Q3 2020 D.R. Horton Inc Earnings Call
[music].
Good morning, and welcome to the third quarter 2020 already as 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. That's kind of watch require operator assistant store. The conference. Please press star zero under telephone keypad.
Sure that's recession will follow the formal presentation.
As a reminder, this conference is being reported its all my pleasure to trigger pull over to Jessica Hansen, Vice President Investor Relations for D.R. Horton Jessica. Please go ahead.
Thank you Kevin and good morning, welcome tripled to discuss our results for the third quarter fiscal 2020. In addition to current market conditions before we get started today's call may include comments constitute forward looking statements as defined by the private Securities Litigation Reform Act of 1990 shot although.
The overwritten believes 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 the over on the date of this conference call and there wasn't does not undertake any obligation to publicly update or revise any forward looking statement.
Additional information about issues that could lead to material changes in performance is contained in D.R. Horton <unk> annual report on form 10-K, and subsequent reports on form 10-Q, all of which are or will be filed with the Securities Exchange Commission.
This morning earnings release can be found on our website and then investor.
Got the over any dotcom and we plan to file our 10-Q and the next day or two.
After this call we will post updated investor and supplementary data presentation to our Investor Relations site on the presentation section under news and events for your reference now I will turn the call over to David All our president and CEO.
Thank you Jessica and good morning.
Hi, I'm pleased to be drawn to also be joined on this call by Mike Lawrie, Our executive Vice President and Chief operating Officer, and Bill weight, our executive Vice President and Chief Financial Officer.
We'd like to first again express my gratitude to our country dedicated field of healthcare workers.
All around the frontline Scary Park you better.
I thought remained with <unk>.
Pandemic.
Our already continues to be the health and safety of our employees customers trade partners and the communities we serve.
During the latter part of March impacts Golden 19, and related widespread reductions in economic activity across United States again negatively affect our best.
During April one restrictive stay at home orders were placed for most of our markets.
Orders decreased and our cancellations integrity.
At our April Nutshells older <unk>, 1% lower than a year ago.
However, as restrictive orders began to be lifted across many markets and economic activity resumed ourselves increased significantly and our cancellations ray returned to normal levels.
And both May and June our net.
Orders increased by more than 50 per cent compared the prior year periods.
Is it altogether net sales quarter increased 38% of course.
We sold 5931 more homes. This core then a same quarter last year well they shouldn't in D.R. Horton to achieve further gains in market share and scale.
We have continued to see strong increases and that sells waters in July.
Compared to the same on last year.
Despite the disruption from cobot 19 or operations the D.R. Horton team delivered a record third quarter, including net sales orders of 21519 homes.
25%, increasing consolidated pre tax income to $782 million and a 10% increase in revenues to $5.4 billion.
Pre tax profit margin for the core and break 170 basis points to 14.5%.
Well our E. B has increased 37 personnel to $1.72 cents per diluted share.
Our homebuilding return on inventory for the trailing 12 months ended June 30 was 21.6% and our consolidated return on equity for the same period was 19.9%.
[laughter] housing market conditions are very strong today.
Remain cautious as to the impact of coal, but 19.
On the overall economy at our operations in the future.
We believe our strong balance sheet liquidity position, an experienced operating teams position us very well to operate effectively through changing economic conditions.
We plan to maintain our flexible operational and financial position by generating strong cash flows from homebuilding operations and managing our product offerings incentives on pricing cells bison inventory levels to optimize return on our inventory investments in each of our communities based on local healthy market conditions.
Mike.
Diluted earnings per share for the third quarter fiscal 2020 increased 37% to $1.72 cents per share compared to $1.26 cents per share. The prior year core net income for the quarter increased 33% to $631 billion compared to 475 million.
The current quarter results included income tax benefit $38.1 billion relating to federal energy efficient home tax credits that were retroactively reinstated earlier in the year.
Our third quarter home sales revenues increased 10% to $5.2 billion on 17642 homes closed.
From $4.7 billion on 15971 homes closed in the prior year, our average closing price for the quarter was essentially flat with last year at $295200 and the average size of our homes closed was down 3%, reflecting our ongoing efforts to keep our homes affordable Bill.
Net sales orders in the third quarter increased 38%, so 21519 homes and the value of those orders were $6.3 billion up 35% from $4.7 billion in the prior year.
Our average number of active selling communities was essentially unchanged from both the prior year end sequentially.
Our average sales price on net sales orders in the third quarter was $294500 down 2% from the prior year, primarily due to a decline in the average sales price for our west region as more of the regions mix shifted to our entry level Express brand during the quarter.
The cancellation rate for the third quarter was 22% up from 20% in the prior year quarter.
Our net sales orders in both May and June increased by more than 50 per cent compared to the prior year periods.
We believe the increase in demand after April has been fueled by increased by urgency due to lower interest rates.
The limited supply of homes at affordable price points and to some extent pent up demand.
We were and remain well positioned for this increased demand with our affordable product offerings lots supply and housing inventories, particularly completed homes and those close to completion, Jessica our gross profit margin on home sales revenue in the third quarter was 21.6% up 30 basis points sequentially from them.
March quarter, and up 130 basis points compared to the prior year quarter, we remain focused on managing the pricing incentives and sales pace in each of our communities to optimize the return on our inventory investment and adjust to local market conditions and new heightened demand. We currently expect her home sales gross margin in the fourth.
Quarter to be similar to the third quarter. However, there is uncertainty regarding the future impacts of covered 19 on the economy, and new home demand, which could negatively impact our gross margins in the future Bill.
In the third quarter homebuilding SGN a expense as a percentage of revenues were 7.9% down 20 basis points from 8.1% in the prior year quarter.
Our homebuilding SGN expense as a percentage of revenues is at its lowest point in our history and we remain focused on controlling Irish DNA, while ensuring that our infrastructure appropriately supports our business Mike.
We ended the third quarter with 32800 homes in inventory 12700 of our total homes were unsold of which 2900 work completed. We also had 1900 model homes at the ended the quarter due to our significant increase in sales and they indicated the portion of our backlog that it's not.
Under construction is higher than normal and our number of completed unsold homes is lower than in recent years. As a result, we have accelerated our pace of home starts across most of our community to ensure we maintain adequate number of homes available for sale in each community to meet demand at June Thirtyth, our homebuilding lot position.
Consisted of approximately 335000 loss of which 34%.
And 66% were control do purchase contracts, 32% of our total and lots are finished and at least 52% of our controlled lots are or will be finished when we purchased them. Our current lot portfolio includes an ample supply of lots for home at affordable price points and continues to provide us a strong competitive position.
And David.
Our third quarter homebuilding investment and watch blended development totaled $1.1 billion of which $390 million finished lots.
We got an $80 million was for land development and $290 million Heartland.
$80 million, our land and lot purchases in the third quarter, where forestar.
After showing our lots and land and development investments in March and April we have sense increased our pace of investments to ensure we maintain an adequate number of finished lots for our home construction pace Bill.
For store, our major majority owned subsidiary as a publicly traded residential lot manufacturer operating and 51 markets across 22 states, our strategic relationship with Forestar as a well capitalized lots supplier.
Across much of our operating footprint is serving us well during this volatile time and is presenting opportunities for both companies to gain market share.
Forestar is delivering on its high growth expectations with revenue growth of more than 200% and net income growth of 80% fiscal year to date in 2020.
At June Thirtyth four stars lot position consisted of 50700 lots of which 38300 or owned and 12400 or controlled through purchase contracts.
77% Forestar his own lots are already under contract with your Horton or subject to a right of first offer under our master supply agreement.
Forestar is separately capitalize from D.R. Horton and has approximately $700 million of liquidity, which includes $350 million of unrestricted cash and $350 million of available capacity on its revolving credit facility.
At June Thirtyth four stars net debt to capital ratio was 25.2% and their next senior note maturity is in 2024.
With low leverage ample liquidity and its relationship with D.R. Horton Forestar is in a very strong position to navigate through changing economic conditions and continue to grow their business Jessica financial services pre tax income in the third quarter was $68.8 million with a pretax profit margin of 43.9%.
Compared to $48.1 million in 40.2% in the prior quarter.
Bite disruption in the secondary mortgage markets in March and April caused by covered 19, and the uncertainty that impacted the cures Act. Our mortgage company is continued selling the mortgages. It originates at strong net gains.
We began retaining servicing rights on some of our FHLB and V.A. loan originations during the third quarter due to disruptions among mortgage Servicers and we will continue to monitor developments in the mortgage markets and adjust our operations to adapt to changes in market condition.
For the quarter, 97% of our mortgage companies loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 71% of our homebuyers.
I think Jay and did you learn accounted for 53% of the mortgage companies volume.
Borrowers originating loans with D.J. mortgage this quarter had an average FICO score of 718 and average loan to value ratio of 91%.
First time homebuyers represented 57% of the closings handled by our mortgage company, reflecting our continued focus on offering homes at affordable price point Mike.
Yes, Hi communities is our multifamily rental company focused on suburban garden style apartments that had four projects under active construction and one project that was substantially complete ended the quarter after selling two projects earlier this fiscal year no. Other projects were scheduled to be marketed and sold during our third or fourth quarter.
For fiscal 2020.
We expect to market and so a couple of projects in fiscal 2021 based on our current pace of construction and leasing activity. After pausing construction starts and new acquisitions by DHL communities in March April and May we began selectively resuming plans for new projects in June and we still plan to grow the DHL community.
These platform.
Hi communities assets totaled $225 million at June Thirtyth.
We also continue to evaluate opportunities in the market for single family rental homes. We are currently building and leasing pounds in nine single family rental communities across our operations as we are in the early stages of our participation in this growing segment of the housing market Bill.
Our balance capital approach focuses on being disciplined flexible and opportunistic our strong balance sheet ample liquidity and low leverage provide us with significant financial flexibility to effectively operate and changing economic conditions and we plan to maintain our disciplined approach to investing capital to enhance the long term value of our company.
During the nine months ended June our cash provided by homebuilding operations was $1.2 billion compared to $606 million in the prior year period.
At June Thirtyth, we had $3.7 billion of homebuilding liquidity, consisting of $1.9 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our homebuilding revolving credit facilities.
Our homebuilding leverage was 18.4% at the end of June was $2.4 billion of homebuilding public notes outstanding and $400 million of senior note maturities in the next 12 months.
At June Thirtyth, our stockholders equity was $11 billion and book value per share was $30.38 up 16% from year ago.
For the trailing 12 months into June our return on equity was 19.9% compared to 17.3% a year ago.
During the quarter, we paid cash dividends $64 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in August we did not repurchase any shares during the third quarter and we expect to cautiously manager level of share repurchases in the near term to maintain financial flexibility until we have better visibility to future.
Dishes and are expected operating results.
Our outstanding share count is down 2% from a year ago and we currently have an outstanding share repurchase authorization of $535 million Cesca as we noted last quarter due to the uncertainty in the U.S. economy, and our business operations from the 19th we would you our guidance for fiscal 2020 based on today's market.
Additionally, we are now providing our expectations for the fourth quarter fiscal 2020.
In the fourth quarter, we expect to generate consolidated revenues in a range of $5.5 billion to $5.8 billion into close approximately 18000 to 19000 homes.
We expect our home sales gross margin in the fourth quarter to be similar to the third quarter in the mid 21% range and homebuilding SDMA in the fourth quarter to be 8% to 8.2% as homebuilding revenue.
We anticipate a financial services pretax profit margin in the fourth quarter of approximately 40% and we expect our income tax rate to be approximately 23%.
We plan to provide annual guidance for fiscal 2021, when we have sufficient visibility into market conditions hopefully on our next earnings call in early November David.
In closing our results reflect the strength of our experienced operational teams industry, leading market share broad geographic footprint and the first product offerings across multiple brands.
Strong balance sheet ample liquidity had low leverage provide us with significant financial flexibility to effectively operate and changing economic conditions and we plan to maintain our disciplined approach to investing capital to enhance the long term value of our company.
Thank you to the entire D.R. Horton team for your focus and hard work.
Your efforts during this time have been remarkable.
We are proud of your work ethic and your process positive spirit has you safely continue helping our customers calls on their much anticipated new homes. This concludes our prepared remarks, we'll now I'll ask questions.
Thank you will not be conducting your question and answer session, if you'd like to be placing the question can you. Please press star one under telephone keypad, a confirmation tone will indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset before.
I think star one one moment, please what we pull for questions.
First question today is coming from Alan Ratner from Zelman <unk> Associates. Your line is now live.
Hey, good morning, guys, congrats on a great quarter and glad to hear everyone's doing well.
First question on the spec inventory supply you're not surprisingly came down quite a bit just given the dynamics in the quarter and how strong demand was there and.
Yeah, you mentioned, obviously, a greater percentage of your backlog right now is not yet started which makes a lot of sense I'm. Just curious as you ramp your start activity here and I'm sure. Other builders are doing the same to not only build out your your existing backlog, but replaced the spec inventory, presumably what are you seeing on the labor side as far as Ah you any tightness.
There are any inflation, that's starting to build out because it seems like there's a pretty healthy ramp and starts coming.
Labor has been a challenge throughout this entire.
Market cycle so.
We we focused our early on.
No driving efficiency through the operation partnering with our labor trades.
And have seen the benefit of that all the way through this cycle.
Yes.
No reality, yes.
[noise] has nothing Mike would tell you the.
Well cycles continue to be very very stable.
I just.
A process of how we build and how we treat our trade.
It's has proven to be very effective and matching the situation.
Got it okay that that's a that's helpful.
Second question you know says you start to think about 21 here yeah. The sustainability of this demand is certainly a big question at this point to.
In the last several years, you've done a handful of of M&A transactions on the private side and I'm curious I know you mentioned buyback potential buyback activity. How are you thinking about M&A right here given given the climate and what are you seeing as far as the pipeline is concerned.
Good morning, Alan we we continue to evaluate different opportunities and it's still comes down to where we can add.
Add to the long term value the company, where we can add.
Product and.
New customer base to serve but more importantly people that are accretive to the to the operating teams. So we continue to talk with several private builders were were more inclined to look at.
The tuck ins that we have done either adding to existing markets or opening up new markets for us, but but you won't see is probably do any massive public.
Acquisitions, but I do think we will continue to evaluate the smaller private.
Have you seen any changes in the privates willingness to sell just given kind of the uncertainty in the climate today or has this bounce back in activity, perhaps emboldened them a little bit to remain.
Yeah and independent company.
I would say, it's both its and its going to vary based upon the situation of a particular private builder as to whether there.
I'm thinking it's still a good place to be or if it's time for them to.
To do something different and to join a bigger operation.
Understood. Okay, guys. Thanks, a lot good luck.
Well I will add that.
We don't.
We're not in a position where we need to go ahead and if it really does have to be a Greg Smith.
And then.
At this point they would have to want to join our family.
And and it's not going to be a.
A stretch.
Kind of a win win for them at us.
Thank you. My next question is coming from Stephen Kim from Evercore ISI. Your line is allied.
Thanks, very much guys, yeah, I wanted to follow up on the cycle time and spot question that Alan just asked so you mentioned cycle times are very stable, that's obviously extremely encouraging.
And example, every I would say but.
We have seen your specs are down and obviously demand asserts significant so I guess the bottom line question for me is would you like to increase your spec levels from where they are today and are you able to do so in an environment where demand is as strong as it has been.
You asked to do first question, yes, Stephen we would like to to increase our spec levels. Today, we have an aggressive starts plan to to increase our specs at the same time, we'll be starting our sold homes.
And so is it is a big plan to start houses, but as David mentioned before we've been focusing early on on the efficiency in the product and the operational focus.
And partnering with our trades and being sure that they're capable of supporting the growth that we haven't froze.
So we do think we'll be able to increase our spec inventory, but it's not going to be without a lot of effort I can promise you that.
Well I'll focus right now is on.
Driving a consistent sustainable Star program week to week project by project.
As we continued to execute.
I think our spec count so I'll come back.
What we historically have carried.
Yeah, that's great very encouraging here and obviously, we would we booked horton into a to take on those challenges as.
Oh I wanted to ask a second question about pricing and the pricing environment. It would it seems obviously that express remains extremely strong I'm curious if youre seeing increased interest in freedom.
And the the traditional D.R. Horton business more recently.
And whether that allows per for a little bit more pricing flexibility, perhaps than we had seen in the past, particularly the D.R. Horton semi custom business.
And and a second half of that question is whether or not you're seeing the mix of local demand versus out of state demand.
Driving what do you saw in May and June and is there a difference in your ability to price.
Of course price for when you're selling to a local versus out of state.
I would say asked to the branding.
We are saying uptick in demand for both freedom and the D.R. Horton brand.
As to the state.
Question, Howard I would say.
We're seeing increasing demand from both.
Hi profiles.
The relocation.
Well down to a more affordable tax friendly.
Hi environment continues and I think Goldman maybe has even accelerating.
And you don't pricing is something we track week to week.
Based upon demand at each individual flag and.
Yeah.
Always consider pricing and are not aside.
You want to.
You never want to be in a position where you push pricing. So hard that you have to come back and I just came back down.
You always want people.
Do you feel like if they buy today, they will save a little bit money, they'll say body versus buying six months or your from now so.
Fortunately our company the entire structure and mentality.
No those decisions are made.
And the individual communities and divisions and the people that are closest to the market actually.
We feel like for like a better decision then we can make up here.
Right now that's that's very helpful. Thanks, a lot there.
Thank you. My next question today is coming from John Lovallo from Bank of America. Your line is alive.
Hey, guys. Thank you for taking my questions are the for the first one on you know me in June at 50% year over year ordered Burke Super clearly very encouraging just you know I know you said July was strong David just curious if you could help us frame that.
In any way how strong it wasn't a year over year basis.
It's consistent with what we saw my Andrea.
Okay. That's.
It appears to have really yes.
Hi.
Somebody who are people in our positioning out there, but it's.
It's a very very very good market right now.
Okay, No that's really encouraging.
With that in mind.
Overall tone you know maybe can be seen is just slightly more cautious that some of your peers, which is I think consistent with how you guys have always sort of run the business and then I think it's prudent but just curious is this really conservatism just given unemployment co bid and things that could happen or are you seeing any signs anywhere.
Any slowing and he is in traffic or whatever it might be.
No signs of slowing.
It's just a lot of uncertainty out there.
That is completely outside of our control.
If you.
If you just look at long term trends in the industry demographics warehouse supply is versus where the future demand is going to be.
Our our should be even today.
You got a feel very very good about long term, but in this industry and that you saw.
What happened in the March completely.
You know from nowhere so.
Yeah.
I do think we'll have a lot more visibility as we get into the November.
Remember top her next year.
Ultimately what can we can.
Reinstating the guidance numbers.
We can then around here.
Thank you.
We're always we're always going to become sir.
You got bill wafer, a CFO you're going to have conservative.
[laughter] thanks, guys.
Thank you. My next question is coming from Carl Reichardt for B T. G. Your line is not a lot.
Thanks wanted right.
I'm going to back that Alan and Steves question about stack and the amount of unsold you haven't and maybe Mike or David is that if you look at your backlog or sold backlog or are you closer to completion with that then you would typically be at this time of year.
And of your unsold spec are you closer to finishing that than you normally would be this time of year.
So I would say that we are we're generally going to be inline with the started sold homes are across the range of production.
Largely this time of year delivering into the fourth quarter.
And similar with the specs were probably maybe a little bit less.
Finished with the specs because of the strong sales demand that we've had they've moved to the sole category and we have been sort of set to close if you will sold to close in the in the September quarter.
So we feel feel really good about the ability to deliver the fourth quarter and the starch plan that we have out and the building permits were able to accumulate we feel good about being able to reload the inventory and bring us back to sustainable inventory levels, we need to support the demand.
Okay. Thanks, Mike obviously, it did the function of the vagaries of this market so.
Just trying to understand the math and then the bigger picture question in your release and on the call you talked about low rates motivating folks and maybe some pent up demand and talk about this idea of the urbanization or de Densification.
Driving demand and I'm curious if if that's something you think you've seen and if you have some sort of sense from the field or or or math that tells you that you're seeing more and more folks come from urban areas to purchase homes.
In suburbs are or exercise and I'd just like your observations on that thanks, a bunch folks.
I think well this is David I think.
That's a trend that was in place before the Calvin.
Hey program, but I think it's.
Really tied towards the millennial being more conservative discipline buyer homes.
This generation soon.
Hi, Thanks.
Forming households.
Later, having children later.
And I think this.
Pandemic has accelerated the trend.
And Uh huh.
Andy Cohen.
[music].
And if demand or pull forward demand or there's just a whole lot of people out there that I think I got to be looking for housing over the next five plus years.
Carl I think what you're referring to is longer term trend I think is continuing as I think certainly pandemics had it had an effect on it.
We would generally agree to that as a trend that probably is accelerating right now, but it's still too early to know the depth of that and the sustainability of it. So so we will try to just comment on what we what we see in front of US and then we'll we'll live into the rest and build a comment on the on the depth of that as time marches on.
Thanks, Congrats guys.
Thank you.
Thank you. My next question is coming from Eric Bosshard from Cleveland Research. Your line is that a lot.
Ah.
And Sir.
But what I'm curious it sure yeah. Good morning, I curious in terms of.
What your plans are in terms of price and incentive I know you had talked previously a quarter ago about sustaining incentives but.
Scene, where orders are your inventory appears healthy what what does the strategy in terms of.
Price in incentive in total and then secondly, if you could just drill a little bit more into California, specifically on that question as well.
So broadly on the pricing incentives as David mentioned before it's a very local decision that's made.
I can tell you that we did see very strong sales demand and so the level of incentives we were offering on sales later in the quarter were much lower than where we open the quarter with.
So we did see firming.
Pricing trends firming.
Incentives and enter but but to to see where that's going to go we're going to meet the market and right now we feel really strong about the sales trends that we're seeing.
Without needing to do heavy incentives.
Every day every year weren't community there is some level of incentives.
And and potential pricing adjustments to meet the market, whether that's up or down and we do see.
Tremendous value created with the urgency for buyers buy as David mentioned before feeling I could save a little bit of money if they.
At today, rather than wait for a few more weeks.
Asked to California worsening stability.
And consistency out there today.
We have.
Reset our our product that positioning out there to the entry level.
Pretty much everywhere, we can and a sense.
Yes, it's driving better returns today than it has in the last four five years.
Great and then just one follow up if I could in terms of land acquisition.
As demand has improved broadly and it appears that.
Builders broadly are more active an aggressive and buying land anything you're seeing different in terms of the competitive environment for securing land.
Or any impact that's having on the cost of securing land.
[noise] you know land prices are going to go up as as the absorptions continue to move up so.
Our focus has been and we'll continue to be.
Relationships.
Developers.
The fact that our operating the operational.
Teams in these markets have been there alone.
I have great relationships with lamps hours I think gives us an advantage and our ability to close gives us an advantage.
Our absorptions for flag.
If you're developing locks.
You want to you want to be selling to somebody who is going to drive very high absorptions.
So it's.
Yeah, I do believe we have a competitive advantage.
People and capital.
And just operational efficiency so.
I can tell you right now weren't we're saying a lot of sales.
Coleman.
Scare I think.
Really created opportunities for US you opened relationships from sellers that had been.
Primarily selling through other other competitors.
Very good about our land position today.
And the things we put in place to sustain that overtime.
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Our next question is from Michael Rehaut of JP Morgan. Please proceed with your question.
Hi, Thanks, good morning, everyone and congrats on the results.
First question I I didn't catch and apologies if you had mentioned that.
What your average community count did this quarter I.
Sequentially or on a year over year basis.
And you know, obviously with the incredible and a string and sell through right now.
If you can give us any sense of higher thinking you know for Q might trend.
At least in the near term.
Sure Mike our community Count was flat both sequentially and year over year and as you can imagine with our very strong sales pace.
We might not be in a in a position to see community count growth in Q4, I will probably stay closer to flat maybe slightly down.
No we have the lot position to continue to deliver homes and communities going forward. So we feel very confident and our ability to continue to drive absorptions and ultimately has continued to count growth. It may just be pushed a little bit further out later next year.
Okay.
Also with I was just kind of curious about kind of on this topic, you know with Forestar, giving out guidance of your midpoint of about 11000 lots deliveries for next year and believe that was a little bit below their prior guidance pre co bid and.
Understanding and obviously there was a disruption perhaps in some of the development activities for for a month or two at the same time you guys were looking at very very strong results are currently and you know into July.
I was just get a sense for maybe how that reconciles you know forestar, maybe looking at a bit less of a delivery year than originally planned. Despite you know demand coming back.
Really strong for you.
Hi, how are those two kind of back patterns.
A work against each other because I would've thought perhaps you know and maybe it's just more of a timing issue, but a thousand lots is not immaterial. So just trying to get a sense of how to reconcile those two data points.
Hi, Mike It it is primarily timing it's July of 2020 and.
Forestar was reestablishing just preliminary.
Delivery guidance for fiscal 2001.
At a time in which they are largest company the largest customers not providing 2021 guidance. So it's just early felt like it was important for forestar to reestablish or at least a baseline expectation for their top line growth next year given that they are truly a growth story and the revenues have been up over 200%. This year, but it is a bit conservative we hope.
And as we live over the next few months and as and as do your Horton gets the sufficient visibility to provide guidance for fiscal 2021.
Our hope would be if they certainly have demand can trends continue as they are right now the strength continues in the industry I would expect the forestar would ultimately be able to two to exceed that and increase their guidance overtime.
So it really timing.
Right right one more quick one if I could.
I guess, we're using another one in on the gross margins, obviously, a lot of strength there and.
You know you mentioned that you're getting some pricing power back, obviously, which which makes sense.
Is there and I know, you're not giving you know fiscal 21 guidance at this point, but just conceptually perhaps.
If you're looking at your your gross margins in backlog currently in you know what you're seeing on the ground you know in terms of just.
You know achieving some incremental pricing you know achieving some incremental scale et cetera.
For any reason to think that you wouldn't be able to the hit like the 22% gross margin next year with all those factors just given the momentum you have right now again, just trying to think conceptually you know, obviously I know you're not giving guidance right now but.
Just along those lines if you have any thoughts.
Conceptually, we would love a 22% gross margin, but looking forward, we could see that there could be some headwind coming at us from from lumber later into the fourth quarter and into ended early 22.
Early 21, excuse me I'm getting confused my years.
And we did have a backdrop right now of the strong demand environment, and some pricing power and really part inside it. So we have some positive tailwinds that we also some headwind and there is still a broader.
Outlook that we're looking at here, what's going to happen in the economy and how the pandemic progresses through the fall and into the winter next year. So so we feel very good about being consistent with our although margins to drive the right pace that ultimately for US is looking to drive the right.
And that's what are ultimately looking at every community we maximize the returns we've dealt with beverage.
Yes, I can provide.
I apologize for the background noise on the line I'm not sure where that's coming from.
[music].
Okay.
And in terms of our overall companywide ROI, Mike I'm worried at 21.6%, which I think it's probably a record return on inventory that we generated that delivering you know an honest 20% return on equity as well. So we'll continue to balance that pace in prices as Mike mentioned, a to maximize returns for both.
I'm sorry in equity.
Yes.
[noise], Mike grew up to now go ahead, if he said something sorry.
Yes, Thanks, a lot I appreciate it.
Our next question say, it's coming from Matthew but they from Barclays. Your line is not a lot.
Yeah. Good morning, Thanks for taking the questions if everyone's doing well.
I wanted to stick with the gross margin side I guess, specifically just given some of the underlying pricing strength in the market, how our spec margins comparing burst to be belt today, and and going forward. When you. When you have this decline in available spec here and in particularly finished.
Back how should we think about what that the implication to gross margins would be as a result of that thank you.
[noise] certainly in a strong demand environment, where we've been selling a lot of completed specs the gap between margins between specs and build to order is narrower than normal, but still typically we do still see higher gross margins on a on a build to order versus a spike, but today that gap slope little tighter than usual.
Okay understood and then just secondly, and apologies if I Miss this but bill if you could speak a little bit about the share repurchase plans and sort of what it will take you know to south.
It's a kind of foster a re accelerating that thank you.
Sure. There you know there's a lot of moving pieces right now we went through a very volatile quarter in terms of demand in terms of what we had doing our operations and the adjustments we've made there and and still going forward. It's in our forward visibility we're seeing.
Extremely strong demand.
We've seen a sell through of our of our spec inventory. So we're actively reaccelerating our specs now so first and foremost we're focused on our business and what we what we feel like we need to reinvest to to keep our spec inventory at the level, we'd like and keep our lot inventory replenished.
So until we get a.
Better sense of what that need is in the core business. Then we'll adjust our then we'll put our plans in place for for share repurchase over the next few months will be sitting down with all of our operators across the company and putting in place our business plans for fiscal 2001.
As we get that set.
And then that will that will help further define and give us better clarity on what we'll do in terms of our our share repurchase. So our statement is we're going to cautiously manage our share repurchase.
And we still have an authorization in place and we'll we'll update those plans accordingly, as we get better visibility our business.
Great. Thanks for the color.
Thank you next question today is coming from Truman Patterson from Wells Fargo. Your line is that a lot.
Hi, good morning, everyone, a nice quarter.
So just a <unk>.
I don't think you know anybody's really expecting you to run it 50% plus order growth.
Forever, just given the supply side constraints. You know are you all really focused on thinking your next quarter or to pushing price a little bit harder to kinda curb.
These absorptions or are you pretty comfortable at this pace I'm in running at these absorptions you know given you know your community count in lockout, and everything just trying to understand which lever you're really trying to to lean on a bit more going forward.
Yeah right now we're very comfortable there are lot position going out into 21.
Uh huh.
We have seen.
Significant and.
Competitive advantage.
Result.
From.
Continued consolidation at market share gains.
There there is.
Yes, what we focus on entirely as a.
Consistent sustainable.
Operations.
And.
Very good about our pace right now.
Mark to market is certainly there.
Huh.
And.
Yeah.
So the pricing side.
Short term.
Pricing price increases actually increased demand sometime so.
Yes, yes, and art it's it's.
And we leave those decisions to local markets. So like Bill said.
Over the next 30 days, we'll be putting together an operating plan for up 21, finalizing I guess, we've had one far sometime but.
Finalizing and.
That will drive a lot more visibility.
Well station for 21, and then 22 and then 23.
Okay. Thanks for that it sounds like a your lot positions, maybe bucking some of the industry trends recently, if I look at your fourth quarter implied backlog conversion rate it looks like it falls to about 80% I'm you know the lowest level and I don't know five years or so.
I think that's pretty clearly a function of construction delays or maybe you know lack of starts during co bid.
Do you think that you can get that back up and running where your backlog conversion gets you know kind of normalized or flat in the first quarter of 21.
Or second quarter of 21 somewhere in there and then you know, but also on that how long do you think it'll take for you to get your spec count kind of normalized in today's market.
Well first we're not seeing really construction delays our cycle times have been very very consistent really through throughout.
And backlog conversion really isn't a stat that that that that we focus too much on we focus more on our inventory position and our inventory turns and right now we're seeing our inventory turns accelerate our sales pace. Obviously has increased dramatically. The last the last few months, which did work down our completed homes a completed specs. So our comes.
Treated spec inventory is lower than it has been in some time also the component of our backlog that is sold but not started is higher than normal. So as we accelerate our starch pace that will that will bring those two back to a closer and closer to a normal level and we expect to still deliver a very strong volume but.
Yeah, but but it takes really are lot position in our home position to support that.
Okay I asked another way your inventory turns will probably be you know lower in Fourq. You do you think that kind of gets back to more normalized levels in the first half from 21.
I think they're watching Houston.
I got to our inventory turns are actually higher than they were a year ago and I think Q4 will continue that way I think that was part of our original guidance for fiscal 2000 or was that we were expected to turn our housing inventory more quickly this year.
And that's that that is what we're doing.
Okay. Thanks for taking my questions.
Our next question today is coming from Susan Mcclary from Goldman Sachs. Your line is now why.
Thank you good morning, everyone.
This is just around you know obviously, there's a lot of uncertainty as we think about the broader macro environment.
Given your buyer base have you any analysis or have any thoughts on the impact of the reduction in the stimulus programs that are scheduled to come up later this week.
I think that that has kind of played into the demand that you've seen over the last couple of months and how are you thinking about it going forward. If there are changes there.
Morning.
I'm sorry go ahead.
Oh you go ahead.
What I think we're seeing with most of our buyers in the traffic. We're seeing is that those people are not directly participating in a lot of the stimulus programs or relief packages that are out there.
Sure the underwriting required for a mortgage today is generally in the first start with a job and steady predictable income stream.
And so we've not seen a direct impact of that to the extent theres a broader follow through to the to the economy will have to wait to see that's part of the conservatism I think at our outlook going forwards to see how that how that plays through in the broader economy.
Yes, yes, the amount of.
Stimulus, it's already been pushed out.
We'll continue to be pushed out I think between now and ended the year.
He has got to impact the markets for.
Multiple years, it's just a lot of liquidity that will filter through the overall economy.
Hi, Kevin I.
Hi, positive impact on housing and People's ability.
Okay. That's helpful. And then you know in your commentary that the average size of the home came down 3% in the quarter, but as we kind of look out at some of the secular shifts that you know or perhaps coming through from cobot more people working from home their kids being home a lot more.
Any of your buyers that are actually looking for slightly larger home or more space or any kind of changes to the layout.
We are seeing more consideration given to a.
Setting that accommodates a better work from home environment, whether it's a an extra bedroom to be used for.
I classroom in office, a play room that provides a little more space, but a lot of our floor plans today.
Accommodate at a lesser aggregate square footage a lot of very functional space, whether that's flex rooms or four bedrooms.
[noise] that.
Worked very well for that today. So we really pleased with the product offering that we have out there, but fortunately in most of our neighborhoods were able to respond to buyer demand very quickly and adjust to what the current buyers in our sales offices are asking for with our inventory homes.
With the next round of starts we haven't given neighborhood.
Okay. Thank you.
[noise]. Thank you next question today is coming from Buckhorn from Raymond James Your line now what.
Hey, Thanks, good morning, congrats on the quarter.
Question on S DNA, a little bit as you're trying to ramp back up on the land spend and get more flagged in the ground is there any sort of near term.
HM.
Disrupt not disruption but.
Are you gonna have to reinvest in hiring people or do you need to start reik read celebrating technology investments to keep up with the pace of demand right. Now is there anything on the S. DNA side that we should consider in the near term a as demand is is the rapidly increase that you need to accelerate them investment there.
Yeah, Buck I don't think we see anything that will move the needle dramatically. It's just a continuation of what we've been doing we did briefly you'll have a hiring freeze during those that that month or so at the beginning of the pandemic, but we're back to normal in terms of in terms of hiring across our homebuilding and financial services operation is wrong.
The business, we're always hiring and adding we're where we need to same thing on technology, we've been making continuing investments over the last number of years.
And we redirected some of those during the pandemic to address the work from home environment and a few things like that but but that those expenditures are not anything that's really out it's going to move the needle in total because there's also things we're not spending as much money on today travel is not as big a portion of our of our.
Spending is in the past.
Hopefully at some point you can be.
But we were worried a company low in terms of our historical SGN, a percentages and expect to be able to stay stay at that level going forward.
Alright, great. Congrats very helpful. Thank you next question just is on the single family rental component did it seems like your thought it evolved on that potential market opportunity and and what you're seeing in terms of.
Maybe the potential for built for rent product offering in your communities I just wonder if you could expand upon your your thoughts at this point.
Is that something you would like to have a portfolio that you could operate internally would you look to sell those as you build them or partner.
With another operator, we just how do you think about single family rentals at this point.
But thats something that we're still learning our way into.
We feel really good about the.
Handful of communities of lead nine communities today that we have homes being constructed for the purpose of rental.
And.
Well have to see we'll have to see what what the market brings us if we bring some of those communities to market for sale or we build the portfolio to to operate or aggregate to a portfolio for an eventual disposition. It's something we're learning our way into today. So we'll we'll be back with you as that progresses.
Okay fair enough I appreciate it thanks, and congrats on a quarter.
Thank you.
Thank you. My next question is coming from Mike Dahl from RBC capital markets. Your line is now a lot.
Good morning, Thanks for taking my questions.
First question I wanted to go back to the sole but not started in backlog and he has mentioned a few times and Billy responded to previous question that percentages higher than the normal, which which makes sense could you actually could you give us what that percentage is in terms of.
You know, what's what sold but not started and how that compares on a year over year basis, and maybe as as part of that I don't know if you have.
Any quantification of kind of like what an average I know your build cycles flat, but what an average delivery.
Quote would be in terms of what you're able to quote to new buyers today versus what you you'd normally.
Able to.
I'll take the second part of the questionable Bill ingest are looking for that the answer to the first part yeah. Right now were we would not be able to quote to you at average because it's going to vary based upon which community you're in and the level of production that's available within a community and the type of product that is.
Communities, we have a very quick bill time, and can deliver homes from start to the completion and three months and others that maybe a four or five month build cycle.
And then generally we're looking to have inventory that's available to move in you know within the next 30 days as soon as you can clear clarify your mortgage situation and get qualified we'd like to have a home that's ready for you as soon as you can you need it.
Got it thanks.
And then Mike on the sold not started we're running and a low double digit you know a little over 10% sold not started which we normally I think would be in a low single digit percentage.
Yeah.
That's that's really helpful. And then the second question and not to belabor, the pace versus price too much but understanding that it's a local.
Local decision as well the are you getting the sense that your local operators are given some of the uncertainty that that may still be out there they are.
You know, making the decision to let piece run a run a little hot for the foreseeable future just capture capture what out what's out there while it's still out there type mentality reverse versus those operators.
Pushing price more aggressively I know you talked about incentives coming coming down, but just wondering if you have kind of a pulse of what your local operators or <unk>.
Our leaning towards today.
And I liked.
Piece versus price versus margin.
It has a lot to do with community size or it is on the community.
You may push price and a community Oregon.
On the back end of it and.
You know your deliveries sales pace.
Yes, he is going to be perform on three or four months worth of inventory or six or seven months, what their inventory and then you have other communities, where you may have a thousand lots on product.
And driving.
Pace actually generates a high return than trying to find that absolutely right a margin dollar.
Either cuts off sales or allow cells to increase and you know lease.
We trust our operators in the field to make those decisions.
Well, you can incentivize them to make good decisions.
And.
It's a model that's been a part of the company or the 32 years I've been here and it seems to be working so.
It really is a community by community process.
Got it got it. Thanks, just just quick follow up to that then as you think about that 2021, you plans is that when you may introduce a little more kind of nudging in one direction versus the other or is it it you're really just I mean, what you're seeing today is.
Pleasing in terms of how everything's being managed.
We could we could do better and it's it's we could make better decisions.
Pretty much every day.
You get up and don't make a mistake you probably didn't do anything so.
We're going to walk through communities with our operators and we're going to talk to them.
You are you.
Making.
The decision, but I.
He is going to drive the highest return from the shareowner.
But ultimately what we have seen over years and years and years.
When you empower people and you give them authority.
And responsibility they become better managers and their relationship. They yeah. It's a culture I mean, it's who we are.
And we're just not going to set up here.
And try to drive pricing decisions and a community and.
Uh huh.
Pick any market you want so.
Okay fair enough. Thanks, David.
Thank you we reach of our question answer session, let's turn the floor back over to David for any further to closing costs.
Thank you Kevin.
We appreciate Everybodys time on the call today and look forward to speaking to you again in November.
And to the D.R. Horton family a once again you have outperformed the industry setting record all time record ourselves.
Hey, 25 21 five.
Thousand 21500.
Unbelievable accomplishment.
On ordinary entire executive team or a hobbled.
Yeah.
Michael.
We're here to represent yet.
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.