Q1 2021 D.R. Horton Inc Earnings Call
Good morning, and welcome to the first quarter 2021 earnings conference call for D. R. Horton America's builder, the largest builder and the United States.
At this time all participants are in a listen only mode.
The 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.
And we'll now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton.
Thank you Christine and good morning, welcome to the call to discuss our results for the first quarter of fiscal 2021 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.
And the deal Horton believes any such statements are based on reasonable assumption and Theres no assurance the actual outcomes will not be materially different all forward looking statements are based upon information available the deal where it and on the date of this conference call and the over and does not undertake any obligation to publicly update or revise any forward looking statements additional information.
And issues that can lead to material changes in performance is contained in the yogurt and the annual report on form 10-K, which is filed with the Securities and Exchange Commission.
This morning's earnings release can be found on our website and investors that the overt and dot com and we plan to file our 10-Q and the next day or two and.
After this call we will post the updated investor and supplementary data presentations to our Investor Relations site on the presentations section under news and events and you referenced.
Now I will turn the call over to David Auld, Our President and CEO. Thank you Jessica and good morning.
And I'm pleased to also be joined on this call by Mike Murray, Our executive Vice President and Chief operating Officer, and Bill wheat, our executive Vice President and Chief Financial Officer.
The D. R. Horton team delivered an outstanding first quarter, which included a 98% increase and consolidated pre tax income to over $1 billion say, 48% increase and revenues to $5 $9 billion and a 56% increase and net sales of orders to 20000 and 418.
Our pre tax profit margin for the quarter improved 440 basis points to 17, 4%, while our earnings increased 84 per cent to $2.14 per diluted share price.
Homebuilding return on inventory for the trailing 12 months ended December 31.
It was 28% and our consolidated return on equity for the same period was 24, 4%. These.
These results reflect the strength of our homebuilding and financial services teams.
Our ability to lever still horton and scaled across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Housing market conditions remained very strong and our teams are focused on maximizing returns and improving capital efficiency and each of our communities, while increasing our market share.
However, we remain cautious regarding the impact of COVID-19, pandemic or other external factors may have on the economy and our operations and the future.
I believe our strong balance sheet liquidity and experienced teams.
And that's very well operating effectively through changing economic conditions.
And we plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and.
And managing our product offerings and incentives home price of self paced and inventory levels to optimize the return on our inventory investments.
And with 42100 homes in inventory and ample supply of lots of continued strong sales trends and January we are well positioned for the spring selling season, and the remainder of 2021 Mike.
Earnings for the first quarter of fiscal 2021 increased 84% to $2.14 per diluted share compared to $1.16 per share and the prior year quarter net income for the quarter increased 84% the $792 million.
Compared to 431 way and others are.
Our first quarter of home sales revenues increased 48% to $5 7 billion.
The 18739 homes closed up from $3 9 billion.
And 12950 of that homes closed in the prior year.
Our average closing price for the quarter was up 2% from the prior year at $304100 and the average size of our homes closed was down 2%, reflecting our ongoing efforts to keep our homes affordable Bill.
Net sales orders and the first quarter increased 56% to 20418 homes and the value of those orders was $6 4 billion.
Up 62% from $3 9 billion and the prior year, we sold 7292 more homes this quarter than the same quarter last year supporting our plan to achieve further gains and market share and scale during fiscal 2021.
Our average number of active selling communities increased 3% from the prior year quarter and was up 1% sequentially. Our average sales price of net sales orders and the first quarter was $314200 up 4% from the prior year the cancellation rate for the first quarter was 18% down from 20% and the <unk>.
The year quarter, we were pleased with our sales pace to date in January and have seen the volume improvement we expect as we head into the spring selling season, we remain well positioned for increased demand with our affordable product offerings and lots of block and housing inventories and Jessica our gross profit margin on home sales revenue and the first quarter was 24.
The 1%, that's 140 basis points sequentially from the September quarter, and up 310 basis points compared to the prior quarter, the sequential increase and our gross margin from September and December exceeded our expectations and reflects the broad strength of the housing market across almost all of our markets.
We continue to see very strong demand and the limited supply of homes, especially.
At affordable price points, and we still have pricing power and are currently using very few sales incentives.
On a per square foot basis, our revenues were up 4% from the prior year quarter, while our stick and brick cost per square foot was down one 5% and our lot cost per square foot was up 4%.
Sequentially, our revenues were flat on a per square foot basis.
Stick and brick cost per square foot decreased one, 5% and our lot cost decreased one 5%.
And we didn't see the impact of rising costs and our December quarter, We do expect both of our construction and lot costs will increase on a per square foot basis, and our homes closed next quarter.
With the strength of today's market conditions, we expect to offset these cost pressures with price increases and currently expect our home sales gross margin and the second quarter to be similar to the first quarter.
We remain focused on managing the pricing incentives and sales pace and each of our communities to optimize the return on the inventory investments and adjust the local market conditions and new home demand.
And the first quarter homebuilding SG&A expense as a percentage of revenues was seven 9% down 130 basis points from nine 2% and the prior year quarter.
The improvement and our SG&A ratio this quarter was better than our expectations and was due to strong leverage driven by our higher than expected volume of homes closed and the increase and our average selling price.
Homebuilding SG&A expense as a percentage of revenues is at its lowest point for our first quarter and our history and we remain focused on controlling our SG&A, while ensuring that our infrastructure appropriately supports our business line.
We ended the first quarter with 42100 homes in inventory and 16003 hundred of our total homes were unsold of which 1600 were completed and we also had 1900 model homes at the end of the quarter due to our strong sales and the second half of fiscal 2040, and the first quarter of fiscal 2021.
Our level of unsold and completed unsold homes is lower than in recent years, we have accelerated our pace of home starts across most of our communities and the past few quarters to ensure we maintain an adequate number of homes to meet demand.
During the first quarter, we started 22800 homes, we have made good progress increasing our homes and inventory and we expect to increase and further in the second quarter as we enter the spring selling season.
At December 31, our homebuilding lot position consisted of approximately 441000 lots of which 28% were owned and 72% were controlled through purchase contracts.
And 30% of our total owned lots are finished and at least 47 per cent of our controlled lots are or will be finished when we purchase them are.
Our growing and capital efficient lot portfolio continues to provide us a strong competitive position, allowing us to start construction on more homes to meet homebuyer demand David for first quarter of homebuilding investments and lot of land and development totaled $1 95 billion.
Of which one of one $3 billion force for finished lots and $490 million, what's sort of land development and $330 million was to acquire land $290 million of our log purchases from the first quarter were for forestall Bill.
Four star of our majority owned subsidiary is a publicly traded residential lot manufacturer operating in 51 markets across 21 states our strategic relationship with <unk> is a well capitalized lots of player across much of our operating footprint is serving us well and is presenting opportunities for both companies to gain market share.
<unk> is delivering on its high growth expectations, and now expects to grow and slot deliveries by 30% to 35% and fiscal 2021 to a range of 13500 to 14000 watts.
At December 31, four stars lot position increased 74% from a year ago to 77005 hundred lots of which 52003 hundred are owned and 25200 are controlled through purchase contracts and 67% of four stars owned lots are already under contract with D. R Horton or subject to a right of first.
Offer under our master supply agreement.
Four story of separately capitalized from D. R. Horton and has approximately $580 million of liquidity, which includes $240 million of unrestricted cash and $340 million of available capacity on its revolving credit facility.
At December 31st four stars and net debt to capital ratio was 31, 8% and their next senior note maturity is in 2024 with low leverage ample liquidity and its relationship with D. R. Horton Force started is at a very strong position to grow their business and navigate through changing market conditions, and Jessica financial services pre tax income and the <unk>.
First quarter was $84 1 million.
And with the pretax profit margin of 44, 9% compared to $35 million and 29, 6% and the prior year quarter our.
Our mortgage company of continued selling of the mortgages. It originates at strong net gains and we began retaining servicing rights on a portion of our FHA and VA loan originations and the third quarter last year because of lower valuations offered by mortgage servicers due to the uncertainty of the impact of the cares act servicing values of since improves and we still.
The portion of our retained servicing rights during the first quarter.
We expect to continue retaining some servicing rights prior to selling them. The third parties typically within six months of loan origination for.
For the quarter, 97% of our mortgage companies loan originations related to homes closed by our homebuilding operations and.
And our mortgage company handled the financing for 68% of our home buyers.
FHA and VA loans accounted for 50 per cent of the mortgage company's volume.
Borrowers originating loans with DHA mortgage this quarter had an average FICO score of 719, and and average loan to value ratio of 90%.
First time homebuyers and represented 56 per cent of the closings handled by our mortgage company up from 50% and the prior quarter.
At December 31 of our multifamily rental operations had four projects under active construction and an additional four projects that are and the lease up phase. These projects represent 2325 multifamily units based on our pace of leasing activity. We currently expect to sell two projects during the second half of fish.
2021 of our multifamily.
Family of rental assets totaled $294 $3 million at December 31.
And as we mentioned and our last call, we are constructing and leasing homes within the single family rental communities and.
After these rental communities are constructed and achieve the stabilized level of leased occupancy each community is expected to be marketed for sale or single family rental operations are currently reported in our homebuilding segment.
During the quarter ended December 31, we completed our first sale of of single family rental community, representing 124 homes from $31 $8 million, resulting in the gain on sale of $14 million. We currently expect one more sale of of single family rental community. Later this fiscal year at December 31.
Our homebuilding and fixed assets included 106 $6 million of assets related to our single family rental platform, representing 13 communities totaling 890 single family rental home and owned finished lots.
We still expect our total investments and a single and multifamily rental platforms to more than double during fiscal 2021 Bill.
Our balanced capital approach focuses on being disciplined and flexible and opportunistic.
During the three months ended December our cash used in homebuilding operations was $269 2 million.
Compared to $178 4 million and the prior year period and <unk>.
December 31, we had $3 $9 billion of homebuilding liquidity, consisting of $2 $1 billion of of unrestricted homebuilding cash and $1 8 billion of available capacity on our homebuilding revolving credit facilities.
We plan to continue maintaining higher homebuilding cash balances than in prior years to support the increased scale and activity and our business and to provide flexibility to adjust to changing market conditions during.
During the quarter, we issued $500 million of one 4% senior notes due in 2027, and we repaid $400 million of $2 five 5% senior notes at their maturity.
Our homebuilding leverage was 17, 3% at the end of December was $2 $5 billion of homebuilding public notes outstanding and no senior note maturities and the next 12 months.
At December 31 of our stockholders equity was $12 5 billion.
And book value per share was $34 33.
Up 23% from a year ago.
For the trailing 12 months in the December a return on equity was 24, 4% compared to 18, 2% a year ago.
During the quarter, we paid cash dividends of $73 million and our board has declared a quarterly dividend at the same level of last quarter can be paid in February.
We repurchased 1 million shares of common stock for $69 $8 million during the quarter and our remaining outstanding share repurchase authorization as of December 31 was $466 million and.
Jessica.
And the second quarter of fiscal 2021 based on today's market conditions, we expect to generate consolidated revenues of six to $6 $2 billion and our homes closed to be in a range between 19000 and 19500 homes, we expect our home sales gross margin and the second quarter. It can be similar to the.
First quarter, and our homebuilding SG&A as a percentage of revenues and the second quarter to be approximately the same as the first quarter we.
And we anticipate the financial services pre tax profit margin and the second quarter of 40 to 45 per cent and we expect our income tax rate to be and a range of 23% to 23.5%.
For the full fiscal year of 2021, we now expect consolidated revenues of 25.2 to $25 $8 billion and to close between 80080 2000 homes.
We expect to generate positive cash flow from our homebuilding operations and fiscal 2021.
However, we are not providing specific guidance for homebuilding cash flow this year, and we prioritize augmenting our housing and land and lot of inventories to support higher demand and.
And you're reinvesting in our home building business, our cash flow priorities include increasing our investment, but the multi and single family rental platforms, maintaining our conservative homebuilding leverage and strong liquidity.
Paying the dividend and repurchasing shares to keep our outstanding share count flat year over year David.
Housing our results reflect the strength of our experienced operational teams and industry, leading market share and broad geographic footprint and diverse product offerings across multiple brands.
A strong balance sheet ample of liquidity and low leverage and provide us with significant financial flexibility.
Affectively operate and changing economic conditions, and we plan to maintain our disciplined approach to investing capital to enhance the long term value of our company.
Thank you to the entire of D. R. Horton team for your focus and hard work.
Our efforts during this time have been remarkable.
Out of your work ethic, and your positive spirit and should continue safely, helping our customers close on their much anticipated new homes.
This concludes our prepared remarks, we will now host questions.
Thank you we will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow up if you have additional questions you may re queue and those questions will be addressed time permitting.
And you would like to ask the question. Please press star one on your telephone Keypad, Inc.
Confirmation tone will indicate your line is and the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up of your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of car Reichardt with B P. I G. Please proceed with your question. Thanks, Good morning, everybody happy newest year.
I wanted to talk a little about your your underlying costs and thanks for the info and stick and brick and land can you can you talk a little bit about what you're seeing in the labor market, David and we're starting to hear a little more.
A few builders starting to say things are easing some others are telling us things are tougher and oftentimes you liked the to talk about specific trade specific markets, but I'm interested just broadly what your expectations are for the labor shortage, beginning to ease or tightened in 'twenty and 'twenty one.
I don't see it being much different punishment on 2020.
Not for us.
We set up.
And try to drive our communities and the most efficient way of making them at the easiest possible possible way we can.
For our price to get in and get out and get their job done we've actually I think through this cycle and then focus on the labor side and have created a lot of efficiency and have expanded our trade base justify.
And I'm, making it easier for them to get in and get out and know what they're doing.
'twenty one.
Our volume is ramping up I think that's kind of that's going to continue to be a challenge but the.
We feel very good I mean, we wouldn't be selling houses if we couldn't build them. So.
Fair enough.
And then I wanted to ask a little bit about the the west region, which the growth is slower than the really significant growth youre seeing and other places and the inventories down sequentially as well and the meantime, and south central and.
Took more order dollars this quarter than you did last quarter. So I'm curious if you're thinking about shifting capital investment among the different regions as you look into 'twenty, one and and beyond is there a is there a day emphasis happening and the west or where is the the slowing is just a function of being out of product in and out of the community banks.
You know the underwriting and the west is much more difficult timelines are longer so through the cycle of our community count continue.
We continue to the slipped down there.
I will tell you.
We have one of the best groups of people and the company kind of West region.
When we talk about platform, we talk about people product price.
And we are certainly strong.
Have a very strong platform out of a list.
One of the returns and Texas, Florida, and Carolinas have.
And then.
Incredible.
And everybody competes for capital and this company so.
I will say.
The west of the <unk>.
And it's an area that I personally and I emphasize this this year and.
And I think you'll you'll say the.
The growth return the call so rapidly and so it'll be posted after the call that our west region and community count was down 9% year over year, and 10% sequentially, which compares today and the company average, which is actually slightly up and but trades.
And that'll do that Jessica alright, thanks, so much everyone. Congrats.
Okay.
Our next question comes from the line of John Lovallo with Bank of America Merrill Lynch. Please proceed with your question.
Good morning, guys and thank you for taking my questions as well the.
First one just on the NIH be had noted that build of responding to a growing more and more concerned with affordability.
Home price appreciation and also with the rates.
Sort of grinding higher and maybe not specific to D. R. Horton book to the industry. I mean, how are you guys thinking about this dynamic and and do you see any risk to the industry wide demand at the spring approaches here.
Of course.
This is why and good morning.
Always focused on affordability, that's something that's consistent across the platform and.
Not as well versed and speak to the industry, but and our communities we're focused on providing the value.
And at what price point were at and so whether we have buyers moving up from their current housing situation two of D. R Horton home.
And where their first time homebuyer with 56% of our buyers and the quarter for first time homebuyers and focused on providing an affordable home for that part of that fits and their monthly budget. We continue to see healthy credit metrics across that buyer group of our FICO score was 719 this quarter I. Thank all of our express brand stand alone. It was almost 710 and and then as well.
As I mentioned on the call. Our average square footage has continued to tick down slightly on a year over year basis and.
And as home prices have risen.
And but what we typically see is first time buyers want and by as much home as they can get for the money and they are buying out of need not of discretionary purchase and so if home prices the red laser and they just buy a little bit less.
Yeah that makes a lot of sense and then how are you guys thinking about the potential for increased environmental regulations under a body of administration and what this could mean for land development cost and timeline and things of that nature.
Well I don't think its kind of help affordability and ideally it's going to extend time.
Uh huh.
We're well positioned with the.
The only control over 400000 lots.
And again.
Oh, we're going to we're going to focus on affordability and.
So the regulations and <unk>.
Maurice of what I'll call and he's going to become more challenging.
Given our position and our people and I think where we can meet that challenge.
Thanks, very much guys.
Thanks, Dan.
Our next question comes from the line of Stephen Kim with Evercore. Please proceed with your question.
Hey, guys fun times.
You know its interesting that the way it sometimes of the builders of trade. It makes it seem like people think you just out of the beneficiary of good luck, but I'm reminded about that statement of luck is what happens when preparation meets opportunity and you guys have done a great job over the last couple of years preparing for the situation.
And so I wanted to ask you about your comment as to capital allocation.
Because you indicated there that you are wanting to carry higher cash levels than normal for the foreseeable future I think you made reference of some uncertainty.
You know and the and the current environment.
But you know arguably homebuilding is always difficult to predict and so I'm curious what are the good rule of thumb from modeling your cash levels going forward and what are the kind of things that youre looking to fade.
Or dissipate.
In order to pave the way for you to hold lower cash levels than that.
Sure Good question Steve.
Just to get to the point in terms of the expected levels, we would expect that each quarter and to maintain at least $1 billion of homebuilding cash, but would expect most quarters to see between 1 billion and of half of $2 billion and let's say the the primary driver behind that shift over the last year as we've been.
And building a little bit more is just our significant increases and volume and scale and activity.
Feel like it's prudent to ensure that we have sufficient cushion to manage.
The significant sudden changes and the business to avoid having of any potential liquidity crunches that just gives us that much more flexibility to respond when we see opportunities of the market.
And so we've seen a number of of of significant shifts in our business over the last few years from a sharp increase in interest rates, which decreased demand and late late.
18, two of the pandemic disruption in the spring of 2020 to the and the very significant increase in demand that we saw and in the summer of 2020, and and and ever since and so from that standpoint, having a having a bit more cushion of bit more liquidity to respond whichever direction, we need to go and the bill.
We just feel like it's prudent I don't see us changing that strategy.
I think that just puts us in a very strong and flexible position to respond to market changes.
Okay, Yep, certainly sounds like we ought to be modeling that on the longer term basis. Okay.
The second question relates to the pretty Awesome margins you all reported this quarter and you know I think you just gave guidance as to that margin fairly recently and so I think of lot of folks are just curious as to what drove the the upside in your margin this quarter and the Pea.
No to the fact that your guidance for the March quarter suggest that it's more than just the temporary spike per.
And thank you still being conservative, but love to hear what drove the upside surprise in this quarter.
So, let's see let's say the first thing we expected to see this quarter that we did not because we've been seeing cost increases coming into our business over the last quarter or two and we expected to see a bit more of that come through and our closings in Q1, which we did not that's still coming we can see it coming through of backlog and we expect to see some of those cost increases start to to hit.
Our margins in the coming quarters that being said, we still of a very strong environment, obviously with the ability to raise prices very low incentive levels and so we do expect at this point now with that additional visibility of another quarter to be able to maintain the current margins that we're showing which obviously are very very strong levels.
We've really had price per section honest the IRA.
Michael on the material of front and we've seen in a very neutral impact from materials other than a little bit of headwind from lumber last year and.
And one of them starting to tick back up so that that's gone into our commentary as well, but really it's a function of home prices and if rather than significantly and building product companies have cost inflation as well and so we are experiencing and increases in material costs that we didn't see as we said flow through in the December quarter, but we do expect those to start flowing through.
And and the rest of the year.
And I'll, just say that our operational teams are doing a great job of controlling costs.
Where we see increases we look for efficiencies to reduce costs and the.
The honest what I think we were a little bit surprise, our stick and brick per foot actually went out.
And that's just a phenomenal job our people yep.
Absolutely great. Thanks, very much guys and best of luck.
And I just like the.
Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Good morning, Congrats on the quarter and thanks for taking the questions.
I wanted to ask about the lot position of of 441000 and I think he said it really suggests that any material additions during the quarter. I guess, you know of number one could you speak at a higher level just around what that signals around your view of the sustainability of housing demand and number two just the the color.
Around the lock you out of during the quarter kind of duration of those lots a lot of inflation if any of that could actually impact 2021. Thank you.
Sure and Matt Youll notice that the most of that addition to the lot position did come in and in the form of auction laws. We continue to significantly increase our option lot position.
We had a new.
On our last call that we do expect our all of the loss of increase modestly in the and they did kind of get back to a normal level there.
We've been on an ongoing.
No effort to expand our relationships with developers across the country and of course, our relationship with four star continues to bear fruit as well so a significant portion of the additions to our lot position through options came from a third party developers and.
And our relationship with four star and with the.
The significant growth, we've seen and demand and significant.
Volume increases that we've seen that we certainly want to make sure we stay and positioned to maintain our we probably have stepped up our efforts to ensure that we're keeping our pipeline of sufficiently out in front of us with the volume we're seeing today.
The volume we see the day now as well as you know looking forward to the more of a medium term, where we just don't see a lot of overbuilding of lot of excess supply and the marketplace relative to household formation of demand and so we want to maintain as bill said adequate.
The port of inventory for the medium term band and so that's why you've seen our controlled lot position increased and.
And the fact that we were so heavy option.
It does allow us to be.
A little more aggressive and the tiny things up so it's.
And again positioning for the future.
The capital efficient with the options.
Okay got it got it that's very helpful color.
Second one I wanted to ask about a S p's.
I think I think bill you might've mentioned or.
And thank you said the order asps of $3 14, and the backlog ASP as rate there as well so I'm just curious number one.
Like for like versus mix of if that's just you know, perhaps emerald is getting a lot better.
But then number two if I look at the closings and revenue guidance for the year it.
It seems to suggest the the closing asps and settled back down a little bit I'm. Just wondering if you. If you can reconcile that and just how to think about closing asps for the year. Thank you.
Sure.
We always see of higher ASP, and our backlog than we do and our sales on our closings because of higher priced homes generally of bigger and take longer to work their way through so that's not necessarily unusual but yeah. So with our sales day as Phoebe has a 314 this quarter of that that's definitely showing a continuation of some price appreciation and and so in the near.
Term.
We would expect I think to probably still see some potential upside and that being said our operators and our team and our people are very focused on providing affordability and so we're going to keep an eye on all of the price points and the payments that are that our borrowers need to have to afford to move into our homes and so are we.
We never plan for significant price.
Price appreciation and beyond a quarter or two because we always know that at some point, we will make some adjustments and our operations to make sure we keep of price points affordable and our.
The ASP per square foot on a year over year basis was up 4% sequentially. It was actually flat.
And so the guidance doesn't kind of like all of the price you know it doesn't reflect quite all of that price of it reflects that we would we would still continue to manage very very closely on the affordability.
Okay, Thanks, everyone and congrats again.
Okay.
Our next question comes from the line of Eric <unk> with Cleveland Research. Please proceed with your question.
Good morning.
The other the.
The of the increased delivery number for the for the year.
Curious what changed.
And where that changed and thinking a bit of geography and mix and.
Also the production pace, but just sort of the the things.
Things of that change the result of and you've taken a little bit more optimistic on full year deliveries.
I think we've seen consistently strong demand across our footprint. Eric in addition, as we've gotten the store.
<unk> stuff and the and the first quarter, we started almost 23000 homes with the with good visibility. The starts for the next couple of quarters, and so that gives us more confidence and the number we can deliver for the full year.
So just a little little player of little more little more of the year coming into focus with what we're gonna be able to accomplish.
We're also seeing that.
Good start to the spring of January which again, it's the.
The back half of it and we did well.
We don't want to put a number of out there that we don't feel really good about so.
And we feel really good about that.
From a.
Production pace and inventory pace.
Anything different that you're doing there.
And I have done there.
Also allow you to get more homes produced.
Anything different.
We're talking about sustainability and and growing the scale of our platform and doing it and a measured approach that allows us to hang on to those increases so I wouldn't say, it's anything differently. Its just further execution of the same strategy of growing our capacity for production and growing our market share market by market and that's what our our.
The teams thinking about every day, when they're getting up and going about their jobs is how do I get a little better today and go out of a little more production capacity and my market close.
Great. Thank you.
And Sir.
Our next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your questions.
Hey, guys. Good morning, Congrats on the great results.
My first question I was I was hoping to drill and a bit more on the land size of follow up to Matt's question earlier, you know if I if I'm just kind of looking at the growth and Youre a lot book and obviously account for all of the closings and you've had over the last year. It looks like over 40% of your current lot book or a lot of lots controlled and actually been tied up over the last 12 months.
Since the since the pandemic began and I'm curious you know we we hear from a lot of builders you know when we underwrite land, we assume today's absorptions today's pricing and and obviously the current environment makes that a little bit tricky because you're your margins and your absorptions are at cycle highs.
I'm curious as you look at the composition of the land you have tied up over the last 12 months could you talk a little bit about how you're thinking about underwriting to gross margin return on inventory to absorptions of whatever metrics you guys think about internally and how that compares to where you are generating business today.
You know our underwriting really hasn't changed much.
And we've seen and absorptions increased.
It does it does and when.
And we're requiring until your cash back and.
10 months of absorption you can you can buy more lots of stage of Canada five of them up the absorption. So we have seen the scale of the deals and get a little bigger.
But the.
Physician.
The.
From a pricing and location standpoint.
Uh huh.
I don't see that we've given up much of it.
And the deals we're doing today versus the deals we were doing two or three or four years ago.
Scale is bigger the face sizes are bigger.
Log prices have been pretty pretty stable.
And all of them.
And like I said this on the last call when when I'm traveling and looking at deals.
And on the deals that we would put all of the Brooks.
This quarter.
We're better than most of the deals that we had all of the books. So it's very.
It gives me a lot of confidence and our guys are doing a great job.
And.
I don't see deterioration and our our lot position from a marketability of really even of pricing standpoint.
Got it.
That's helpful color.
The second question on the closing guidance for the year I just wanted to maybe get a little bit more commentary there. So if I look at your <unk> Guide your closings are going to be up and you know just under 40% through the first half of the year and for the full year guide the midpoint is think of the.
The 24% increase which obviously is incredibly strong and I'm just curious what's driving that deceleration and the back half because your backlog is going to be a very strong strongly. So is this a function of conservatism around cycle times and just you know the backlog conversions might be a bit lower than years past because of how elevated the backlogs are or is there something else.
That's that's driving maybe that you sell and the back half.
It's really the stage of construction of our homes are in al and we have a lot fewer completed specs today and then we typically have and as a result, we're selling and closing and fewer home intra quarter than we typically would I think the quarter that was and the 20 mid <unk> 20 per cent range and typically it's in the high thirty's or 40 per cent range and so it's really just the phone.
And of the stage of our inventory and we did get as Mike said, almost 23000 home started this quarter, but a lot of those are still and the early stages of construction and and so a lot of the homes that will be starting here a little bit later in the year wont be available for this fiscal year, but they'll put us in a very good position to continue growth and fiscal 2022.
And when you look obviously at the year over year increases we started to see some very significant year over year increases in Q3 last years, Q3, and Q4, where we're much more significant sort of the day year over year increases going forward for naturally not going to necessarily continue at the same pace. They are right now, but we're still from the onyx.
<unk>, a very strong year of very strong year over year increase for fiscal 'twenty one.
Sure absolutely. The that's helpful. Thanks, guys and good luck.
Okay.
Our next question comes from the line of Michael Rehaut with J P. Morgan. Please proceed with your question.
Thanks, Good morning, everyone and congrats on the results.
The first question I kind of wanted to ask about the underwriting and and the gross margins and.
Maybe from another angle and and apologies, if maybe I'm, beating a dead horse here, but you know with.
With the gross margins at 24%, obviously, that's you almost have a a very good problem to deal with and and kind of keeping those margins of sensibly the extent possible.
And at these levels, which are you know kind of rarefied air for you historically.
Yeah.
You mentioned earlier.
That you haven't seen much appreciation of the lot prices like price as being pretty stable and and the deal flow is pretty attractive right now right.
Home price appreciation works of moderate.
You know, obviously today and.
Let's call it of high single digit.
Type of year over year dynamic on a on the same store and spaces.
And if that were to moderate more of like a low single digit rate.
Given where you're underwriting the deals to today should we expect.
And that gross margin did come in a little bit.
Over the next couple of years is that the right way to think about it or are there other factors that maybe we're not appreciating.
We really have no insight to the gross margin and the next few years I mean gross margin really the function of the market. Mike We're focused on the underwriting to return and although we don't see it right now even if we did see a compression of our gross margin for whatever reason and affordability interest rate something here and we don't foresee today is an issue we can see.
Will generate very attractive returns on our current land bank and with the efficiencies of David is kind of already talked to and in our business today and our ability to keep turning our houses and but we feel very comfortable with our current lot position and that we are going to be able to offset cost going forward and hopefully hanging around this.
<unk> 24 per cent range that really further than a quarter out we don't have a whole lot of visibility because we do Turner houses and much more quickly I think and the industry by and large and so we have the best early read on cost and gross margin and the market.
I can't emphasize enough. The gross margin is not part of our underwriting hurdles returns of his our underwriting hurdle and certainly higher gross margins you know can can.
And generate higher returns, but we focus first and foremost on hitting returns hitting our absorptions and each community and.
And then the market, sometimes we'll give you more margin and then you may have underwritten.
And if you look at all of our average sales price.
You know we are.
We are significantly more and portable affordable and then most of our payers and the kind.
And the whole living space and.
And our land portfolio and our operating structure.
Our are designed and geared.
To drive the affordability so.
You know are we when I look at the competitive makeup out there.
And both of the resale market, which is really today our primary competitor.
At this price points and the.
Our peers in the industry it's.
And we feel we feel very good about our kind of position and.
And which allows us to underwrite the.
And the ex U.
The.
The positions that we believe will keep us on the interest rate.
Right and I appreciate it.
I guess secondly, I just wanted to zero in on the SG&A for a moment you know the results were significantly better than what you were looking for I think by order of about a 100 basis points.
Yes, your closings were only modestly above.
Above guidance.
So I was wondering.
You had mentioned you know you know leverage off of the strong volume but.
You know you really had and instead of 40 basis points, a 140 basis points of the year over year leverage.
You know and and additionally, you're expecting.
SG&A ratio to be flat sequentially versus historically.
Yeah, a little bit better. So I'm just wondering if there was anything specific to the first quarter and apologize if I missed this earlier that benefited us.
This price you know this past quarter more on the one time basis of what kind of drove that differential.
Michael Thank you.
You you touched on and part of it and deliveries were a little bit ahead of what we had guided to an addition of ASP and he was a little higher which drives a little more SG&A leverage.
So I think Jessica touched on before and the lower level of completed inventory, especially of the completed specs that we're carrying and the business today able to operate the inventory portfolio of very efficiently.
And that's that requires less SG&A to maintain and care for those homes, while they're sitting completely because we do one of those costs through of SG&A. So as we have less of those we had around 5000, a year ago and today, we have about 1600 and so that's that's an improvement and a tailwind as well and although we guided to flat flat SG&A.
Sequentially on a year over year basis, it would actually be approximately 40 basis points of leverage which is and it's still a pretty nice news and when we think about it on an annual basis as our SG&A the already at record lows and you know, we're not going to ever be able to model and say that our SG&A is going to be down more than say that on an annual basis.
And can we ultimately and maybe get there. If if you continue to see prices rising ASD played the big role and that I'm sure, but right now we feel like you know of leveraging our SG&A of 40 basis points on the year over year basis is the role of niceness.
Nothing one time.
And yes, there are some changing conditions and and the volume and pricing itself, but nothing nothing one time of the quarter.
Right. Thanks, so much guys.
Thanks, Mike.
Our next question comes from the line of Nishu Sood with UBS. Please proceed with your question.
Thank you. So first question I just wanted to ask was around the demand trends.
You know a lot of folks are wondering.
The demand has been so strong what's the kind of look like when life returns to normal I mean, clearly we're far from being.
<unk> back to normal, but you know and like you know the last quarter, obviously vaccine news. There's some hope out there is there anything you can you you've seen in terms of the traffic or what folks are looking for how it's evolving that gives us any any insights into how your how your home buyers are looking at thanks.
You know the the demand out there I think.
Is really driven by demographics and.
And and I think it has been accelerated.
Most of the pandemic and People's.
Desire to become part of our to find a safe environment for their family.
And I really don't see that demand.
The issue changing.
So I mean, it's.
It accelerated the long term the long term.
The program and it's and it and it got accelerated and I'll discuss the state. So I mean, we are positioning we are where we are driving.
The to take advantage of as much of the demand as we can and.
It's.
I mean right now today, it's it's it's very good out of a lot of our floor plans and issue actually already incorporate and flex space and depending on what of buyers looking for today, whether it be of home office of second home office of learning space for their kids and those types of things. We've we've already always had floor of planes that can occur.
On the date that and and we can continue to adjust our starts based on what those home buyers of potentially looking for and then of the things that have always been true or and as people start their families and have children and they generally want of backyard for their kids. They want and then public schools and maybe a garage for their cars and other things have kind of always been true that go along with the demo.
As excited of the equation the the David was talking to so I would say other than the acceleration from the pandemic and that's been positioned and the right places with with a lot of different floor plans to choose from and no significant change on that fact and still the strongest demand is at the most affordable price yet and so and that's been a trend that we've been saying for quite a while obviously, we're very well positioned and.
Take advantage of that and the environment right now of low interest rate, that's accommodated for that as well and and it's certainly a benefit for that demand as well, which you know for right now we don't really see that changing much in the near term.
Gotcha Gotcha makes sense.
Second question I wanted to ask was around your inventory levels.
And so demand has been so strong obviously you folks have ramped up your starts considerably but still remain the standard just looking at the at a metric like your inventory against your backlog.
Just kind of sizing of it still remains behind where it would be normally our read of market, where demand and theres. Just so strong it will be difficult to get back to your normal our targeted levels of inventory or do you see as the year progresses here and there could be some some progress on that even if demand does remain as strong as it has been.
The demand remains at the exact level of it is today and be very challenging for us and get back to a historical relationship between total inventory and backlog and demand is that good and we looked at our starts capacity you know neighborhood by neighborhood week by week and we are increasing.
The increasing.
That capacity over time to make sure it's sustainable and we're doing it with.
With our trade partners and mind, so while we're doing that demand continues to expand to absorb that additional capacity, we're putting into the marketplace.
That's the price points, we're serving really more focused and issue on homes conversion and backlog conversion I mean backlogs and the function of what we're selling and and we're going to sell.
Well, what's out there from the demand perspective, and ultimately we will get the houses started we've got the lot positions and do it unlike anyone else in the industry and we wouldn't be selling the houses. If we didn't have the lot and until kind of a sliver of all about our cost structure and and what kind of return we're going to generate on those houses and so we're really focused on the houses we have and inventory and how quickly we're turning of.
And rather than the backlog conversion metric and trying to improve our housing inventory turn and generally we turned out at least two times of year last year, we did a little bit better than that this year and now with our new guidance for reflecting better than two times as well.
We talk to our operators of all the time about the bill.
And this disciplined focus and consistent and your starts of new communities.
And that's how we're building capacity to deliver more homes.
But the but let us.
Execution of the community level.
Got it thanks, so much.
Our next question comes from the line of Anthony Pettinari with Citi. Please proceed with your question.
Hi, good morning.
I'm wondering if you could talk a little bit about expected seasonality for the year and and given the buyer traffic patterns. You've seen does it lead you to believe you'll see kind of of traditional spring selling season or could demand maybe be more evenly distributed throughout the year and I think we've heard from others that buyers are visiting homes, maybe on what used to be you know off peak days of off peak.
Ours is that something you've seen or can you just comment generally on any kind of changes you've seen and buyer behavior.
Yes, we've certainly seen very different seasonality throughout 2020 are strong and stronger demand through the summer and fall winter and two.
<unk> thousand and 'twenty than we've seen historically, so we're coming off of some of unusually strong periods, but that being said with what we've seen thus far of January we're seeing we're seeing increases in volume that we would expect to see a range of remains to be seen whether it will slip and still see the same percentage of relationships between our Q2 and Q1 that we've seen historically or not but but right now we.
C of very strong demand environment.
Definitely some different patterns and and buyer behavior than we've seen historically, but but feeling good about what we can see going ahead with the very strong Q1, what we see the same sort of patterns throughout the fiscal year. We historically was saying that I would I would expect there'll probably be a bit of flattening.
And if some of the historical patterns.
But obviously off to a very good start and and I think.
And the way the things we're looking at right now and we're optimistic about the spring.
Okay. That's helpful. And then it seems like some of your peers are pushing price and slowing down the sales pace. Given you know some production constraints I'm wondering if you're seeing markets, where price increases by competitors or maybe a bit steeper than yours, and you know and has that improved your value proposition for customers or maybe.
Maybe to ask the question another way do you think your of affordability and it just maybe stronger than it was 12 months ago with competitors raising prices or any kind of general comments on the pricing environment.
But if you just look at our average sales price.
Kris over quarter over quarter over quarter compared to our competitors and yeah. So I would say.
The competitive advantage has increased and and Farooq.
But again, it really comes down to the ability to deliver the homes and and I think that's when we gave the largest competitive advantage.
With the the.
And the discipline around what we're doing and and the focus on efficiency over the last couple of years. So it's true.
Uh huh.
It doesn't do any good to sell the house at any price can't deliver.
We're focused on the delivery side of it.
Yeah.
Expanding our capacity.
The becoming more and more efficient.
Our processes.
Okay. That's helpful I'll turn it over.
Our next question comes from the line of Jack the Genco with Susquehanna. Please proceed with your question.
Hi, good morning.
You talked a lot about returns and we've talked about you know underwriting and not really focusing on margin and David you sound pretty constructive on the on the land environment I guess my question would be.
And I'm thinking about Horton.
Longer term 60, 40 option versus owned mix coming.
Coming into the 72 this quarter.
72 of the new 60.
And if the goalposts changed or is it really more of an interim function.
And that's where the market's kind of brought you in terms of availability of new acquisitions over the last couple of quarters.
And actually 70% of new 60.
And what can we wait we're going to continue to try to the grind that number higher.
And ultimately it comes down to the relationships and execution of the field.
So.
Uh huh.
And my my expectation over time is that we will continue to get it right.
Point here of point there.
And the drive better and better efficiency capital efficiency through three of our business.
And through our company and ultimately probably the industry.
Okay, great. Thanks, and then.
And with the single family.
The rental sale.
It would appear that the gross margin on those 124 homes.
Well, it's pretty healthy and maybe in excess of the of the of the.
The company margin and mine.
Looking at that the right way or is there something I'm missing obviously you've got.
And costs and everything below the line, but just from a just from a you know from a purely of margin perspective. It looks like that was a really healthy margin on the sale of those those units.
Yes, we were very pleased with the transaction and.
And we look forward of that to continue to explore that business. It seems to be attracting a lot of capital and a lot of interest today, and we expect to be able to take advantage of that.
Alright, thanks, taking my questions.
Thank you Jack.
Our next question comes from the line of Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you and congratulations on the results.
And my first question is just you know I wonder if you could perhaps quantify a bit more of the comments around January and you're just perhaps framing the magnitude of of what youre seeing either sequentially or on a year over year basis for us.
So the three weeks and we.
We rarely Colombia and on a single month much less just a few weeks, so but suffice it to say what we generally expect when we get into January as we expect there to be a step up and traffic and and volume coming through our weekly sales pace and so we have seen that we've seen three weeks of of of of weekly sales, thus far and and there.
It has been that the that discernible step up in volume and January versus what we had seen in the in the December quarter. So were encouraged by that several years ago, we would of the spring selling season, the kick in with the superbowl effectively at the end of January early February the past several years this year being no exception, we've seen that the sales.
<unk> accelerated.
Coming out of the holidays after January one.
Okay. Thanks, that's helpful and my new.
Next question is around you know what youre seeing in terms of some of the suppliers. You know, we've obviously heard that with the ramp in volume and and some of the supply chain issues that that those companies are seeing and their own business is that there's been some constraints you know, maybe especially and in some areas like appliances and Windows can you just talked of what Youre seeing there.
And and I guess, maybe in some areas is there anything that you've heard more recently around the the issue with some of the semiconductor supplies and and some of the issues that they're seeing and those industries.
So it really various products are in short supply of do it kind of depends on what market and what day and would agree with your sentiments on both windows and appliances, and we've had challenges and in both of those and our product partners have been working hard to support our business and we don't have to push back any closings and we've been very pleased.
Where we have to we substitute upgrade and even install other brands. It is necessary to make sure we're not having to push clothing I don't know that I have anything specific on the semiconductors that I've heard and as of late but I I really would've put windows again is the headline of this quarter and it's probably actually got and even a little worse than when we said that last quarter.
Got you okay. Thank you.
And Sir.
Thank you do the time constraints. Our final question will come from the line of Buck Horne with Raymond James. Please proceed with your question.
Hey, Thanks for squeezing me and I appreciate it I'll try to keep this one quick.
The question, we get a lot from investors and kind of where is all of the buyer demand coming from how sustainable that it did and I'm. Just curious if you get from a high level.
Back of any evidence of.
The population migration and that seems to be happening around the country or are you seeing any noticeable uptick and out of state buyers are out of market buyers versus your historical normal and and has that changed at all one way or the other dependent make began.
I would say anecdotally, yes, I mean, we continue to see and Texas and Florida as our two styles of states with you know a lot of diversity and just even within those states that clearly there has been a slight and a lot of cases from the coast and Texas, The Florida. The Carolinas and then you know from the West Coast.
And the Salt Lake and the Vegas in the Phoenix, and so I think we would expect that trend to continue and in that regard I'm really like our positioning and as it pertains to our lot position across the country also liked the fact that you don't see existing home inventory levels.
The for sale.
And at high levels at all the supply is very tight for a home that are available and the next 60 to 90 days and that has been and consistent part of our business model for forever is to be a alternative to that used home and provide our customer with the new home.
On their time line and Buck you didn't ask this specific question, but we've had a lot of conversations over the last quarter or so about just the the age and you know for the last however, many years about a millennial is ever going to buy a home coming off and you know of around 35 per cent of our business and the 2019 was to buyers 34 and under.
We saw that pretty quickly and the pandemic and through the remainder of fiscal 'twenty and and now into 'twenty, one and pick up to the low 40, and so I think of you know 42% versus 35 per cent is a pretty big move and and we've seen that settle out to where our over 40 per cent of our buyers of 34 and under I think answering that question the yes millennials.
And are going to own them.
And I think that's great.
Okay, and you don't get everything worsening.
And everything we're saying it's been the long term trends that we've been experiencing really coming out of the downturn.
The COVID-19 accelerated it and.
It feels like right now the third acceleration.
Out of the new norm going forward.
And that's extremely helpful. Thank you guys appreciate all that color and and just one last one on the single family rental business just follow up on that of that.
And the outstanding community create I'm just wondering.
You mentioned that you plan to double your investment and the platform of the course of this year. So it sounds like there's quite a bit of scalable opportunity. How do you think about the total market opportunity for four of them developing single family rentals within your platform and you know.
Would you continue on the method of building it yourself pre leasing it and and then and flipping it stabilized or do you would you pre pre sell some of these or partner with investors and ahead of development. How do you envision the scaling up of the vet business.
Where we are today with the the program as we are still learning the business and the execution side of it we.
We were very pleased with the the first transaction and as we learn more about the market. We will evaluate various alternatives for how we want to go about scaling it up and ultimately capitalizing it.
But the but we need to we need to know more about what we're doing we do see a lot of opportunity. We think there is some portion of the.
So the population that will be a great customer for this product that the desires of single family lifestyle, but the main off for whatever reason.
Purchasing of home and so we want to build up to be in a position to help supply this and Bob just to clarify of the comment about doubling our investment this year and refers to our entire rental platform, both multifamily and single family and for our total assets and the combined platform at the beginning of the year was $330 million. So we expect that $3 30 to more than double in fiscal 'twenty one.
Got it got it thank you so much and congratulations.
Thanks, Mike.
We have reached the end of the question and answer session. Mr. All of that I would now like to turn the floor back over to you for closing comments.
Thank you Christine.
We appreciate everybody's time on the call today and.
Look forward to speaking with you again with our second quarter results and I.
And to the D. R. Horton team an outstanding first quarter.
And that up to have an unbelievable year stay.
And stay humble stay hungry and stay focused.
Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.