular product type that.
Garnered.
Lions share of that just talk about the relatively strong land spend in greater detail.
Oh sure Steven.
As you know you study our land spend there is some lumpiness kind of from quarter to quarter and so one quarter just based on the timing of when deals close and when they get ready to go and based on our business plans there can be a bit of lumpiness. There one thing I would point out is that over half of our of our land acquisition spend is for finished lots and so we continue to two too.
Dedicated though a lot of our spend to finished lots, which turn very quickly.
And so I would really just attribute I wouldn't say there is necessarily any changes in our plans, but I would attribute a bit of this to little bit of the Lumpiness point out that finished lots or a heavy part of the of the spend but that we do we are optimistic we do see growth.
Certainly in fiscal 2000, and right now we still see a very good.
Underlying fundamentals for the business and so we're we're still actively replenishing our early in a lot supply and we have to replenish it at a faster rate as we continue to grow our sales in closings pay so you've seen our owned lot count remained relatively flat for quite some time. So it's really just a function of having to replenishing it faster rate.
Great.
Yeah. That's a that's helpful. Second question relates to the broader macro environment or rather the broader environment with respect to housing policy. We've seen some interesting moves here as of late.
We've seen.
The average.
Hi, guys a high LTV lending.
Curtail the rain back by the the FHLB say.
And yes, we've also heard the CFPB weigh in here and suggest you're going to move to enable our spread versus the BTI I was curious as to whether or not you have looked into this some of what we've heard is that the move to the IPO, our spread will actually be stimulative to ensure that.
Housing.
Top of the dropping rigs I would seem to be.
Extremely favorable for your business and I was curious if you had looked at that at all and if you have any view on whether or not these broader factors may be positive for your business the way it would appear to us.
Sure and a high level I think we'd agree with what you're saying that being said, it's super early and out there and it's not something that we've spent a lot of time on I'm sure a mortgage company would have a much more detailed response for you.
But anything you know that continues to improve mortgage standards and makes it easier for people to get into a house clearly I'm would be a benefit to our business that being said as David mentioned in his opening.
Financing availability is still good I mean people that should be buying houses are who are buying habits today, and we're not necessarily in favor of people with significantly high de T.I.s or really low credit scores being in the house, because we're very cognizant of what happened and last cycle and we don't want any repeat at that.
Thanks, a lot guys.
Thank you. Our next question is coming from Truman Patterson from Wells Fargo. Your line is now live.
Hi, Good morning, guys, let me just growing congrats on the good quarter as well.
So.
So your guidance is for you know mid to high single digit closing growth you bumped up the high end a little bit but is there anything structurally limiting you from going above the high end of that guidance, particularly on the land side I'm thinking availability of lots your ability to to get lots developed and that also includes you know municipality comes.
Strengths Dwayne community openings that might create any kind of gap outs.
Seven work, we're really excited about the way this year started up the first quarter in through the first several weeks of January .
And we have increased our guidance as a result of that.
Structurally it's it's a it's a question of other lots that are out in front of US we feel good about the community positioning we have getting some communities opened but right now we're not going to increase our guidance based on where we are today in the spring selling season, but we will certainly look to up to deliver all the homes. We can at the best returns we can do.
In fiscal Tony.
Okay. Okay. So to put another way, there's nothing structurally limiting you on the land side from going above that if the markets a bit healthier than what you you expect as of today.
There's there's a finite number of homes, we can build over the next eight and a half nine months and deliver by September Thirtyth.
But you know we're comfortable with our guidance range today, and we'll just have to see.
What the spring is going to give us and.
Where we end up in our inventory positioning in March and into April and May our guidance already incorporates a higher housing inventory turnover then what we did last year. So it reflects an improvement in terms that building building telling in closing more houses this year than last year, which is what we continue to be focused on is as efficiencies in the business, but that is what when.
Further upside in our current guidance.
Okay, Okay, and then sticking on on the land side.
Option lots jumped nicely.
This quarter you know as you all continue rotating towards more option land, how should we think about where that growth comes from is it.
Merely through Forestar is it more than even balance between Forestar in your third party developers and then any way you can put out a target over the next couple of years. What you think you can get bad optioned land bank as a percentage of total up to.
You know, we're not going to we're not going to set a hard target.
Internationally, we talk about goals, but.
Thats, an internal conversation and.
It's kind of a balanced program I think the Forestar platform.
Is it.
Again built out we're very happy with the progress we're making there.
But we're also equally focused on our third party developers and they are they are a part of the D.R. Horton family in.
That that pipeline continues to get better and bigger and.
So it's a collection of the of the to the Prime Minister's focus were.
We're treating capital as if it's I precious commodity in.
We're going to try to treat it better than anybody else in industry.
All right. Thank you.
Thank you. Your next question is coming from Matthew Breese. They from Barclays. Your line is now live.
Good morning. Thank you for taking my questions. So I wanted to ask on the CNS side since your guidance implies sort of flat percentage year over year. Although you are growing the top line and kind of managing that inventory positioning is any reason why we wouldn't see a bit more leverage and how should we think about that.
Beyond the next quarter. Thank you.
You know as if to the extent, we're delivering on our closings guidance and showing your mid high single digit growth and revenue, we do expect to see leverage on our on our SGN I an improvement year over year, we're very pleased with the 30 basis points. We saw in the first quarter based on what we see today in the volume we see in Q2, we do expect as DNA to be read.
Ultimately flat with last year in Q2 boat, but overall, we do expect some leverage for the year.
Okay appreciate that and then.
As you just mentioned a I believe to the prior question. Your your guidance for the Q2 closings does imply kind of a continued uptick on that conversion of your inventory positioning but you did also mentioned earlier that labor is kind of not surprisingly getting tighter. So can you speak a bit about that balance and what exactly are you.
Guys doing on the ground that that supports that improving efficiency. Thank you.
It gets back to that to me it gets back to relationships substrate base and.
For the last.
I don't know ever since the downturn, we've had a steady and consistent.
Level of production going in our communities.
So I have tried base has gotten better at building the houses.
And when they're not out they're chasing work or something.
We can build more houses are within what we what when I look at is the same labor.
Huh.
Same.
We feel more square footage was the same look.
With the same labor hours. Thank you.
So it's.
It's a process it's something we've worked on all the way through this cycle.
I think early on we felt like labor is going to be the constraint on housing.
And we have done I think I have a great job of managing the trade base and making sure that those guys were making money and we were still deliver analysis at a reasonable cost met the other thing we look at here and we watch sort of from a high level perspective is what our build times are doing and are we are.
Process, when we started a house do we get it.
Completed and then closed and we're not seeing those times elongate, which would be real more acute indicators are labor shortages in various markets. So the longstanding deep relationships, we have with lot of the labor suppliers combined with a more efficient.
Plans set if you will in our communities and focus on the the first time homebuyer and affordability has driven our ability to continue to turn houses a little bit better and we're going to see a lot of improvement and that metric this year.
Alright, Thank you for the color and congrats again on the quarter.
Thank you.
Thank you. My next question is coming from Michael Rehaut from Jpmorgan. Your line is not a lot.
Thanks, Good morning, everyone and again congrats on the quarter.
First question I had was on the or your outlook for the year for community count and sales pace.
I believe last quarter, you talked about and correct me, if I'm wrong, but a you'd expect community count average community count for the year to be up year over year low single digits. I was wondering if that's still the expectation I believe it's been flat sequentially more or less for last few quarters, but you know I guess the expectation where it.
The drip drift upward a little bit.
And then also on the sales pace he had a nice improvement year over year and I was just curious if that was more driven by market conditions or certain product or geographic mix shifts and how you think about the next quarter too.
Sure. So when we think about community count, Mike and if the hardest one for us to protect quite honestly, which is why we never give formal guidance on it I think our base cost would be that we would anticipate it to tick up at some point as we made throughout the year, but one that inflection point actually happens is it's hard to call exactly.
In terms of the sales paces as we mentioned in his script that does reflect the moderation in demand we signed late calendar 2018, and so we did have although we generally don't talk about comps. We did have a relatively easy comp when you look at that and what our guidance reflects for the year from a closings perspective would infer that are.
Sales and year over year increase is going to moderate from Q1, and it'll fluctuate Q2, Q3 Q4 in a range that supports that closings growth guidance that we've alluded to.
No that that's helpful. Thanks, Jessica for that I I guess secondly.
One bigger picture kind of maybe piggybacking off an earlier question of owned versus option.
Yeah, maybe set a different way you know your lot option percentage has HM. Obviously, we are huge amounts of progress impressive progress over the last few years now it's kind of been in that low sixtys type of range 60 to 60 162, maybe over the last.
Three or four quarters.
Yes that increase over the last few years has been a big big driver of your improved return profile.
Just trying to get a sense of over the next two or three years.
You know certainly we're you're not going to do the same type of.
Degree of of change on there are lot option profile.
So you have before maybe you'll crept up a little bit you know I do recall you guys talking about a 70% number perhaps but maybe now that's not that's concrete.
But you know how should we think about over the next two or three years. The next big lever of improvement in returns would it be more from a share repurchasing standpoint.
Or are there other levers that that perhaps were not thinking about.
Yeah, Mike as we expected to be just continued incremental improvement on all fronts. We do expect to continue to in our goal is to continue to push that option percentage upward, we're not going to set necessarily an upward target, but we do expect to incrementally improve that as forestar grows builds out its platform even further that's.
We need to be part of of that growth story as well as expanding relationships with our developers we've already alluded to on this call. We're expecting to turn our housing inventory faster this year and so that's going to be an incremental lever in terms of returns. This year and then as the as our operations are more push sufficient and generate more cash.
That gives us more flexibility on the capital allocation side and is over the last several years we have.
Instituted.
An increasing level of share repurchases and dividend payouts to shareholders, which has enhanced our OE and so as we continue to incrementally improve each year I think each one of those levers is going to allow us to continued eagle incremental improve both operational returns and returns to shareholders.
Great. Thanks, so much.
Okay. Thanks, Mike.
Your next question today's coming from Jack the CECO from inside your line is now live.
Hi, good morning.
I wanted to revisit the the pace question a little bit more.
The one Q here. This one is I think the probably the high watermark since the crisis on sales pace and I'm curious.
The guide sick would suggest that pace will continue to improve through through the year, maybe the slower clip but.
The improvement.
During past year over year with easy comps, but the improvement over the last four or five quarters is that all product segmentation or are you seeing lift across all your product types Im curious if theres any regional differential.
That could drive maybe incremental pace improvement through the latter half of this year maybe into next year.
I think we're seeing you're generally increased absorptions at our more affordable price points, whether that's the entire community or certain plans within more the traditional Horton braided communities.
We we are not heavily exposed to the to the luxury into the market. So we're not experiencing if there is any lift there or not lift going on there we can't speak to that very well, but across all of our geographies, we're feeling pretty good about the traffic pretty good about the demand.
In the most recent quarter in the quarters, leading up to it.
And then maybe.
Yes, the January trend the last couple of weeks would it be.
Consistent what we saw in the fiscal first or is that build sort of continuing in the most recent a couple of weeks.
I'd say, we've seen normal seasonality week to week as we progressed in in January .
Seems like historically people talked about a Super Bowl Sunday being that kick off to the spring selling season, and we've noticed the past few years that seems to be starting a little bit earlier and maybe it's because the cowboys no didn't make the playoffs people are buying houses sooner.
We're excited for the Cds and.
I think.
And the 40 Niners and yes.
[laughter] equal opportunity [laughter], just one more for me.
A couple of the job sites you've got.
It looks like you're trying to build a team on the single family rental side can you just refresh us on the strategy there in the thoughts owned versus build for for for others and how you're thinking about the business today.
Yes, we're currently thing about the business, we're still early stages on it and we're trying to ticketing and really understand the operations of the business and see where we add the most value to that process.
Today, it's probably more dipping our toe in the water on the own side, but but we're certainly looking at it hard and im not shut the door and any possibility today.
Alright, thanks, taking the questions.
Thank you Jay.
Our next question is coming from Ken Zener from Keybanc capital markets. Your line is ally.
Good morning, all.
Good morning, one again.
No.
Yes, Youre closing guidance I assume that was on higher intra quarter order closings can you confirm that and what was the percent offer intra quarter order closing and this morning, you versus last year.
You are correct that we did that and this quarter. It was 40% that we sold in close in the same quarter, which is slightly higher than we would typically do I don't know that I have Oh, you have last year last year was 37%.
Okay, and then related to that is there any shift in terms of I mean, that's where I would expect to see efficiency showing up so could you.
Talking about if there's anything that you're thinking about in regards to that increase in that percents and talk about the margin spread that you're are the trend that you guys had been seeing between the backlog closings on specifically the inter quarter closing units.
On the first part can I would say if it's pretty much in line with what we would expect especially with the number of completed specs that we have that allows us opportunity just selling clothes more homes within a quarter. So I would expect that trend to continue last year in the second quarter, we actually selling clothes, 45% homes in the same quarter sold and close.
If you look at the margin differential that stay relatively consistent and that there is a slight differential.
And a slightly lower margin on adds back then there is build jobs that being said really the only big differential is on our completed specs that had been completed an unsold for a period of multiple months. So the earlier, we sell it as this back the tighter that differential is and as a reminder, about 80% of what we call.
Other than a quarter started it is this back so when you see that 21% home sales margin. We reported this quarter, that's buying largest that gross margin.
Why is that.
Spec margin a bit lower.
First backlog, yeah, Theres price appreciation I mean, what is that I mean.
What is it that's moving is that you have to discount it that seems.
And consistent with order strength.
No. It's that we're underwriting to a return and as we turn our spec housing more quickly than then bill jobs were able to work for a slightly lower gross margin and get an equivalent return and in a bill job, you're actually going to lose the price appreciation. If you lock in before you start construction.
So we like selling more in real time in capturing that margin as we move along the way kicking a lot of our bill job sales are actually.
Sales of of homes that we had planned to start anyway. They were in the production planning process to start they just had not started yet but they were released to sale on the sales floor. Our average time in in backlog for a customer that's in a bell job is not terribly long because our homes generally we're building to affordable price point homes Bill.
Old.
Fairly efficiently and so the customers not sitting for a long period of time going through a large design selection process lengthy permitting process until we get to start a lot of these homes will be starting very soon after they signed a contract. So it's a very tight margin differential between just a traditional specs sale to the marketplace.
I appreciate that and if I could one last question did you guys called most of your permits in California to get ahead of the solar mandate. Thank you.
No I don't think so [laughter], where we're responding to the market out there and.
Certainly the solar mandate is going to increased cost but a.
Pulling a permit and building a house when there's not a market for.
If it's going to going to create a whole lot less.
Return, then then pay any additional costs so.
It's just kind of business issues for us out there and that's all our mandate was we've known about that for several years that we've had the ability to prepare and that's in our underwriting and we knew those costs are coming in as more and more homes are being dealt with solar our base case expectation as it does cost will come down.
Excellent. Thank you very much.
Thank you. Our next question is coming from book Corn from Raymond James Your line is alive.
Hey, Thanks, Good morning quick question.
So.
What color a percentage of communities that you were able to raise price on a same plan basis.
But we don't have that information in terms of fracking.
Across our neighborhoods, we really haven't powered our local operators to be looking to meet the market to drive return and that is certainly a function of pace in margin and they're looking to maximize that at every community every week every day frankly as looking at what that paces and that's nothing that we're managing centrally so we don't.
They had the ability to give you that color today, when we talk about a lot our revenues per square foot. That's a metric people and we've consistently report and we haven't given that yet today year over year, our revenue per square foot was up about 3% and our stick and brick costs were down about half a percent sequentially, our revenues per square foot and her stick and brick cost per square.
But were essentially flat.
Okay. That's helpful. It's great and switching over to just the multifamily investments I'm. Just curious if you could provide any potential quarterly timing of expected sales are closings or how do you think of potential gains on sale from the multifamily division either this year next year, how do you play.
And on growing that investment going forward.
Sure in terms of timing weeks, we expect to close a total of two projects in fiscal 2020, we closed our first one here in Q1, we did state of one of our communities is substantially complete and so on the process of stabilizing the the rental situation in marketing. It. So we would expect to close that one.
Later in fiscal 2020 don't have a specific quarter guide for you on that.
Then we do expect the investment level and DHL communities to grow.
This year, we expected to grow approximately 100% from the pointed at the start of the year over the course of this year as their pipeline is growing and their number of projects will will begin to grow more more more directly over the course of fiscal 2020, which will ultimately result in some future years delivering more than two a year, but does.
The lead time the pipeline.
On those deals is two to three years long. So so we're still a couple of years out from a significant increase of of volume of project sales and DHL communities.
Super helpful. Thank you.
Thank you. My next question today is coming from Jade Rahmani from KBW. Your line is now life.
Thank you with respect to single family rental and multifamily do you have any interest as a company have any interest in creating a permanent capital vehicle to hold those assets.
And my experience in the retail sector. The highest valuation is ascribed to continual recurring earnings rather than gain on sale type earnings were.
You know, it's unpredictable to the market just curious as to your thoughts on that.
Yes, I understand that Jade and that's something we're aware of that as well and that's one of the things that we're we're studying as we as we get further into this business. Our goals early on has had been to ensure that we have.
A strong efficient operating platform for beginning with multifamily and as we look at the single family rental space. We're looking to do the same thing there and as we get that established we then look to growing the platform and setting the capital base for it and so as as we look at the medium and longer term.
Plans for for saying the capital base for both of those businesses. That's certainly something that we will be can considering for the longer term.
Thanks, very much turning to financial leverage was wondering if the total debt to capital at slightly below 20% is in line with your long term target or you think theres potentially.
Improvement in that ratio in years to come.
Where we are today, we don't expect to to increase our leverage we expect to as we are generating cash and adding to our equity base that our leverage would would not increase from here and we could see further decreases.
Our stated maximum leverage is 35% or below.
But obviously, we've got a lot of headroom on on that today, but that does give us room that in certain certain scenarios. We we we would leave ourselves some room to to invest further and increased leverage but we don't we will see that in the short run.
Thanks very much.
Thank you. Our next question is coming from Rohit Seth from Suntrust. Your line is now why.
Hey, Thanks for taking my question can you give us an update on what's happening with the freedom brand any color on that buyer segment.
You know we continue to work on that that.
Product offering presentation and.
And a lifestyle or it's a it's something we're we're happy with.
I think it will be a larger and larger portion of our.
Deliveries in the in the future.
Its a.
It's it's a growing demographic and we think we can provide a product and.
Lifestyle that.
People are going to move into.
Is would you say are you expecting a rabbit not business in your in your annual guidance or is that Daniel guys more driven by a kinda Andrew bar.
It is still the entry level buyer driving driving the market.
The.
Freedom brand for US is part of our long term.
Meet the needs of as many buyers out there as we can.
And I think as a market moves it will.
Become a more and more important part of what we're doing.
Understood and then second question on your gross margin guidance, 21% can you break out the cost what gets there you know what's your labor.
Cost inflation expectation and material costs, and then land costs.
I'm really just more of the same so in a modest increases and I'd say labor has stayed in a low single digit percentage range now that we've kind of cycled through the lumber headwinds that we had and materials, we essentially what we'd expect to the net neutral we always have some categories where costs are going up but our purchasing teams do it.
Fantastic job, finding other categories and set to lower our cost an offset what other and whatever increases were not able.
Set to push back on and then land really has been kind of a a low to mid single digit percentage increase at least on a on a per square foot basis, and that really is not expected to change either I mean land land costs are coming down as home prices rise land costs typically follow so really just more of the same in.
20, as what we experienced in 19, if you take out in a late calendar 18, and incentive environment and the lumber costs and that we cycled through.
Okay understood and then what is the expectation for tariff the tariff impact or no impact or what.
We sell.
We've got price protection on most everything if there is a modest impact from any of the terrorists we've identified ways to offset that.
All right great. Thank you that's only have.
Thank you. Our next question is coming from Mark Weintraub from Seaport Research. Your line is now alive.
Thank you.
The you you'd mentioned the very positive early returns on spring selling season without largely just a reference to strong orders in January or was it other things that color that comment.
The primary thing or the order trends I mean, that's the first read we're getting on on what's coming through and they're coming in at a great to pace that we've expected and we're seeing good seasonal build week to week with it.
And you know anecdotally, we're not hearing about any any pushback or or pressure on pricing from the customer side of the marketplace today.
I kind of following up on that.
Obviously is just could you just mentioned to you have a fairly benign cost environment now if if things keyed up labor because go higher materials go higher et cetera.
Did you have a senses to what type of pricing power you might have in the current environment and really I recognize it's always the question of pace versus price, but I guess at some points in time, when you try and push price it could have a bigger impact that at other times and certainly we saw that in the last year or two do you think that we've created a bit more cushion.
And the environment so that.
There would be more leeway on price if up costs start to go up or do you think we haven't exited that environment.
Feel really good about the market conditions, we're seeing today in the buyers that are coming in and urgency to buy.
So I would say we have some cushion to work with in that but but again, we're not just looking at a margin number. It is a return number as you alluded to before the pace versus price and so driving the communities at the plan absorptions. We found drive the highest returns and then the activity that you get that coming out of.
By are seeing activity seeing momentum drives generally some pricing power in some margin expansion executing at the community level and that's that's really where our focus isn't as it's rolling up we've seen pretty consistent margins in the last couple of quarters, and we're looking at that and into next quarter.
We're optimistic about spring and Thats going to tell us where margins ultimately go for this year.
Okay, Great and one last one.
[laughter], where where are your thoughts on offsite manufacturing as a way to.
Potentially mitigate our improved the labor side of things and time.
So we have.
A lot of our homes today or.
Put together with the trusses refreshes that are manufactured off site others were doing wall penalisation.
In certain markets and it's something we continually evaluate to look at the most efficient from both a time and they cost perspective.
As to how to deliver the home at the best value to the buyer. So we're always evaluating it we haven't seen a sea change.
In the economics of that today, most of our homes are probably stick framed with trusses would be probably the broad generalization to say, but there are some markets, where we still build groups on site.
Great. Thank you.
Very very across the country.
Thank you. Our next question is coming from Jay Mccanless from Wedbush. Your line is now live.
Hey, good morning, just two questions.
On incentives.
He's doing its incentives now and Portland, what are you seeing from your competition.
Pretty stable environment, there I'll certainly on a year over year bases, our incentives are down significantly but over the last couple of quarters, then pretty stable, it's a normal environment, where there's usually some level of incentives related to closing costs.
And then community by community there could be some specific incentives, but but nothing out of the ordinary certainly in our business and really we're seeing a pretty rational environment across other builders as well not hearing anything of the ordinary I'd say the.
Market is good.
People are as Bill said.
Forming rationally.
The good down to be hold on.
My second question just talking about what your average lots per community is right now and are you expecting that to trend Oh, just to get the higher year over year unit closings you talked about my God.
It's slightly trended up here over the last couple of years, Jay as our absorptions has improved that does allow our underwriting to hit our standards and do slightly larger communities. So I would say that is incorporated a in what we're expecting for fiscal 20, but that's really just spend more of the same as what we've experienced each of the last few years most.
And we'll product types and larger communities allows us to drive more absorption. So I don't have our current average lot size or lot count.
Ross I would say per 100 5200 lots.
But obviously, we've got significant variation in that we've got communities that are 30 lots. We've got communities that are a thousand lives.
More options some more on yes, theres a big mix there.
Okay, great. Thanks for taking my questions.
Thank you. My next question is coming from Alex Paris from housing recent Central Your line is now live.
Yeah. Thanks, guys, Yeah, it's a great quarter.
For the year.
I guess I, just wanted to circle back little bit to there.
The guidance so the last two quarters orders have been.
Double digits.
Little bit off of that was maybe easier comps but.
I guess I'm just curious.
Just you guys just being conservative.
Certainly in this spring selling season, basically, giving that single digit or booked guidance well delivery guns.
[noise], so Alex and could not to be repetitive that really it is a function of and where we sit today. The number at houses we have the number of houses we had going into the year and we did have an much easier comp and this quarter and compared to only town or last year and when when the market was completely dead.
A friend of what it is and to remind everyone. We heavily incentivize into December and really into the spring to continue and the sales increases that we saw I think we were the only builder in calendar fourth Q.
As a team that had an up and quarter or sales were up about 3% and that really was just a function at how heavily incentivized in December to get there until October and November you can read into were very tough month and that led into and good comps this year and 19% up though I mean, it's a good market as as Mike.
Alluded to several times and we feel very good about the market today.
And that we sit here today, we haven't seen with spring selling season, we've got 5% fewer houses in the ground and still if we're able to push and get a few more starts in spring stronger than expected there'd be a little upside.
Actually back so we don't see a whole lot and we did already rain the higher end of our guidance.
500, Hound and on balance out we're looking at much stronger returns in fiscal 2020, because we're we're still seeing a good pace, even if the guidance level, we're seeing a good pace at better margins better returns and a better turn of our inventory this year as well. So we're very pleased with our positioning with a with a good market backdrop.
And with our plan for the year.
Got it and then you mentioned that the best returns come from linking sales pace pretty strong so.
We re doesn't necessarily to be that you're not seeking to push prices too much to not upset that strong sales pace.
It depends on the community Alex and it really just depends if we've got another community replacement community ready to go behind it we're going to most likely plus mark pace than we are price and because that's the best thing. We can do is continue to turn or inventory generate more revenue and profit initial her period of time, but if it's in a an area that can.
Okay, where we don't have a replacement community or for whatever reason that community is not replaceable and we're going to be more likely to push and price. So it's always a balance community by community.
Okay. Appreciate it thanks, and but less this year.
Thank you Alex.
Thank you we reach of our question and answer session, let's turn the floor back over to David for any further closing comments.
Thank you Kevin.
We should everybody's time on a call today and look forward to speaking to you again in April .
The D.R. Horton team outstanding first quarter.
Thank you for your focus and hard work and.
We've got a great year set up thus go delivered.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.