Q4 2020 D.R. Horton Inc Earnings Call
Good morning, and welcome to the D.R. Horton America's builder, the largest builder in the United States fourth quarter 2020 earnings call and webcast.
At this time all participants are in a listen only mode and interactive question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Thank you you may begin.
Thank you Paul and good morning, welcome to our call to discuss our fourth quarter and fiscal 2020 financial result.
Before we get started today's call may include comments that constitute forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
Although D.R. Horton believes any such statements are based on reasonable assumptions. There is no assurance that actual outcomes will not be materially different.
All forward looking statements are based upon information available to deal with on the date of this conference call is younger and 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 deal wouldn't be in a report on form 10-K, and subsequent reports on form 10-Q, all of which are or will be filed with the securities and Exchange Commission.
This morning's earnings release can be found on our website and investor that Gilbert and Dotcom, we plan to file our 10-K towards the end of next week.
After this call will post updated investor and supplementary data presentations to our Investor Relations site on the presentations section under news and events for your reference.
Now I will turn the call over to David Auld, our president and CEO.
Thank you Jessica good morning.
He used to also be joined on this call Mike Murray, Our executive Vice President and Chief operating Officer.
Bill White, our executive Vice President and Chief Financial Officer.
You don't working finished the year with a strong fourth quarter, which included 81% increase that's helpful do 23726 home.
I got a 60% increase in consolidated pre tax income of $1.1 billion and a 27% increase in revenues to $6.4 billion.
Yes profit margin for the quarter and from 340 basis points to 16.5% and our earnings.
Earnings per diluted share increased 66% to $2.24.
Well here consolidated pre tax income increased 40% $3 billion or $20.3 billion the brothers.
Pre tax profit margin for the year improved 260 basis points to 14.7%.
Thanks to the literature increased 49% to $6.41.
We closed a record 65388 homes. This year, an increase of almost 8400 400 home or 15% from last year.
Homebuilding return on inventory was 24.6%.
Return on equity was 22.1%.
These results reflect the strength of our home building at financial service teams, our ability to leverage your scale across our broad geographic footprint.
Lot of positioning to offer homes at affordable price points across multiple brands.
Cash flow from operations.
Sales and $21.9 billion.
Over the past five years, we have generated over $5 billion in cash flow from homebuilding operations.
Growing our consolidated revenues by 88%.
Earnings per share by 206 papers.
During this time, we also more than doubled our book value and reduced our homebuilding leverage to 17.5% while significantly increasing our returns on inventory [laughter].
I don't think market conditions are apparently very strong.
Our teams are focused on maximizing returns while increasing market share.
Over.
My cautious regarding the impact of the cold.
19, pandemic and other external factors might have on the economy and our operations in the future.
Leave our strong balance sheet liquidity that experienced teams positioned us very well to operate effectively and changing economic conditions.
Got to maintain a flexible operational and financial position, but generating strong cash flows from our homebuilding operations and managing our product offerings incentives home pricing sales price and inventory levels optimize return on our inventory investments in each of our communities based on local housing Baltic.
Dishes.
38000 homes in inventory.
Ample supply of lots I couldn't trend due to strong sales trends in October we are well positioned for another great year in 2021, Mike.
Diluted earnings per share for the fourth quarter of fiscal 2020 increased 66% to $2.24 per share and for the year diluted earnings per share increased 49% to $6.41 net income for the quarter increased 64% to $829 million and for the year It didn't come.
Increased 47% to $2.4 billion, our fourth quarter and fiscal 2014 results include income tax benefits of $15.8 billion and $93.4 million like the federal energy efficient homes tax credits that were retroactively reinstated earlier in the year.
Our fourth quarter home sales revenues increased 28% to $6.1 billion like 20248 homes closed up from $4.8 billion on 16024 homes closed in the prior year.
Our average closing price for the quarter was $302600 up slightly from last year, while the average size of our homes closed was down 3%, reflecting our ongoing efforts to keep our home supportable built.
Net sales orders in the fourth quarter increased 81% to 23726 homes and the value of those orders was $7.3 billion up 84% from $4 billion in the prior year.
We sold 10596 more homes this quarter than the same quarter last year. This positions D.R. Horton to achieve further gains in market share and scale as we deliver these home store customers during fiscal 2021.
Our average number of active selling communities increased 3% from the prior year and was up 2% sequentially alright.
Our average sales price on net sales orders in the fourth quarter was $307600 up 2% from the prior year.
The cancellation rate for the fourth quarter was 19% down from 23% in the prior year quarter.
We believe the increase in demand in the second half of our fiscal year was fueled by increased buyer urgency due to lower interest rates the limited supply of homes at affordable price points and to some extent pent up demand from the pandemic slow down earlier this year.
We were and remain well positioned for this increased demand with our affordable product offerings lots supply and housing inventories. We continued to see strong increases in net sales orders greater than 50% in October compared to the same month last year Jessica.
Gross profit margin on home sales revenue in the fourth quarter was 22.7% up 110 basis points sequentially from the June quarter, and up 170 basis points compared to the prior year quarter. They.
The sequential increase in our gross margin from June to September exceeded our expectations and it was primarily due to the strength of the overall housing market, which resulted in some pricing power and lower sales incentives.
On a per square foot basis, our revenues increased approximately 4% sequentially, while our stick and brick stick and brick profit per square foot increased 1.5% and a lot has increased 6%.
We remain focused on managing the pricing incentives and sales pace relative to your lot supply and production capacity in each of our communities.
Optimize the return on our inventory investment and adjust to local market conditions and new home demand.
We expect both our construction and lot costs and our home prices will increase on a per square foot basis in our home is close next quarter and we expect a further reduction in the average size of our homes closed.
We currently expect our home sales gross margin in the first quarter to be around 23%, though.
In the fourth quarter homebuilding <unk> expense as a percentage of revenues was 7.6%.
90 basis points from 8.5% in the prior year quarter for the year homebuilding <unk> expense was 8.2% down 50 basis points from 8.7% in 2019 our.
Our homebuilding SGN expense as a percentage of revenues is at its lowest point in our history and we remain focused on controlling her as she had a while ensuring our infrastructure appropriately supports our business like.
We ended the year with 38000 home that inventory 14900 of our total homes were unsold of which 1900 were completed we also had 1800 model homes at the end of the year due to our strong sales increases in the second half of the year, especially for homes, which were available for quick delivery our level of unsold.
And completed unsold homes is lower than recent years as we mentioned in our last call. We have accelerated our pace of home starts across most of our communities to ensure we maintain an adequate number of homes available to meet demand.
Made good progress to increase your home and inventory during the fourth quarter and we expect to increase them further during the first quarter of fiscal 2021.
September Thirtyth, our homebuilding lot position consisted of approximately 377000 lots of which.
It's 30% were owned and 70% were controlled through purchase contracts.
Percent of our total owned lots are finished and at least 50% of our controlled lots are or will be finished when we purchased them.
Our current lot portfolio continues to provide us a strong competitive position, allowing us to start construction on more homes David.
Our fourth quarter home building investment in lots land and development totaled $1.6 billion of which $690 million finished lots 500 million was for land and $380 million was for land development $330 million.
Our land and lot purchases in the fourth quarter were for Forestar.
After briefly slowing our investments in lots land and development earlier this year, the beginning weeks and abandonment we.
We have sales increased our pace of investment to ensure we maintain adequate lot supply to support our strong sales and home construction pace.
As a result for the year, we invested $5 billion in lots land and development.
In October we acquired the homebuilding operations of bracelets and Whos, the largest home builder and Corpus Christi, Texas for $23 million in cash assets acquired included approximately 90 inventory homes 95 finished lots control of 840 additional lots of new purchase contracts and the sales order backlog of 125 homes.
We welcome the grades and team to the D.R. Horton family Bill.
Forestar, our majority owned subsidiary as a publicly traded residential lock manufacturer operating in 49 markets across 21 states, our strategic relationship with Forestar as a well capitalized lots supplier across much of our operating footprint is serving us well 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 100% and net income growth of 84% in fiscal year 2020, while they continued to build out their national operating platform.
At September Thirtyth four stars lot position consists consisted of 60500 lots of which 42400 or owned and 18100 are controlled through purchase contracts, 72% for Starz owned lots are already under contract with your Horton or subject to a right of first offer under our.
Master supply agreement.
Forestar a separately capitalize from D.R. Horton and has approximately $740 million of liquidity, which includes $400 million of unrestricted cash and $340 million of available capacity on its revolving credit facility.
At September Thirtyth, four stores net debt to capital ratio was 22.1% and their next senior note maturity is in 2024.
With low leverage ample liquidity and its relationship with your work from Forestar is at a very strong position to navigate through changing economic conditions and continued to grow their business Jessica financial services pre tax income in the fourth quarter increased 100% to $121 million with a pre tax profit margin of 54.9.
<unk> compared to $61 million and 44.8% in the prior year quarter for the year financial services pre tax income was $245 million and $585 million of revenue, representing a 41.9% pre tax profit margin.
Despite the disruption in the secondary mortgage markets earlier this year caused by COVID-19 and the uncertainty the impact of the care that our mortgage company is continued selling the mortgages. It originates at strong net gain.
We began retaining servicing rights on a portion of our FHLB and being on originations in the third quarter due to lower valuations offered by mortgage servicers.
Looking now you said sales improved and we expect to sell these rights to third parties.
We'll continue to monitor developments in the mortgage market and adjust our operations to adapt to changes in market conditions.
For the quarter, 98% of our mortgage companies one originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 69% of our home buyers.
Hey, Jay M.D.A. lines accounted for 50% of the mortgage company volume.
Originating loans with D.J. mortgage this quarter had an average FICO score of 719, and an average loan to value they should have 90% for.
First time homebuyers represented 58% as the closings handled by our mortgage company up from 50% in the prior quarter like DHL communities is our multifamily rental company focused on suburban garden style apartments that had five projects under active construction and one project that was substantially complete at the end of the year.
These projects represent 1730 multifamily units, including 1430 units under active construction and 300 completed years.
Communities sold two projects during the first and second quarters of fiscal 2020 in fiscal 2021, we expect to begin marketing two or three projects for sales. However, we will be flexible on the timing of these sales based on market conditions, we expect new apartment sales to occur in the first quarter.
Communities assets totaled $246 million at September Thirtyth.
As we mentioned on our last call. We are also continuing to evaluate our opportunities in the single family rental home market during fiscal 2020 several of our homebuilding divisions begin constructing and leasing homes as single family rental properties at September Thirtyth 2020, our homebuilding fixed assets included 87.2 million.
In dollars related to a single family rental platform, representing 10 communities totaling 740 single family rental homes and finished lots of which 440 of these homes are complete.
After each of these rental communities is constructed and achieved a stabilized level of leased occupancy, we expect to market and sell the entire community.
We expect our total investment in our single and multifamily rental platforms to more than double by the end of fiscal 2021 Bill.
Our balanced capital approach focuses on being disciplined flexible and opportunistic.
During fiscal 2020, our cash provided by homebuilding operations was $1.9 billion and our cumulative cash generated from homebuilding operations for the past five years totals $5.2 billion.
At September Thirtyth, we had $4.4 billion of home building liquidity, consisting of $2.6 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our homebuilding revolving credit facilities.
Our homebuilding leverage was 17.5% at fiscal year end was $2.4 billion of homebuilding public notes outstanding and $400 million of senior note maturities in the next 12 months.
Subsequent to year end, we issued $500 million of 1.4% homebuilding senior notes due in October 2027.
We plan to continue maintaining higher homebuilding cash balances than in prior years to support the increased scale and activity in our business and to provide flexibility to adjust to changing conditions and opportunities.
At September Thirtyth, our stockholders' equity was $11.8 billion and book value per share was $32.53 up 20% from a year ago.
For the year, our return on equity was 22.1% an improvement of 490 basis points from 17.2% a year ago.
During the quarter, we paid cash dividends of $63.7 million.
For the year, we paid cash dividends of $256 million and repurchased 7 million shares of common stock for $360.4 million.
We did not repurchase any shares during the third and fourth quarters, but we expect to resume share repurchases during fiscal 2021.
Our outstanding share count is down 1% from a year ago and we currently have an outstanding share repurchase authorization of $535 million.
Based on our financial position and outlook for fiscal 2021, our board of directors increased our quarterly cash dividend by 14% to 20 cents per share. We currently expect to pay dividends of approximately $290 million in fiscal 2021 Jessica.
Based on today's market condition, and looking forward to the first quarter of fiscal 2020 mine, we expect to generate consolidated revenue of $5.4 billion to $5.6 billion and our home is close to be in a range between 17000 518000 home.
We expect our home sales gross margin in the first quarter to be around 23% and homebuilding as seen in the first quarter to be approximately 8.9% of home building revenue.
We anticipate the financial services pre tax profit margin in the first quarter of 35% to 40% and we expect or any tax rate to be approximately 24%.
Looking further out we currently expect to generate consolidated revenues for the full fiscal year of 2021 of $24 billion to $25 billion and to close between 77080 thousand home.
We forecast an income tax rate for fiscal 2021 of approximately 24% and we currently expect our outstanding share count at the end of fiscal 2020 wise to be approximately flat with the end of fiscal 2020.
We expect to generate positive cash flow from our homebuilding operations in fiscal 2021. However, we are not providing specific guidance for the level of our homebuilding cash flow in fiscal 2021 at this time and we prioritize investing an attractive return opportunities in our homebuilding business.
On many are having and land and lot inventory after much better than expected demand this year and potential M&A after.
After reinvesting in our homebuilding business, our cash flow priorities include significantly increasing our investment in both our multi and single family rental platform.
Maintaining our conservative homebuilding leverage and strong liquidity.
Paying a dividend, which was just recently increased and repurchasing shares to keep our outstanding share count flat year over year David.
Closing our results reflect the strength of our experienced teams industry, leading market share broad geographic footprint and affordable profit product offerings across multiple brands are.
Our strong balance sheet ample liquidity and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions, and we plan to maintain our disciplined approach to investing capital to enhance the long term value of the company.
Thank you to the entire <unk> team for your focus and hard work.
Our efforts during 2020.
Been remarkable.
We are proud of your work ethic annual positive spirit as you safely continue helping our customers calls on their much anticipated.
We closed on most home in a year in our company's history are incredibly well positioned to continue improving our operations and 2021 just.
This concludes our prepared remarks, we will now take questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is on the question Kipp you May press star two if he would like to move your questions in the queue for participants using speaker equipment it may be necessary.
Pick up your handset before pressing the star kids and the interest of time, we ask that you limit yourself to one question and one follow up.
Please hold while we wait for questions.
Thank you. Our first question comes from John Lovallo with Bank of America. Please proceed with your question.
Hey, guys. Thank you for taking my questions.
The first one is you reached 70% options, even faster than we anticipated and there's a pretty nice jump from.
Route 65.7% in the third quarter. The question is I mean, do you expect to be able to kind of grind higher from here or was there something unique in the quarter that allowed you to step up to adopt option percentage.
No and I would say there's anything unique it's just a.
The continuation of hard work and focus.
Yes, our expectation is we will continue to drive.
It's really a combination of both four stars grows and our increased relationships with third party developers. They are both driving that percentage higher and John as we've said from quarter to quarter, you can see some volatility some quarters could be up so I'm going to be slightly down it can bounce around a little but the general trend will be continuing to grind higher.
Okay. That's really helpful. And then in terms of the liquidity position you guys announced the dividend raise today. The fact that you'll buy back shares to keep the count the share count flat and also you know your plans to reinvest in the business, but 2.6 billion of cash is a lot of these or is there any reason why you wouldn't become more aggressive on buyback.
Well, we'll evaluate that compared to the alternative opportunities in the business, but clearly with the returns we're seeing in the business today and the demand that we're seeing we have a need to reinvest in our homebuilding business significantly to put our homes in inventory at a level to meet demand and and have our lot position in a position to to meet demand.
As as well as we look at our cash balances our scale and our volume in level of activity in our business is significantly higher than it was even just two or three years ago.
And so we do expect to maintain a higher cash balance going forward than we have historically I think you will expect to see from us at a minimum at quarter ends will always be an homebuilding cash greater than a billion dollars, but I think most often you'll see our cash balance between a one and a half and $2 billion.
And just for a frame of reference we feel like that's an appropriate level of cash to maintain in the homebuilding business to support our activity because just as a frame of reference on a monthly basis, our cash spend for for our accounts payable for our home construction land and land development payroll taxes basically all of our cash expenses range between.
$1.72 billion every single month, so maintaining $2 billion or cash is not excessive really feel like it's an appropriate level for our business and also gives us flexibility then when we see changing market conditions or opportunities to adjust and take advantage of those.
That's really helpful. Thanks, guys.
Thank you. Our next question comes from Stephen Kim with Evercore ISI. Please proceed with your question.
Great. Thanks, a lot guys impressive quarter exciting times. My first question relates to production rates and Ah you know particular I was looking at your homes under construction, which were up 34% year over year. If you include model homes, and then relative to that 17.
Five to 18000 closings number in one Q, which seemed a little low to me but.
You're giving your backlog I mean, I assume that they don't close in one cubic close in twoq, but talking about this homes under construction up 34%.
Is that kind of rate, 30% to 40%, let's call it a growth in homes under construction.
Staying up or rates in your eyes in your eyes for let's say the next six months or is.
Is that something you're able to do kind of as the first sprint, but that's not in your view as sustainable I'd be curious to see what you say about that.
Good morning, Steve.
We we anticipate the homes Weve gotten started in the fourth quarter really going to help us deliver the backlog and deliver new spec sales in Q1 and into Q2, but because we started so many homes in Q4, they are not as far along in the production process as they normally would be so there, perhaps a little younger than.
The average balance might have been plus we just had fewer completed at home inventory at the end of September this year than we did last year. So it's going to take while the completes our home to deliver it in Q1 or Q2.
I think we'll see an elevated level of home that inventory you know going into the next quarter.
And then we're going to monitor for what we see in spring selling conditions and will adjust to meet demand right. Now we feel really good about the outlook for the market and and so you get a lots in front of us and the production capabilities to continue starting their homes.
Delivering to the higher demand levels.
Great. So in in that response, I really didn't get a sense that the growth that we saw in the homes under construction was something that was overly stretching your capacity. So I mean, you're gonna gauge market conditions, but in terms of your ability to scale I'm not getting the sense that you've sort of overstretched yourself.
Correct me if that that's an incorrect a a translation of what you said.
No.
Same okay David.
Thing we do.
We think about the scalable sustainable.
Uh huh.
A major factor in that and the thought process. So you know I lost a lot position our foreign lot position.
Yes, we are controlling have.
Ankle ever to us.
Best I've ever seen in the markets the best I've ever seen.
But you know a one day I don't pop stars Doesnt doesn't help so you can't sustain right.
It really adds went away so.
Yeah, and we've been really clear about that so thanks for that.
We feel very very good about that.
Well we are done.
Well, if the market is and has given us.
Well, that's encouraging and my second question relates to gross margin.
The gross margin you put up in Fourq, you if I'm not mistaken was the strongest you've seen since 2006.
And it certainly seems like there's a pretty significant trajectory upward trajectory in that gross margin with a lot of momentum.
You guided three months ago to a gross margin level substantially lower than what you actually did not complaining, but I would just be curious as to.
What the driver is to the access or the overage of the outperformance in the gross margin was and particularly how it came in over the course of the quarter that led you to be so pleasantly surprised and us too.
It was a combination of several factors Steve it did exceed our expectations.
When we spoke last spoke in July we were seeing unusual demand you know into the summer, but I think we still had some question as to how long it might sustain and you know Fortunately for the market. We continue to see very strong demand all the way through to the end of our September quarter and of course, we commented there through October So we had.
But certainly more pricing power throughout the quarter as we were selling through our spec inventory than than we had anticipated. We also had some anticipation that we might see a bit more cost increases come through then we have thus far and those are still coming we see those coming in the next quarter, but we did not see as much cost increases in our stick and brick as.
As we would have anticipated and in July.
Oh, that's great sounds like Brad and his team are doing a good job as everybody else is too. So thanks very much guys good quarter.
Thank you.
Thank you. Our next question comes home Carl Reichardt with BTG. Please proceed with your question. Thanks morning, everybody.
I wanted to ask about the breadth of demand you know when depend demick started and in your business started to improve a lot of chatter about the low end and spec homes trading at a premium as youth he's looked over the last quarter or two have you begun to see that broadened David into both to the belts and into other segments, including sort of the Emerald brand freedom.
Brandon and to the higher end of the Horton brand.
I'm, calling saying better demand across the spectrum.
Having a house that you're gonna lever in 30 days.
Thanks, Mike do you want to.
A very strong position.
To drive value for the shareholders. So oh.
As Mike said, our inventories much longer but the.
The demand is optum pets.
Oh, I don't know how.
How many times I've said it but it started 10 years about smoking adverse thing and it does feel sustainable.
Unlike though.
What was the Pos demand in the last.
Hey, upcycle.
Thanks, David and then I'm, just because you mentioned towards the end of your remarks about more substantial investment in multifamily and single family rental and then I think you mentioned M&A and given the cash balance and ER and the returns you're seeing in housing generally can you just can you.
Talk a little bit about the opportunities that you see in multifamily and single family rental and has anything changed any M&A environment that makes you more interested beside the fact that returns are great right now in the building.
No I think we've taken a balanced approach across our business and I did mentioned that were first and foremost focused on reinvesting in our homebuilding business, because we see very attractive return opportunities and the great thing about what we've done with our business model as you know Carl over the past few years at generating over $5 billion a cash flow.
And in the last five years gives us a lot of opportunity to not only reinvesting the home building business, but also investing in these other opportunities and we also do you think will overtime be returns accretive as well and both multifamily single family. We look today is very strong opportunities and we did take a brief pause on some of that and ER.
Earlier in the year, but now that the market has recovered and really the pandemic slowdown didn't last nearly as long as I think anybody would have expected and we're back to investing in both of those businesses. As we would have originally expected I think Mike said in his prepared remarks, we would expect to double our investment in both of those platforms in fiscal 2021 as compare.
Through the end of fiscal 2020, and then M&A you've heard US talk about I think every single quarter.
Something they continue to be interested in but with our footprint our platform. Our people. We are in a very strong position to where we can organically grow and deliver on our growth expectations.
Continuing to consolidate share regardless of M&A and so we can be very opportunistic on that front that we are in a decade and continuing to explore those opportunities. If we find the right behavior right team. The right platform of course at the right price and that it can be a very great way to enter a new market as you saw us do this quarter and with a relatively.
The small acquisition you did it gave us interesting.
In China, excuse me into a new market in Texas and in Corpus Christi.
I'd just add on to that Carl that yeah, we see the rental operations.
Those businesses, yes, we have capital that we see new investors will be found that there is a real synergistic.
Operating.
Platform with our home building.
Yes, and and we've seen that in the sourcing of opportunities as well as the execution and construction and just our general approach and focus on the business. So we've been really excited about the opportunities and the returns we see I have rising there.
And Paul I'll, just that you know again back to bill.
Scalable sustainable program.
Large percentage of the population evolves none.
No not at all in all.
Sadness that is to say.
And I do think having the capabilities to execute on the rental side does the rest.
Our operating platform somewhat.
And we'll add a significant value to shareholders.
We build that platform.
Okay I appreciate it thanks a lot.
Thank you. Our next question comes from Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys. Good morning, congrats on the phenomenal quarter and results.
My first question is just thinking about the volume growth rate traditionally I've always kind of thought about the trend in your spec inventory as a pretty good barometer of where you see the order book growing over the next quarter or two and it seems like recently there has been a fairly wide disconnect there.
With that spec inventory trending lower year over year and order growth hitting new new all time highs for you guys. So it seems like you're you're seeing a greater percentage of your business now on the tube sales side as opposed to spec just looking at current order activity. So first I was curious if you could quantify what that mix looks like and.
Also you know how how high do you are you comfortable taking that to be built a component of your business going forward, recognizing that yes, probably pretty tough to keep pace with spec starts and the demand today.
Yeah, we don't pick up the last comment you made that it is very tough to keep up with demand today. If we if we start a home every city theres demand for it and its north in the marketplace.
With regard to our to be built sales are still saying about.
The same proportion of our sales coming through in the to be built I would say that it is higher as an absolute number being higher because they're told total sales demand is much higher than it has been but we continue to focus on starting our specs and starting our to be built and then limiting.
The sales availability for to be built in various neighborhoods being sure that we have the capacity to start that home.
Within a reasonable timeframe that is within our control to do so and not to leave it out there for a long period of time and so a lot of the houses were starting today are just pretty plans production starts that warehouses, we are going to start anyway. So we don't necessarily think about them is a to be built on it.
So very efficient, we're just selling into that pace. So far we've actually started that home, it's not necessarily a pick up in skilled jobs. It takes a little bit more about a dozen time in offers more customization or offline.
The sales office, a few months ago, and the age and I was talking to so.
So that the foundation is the new carpet and that as soon as we get a a foundation going in there is tremendous demand that people want to get out of that house and a and b in line to buy it.
Gotcha other that's that's very helpful context and.
Second we've heard from a lot of your competitors about the need to intentionally slow sales activity for a multitude of reasons either closing out communities faster than expected difficulties sourcing labor difficulties sourcing materials not wanting to extend the backlog too far where you don't have visibility into costs.
I'm just curious you know it doesn't seem like you guys are doing that at least not not on the wide spread basis, but do you.
Isn't having to potentially do that in the near term based on where we are year supply side and the demand side is today, where do you think you can continue selling to demand really indefinitely based on what you see in the market today.
You know when you approach it from a subdivision by subdivision standpoint and.
And while we had a lot.
Lots out in front of you know, we built all things that maximize our returns.
Oh, no equity and inventory.
And you know its a.
Yes.
It's really driven by.
[noise] individual divisions and the markets with the help of again.
I can tell you we have Paul.
Thanks, Charlie.
Right pricing.
Hi, I'm going to attempt to slow down sales.
I didn't say much of a change in the.
And the sales price so.
The only thing if it really is driven by the production capability of that division.
That submarket.
Asked and whether they can deliver more on our.
Rather than need to slowdown.
And then there is some some tweaking of that out in the sales obviously I mean, it's oh.
You know at the backend of us not to mention you want to drive the highest margin you can.
But.
If you are on the front end all right in the middle of a <unk>.
Community, which we have numerous big Big communities, you got to be very careful with your price appreciation on their cellphones, because nothing stop sales line.
[music].
Let him one gap I at one price and then having to incentivize or drop the price on somebody else down the yeah, yeah, that's almost done.
So it's a you know we would call that are not sides.
Paris project by project Division by Division.
And.
Uh huh.
We trust our operators out there do you.
Michael its decisions and.
And it's been working for for her in a long time and Allen in spite of extraordinary and increased demand and sales. This quarter. We did see our community count go up and 3% on a year over year basis, and 2% sequentially, which is really the first time, we've seen a meaningful change in our community count and that's in spite of 80 plus.
An increase in sales this quarter and we've been talking for a long time and see all I think that comes up on every call and about one is the community count coming and we've got a lot and the company is ready to go when they're going to continue to replenish our community count and bring new communities online, which is going to help support our continued growth in fiscal <unk>.
Okay.
And every time weve done since the last.
Downmarket.
Aspen to.
Do you risk on a lot of them awesome.
And we are we are uniquely positioned.
Oh, Hi, Vernon long runway on land and lives and.
I think surprising is the same but every time I go up.
Actually at least one or two deals in the division that's better than anything else I have today.
And that's the result of.
Focusing on the relationships within within these markets and trading these trade partners and.
Last dollars life partners.
Uh huh.
But they are kind of a part of our business that are.
Another part of our de risk de risking our balance sheet generating cash flow and positioning us to grow and gain market share.
At a pace that is driven by the market.
They are all kind of knowledge at another time.
That's great. Thanks, a lot guys best of luck.
Thank you. Our next question comes from Michael Rehaut with JP Morgan. Please proceed with your question [noise].
[noise] I think Seth good morning, everyone and again congrats on the results.
Just wanted to hit on a little bit of a bigger picture question I think when you look at how the stocks have pulled back a little bit off their highs in the last month or so.
Yeah various reasons for that.
And you know, particularly with the vaccine out and you know thoughts investors thoughts around maybe a market rotation and a return to normal in various ways I think the debate over the next you know call. It three to six months is going to be whether or not you know current sales pace is peak.
Whether or not you know fiscal 21 earnings its peak.
Yeah, I would love your thoughts on that and you know obviously you know from a cyclical standpoint, you know, we're just barely getting back to long term averages in terms of housing starts, but how do you think about the sustainability of sales pace that you are currently seeing.
If there are any governors on that again with regard to the prior question around perhaps restricting sales and allowing your construction pace to catch up.
But how do you think about you know where you are in the cycle, where you are versus peak earnings.
And the ability to sustain its not things.
Exactly at current sales paces, but.
Thereabouts.
To allow your earnings to go higher over the next few years.
Oh My God.
He feels like.
There is runway on this market.
And I say that because while I'm out talking.
Uh huh.
Only that division monitors within these markets.
Talking about employment growth.
They talk about population growth.
Let's talk about the positioning that they have.
And I just you know I just don't get a sense of this is.
A frenzied.
Our overheated environment, often where people are speculating on house.
Yes, yes.
Family formation Yeah.
Yes.
Saddam sizing, it's it's a lot of different things, but oh.
I believe anyway, or our long term demographic shifts.
When I look at.
Well, we are and what we're doing in our product positioning our profit price point positioning.
You know our.
Incredibly deep very talented long tenured employees.
I just know hockey we've got we've got this market still has legs.
And Mike from a positioning standpoint, we positioned ourselves to be in a very strong and flexible position to adjust to anything that does change as we look at the broader market inventory levels are still tight relative to demand as you. As you mentioned, we're still not not back to even normalize levels over the long term of normalized housing starts.
And so from that standpoint, we just want to stay as flexible as we can we've been through cycles. We recognize there will be times when when the when when when the cycle turns and we're going to be in very strong position to adjust to that.
Yeah, we wouldn't ever plan out our business model to show, an 81% sales increase in one quarter, but we do position ourselves to grow consistently and gain market share and right now we're in a very strong market, where overall growth rates are stronger than weve seen and so we're outperforming that it went.
When when things moderate to to to slightly lower levels than they are today. Our expectation is we'll be in position to outperform that but with a lower risk profile.
And the ability to to preserve the downside you know on on earnings when things do come under pressure at whatever point that is but again right now we see a good market right in front of us and we're going to make sure we stay position with affordable homes.
And our production in front of what we see the demand to be.
Great. Thanks, guys. Appreciate that I guess second question its possible it love to delve in a little bit more and revisit some of the order trend trend lines that you've been seeing the last few months.
You know I think you started out the quarter up around 50% or maybe.
Just above 50% I forget the exact language.
You ended the quarter with a growth of 81% I'd love to get the breakout of of August and September possible and you know with October up also around 50%.
It implies obviously a deceleration from are ridiculous this strong number I I presume.
I wanted to get your sense again, you know gross margins up roughly 150 basis points over two quarters.
If you go into first quarter from third quarter, you know your inventory is sold down dramatically.
I I, just wonder is well around.
It's either some of the price increases that have come through or again in certain instances, maybe you're just holding back a little bit on sales growth or order taking to allow a catch up here. If that's how we're supposed to understand you know where we are.
So the current order trends, because obviously going from something obviously, well north of 80%.
For the last couple of months on average it back down to 50.
I'm just trying to think through the drivers of that.
Sure, Mike and say, we are not giving specific monthly quarter trends that we did say back in July that our July sales were up Greg I mean, 50%.
I mentioned that our October sales are up greater than 50%.
They're not at the time of the fourth quarter as a whole. So you can back into August and September where where software.
But as Phil already alluded to we don't ever have a business plan that our sales are gonna grow 81% and you know on an annual rate or really even in a quarter. So it really continues to be a ballot community by community.
So there are still some communities that are performing you know at very very strong order rates in there somewhere we've taken some price.
Because of our eight or housing or lot position and flood the sales pace to some extent until where we settle out somewhere between that 51, what we've guided to for the full year for closing is to be at the 18% to 22%, we'll see how the spring unfolds. It doesn't mean, we can't do better than that based on how we're starting off the year.
Our houses a lot position our product our people all of the things we believe put us in a very strong position. It consistently outperformed the market again in fiscal 2021, so they could only be in one month into the year, that's what where we feel comfortable and headed for the year, but our first quarter guidance for closings is up mid third yes.
And so we see stronger growth in that in the first quarter of the short term visibility and then longer term, we'll we'll see what sales demand and positioning our as we get into the spring.
So just to understand then what you're saying is is that the upside in that the upside potential a case for closings growth in 21 could be driven off of a continued robust order pace in the first half.
And not necessarily production constraints.
Correct.
Well great. Thanks, Christine we have don't hear US say, we have significant production constraints. There are always some but we feel very good about our positioning and ability to continue to increase production and sustained production levels.
Perfect. Thank you.
Thank you. Our next question comes from Matthew Blair with Barclays. Please proceed with your question.
Good morning, Thanks for taking the questions I wanted to ask about the percentage of lots can control their contracts up to 70% they talked about it earlier and I heard you say that it's basically a reflection of just kind of a long term strategy.
Coming to fruition I guess, but I mean, just how quickly you moved up in that percentage and this unusual year. My question is if there's any kind of measure of risk mitigation that as signaled into into you know how you view the sustainability of housing demand and I guess the terms on me is lot contracts to obtain.
Changed at all or gotten any less favorable perhaps the D.R. Horton on balance.
Well I can again because of our scale and absorption pace per community.
[noise], we get when you.
In terms on the market.
I think as land prices gone up after the launch of the house.
But.
When when the seller is looking at hands wrist side of equation.
You know do you want.
That's my Great high absorbing company buying a lot smoky on somebody else.
And and that has worked to our advantage as we have continued year after year after year after year to build relationships with these people.
So.
From a risk standpoint, having.
Having a set price you're buying a lot at some point in the future is significantly less risky and own the land so.
And there's also just a much more efficient use of capital. So that's something that we're going to continue to work home.
And and I think it buttoned up and really it's been our focus this entire cycle is to push that percentage up so that percentage increasing it not a read on the market and it's just a read on our continued success in building those relationships for started developing this platform and putting us in a in a very strong capital efficient way.
Had to run our balance sheet, yes does it de risk is to the downside to some extent, but it's really more about the capital efficiency and driving improved returns.
Okay understood. Thank you both for that second one just just back on the gross margin I think I heard you say that perhaps cost inflation in the quarter, maybe didn't come in to the extent you initially expected and correct me if I Miss heard that but just thinking about the volatility in lumber prices and how that tip.
Really runs through your piano, a little quicker than others can you just comment to what extent lumber was a headwind in Q4 and if there is still more of that headwind to come in Q1, just kind of what's assumed around how that flows through the <unk>.
Yes, Matt we would expect that we had a little bit of that headwind in Q4 in the September quarter, but I think we'll see more of it and most of our lumber headwind hit and pass through in the December quarter.
And that was factored into our margin outlook of around 23% for the quarter.
Understood. Thanks, everyone.
Okay.
Thank you. Our next question comes from Derek for short with Cleveland Research. Please proceed with your question.
[laughter].
Good morning.
Two things two things curious about first of all.
On the cost and input side of the equation sticks and bricks and labor in a lab.
Curious in terms of what you're seeing and anticipate in terms of.
Not only cost but availability.
You could just speak to both sides of that where we are and what you see on the next call it three or six months.
Yet we have seen and we telegraphed that we've seen some cost inflationary pressures on some of the lumber.
The other materials and certainly labor, but you know with our market scale deep long term relationships our production.
Approaching orientation to the business, we're able to work with our local trade suppliers aggregate going market share, but also aggregate labor share in a given market and by maintaining a sustainable starts pace that allows them to plan their business as well and it's again, it's like what David mentioned to before.
From that yet the LAAP developers.
Would they rather work with a.
Production oriented investment grade building platform for somebody else and oftentimes, we're able to attract and retain labor through market cycles. I mean, we have consistently paid our bills on time and work that these folks as partners new market up cycles and down cycles and there's lot.
Long memories here.
And and long relationships, so we're able to get the labor to our job site.
We expect we will have pricing changes it will it will go up and it will go down, but we expect to have the labor on our job site.
From a material standpoint.
As we said in his very clearly known in the industry. There are increases that are recurring and we were anticipating that all of that is anticipated in our forward Barbie margin guide, which we're anticipating a slight improvement in our gross margin going into Q1.
From an availability standpoint, there are periodic shortages of certain products in various areas and so our operators and ER and our national purchasing team is working with our suppliers on addressing those making substitution.
Where where we need to and in order to address those but nothing that is causing significant hold backs on our on our production right now.
Correct, you know a shortage of the day as Windows and so we're saying probably.
More issues or windows than anything else, but again, it's just part of part of business part of where we are and and the spin and then the process and we're just addressing those as we need to.
And I'll say that.
Everything we've been working on.
Market share gains quantity.
De risking the balance sheet, all those things help in any in any market.
Got it say, it's a true advantage and a good morning.
Great. That's helpful. And then just to follow up the gap between order.
Orders and backlog.
Deliveries is as wide as it's bad.
Do you have any I I assume the delivery number is as good as it can be in terms of what you can do you have any concern about the sustainability of.
Orders in backlog I guess trying to get to the patients of your customers to wait for what's probably little bit more of an extended delivery schedule than they might normally be used to with your company.
I think if you if you look over time, you may see that we have fires in backlog, a little bit longer and it during a production cycle because we've been selling some of our production earlier and its production cycle.
Compared to their alternatives in the marketplace today, I think you'll consistently find that we're delivering homes faster than any of the alternatives that are available to those individuals today. So overtime. It may change a little bit, but the relative comparison as to what else is available at that point in time, when you make the buying decision.
The point is that as much a repeat customer a short time frame, it's a different customer comparing competing alternatives.
Okay. That's helpful. Thank you.
Thank you. Our next question comes from Adam Baumgarten with Credit Suisse. Please proceed with your question.
Hey, everyone. Thanks for taking my questions just on the margins the gross margins they've stepped up pretty nicely in fourth quarter and then you guided for the first quarter, how should we think about the sustainability of those as we move through the year and maybe some of the puts and takes you maybe looking out two going forward.
I think we generally talk to the puts and takes I mean, there's three big buckets right.
And our labor and not material in from really all three year ahead, then today.
But we've been able to offset that with price and I think the awesome manage our increases in clot labor and materials, probably better than the industry, the home and because of our scale, both locally and nationally so the market conditions on art, a home and remain just throw back isn't it throughout the spring we have 30 cents.
Upside to our margin on as we move throughout the year, but it's really too early for us to put any color around what the margin looks like for the full fiscal year 21 until we see the spring selling season, which is why we're really only specifically guiding on Q1 gross margins around 23%.
Okay, Great and then just any commentary on cycle times have they changed much have you seen any lengthening over the last three or so months.
Actually been very impressed with our team's that they've been able to hold and compressed slightly the cycle times in the build though process.
We always set goals to get better in our operations every day and I'm pleased to see that the teams have delivered on that.
Great. Thanks, a lot.
Thank you Howard.
Our final question comes from Truman Patterson with Wells Fargo. Please proceed with your question.
Hey, good morning, everyone. Nice results just had a couple of questions that I want a little more clarity on.
Hi, Jessica.
Community Count could you give an outlook for fiscal 2021, and I know you all don't necessarily view community count as you know a a great indicator. If you will so I'm really hoping to understand at the local level. You know are there any muni permitting constraints.
Any horizontal lot development constraints zoning board issues et cetera, or is it pretty much business as usual and then on a I believe you all already gave a number but I didn't hear it could you.
Give us the number of finished lots you have currently and then also the number that are under development.
Sure. So our finished lot count.
Why did we didn't get to actually I have always said, 30% to 34000. Other owned lots are finished and then another 50% of our control bought our will be finished when we purchased sensor that'd be roughly 133000 watt.
And so roughly 170000 lots in total that either are or will be finished once we purchase them.
In terms of community count as I mentioned, it was up 3% year over year, 2% sequentially really with the size of our platform and the number of absolute communities. We already have we don't generally anticipate moving much more than that and it's probably at no more than a low single digit percentage and there can be some quarter to quarter back variability.
He did that as well, but I think we do believe as we move throughout fiscal 20 line you know on average our community count will be up slightly.
Okay. Okay. Thank you for that and then you know finally on on you know some labor constraints. Your backlog units or you know are up 96%. I think you know are you all finding enough labor to actually get all these home started I know you all build up your guidance from the community in the division.
One level.
Are there any areas, where you're seeing you know a large degree of labor constraints or on the flip side or are you are you, having any local areas, where you're seeing a a what's called an abundance of labor currently.
I wouldn't characterize anything as an abundance of labor area, but.
But I would say you know the thing we look at to monitor that as our overall cycle times and we did actually see those hold and then compress here very recently, so we're very pleased with that that's telling us that we're getting labor on the job sites and getting the home is completed and the composition of our homes inventory to be more favoring the backlog is simply a function of demand.
It's not taking us longer to build the houses were just selling them earlier in the production process than we might have a year ago.
Okay. Thank you.
Asked her home just honestly that driving efficiency.
In the last 10 11 years in this region were able to deliver the houses were shown.
We are.
We we try to create several processes.
And our LIBOR based on expanding the number of people.
And.
Benefiting from that today.
[noise] [noise], Paul what I didn't get my closing remarks.
[noise] like Oh, well.
We appreciate Everybodys time on the call today and look forward to speaking with you again in January to share our first quarter results and finally, congratulations to the entire D.R. Horton team.
The only way you the first home builder to close more than 50000 homes in here.
Now the first to close greater than 60000 homes have a.
Solidly on the way to being the first to close to 80000 home spending.
Turning to the best in the industry.
Horton and this entire executive team continues to be humbled and honored represent you on these calls.
He sank stays at home.
The intent.
[noise]. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great to.
[noise].