Q3 2019 Earnings Call
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D.R. Horton.
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Hold in early fiscal 2020.
DHS communities total assets were $167 million at June Thirtyth Bill.
Our balanced capital approach focuses on being flexible opportunistic and disciplined.
Our balance sheet strength, and multi year earnings and cash flow generation have increased our flexibility and we are utilizing our strong position to enhance the long term value of the company.
During the first nine months of fiscal 2019, our cash provided by homebuilding operations was $605.7 million at June Thirtyth, we had $1.6 billion of homebuilding liquidity, including $578 million of unrestricted homebuilding cash and $1 billion of available capacity on our revolving credit facility.
Our homebuilding leverage ratio improved 370 basis points from a year ago to 18.5% the balance of our homebuilding public notes outstanding at the end of the quarter was $1.9 billion and we have $500 million of senior note maturities due in the next 12 months at June Thirtyth, our stockholders' equity was $9.6 billion and book value per share was $26.08 up 14% from a year ago.
During the quarter, we paid cash dividends of $56 million. We also repurchased 3.7 million shares of common stock for $159.3 million utilizing the remainder of our outstanding authorization.
Our stock repurchases for the first nine months of the year total 9.8 million shares for $375.5 million, resulting in a 2% decline in our outstanding share count at the end of the quarter compared to a year ago.
Subsequent to quarter end, our board issued a new authorization to repurchase up to $1 billion of our common stock with no expiration date.
Our top priorities for cash flow utilization remain to consolidate market share by investing in our homebuilding business and strategic acquisitions reduced homebuilding leverage and return capital to our shareholders through dividends and share repurchases Cesca looking forward to the fourth quarter of fiscal 2019, we expect to generate consolidated revenues in a range of $4.75 billion to $4.9 billion up to close approximately 15700 16000 pounds. We expect our home sales gross margin in the fourth quarter to be in the range of 20.4% to 20.7% and homebuilding as seen on the fourth quarter to be approximately 8.1% to 8.3% of homebuilding revenues.
We anticipate a financial services pre tax profit margin in the fourth quarter in the range of 31% to 34% and we expect our income tax rate to be approximately 24.5%.
For the full fiscal year 2019, we still expect to generate cash flow from homebuilding operations as at least $1 billion and we expect our outstanding share count to be down approximately 2% at the end of the year compared to the end of fiscal 2018.
Based on today's market conditions are expected growth for fiscal 2020 is currently in the mid to high single digit percentage range for both consolidated revenues and homes closed we expect to get further fiscal 2020 guidance on our November earnings call David.
In closing our results reflect the strength of our long tenured well established operating platform across the country.
We are striving to be the leading builder in each of our markets and to expand our industry leading market share.
We have been the largest builder by volume in the United States for 17 consecutive years.
According to builder magazine's recent local leaders issue in 2018, we were the number one builder at all of the top five us housing markets and D.R. Horton with a top five builder and 31 of the top 50 housing markets.
We are focused on consolidating market share, while growing our revenues and profits and generating strong annual cash flows and returns while maintaining a flexible financial position.
We are well positioned to do so with our conservative balance sheet.
Broad geographic footprint affordable product offerings across multiple brands attractive finished lot and land position and most importantly, our outstanding experienced team across country.
Thank you to the entire D.R. Horton team for your focus and hard work, we are incredibly well positioned to continue growing and improving our operations.
This concludes our prepared remarks, we will now host questions. Thank you.
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Our first question today is coming from Carl Reichardt from BTG. Your line is now live.
Good morning, everybody.
Good morning, Mark.
Hey, I wanted to talk a little bit just first of on the south central and the southwest regions, where orders were off a little bit can you just talk maybe mike or or David about community count versus absorption rates. There I think southwest is short communities now and the plans to kind of to regrow those regions.
Yes, what we're seeing in the southwest is that we are short communities relative to where we were and frankly, that's a function of our of our success. We've had in those markets. We've sold communities at faster paces in anticipated and the replacement communities are not yet online and we will be looking to replace those communities replace those flags south central frankly, it's going up against a very tough sales comp last year I think they were up over 20%.
In this quarter.
And while their community count is going to be about flat absorptions did not grow as much but we're frankly pretty satisfied with the absorptions. We have there this year based on what we saw in the in the late fall and early winter and then seeing the margin expansion that we've been able to achieve with little stronger selling season.
And the specifics will be in our supplemental presentation as well as our call Carl that just for reference our southwest active selling communities were down 13% year over year.
And right in line with the sales orders, so very very strong absorption still out of that market.
Great. Thanks, and then just as a follow up and we've talked a lot about local market share and the advantages that can bring and we've seen some peers of yours move.
To lower price points, and they are delivering greater order growth than you, but but at margins that are well below can you talk a little bit about as the rubber meets the road here in what has been the softest market can you talk about how you been leveraging market share to protect those margins grow those margins and keep your absorptions reasonably strong thanks guys.
Cause a David.
You know we've been we've been in this.
Affordability push for the last five years.
We have incredibly well positioned communities very Dave.
And lot supply.
And.
You know, it's not something that is going to continue to out grow.
The overall percentage of what we grow it has driven growth for lower for the last three or four years.
It's it's fully rolled out.
And from a competitive standpoint.
Yes, there are people pushing down on price, they're having to give away more margin than we are but those are not as well positioned or as deeply positioned as we are.
So we feel very good about what we've done where we've been.
I feel very good about the pace and margin balance that we're now executing so.
Great. Thanks, David appreciate it.
Thank you. Our next question is coming from John Lovallo from Bank of America. Your line is now live.
Hey, guys. Thank you for taking my questions. The first one is on the $1 billion share repurchase authorization that seems like a little bit of a pivot for you guys. When we think it's pretty positive, but maybe just give us.
A little help on what drove the decision and then in terms of expected cadence of repos and when will you expect to be kind of consistent buyers each quarter more opportunistically, how should we think about that.
Yes. Thanks, John This is bill.
This is the next step for us we've begun being a more consistent repurchaser of our shares over the last couple of years and generally the pace of our repurchases have been increasing.
Over the quarters.
With an opportunistic fluctuations when when we see a pullback in the stock, but we're we're repurchasing shares out of our cash flow and as our share cash flows increased we've increased our repurchases. So we see this authorization is kind of the next step and that process.
We do expect to continue to be a consistent repurchaser, but we will see some fluctuations quarter to quarter, depending on what we see the opportunities.
The deltas agent has no expiration date, so it doesn't necessarily imply a specific cadence or specific timeframe. They would all be spent but we feel like that was the appropriate amount to two authorized to put out in front of us and and signal to the market that we're going to continue to be a consistent repurchaser.
Yes that makes it makes a lot of sense. Okay, and then in terms of July kind of being in line with normal seasonality and then that coupled with the 2020 outlook that you guys put out there seems like the market is doing reasonably well here I mean, one of the pushback that we get from from some folks is that lower interest rates kind of resulted in some pull forward.
Orders over the past couple of quarters that doesn't seem to be the case, but I just wanted to get your view on that.
I mean, that's that's not my belief I can tell you.
I think that there is tremendous opportunities provide us the math.
And the affordable.
Market households band Foreman job jobs bank right created and.
And there's just a limited amount of supply even today so.
I think the demand is there if you can position anda.
Derive a price so that they can buy.
Okay. Thank you guys.
Thank you. Our next question is coming from Alan Ratner from Zelman and Associates. Your line is now live.
Hey, guys. Good morning, Thanks for taking my question nice job with the margin improvement.
I think we were actually surprised that you were able to drive that that level of improvement and at the same time. It looks like you had a lot of success selling specs in the quarter. I think this is the first time in quite a while where your homes in inventory is actually down slightly year over year. So just curious if you could talk a little bit about.
Did you see we've got a concerted effort to drive that that spec count lower during the quarter or was that just a function of where the demand was and I guess more broadly with with your inventory position down slightly.
Is that by design or are there some some headwinds that might be slowing a bit and the construction cycle labor weather et cetera. So just talk for all that would be great. Thank you.
Sure. Thank you Alan.
This is Mike what I would touch on is that seasonally we would expect to see our homes inventory build in the earlier quarters, and then start to kind of run down as we satisfied some of that spring selling demand I think this quarter, we had 38% of the homes. We closed this quarter were sold in the quarter as well.
And so a lot of that reflected.
With the enhanced margins are reduced incentives and seeing a buyer return to the market and a little bit of tailwind.
On some of the material costs, most notably lumber.
We have inventory position, where we like it right now go into our fourth quarter, we have more inventory right now than we had this time last year and we expect to be well positioned at September thirtyth to to start fiscal 2000 as well.
We're not adding any longer.
Bill Times I mean, we're we're continuing to do what we do.
Gotcha Thats helpful. And then just on the pricing environment, you mentioned pulling back on incentives can you talk a little bit about.
The percentage of communities, where you reason that prices either through lower incentives or or outright based price increases and I think your order price actually ticked higher year over year, which was the first time in quite a while but I know theres a lot of mix involved there so.
Are you seeing pricing power what percentage of your communities or which markets are you seeing it in and to what magnitude. Thank you.
And generally most of the improvement in our gross margin was driven purely by lower incentives and not from pricing power I would say today versus.
At any point really last year in fiscal 2018, we still have less pricing pricing power today than we did a year ago, but the pullback in rates has helped so it's a little bit better sequentially in that regard, but the main driver to our gross margin in Q3 and also what were expecting in terms of improvement in Q4 is more from the pull back on incentives and that continued roll back then it is pure pricing power.
Do you have those numbers handy, Jessica just percentage of ASP that our incentives today versus a year ago quarter ago. There was something you kind of see.
So we don't typically add quantify incentive is because to us whether it's price or is it something flowing through cost of sales that all falls out in a margin said to us margins the best grade and we don't typically try to quantify incentives that way.
Understood. Thanks, guys.
Thank you. Our next question is coming from Eric Bosshard from Cleveland Research Company. Your line is now live.
Hi, good morning.
A follow up just to make sure we understand the path forward with incentives and pricing is.
Talk about your comfort of what you're doing in both those areas now.
If the progress that you saw in this quarter is the new normal or if you feel like there's further opportunity in the area of incentives and pricing.
I think Eric will is something we continually measure and manage community by community and our operators in the field are making those pricing decisions to meet the market that they see in front of them.
So yes.
I would expect that we would as Jessica mentioned in the gross margin guidance continue to see a little bit improved margin into our fourth quarter.
Based on.
The selling environment, we're in today.
And the strength of the buyer that's coming to our doors.
We feel really good about that I think we're going to see some further expansion in margin.
And as well as maintaining the pace that we are at.
And then secondly, the guidance looks like now your full year deliveries will be at the high end of the range you established earlier.
What's different within that is that a better market or better market share or how would you sort of segment between those two factors that are contributing to you get into the high end of the range.
I think it's just a bit better visibility as weve gotten through the spring and we've been able to see our pace continue at a solid base, we have a greater confidence level in our ability to sell in and sell through the the homes that we have and and deliver on during this fiscal year just the sequential improvement visibility I think was the primary factor, it's a very solid market as evidenced by our ability to pull back incentives throughout the quarter and I think we're still seeing very solid market out here as we as we go into Q4.
Great. Thank you.
Thank you and next question is coming from Truman Patterson from Wells Fargo. Your line is now live.
Hi, Good morning, everybody first wanted to look at your option lot count as a percent of total lots a tick down a little bit sequentially. I figured you guys would have continued increasing that's given you know.
Forestar.
Et cetera could you guys just discuss a little bit about what drove this and then land environment in general are you seeing.
The availability of option land.
Or developers improving.
In terms of the change in the option percentage stream and I think.
That number is very dynamic it moves.
Every time, we sign a contract or take down lots or or cancel the contract and so there is a lot of volatility in that you know directionally that general trend we've had over the past few quarters in past few years frankly as weve been working on this has been to push it higher.
And we're continuing to to work at that we working with developers both Forestar and other third party developers constantly looking for ways to expand.
That controlled lot position and partner with them to deliver communities and lots to us.
Availability, it's still a tough job to find the right land and to get it entitled in todays market.
And bring it.
Into production.
But isnt that our team across the country works very hard at every day.
Okay. Thanks for that and then on.
You guys gave us a little bit on 2020 guidance I believe mid to high single digit revenue growth.
Could you just maybe break that out how you're thinking about market conditions.
And with that.
Urals community count growth, possibly versus absorption improvement.
Sure I mean, that's our preliminary fiscal 2020 guidance and so today, it's only July we're going to stick with just consolidated revenue growth and homes closed in the mid to high single digit percentage range and we'll give further breakdown in color in November when when we've completed our fiscal year end and obviously the only perspective, we can give on that is based on today's market condition.
So thats, assuming that conditions remain relatively consistent with today.
Directionally would you assume that your core community count continues to grow.
We've never given specific guidance on community count and we're just going to stick with what what we currently expect for fiscal 20, and we may have a little bit of non specific guidance that color on community count in November but then today, that's what we feel comfortable with for our preliminary guidance.
Okay. Thank you nice quarter.
Thank you.
Thank you. Our next question is coming from Michael Rehaut from JP Morgan. Your line is now live.
Thanks, Good morning, everyone and congrats on the results.
The first question I had was on.
On sales pace and I guess, it's a little bit of a pace versus price question, but more focused around sales pace. You know you've had some competitors that you know.
Sales pace up anywhere from mid single digits to you now healthy very healthy double digit rates.
You guys are a little bit more plus or minus flattish this year, but in contrast.
You've had.
Strong double digit sales pace growth for the prior three four years. So my question is are you just at a point in the market you are in your own shift towards first time, which kind of led the industry.
Kind of in a more of a steady state and it's kind of taking the market as it is.
Because it seems like most other builders talk about this improved strength or improving strength in entry level.
Thats driving that higher sales pace.
Whereas you might already.
I have been there and benefited.
Yes, I'm trying to just reconcile that because obviously also it seems like you're a little bit more comfortable today.
Not necessarily at hearing.
You know at any price adhering to the double digit topline growth.
And focusing a little bit more on a balanced approach. So just trying to get a sense of.
It's a long winded question I apologize, but you know that more flattish sales pace.
Kind of how that reconciles with some of the other builders were seeing and versus your own positioning.
Over the last few years.
Michael Thank you very much this is Mike.
I think the way to start with the answer to the question is we've tried to move to the entry level to the affordable product positioning with express five years ago, and we had been out rolling that out and seeing very good absorption in demand.
For that product very well received over the past five years, and we did fuel a lot of years of double digit topline growth in units.
We as David mentioned before on the call secured a lot of very good long.
Land positions and opportunities in that and we're now at a place in our rollout that it's fairly mature we're getting good absorptions per community and from a balance perspective, we're looking at the pace and price and focusing on what's driving the best returns for our inventory investment and that's what we're seeing today is that we got it.
A pace that were very very satisfied within our communities looking at each one of them individually and then looking to see what can we do to adjust incentives adjust product offering to enhance margin that then increases overall return in those communities as we're working through so so by and large we have.
Done the rollout to the entry level.
And now we're looking to kind of if you would trim the sales on the business plan a little bit to maximize the returns were getting out of those communities and continuing to look for new communities to replace those and so so others, we've been saying for a long time as we've opened up communities, we see great demand and we were not able to satisfy all that demand. So some others have come in and are helping to meet a bit of that demand, but we still feel really good about our positioning in the performance we're getting out of this.
Great now that's helpful and it makes sense, obviously, so thanks for that.
I guess secondly on the lot positioning.
I noticed that the option lot percentage tick down a point sequentially in the third quarter. After again several years of very impressive growth and gains in that in that number.
How should we think about.
The option lot percentage course over the next couple of years.
Obviously, the the low sixtys kind of exceeded your goal or hit your goal.
Faster than expected.
Should we kind of expect this type of range to be more of the new normal or is there kind of another leg up in the option lot.
Percentage over the next couple of years.
I think you asked the question the right way and the term.
Of years to look at this it is a fairly volatile measurement and we have been very fortunate the past several quarters. It has done nothing but increase.
But it will bounce a little bit from time to time, but directionally over the next few years, we would still expect that controlled lot position to climb above its current level.
I wouldn't say that theres going to be a rapid accelerated leg.
With that or anything we can point to as a catalyst to take it immediately up three to five 710%, but continually as we are continuing to adjust our business to focus on returns. We're looking to continue to control more land in partner with more third parties and delivering lots of the builder.
Great. Thank you.
Thank you.
Thank you. Our next question is coming from Matthew Boulay from Barclays. Your line is now live.
Good morning.
Thank you for taking my questions.
I wanted to ask on back on the inventory side.
Just looking at the finished first under constructions back and it looked like the finished spec which was a little higher as a mix.
Then it typically is can you just elaborate a little on why that is obviously you gave us that near term margin guide, but just kind of any implications around margins are incentives from where that finished spec position us. Thank you.
No. We we certainly are in a strong position to sell and to deliver on what our guidance is for Q4 fiscal 19 and in fiscal 20 in the end. The finished spec position gives us an ability to selling closed homes in the same quarter. So we're pleased with that positioning but really no no really implications on our margin guide, we expect our margins to still take up into Q4 and feel good about.
Our positioning in the market to continue to maintain margins at that level. We have a very strong focus on completed unsold specs over a period of time and that number for homes greater than six months that have been completed unsold has stayed in a really tight four to 600 homes range, which on our overall base of inventory of almost 30000 homes is very manageable and as Bill said, we feel like we're in a very strong position for Q4.
Okay, Perfect and then just secondly back on the closings guide.
7% to 9% in the fourth quarter, but just looking at the backlog units and.
As we just talked about that inventory units are down year over year. So clearly the backlog conversion is stepping up nicely. So is it really just what you're seeing in the sales environment. In July is labor, perhaps loosening just what are you guys seeing that's allowing for that type of improvement in backlog conversion. Thank you.
I think one of the things just touched on is that we have a fair bit of completed homes, both unsold as well as sold that will be delivering in the fourth quarter.
Yes in the aggregate our homes and inventory are up year over year, they're down sequentially, which is seasonally what we would expect to do in our business plan.
So we had the homes out there we're going to close in the fourth quarter.
All right got it thank you very much.
Thank you.
Thank you. Our next question is coming from Ken Zener from Keybanc capital markets. Your line is now live.
Good morning, everybody.
Good morning, Jim.
So if we could just do a little math here.
Basically you are running a lot more pre build homes in one Q.
See it closed at higher percent.
In Threeq here is how I look at your 38% number that you disclosed for intra quarter orders closings.
What I'm interested in is Youre closing four for Q at the low end 15700.
Up to 16000.
That's interesting in that you have a hot at some pretty high percent of your under construction, which is how we do everything can you explain why that low end of guidance, which is 54% of units under construction would be up from 49% last year I know you have.
Spec homes, which is normal and you had a last year. So are you getting higher conversion cycles or what is it.
Well to be specific about the completed specs that we've referenced a couple of times, we have on the 6000 actually 5600 completed specs at the end of this year last year. We only had about 3600. So we are in a very strong position to deliver on that guidance and right behind those completed specs. We also had homes that are close to completion and we can also sell in closing the second quarter.
Okay.
Now using that same logic, where you guys well you guys referred to seasonal order peso kind of your pay sequentially.
And in prior years, you know, you've given guidance, where your implication wise.
Because of the entry level.
Or or other type of products.
You saw greater absorption is there. So my question to you is this I mean is there any reason as you gave guidance for flight 20 that you'd see anything other than normal seasonality.
Not that we see today I mean, we don't have a crystal ball to what the spring selling season looks like but where we sit today, we and normal seasonality.
And then last question could you given the mix.
In the third quarter of 38% I think Chris normally 35% interim quarter closings, what was the spread would you say between those.
You know pre build homes being.
Ordered and close versus your backlog.
That's definitely sell and close in the same quarter is almost 100% homes that were already started going into the quarter.
And the margin differential between those in backlog.
And we get generally just look at our spec margin versus our build that job margins generally our specs run a slightly lower gross margin than our build job.
But they turn faster so from a return perspective, there there was a creative and then roughly 80% of the homes, we close our specs. So really our overall margin really does reflect largely our spec margin.
I would say that no.
The houses we sold and closed in the quarter, we probably achieved a better margin on those and we would have if we would have sold in the first quarter or the second quarter right.
Yes, it is interesting dynamic.
Yes, and I think that that is part of the margin lift we saw.
Unexpected thank you everybody.
Thanks again.
Thank you. Our next question is coming from Jack the Cinco from ESI James Your line is now live.
Hi, good morning.
Wanted to just sort of back up on sounds a little bit I think it's been.
Pretty well telegraphed in the market that.
Large competitors, but.
Using incentives to meter volume goal and I think some other.
One of your peers of yours sort of call that out.
Margin beat this quarter is it.
I guess Im curious was it the market in some of those pressures getting better David earlier, you talked about positioning of your assets certainly market segmentation and entry level.
Your margin improvement is how much of that is those three items is it the market just getting better or is it because it is important specifically.
I would say the.
Affordability, we gained.
Affordability on the quarter, because interest rates dropped lever for us.
For reduced a little bit for us.
Both those things help.
Other margin.
But I can tell you when we get up every day thinking about positioning.
And how we're trying to put the right house right lot right community.
And then have it priced.
So to turn.
And so.
And I know, it's sacrilegious site us, but we really don't look at the other builders much at least auto so.
Hits.
We're just trying to get better in our community presentations are.
Our our community offerings.
And stay competitive every day so.
I would say, yes, more often than the market but.
I'm, probably a slightly biased.
Okay.
And then on the apartment business I know.
Started out some kind of a smaller and smaller but then it could go.
I think so far a lot of these near master plans or areas, where you're already building is that mandate for strategy too I mean are you still merchant growth do we see a pivot to some on some of these were comfortable obviously, there's a couple other publics doing the same thing and then just a reminder on.
Project level financing is not is that all on hortons balance sheet are you partnering how do we think about that a year from now.
Yes.
Absolutely when we started this.
We thought it was.
Got to work hand in hand, with our with our.
Our homebuilding operation.
Where we started it was in communities, where we have apartments zoned land we own that typically we would have so.
And felt like we could drive higher value for our shareholders by building it out and so on.
Our long term strategy.
Is to sustain and scale.
That program.
And whether we buy whether we hold them sell them.
It's going to depend on market and cap rates and.
And pipeline.
Feels we've got coming right now as we're learning the business, we're selling them and they actually.
Even bill weight.
It was a little skeptical going into it but.
They're driving pretty good returns.
And as we look at our pipeline of stuff that's under construction right now.
It looks like a business that's going to that's going to be able to what we're going to be able to scale ends up.
Jack in terms of financing, it's all on our balance sheet today, but we are assessing what that looks like in the future and we'd expect to utilize some level of third party capital and at some point.
And ultimately again.
Ultimately it comes back to people and I can tell you what our community you guys have done in establishing platform and getting the right people in the right slots.
Has been very impressive so.
We like what we see so far.
Thank you.
Thank you. Our next question is coming from Stephen Kim from Evercore ISI. Your line is now live.
Yes.
Thanks, and good quarter I wanted to talk a little bit about your 2020 guide in particular this year you decided not to include a margin guide in 2020.
And just wanted to get into that a little bit.
Obviously, there's a lot you know we can't know and.
About what the next year is going to bring in terms of the economy and.
Demand.
Yeah.
From from from rates, but there are two things two factors that I think we can maybe think about qualitatively. One is the margin on spec and the second is the lumber benefit.
Which is you are seeing near term.
On the specs David I believe you mentioned that you thought that your margins on specs are usually a little lower than the build to order, but not right now and in part because of the drop in rates I'm imagining so folks wanted to close quickly and lock in those rates.
That benefit to your margin on your spectrum I would have to be T. O I would assume shouldn't we shouldn't assume that's going to continue unless rates dropped further which is not something that I would assume you would bake into your outlook and then secondly in terms of lumber benefit I'm thinking you know we don't know how much that was I'd be curious if you could give it to us, but I assume that benefit shouldn't be assumed to continue in 2020, either. So these are two things that maybe you know.
On the margin next year are there material offsets to these things that you could point to.
That might give us some some hope that margins could grow next year.
Hey, Steve and Jessica and we've kind of outlined we gave preliminary guidance with what we felt comfortable with today that we can commit to for fiscal 2020, and it's all subject in today's market conditions.
And we're going to focus as we always have on maximizing returns and gross margin is going to be a product as both the overall market and what it takes from a price and pace perspective community by community to maximize returns and so we're not going to try in July to to give any sort of gross margin color for fiscal 20 other than continuing to make sure we're balancing pace and price to maximize returns.
And just.
I'm, sorry, I misspoke, but just just to clarify what I thought I said.
The houses we sold and closed in Q3 were at a higher margin than if we would have sold and closed.
The houses we sold and closed in Q1.
Specs because.
The incentives have abated.
And.
We are seeing.
But less of a need to incentivize a finished house to get it to get it under contract and closed what I see at what I said earlier about spec margins generally being lower than build job margins is still true that was true this quarter and that wouldn't be in a base case scenario we have.
Got it okay that is helpful. Appreciate that.
And I guess could you give some color with respect to the lumber benefit you Didnt really.
Talk specifically about that could you could dimensionalize that for us in some manner.
We probably would quantify that is about it our sequential margin.
Improvement.
Probably about 20 to 30 Bips of tailwind came from.
Lower lumber costs and the homes, we closed this quarter versus what we closed in the second quarter.
Okay Thats really helpful. And then last one for me is I think you mentioned somewhere along your remarks that the build cycle times have not changed you. So your cycle time hasn't improved and it hasn't deteriorated I assume is what that what that means and then therefore I guess I'm thinking into next year or just as we go forward. If we're going to improve the returns without the margin is it possible for you to do that effectively without increasing or shortening your build time on average.
We have not seen our build times lengthen this year and they have not contracted as much as we would have liked other but that does remain an area of focus to US is is how do we better stewards of the capital and turn that capital more efficiently and and getting build times to be as efficient as possible is certainly a huge part of that and that's something we do get up every day and think about how to do that I mean, David talked about we try to enhance margin everyday. We also try to enhance the build time, we talk about our cash flow cycles, that's a big part of our cash flow cycle.
So you're exactly right that is an area that we need to focus on.
Great. Thank you very much guys.
Thank you. Our next question is coming from Mike Dahl from RBC capital markets. Your line is now live.
Good morning, Thanks for taking my questions.
My first question was on.
Still around kind of the pace versus margin or return discussion and following up on just echo what I think you just said and what Mike and.
David also touched on earlier.
I know it's not all.
One size fits all but at a high level, what I'm trying to figure out is you go into the year with a generally speaking kind of a unit goal you put inventory on the ground that positions you to meet that and so the question is.
You go through the year and demand kind of fluctuate is it the right way to think about.
What to expect from your results that the swing line is actually on gross margins versus.
Versus upside or downside on on units.
Just because I think theres still a question of.
Whether there are some bigger picture strategic shift in the way you're thinking about volume versus margin or returns at this point or if this is really just a function of market dynamics.
Yeah, we've got a place I talk about one I'm not traveling division's margin is the great.
If you do a great job of positioning the product.
For the price point and the man that exist, then you're going to you're going to run a very high margin.
In excess of 20%.
If you do a very poor job of positioning prize pool in product.
Then you're probably going to run a lower margin because you.
We are going to hit a certain pace, we are going to maintain production in the community and then just off that process. So.
You know, we do put a plant out there we do.
We do have expectations and when we get everything right the margins run very very high.
When the markets working with us on margins improve so.
But we are going to run at a pace.
Okay Thats helpful. Thanks.
Yes, you'll see in the short term that margin grade is what the differences between how well, we do and how what we want to do.
But in a little bit longer term, we can moderate adjust the pace based on market conditions.
As we are seeing to maximize the return and more broadly as weve over the past five years 10 years coming out of the downturn attained a lot of market share and scale. We've been able to then focusing on how best to maximize the company's return on equity and what are some of the levers we can pull there and consistently driving cash flow trading opportunities for us to de risk the balance sheet.
Invest in new opportunities for us to grow the business or to return more capital to shareholders. We think is the most accretive way to drive value for our shareholders.
Okay. Thanks for that.
And then my second question is just a follow up to Steve's question around lumber you quantified that is 20 to 30 basis points sequential benefit in Threeq you I was wondering.
What the.
What the sequential benefit is in your Fourq guide versus Threeq, you specifically related to lumber and then can you give us.
At a higher level.
Your direct cost trends on a I know your home size is shrinking so maybe on a per square foot.
Basis would be helpful.
I'll comment on Q4 first so it's a bit of tailwind on lumber is a component of our guide of a of a sequential improvement of 10 to 40 basis points in gross margin in Q4 don't have a specific component of that because your mix will will will impact that in actuality, but it is a component of our of our guide for a sequential increase yeah and outside of incentives in lumber are really our revenues per square foot in our cost per square foot were relatively flat sequentially and other than the two pieces that we called out which drove the improvement in our gross margin.
Okay, great. Thank you.
Thank you. Our next question is coming from Jade Rahmani from KBW. Your line is now live.
Good morning. This is Ryan on for Jade, Thanks for taking the questions.
Just first thinking bigger picture do you think that the fundamental structure of the homebuilding industry is is really too fragmented and therefore presents an opportunity for someone like VR hardened to consolidate over the intermediate term.
Well, we've been consolidating and I can tell you our our plan is to continue to consolidate.
If you look at the industry when we went public it was.
Public builders were about 3% of the overall market.
And every employee every year since and leave the publics have gained more market share and we have gained more market share.
Let's see how the problems.
And I for one don't see that changing.
And I guess.
Dovetailing off of that topic do you think that there are material scale economies that would further benefit the company in a majority of your markets.
For.
Is that process somewhat over is that thought process somewhat overblown.
That's that's a big focus of ours, while we're certainly the largest volume builder in the country. We're not number one in every in every market. So we're we're focused on what can we do in each market to aggregate market share and become the largest builder. We're we're top Ivan in 31 of the top 50 markets. So we see plenty of opportunity you can still could consolidate market by market and really that happens at the community level everyday.
Great. Thanks for the commentary.
Thank you. Our next question today is coming from Jay Mccanless from Wedbush. Your line is now live.
Hey, Thanks for fitting me on the first question I had could you talk about.
How orders trended on a monthly basis through the quarter and then if you could quantify what you've seen so far in July .
At energy I think we intend to call David mentioned that we've seen in our June quarter end and our July sales through.
We can't talk about today, yet, but true most of the month and we just see normal seasonality and in line with our expectations. So putting that is right, where we want to be to deliver the fourth quarter, we've talked about.
Okay.
And then I think you commented on it a couple of times, but that the expansion of the affordable product says has basically been completed I was wondering if that applies to freedom as well and maybe what you're seeing from active adult demand and also move up demand since most everyone's been focus on affordable would love to hear how some of these other sectors are performing.
No. The the freedom brand is still early in the rollout.
We have gotten much better at positioning that product.
But we are not anywhere near where we want to be at this point.
I will say the.
Every community we rolled out.
Seems to be a little better positioned a little better reception from the.
The customer and.
It's a brand is going to be a part of this company for a long time and I think will at some point approach, 10% plus of our deliveries.
The the luxury brand.
Again, we continue to get better at it nowhere near where we want to be.
It gives us areas the focus right now.
The affordable.
Oh product lines.
Have driven returns and growth in.
We pay our gas based upon returns on profit so.
Their focus has been on delivering what the bar launch.
But there will be a point in time, we're off.
That will drive a better return than than entry level at least it has been in past cycles.
Very happy with everything we're doing them, we just got to get better.
Thanks for taking my questions.
Thank you. Our final question today is coming from Buck Horne from Raymond James Your line is now live.
Hey, Thank you good morning.
Question.
Touching on the lumber benefit you're getting I was wondering if you could quantify for us a little bit either on a cost per square foot or or otherwise just how labor costs have been trending throughout the quarter and also what you're seeing in terms of land inflation. That's out there and my secondary question to that would just be how how your pricing lots that are coming from Forestar, how do you negotiate those prices.
So.
First one of the question on terms of labor cost, we're not seeing a lot of.
Other changes really stick and brick also labor cost right now quarter to quarter holding it flat we're pleased with.
The relationships and the teams we have out there negotiating those.
Land and development costs are are always a challenge that we work back against a lot of our deep positions and.
And.
Market scale have helped with that and we've not seen a lot of lot cost inflation coming through on this quarter's closings.
So we're happy with the benefit Thats produced.
And then the third part of the question I think it was four stars log pricing.
We look at.
For an opportunity that we bring to to Forestar that we have tied up we negotiate with forestar and they have return hurdles and metrics that they have to achieve and at our land teams know what those are and they'll bring those those projects only on negotiate that take down structures and the pricing to achieve those return hurdles and if it works for both parties. We go forward with the deal at Forestar does it.
If it doesn't work, we can't find a way to make it work than than your snowmobile forestar to us for an opportunity to forestar sources.
We had we had the opportunity to get up to half the lot tied up but thats really a right of first offer first refusal.
On those parcels and they have their return hurdles that you're out there competitively bid to get in the marketplace with other builders.
And they worked with us where it makes sense and then work with other builders, where it makes sense as well so they sell both two to 14 and they sell to third party builders as well.
That's great. Thanks for one.
All right. Thanks, one last one in here at the tail end of it just switch gears to the mortgage market a little bit.
There was some concern are you some questions how did the industry just with the the FHLB discussing ex letting the deal.
I guess, the patch around GFT loans and debt income ratio letting that Patrick buyer.
In early 2021, I know, we're a long way out from there, but just wondering if you could give us a feel or do you have any metrics around how many of your buyers could be.
You know affected by a change in those those underwriting parameters how many of your buyers have.
Ratios over 43% or anything around that could help.
Sure back I think you kind of hit the nail on the head with how we would start which is 2021 is a long ways out and so I think a lot can happen between then and get that fully expiring go away or December some middle ground be reached between now and then we'll see and it's a long ways out in terms of our buyers and their debt to income for the buyers that are you utilizing our mortgage company on average for our entire mortgage company. This quarter. The DTA percentage was about 42% and so we do have a decent amount of our buyers that would be at that 43% or above on but that doesn't mean, just because it's the patch were to go away for conventional theres not a product for their needs will be eligible potentially for an FHLB loan and then the first question. We also always ask is do you have other sources of income that we can verify that we haven't yet to go into that equation. So typically any sort of change that gets implemented like that it's not a 100% roll out our mortgage company just mortgage company.
Does a phenomenal job of working with buyers in our pipeline to find them a different product and if this patch word to expire, which I don't know that that's anybody's base case scenario right now.
I feel confident that we figure our way through it without a lot of fall out.
Thank you so much really helpful.
Thank you Brett.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comment.
Thanks, Kevin.
We appreciate Everybodys time on the call today and look forward to speaking with you again.
In November .
And does the D.R. Horton team outstanding quarter. Thank you.
We are.
Forever Grateful appear for what you guys do out there.
And.
I guess, we'll talk to you sooner than November [laughter]. Thanks, everyone.
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.