Q2 2021 D.R. Horton Inc Earnings Call
Good morning, and welcome to the second 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 and interactive question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder of this conference is being recorded.
I'd now like just from the conference over to your host Jessica Hansen, Vice President of Investor Relations for D. R. Horton thinking you may begin.
Thank you Melissa and good morning, welcome to our call to discuss our results for the second 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.
Although D. R. Horton believes any such statements are based on reasonable assumptions. There is no assurance that actual outcomes will not be materially different.
All forward looking statements are based upon information available the D. R. Horton on the date of this conference call and D. R. Horton does not undertake any obligation to publicly update or revise any forward looking statements.
Additional information about issues that could lead to material changes in performance is contained and Dr. Horton is the annual report on form 10-K, and its the most recent quarterly report on form 10-Q, both of which are filed with the Securities and Exchange Commission.
This morning's earnings release can be found on our website and investor that the over and Dot com and we plan to file our 10-Q early next week. 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 for your reference.
Now I will turn the call over to David Auld, Our President and CEO. Thank you Jessica and good morning.
And I am 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.
You know of Horton team delivered a strong second quarter highlighted by 95% increase and earnings to $2.53 per diluted share on.
The consolidated pretax income increased 90% on a 43% increase and revenues to $6 $4 billion and our pre tax profit margin improved 450 basis points to 18, 3%.
Net sales of orders for the quarter increased 35% the $27050 on home.
And our homes and the inventory increased 38% the 46001 of.
Our homebuilding return on inventory for the trailing 12 months and at March 31 gross.
31, 2% and our consolidated return on equity for the same period was 27, 1%.
These results reflect our experienced teams and expanding production capabilities, our ability to leverage D. R Horton and scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Housing markets.
Conditions remain very robust and we.
We are focused on maximizing returns and capital efficiency and each of our communities, while increasing D R Horton and market share.
And I believe our strong balance sheet liquidity and low leverage position us very well to operate effectively through changing economic conditions, we plan to maintain our flexible operation and financial position by generating strong cash flow from our homebuilding operations and managing our product offerings and Fedex home price.
<unk> sales pace and inventory levels and optimize the return on the inventory investment.
Earnings for the second quarter of fiscal 2021 increased 95% to $2 53 per diluted share compared to $1 30 per share in the prior year quarter net income from the quarter increased 93% to $930 million.
Compared to $483 million, our second quarter home sales revenues increased 41% to $6 2 billion on <unk>.
19701 homes closed up from $4 4 billion on 14539 loans closed in the prior year, our average closing price for the quarter was up 4% from the prior year at $313200 and the average size of our homes closed was down 2%, reflecting our ongoing.
Calling efforts to keep our homes affordable mill net.
Net sales orders and the second quarter increased 35% to 27059 homes and the value of those orders was $8 8 billion.
Up 47% from $6 billion from the prior year.
And we sold over 14200 more homes and the first half of fiscal 2021, and the same period last year supporting further gains and market share and scale.
Our average number of active selling communities increased 4% from the prior year quarter and was flat sequentially R. M.
Average sales price on net sales orders and the second quarter was $327000 up 9% from the prior year.
Insulation rate for the second quarter was 15% down from 19% and the prior year quarter.
Our local teams from managing the sales order pace and each of their communities based on their lot position number of homes and inventory and pace of home starts and production. They are increasing sales prices were supported by the market, while remaining focused on providing homes at affordable prices.
We are pleased with our sales pace to date in April and remain well positioned and the strong market with our affordable product offerings lots of lines and housing inventories and Jessica our gross profit margin on home sales revenue and the second quarter was 24, 6% of.
50 basis points sequentially from the December quarter, the increase and our gross margin from December to March exceeded our expectations and reflects the broad strength of the housing market across our footprint.
The strong demand for a limited supply of homes has allowed us to raise prices or lower the level of sales incentives and most of our communities.
On a per square foot basis, our revenues were up three 5% sequentially, while our stick and brick cost per square foot increased four 5% and our lot costs increased 2%.
We expect both of our construction and lot costs will continue to increase on a per square foot basis. However, with the strength of today's market conditions, we expect to offset these cost pressures with price increases.
We currently expect our home sales gross margin and the third quarter to be similar to or slightly better than the second quarter.
We remain focused on managing the pricing incentives and sales pace and each of our communities to optimize the return on our inventory investments and adjust the local market conditions and new home demand no.
And the second quarter homebuilding SG&A expense as a percentage of revenues was seven 6%.
The 70 basis points from eight 3% and the prior year quarter the.
The improvement and our SG&A ratio this quarter was better than our expectations and was due to our higher than expected volume of homes closed and the increase and our average selling price on.
Homebuilding SG&A expense as a percentage of revenues is at its lowest point in the March quarter, and our history and we.
We remain focused on controlling our SG&A, while ensuring that our infrastructure appropriately supports our business like we have increased our housing inventory and response to the strength of demand. We started 23700 homes. This quarter of 33% from the second quarter of last year and ended the quarter with 46001 hundred home.
And inventory up 38% from a year ago.
<unk> thousand 200 of our total homes at March 31 were unsold of which 700 were completed.
Also had 1900 model homes at the end of the quarter.
At March 31 of our homebuilding lot position consisted of approximately 487000 lots of which 25% were owned and 75% were controlled through purchase contracts and 26% of our total owned finished lots owned lots are finished and at least 45% of our controlled lots are or will be.
Finished when we purchase them on.
Growing and capital efficient lot portfolio is key to our strong competitive position, allowing us to increase our production volume to meet homebuyer demand David.
Our second quarter homebuilding investment and lots of land and development totaled $1 7 million.
Of which $980 million was for finished lots and $440 million was for land development and $290 million plus to acquire land.
$270 million of our lot purchases from the second quarter were from force.
Bill.
<unk>, our majority owned subsidiaries as a publicly traded residential lot manufacturer operating in 54 markets across 22 states, our strategic relationship with <unk> as a well capitalized lot of supplier of across much of our operating footprint is serving us well and is presenting opportunities for both companies to gain market share for star is delivering.
On its high growth expectations, and now expects to grow its lot deliveries by 40% to 45% and fiscal 2021 to a range of 14005 hundred to 15000 lives with a pretax profit margin of 10 to 10, 5% and.
At March 31, four stars lot position increased 62% from a year ago to 84500 lots of which 58007 hundred are owned and 25800 are controlled through purchase contracts 60.
63% before stores owned lots are under contract with D. R. Horton, we're subject to of right of first offer under our master supply agreement.
We're sort of separately capitalized from Dr. Horton and had approximately $500 million of liquidity at quarter end, which included $170 million of of unrestricted cash and $330 million of available capacity on its revolving credit facility at March 31, <unk> net debt to capital ratio was 34 and four 1%.
The store has been active and the public capital markets recently issuing common stock through its at the market equity offering program issuing new senior unsecured notes, calling for redemption of some of its higher coupon senior notes and extending the maturity and increasing the capacity of its revolving credit facility.
With low leverage strong liquidity and capital markets access and its relationship with D. R. Horton for stores and of great position to continue to grow the profitable business Jessica.
Services pre tax income and the second quarter was $107 $7 million with the pre tax profit margin of 47, 8% compared to $24 $7 million and 23, 6% and the prior year quarter the.
The improvement and our financial services operating margin is primarily due to strong net gains on sale and better G&A leverage due to increased loan volume.
For the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 67% of our home buyers.
FHA and VA loans accounted for 47% of the mortgage company's volume.
Borrowers originating loans with DHA DHT and mortgage this quarter had an average FICO score of 720, and and average loan to value ratio of 90% first time homebuyers represented 57% of the closings handled by our mortgage company and this quarter and Mike at March 31 of our multifamily rental operations had eight projects under act.
On the construction and it.
And an additional four projects that are completed and in the lease of days based on our pace of leasing activity. We expect to sell two of these projects during the second half of fiscal 2021 of our multifamily rental assets totaled $394 4 million at March 31 as.
As we've mentioned we are now constructing and leasing homes within single family rental communities. After these rental communities are constructed and achieve a stabilized level of leased occupancy each community is expected to be marketed for sale or single family rental operations are currently reported and our homebuilding segment. There were no sales of single family rental communities during.
And the second quarter. However, we still expect one more sales later this fiscal year at March 31, our Unbilled and fixed assets included $182 6 million of assets related to our single family rental platform, representing 27 communities up from 13 communities and the first quarter.
And now expect our total investments at our single and multifamily rental platforms will increase between 400 $500 million from the beginning to the end of fiscal 2021.
Our balanced capital approach focuses on being disciplined and flexible and opportunistic during the six months ended March our cash provided by homebuilding operations was $138 million compared to $52 million from the prior year period.
$215 million of cash provided by our homebuilding operations was due to a deferral of estimated tax payments granted by the IRS as a result of the Texas Winter storm this year and the cash flow impact of this item will reverse and our third quarter.
At March 31, we had $3 $7 billion of of homebuilding liquidity.
<unk> of $1 9 billion of unrestricted homebuilding cash and $1 8 billion of available capacity on our revolving credit facilities.
We plan to continue maintaining higher homebuilding cash balances and liquidity than in prior years to support the increased scale of activity and our business and to provide flexibility to adjust to changing market conditions.
Our homebuilding leverage was 16, 8% at the end of March was $2 $5 billion of homebuilding public notes outstanding and no senior note maturities and in the next 12 months and.
At March 31 of our stockholders equity was $13 billion.
And book value per share was $35 96 up 25% from a year ago for.
For the trailing 12 months ended March our return on equity was 27, 1% compared to 19, 1% a year ago.
During the quarter, we paid cash dividends of $72 7 million and.
And our board has declared a quarterly dividend the same level as last quarter and can be paid from may.
We repurchased $4 5 million shares of common stock for $354 million during the quarter and the remaining outstanding share repurchase authorization at March 31 was $115 1 million.
This week, our board of directors authorized a new $1 billion stock repurchase authorization, replacing the companys previous authorization.
The new authorization has no expiration date.
We are committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year, Jessica and.
And the third quarter of fiscal 2021 based on today's market conditions, we expect to generate consolidated revenues of seven to $7 $2 billion and our homes closed to be in a range between 21000 and 523000 home.
We expect our home sales gross margin and the third quarter to be and the range of $24, 6% to 25% and our homebuilding SG&A as a percentage of revenues and the third quarter to be approximately seven 5%.
We anticipate of financial services pre tax profit margin of approximately 45% and we expect our income tax rate to be and the range of 22% to 23% for the quarter.
For the full fiscal year of 2021, we now expect consolidated revenues of $26 eight to $27 5 billion and to close of between 82000 and 584005 hundred homes.
We still 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 as we prioritize augmenting our housing and land and lot of inventories to support higher demand.
After reinvesting in our home building business, our cash flow priorities are balanced among increasing our investment and both of them multi and single family rental platforms and maintaining our conservative homebuilding leverage and strong liquidity.
Paying the dividend and repurchasing shares to reduce our outstanding share count by approximately one 5% from the beginning of fiscal 2021 day.
David and closing our results reflect our experienced teams and expanding production capabilities industry, leading market share broad geographic footprint and diverse product offerings across multiple brands and our strong balance sheet liquidity and low leverage provide us with significant financial.
Flexibility to capitalize on today's robust market and to effectively operate and changing economic conditions. We plan to maintain our disciplined approach to investing capital to enhance the long term value of our company, which includes returning capital to our shareholders through both dividends and share repurchases.
On a consistent basis.
Thank you to the entire D. R. Horton team for your focus and hard work.
<unk> continued to be remarkable.
We are incredibly well positioned to continue growing and improving our operations. This concludes our prepared remarks, we will now host questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is and the question queue.
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Our first question comes from the line of John.
John Lovallo with Bank of America. Please proceed with your question.
Hey, guys. Thank you for taking my question.
The first one I guess you know it really seems like the asset light strategy that you guys embarked upon.
Few years ago is really hitting stride now I mean, the option percentage up to close the 75% and buybacks now expected to actually lower the share count. So these are all things that and we had hoped for some time and again really seems to be hitting stride. Two of two questions on that I mean, where where do you now see sort of of the target per cent of ops.
And I know it can fluctuate quarter to quarter, but any change and the view longer term on debt and then.
Is the view now on buybacks has that changed do you think that you'll actually be able to continue chipping away of the share count over time.
John I'd say, where we're always going to try to get better and.
Continuing to push the auction as a percentage of total.
We consider that a better utilization of the cap so.
75 now over time.
And would expect that the.
It turned out in the eight and we'll get the 80 overtime.
And different market conditions.
It could grow beyond that.
So it's.
It's just it's a.
Everything we do we talk about sustainable scalable and that follows right on track.
We believe that optioning lots is.
Will drive better cash flow better.
Returns to our shareholders and.
And as our as our builders and our platforms out there.
Execute that strategy and relationships grow stronger.
And it's just the.
There is a momentum that I think will continue.
And then John with the.
With respect to share repurchases would use the word sustainable as well there as we have progressed on our and our.
The capital light strategy as we've generated more cash flow as we have gotten and position with our scale to reinvest in our business to support the scale that we believe that the market will bear today.
And we've improved our balance sheet and our liquidity position. We are now in a position where I do think we have hit an inflection point, where I think we can more definitively talk about <unk>.
<unk> repurchasing shares and consistently reducing our share count over time, and so we had a little bit of interruption with COVID-19 last year, and which we paused we reinstated share repurchase last quarter and then this quarter, we've accelerated and and now with the new authorization. We are in more definitively, stating that we expect to consistently reduce our share count each year.
Going forward and that will be part of our balance program.
Yes, that's really encouraging on both fronts guys the.
The second question is we have heard through the channel of what I would characterize as maybe seemingly aggressive behavior by some.
Some of your competitors in terms of whether it's.
The prices being paid for land and potentially even cutting some corners to get to get homes closed and so just curious if you guys have heard any rumblings like this and the market and and if so I mean does it maybe suggest that things are getting a little bit to head of your overall.
And we've seen.
On a very limited basis.
On my erratic behavior on the.
Land from for a builder as well.
Position themselves, where they just don't have.
Adequate or even.
The non adequate supply of lots.
They are buying out of desperation.
But it hasn't been consistent across all of the markets and it and even with the end markets, where I have seen it.
It's not impactful to the overall land valuation.
R R.
Our entire process through this.
Through the cycle.
And it's been to.
The auction lots of type of of all of our positions while the control pricing.
And through this market and.
And I think we said it on every call and we are we are incredibly well positioned on our lot supply and if somebody is being erratic.
It will.
They're going on.
And a very difficult.
And the compete if if they are accelerating their overriding land price.
We are and we're pretty efficient and delivering houses and our land pipeline and as long and deep and.
Very well priced.
John back to your other question about closing homes before they are ready we've been on this business a long time and certainly have kind of learned the lesson that we don't want to close the home before its time. So we will wait until the home is ready and the buyers satisfied with the home to be and they're at the same time buyers are very anxious to get in their homes build times have elongated.
And with supply chain disruptions and.
And some of the labor availability or production process and are consistent cadence of stars helps us overcome a lot of it selling homes. After we've started them and their production cycle and gives us more assurance of a completion date and we're able to better work with the buyers on make matching that completion and closing date align with what they need to move.
And from whatever situation and are coming from so keeping that buyer happy to the process and most importantly, the day they move and their house, they're very happy with the complete and Dr. Horton home that they've just purchased.
That's really helpful. Thanks, guys.
Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, Yeah. Good morning, everyone. Congrats on the results and thanks for taking the questions.
I wanted to ask a question about the revenue guidance and it's entirely possible I missed it but just you know to the extent you're raising the full year revenue guide by about I guess, one $7 billion at the midpoint.
You know, but deliveries up about 2500 at the midpoint.
It seems like Theres, a lot more revenue there than would be implied by the deliveries of just what else is driving that uptick.
Yes, Thanks, Matt.
With the.
Sales price increases that we have seen in recent quarters with the sales price increases we've seen and our net sales orders this quarter, we are anticipating.
Further increase and our closing average prices in Q3, and Q4 versus where we've been in the first two quarters. So there is some expectation and visibility to increase sales prices and that and that revenue guide.
As well of total consolidated revenues of does include our of financial services revenues as well and we're seeing very strong.
The net gain gained performance there and so there's probably a bit more contribution from from that segment of our business into the consolidated revenue guide as well.
Okay perfect. Thank you.
The second one you know I wanted to ask about the the administrations of first time buyer plan that was laid out the other day, it's obviously much more.
I guess surgically targeted than the broad plan that was initially presented but do you have any insight into what portion of your buyers might qualify and of this down payment plan as it was laid out.
And I don't have the percentage of share with you that honestly, we haven't spent a whole lot of time on that today I do think it's a narrower and target and then what was initially proposed and so I don't know that we expect it to move the needle a whole lot and on.
Honestly the market strength today is extremely robust and we don't really need anything to the increased demand further or put more pressure on home prices, which is ultimately what more buyers with a limited supply and the market can drive so we're going to continue to maintain our focus on affordability and Im sure our mortgage company and I'll be focused on on what we need to new on that front and.
We will support those buyers and as they come into our sales offices and if that is something that can take advantage of the we don't expect that to be a big impact overall.
Got it understood. Thanks, everyone.
Okay.
Thank you. Our next question comes from the line of Michael Rehaut with Jpmorgan. Please proceed with your question.
Hi, Thanks, Good morning, and thanks for taking my question.
First of all I, just wanted to drill down a little bit on the increase of of closings guidance.
Which I think is really noteworthy given you know.
All of the concerns around.
The supply chain and you know.
The well publicized the limitations around different.
Parts of the supply chain and et cetera that we've all heard about.
Maybe you can kind of walk through.
And if there are specific efforts that you've kind of put into place.
And that gave you the better visibility for that and the back half.
And certainly also the the increase in closings is much higher than the the beat that you had in the second quarter itself. So.
I was hoping you could kind of talk to whats driving that debt increased guidance. If it's you know perhaps some.
No.
Proved efficiencies in the field, if it's better supply chain arrangements or with certain key.
No providers of of.
And you know either lumber or on the labor side, you would love to hear a little bit more on what what's driving that.
Thank you Michael.
Whats, giving us confidence from the ability to raise our deliveries guidance has been the starts we've been able to get out for the past two three quarters frankly, we've had a very strong home starts.
And that's the result of our teams and positioning their operating platforms to be able to have a sustained production cadence and a given neighborhood and given the sub market and that's allowed us to enhance our relationships with a lot of the local subcontractors and labor providers and a given market, we're able to give them a consistent and plan full.
The startup program that they can then plan their business back to on the materials side.
There certainly has been what they'll call the a whack a mole game of trying to find the latest thing that were out.
With our purchasing scale and.
And a lot of our national partners that we've been working with they have been really good and helping us get product into homes that we needed to close the homes and and those teams have deep relationships with with multiple channels and their markets able to get the components, we need to complete the loans. So honestly our build times have elongated.
A little bit here lately is not surprising, but but we're very pleased with the progress we've made at holding the line and the confidence we have and our production process today to the upper.
Of our guidance for the year and deliver more homes into the strong demand we're seeing.
No that's very helpful. Thanks for that.
I guess secondly.
You continue to do very well, obviously with the sales pace improvements year over year.
You know at the same time, you know you kind of mentioned that you are.
Managing net sales pace.
You know with the mind of of your capacity on starts.
And I believe you know obviously the rotor growth came in a touch below our estimates, but you know obviously still extremely strong and.
The the.
And the need to make sure sales don't go too far out I think is well understood.
How should we think about sales pace in the back half you know from current quarter levels is it something where we should expect more of a flattish type of year over year prospects just given how the business is currently being managed.
Or would you see perhaps some further upside potential if you were able to.
Further improve your starts capacity.
Sure Mike.
Today, our start space and our production pace truly is leading our sales pace and we're essentially selling based on that production schedule is as Mike mentioned, a few minutes ago based on the visibility that we see right. Now we think we can continue to expand our capacity and put ourselves on a great position to continue to grow our business.
<unk> into fiscal 'twenty two.
At a double digit pace, but that being said the quarterly sales order pace. When you look at the sales order pace last year and Q3 and Q4, we had some very strong levels that are some very strong comps that we're up against and the back half of the year. So on our on our normal cadence and and positioning ourselves to grow double digit next year.
The sales order.
Comparable year over year, and Q3, and Q4 could be in the range of flattish slightly up slightly down but that doesn't really change the positioning that we're going to be and in terms of growing our topline and our bottom line and fiscal 'twenty, one and positioning ourselves for fiscal 'twenty two.
Great Great. That's very helpful. Appreciate it.
Thank you. Our next question comes from the line of Carl Reichardt with <unk>. Please proceed with your question. Thanks. Good morning, everybody. Thanks for taking my question and I wanted to ask about the lot count and how it ties to future community Count I think lot count was up I think 48% year on year and enormous Inc.
<unk> for a large company can you maybe talk about the the cadence of how you expect your communities to grow over the next couple of three years based on that that significant increase and in light.
Yeah, I think we're looking at low single digit community growth I mean, when you look at on a lot count.
A lot of that is option positions.
And what are kind of deliver over the next year of two years.
And then the last for two to three years beyond that.
And so.
At the at the pace of communities are running.
Yes.
Looking for 600 700 lot of broad.
Yes.
And what you've done at the community count, but it does and.
And does significantly increase lockout, when it's replacing some of the half the size so.
It's about scale it's about.
Driving.
Consistent.
The disciplined starts and the land right now is.
Yeah.
It is [laughter].
Really good.
So on Bill mentioned the the.
Stock based on driving our sales pace.
That is the reality of what could start morehouse actually be selling warehouse.
So every month with us, it's about driving production capability and expanding our.
Our stock program and if you look at week to week to week to week is how we manage it.
Our operation operators out there doing a great job.
Thanks, David and then isn't it drilled down and back to material cost increases and the tie them to the scale that you have whether it's local scaler or national scale.
If you look at the conditions now David D E C P and maybe talk to some specific examples even of the.
The the leverage <unk> been able to get relative to peers on costs or the acquisition of materials and if there were shortages because it seems to me that the that along with the spec models and a pretty important aspect of why you're continuing to grow as fast as you as you are and despite the size of the company. Thanks a bunch.
It's call it the consistent disciplined star program that we've been on and managing very effectively and communicating that to our trade base.
And so if they have visibility on what their work process load.
Gotta be over the next 60 90 days.
And.
The scale matter of absolute the scale of letters and I feel like.
Every month every really every day every week every month.
Our competitive position because of our scale because of our discipline.
Gross and.
Uh huh.
And we talk about sustainable it is a great market out there and.
And I feel like what we're doing is the way we have the ability to sustain and Karl in terms of the material cost increases, although we have hedged and take some cost increases as home prices have continued to rise and our building product partners have been experiencing cost increases and their business. We generally have price protection built in and to where we have a cap on.
On what our increase is going to be so when you see of headline price increase for our product category and generally what we're taking is less and.
And they just be protected and in a form of the backend rebates and so we can protect the market price for our partners, but we are generally taking something much less than whatever the overall market increases.
That's very helpful. Thanks, guys. Good thanks, everybody. Thanks.
Thanks Carl.
Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yeah. Thanks, guys.
And David when you were talking about the how the market was really good I was thinking about all of the people who are reading the transcript of we're not going to be able to capture [laughter] transfer back and to capture the the emphasis there.
The shame.
I wanted to ask you guys about production capacity.
Putting community count growth aside because everyone is very focused on that I'm focused on the potential for your absorptions you know unit.
Production per community to increase from here.
One way is obviously through a mix of communities you know bring it on the larger communities I think you referred to that a little bit or more entry level communities, which naturally have a higher level of absorptions, but I'd also think you could increase production within each type of community you know like the each supervisor of running a little more labor or paying overtime rates or whatever.
And so what I'm wondering is as you look at your absorption rates today.
Per community how.
How much room is there from here to increase.
Either your mix of you know higher running communities higher absorbing communities.
Or and I should say how much ability is there to increase your throughput within each type of community through from here given that your starts are up 34% I think or so out of this past quarter.
Steve and I think there's always room to improve and we're pushing that mentality out every day.
Nothing is good enough and we gotta get better and at our operators and our culture and our company.
They're all competing with each other.
And so you know when you look at the numbers of our of our divisions and you'd like.
But the the guy that's in the.
10th or 11th slot wants to be the number one slot and some of it but to do that he has got to get bigger and he's got to get better.
And that's.
That drives a very good result for our shareholders.
And you know.
We talk about.
Absorption as a global the Elisa it's really.
Subdivision by subdivision market by market.
And hmm or improvement and.
And the platform and and the what had been our small of our markets scaling up to become debt markets.
<unk> has been nothing short of and all I mean, we've got great operators out there that.
I think they have a lot of room to scale up and they are positioned to do it and.
We've got a market that has really derisked.
That effort so.
I mean, I think our numbers are going to get better savings I think we've got a lot of upside and what we're doing and.
And I didn't see the chart of how many markets. We're number one in the last quarter I think it was 13 <unk>.
13 out of 91.
I mean, our expectation is we're going to be number one and every market.
We've got a tremendous amount of opportunity and scale up we hate to put a goal of trying to define what the edge of the university of because we take the limited ourselves I think five years ago. If you look back and told US we'd be doing these absorptions and production capabilities.
We'd have been limited to what we would have said at that time, so as David said no matter, what we're able to get done. We know we can all do a little bit better and be able of smarter about how we do things and.
And Stephen obviously, and the current market with the strongest demand. It is it's a little different than what we've seen at other times on the past if it truly is we can increase absorption of if we can increase production capacity and capability. So our operators are our construction managers and everyone is looking for how can we continue to expand our starch face each week.
Whether that's finding additional trades of helping our trades and be more efficient. So they can do more homes and the same amount of time. So everybody is working to just get a little bit better and we've consistently been growing in the double digit pace for several years with just the low single digit community count growth that we would continue to point each of our lot count as the driver if we have a finished lot.
What we're gonna start of home ultimately and were going to sell and close it and so that's really more of the drivers and then thinking about just the community count growth expectation.
Yeah, absolutely alright upward and onward.
Second question relates to kind of affordability, you know, you're and you're probably getting a lot of questions about Gee Whiz you know prices are up so much.
He is and affordability being stretch and I was wondering if you could share with us whether youre seeing any signs of stress yet at the first time buyer and then more sort of holistically.
The prices that the homebuilders are pass through inherently lags the resell market when prices are rising this fast because you know you all don't sell above asking price right, whereas in the resale market. Most homes are now selling of Bob asking price and so.
Given the prices and the resale market are up.
Pretty close to 20% right now isn't it right to think that your prices in your communities should be able to rise further from here based simply on the pricing that has already been achieved in the resale market and which obviously first time buyers are paying so I just wanted to so one can you do you see any stress on.
The first time buyer market and then two do you agree with me the pricing for builders kind of lags a little bit inherently in this environment.
Yeah, I think we would agree with the the latter of the pricing might lag a little bit and but we clearly are seeing the ability to continue to push price. Our first time homebuyer percentage is actually up and year over year, and 57% compared to 53% last year and we actually saw it tick up to the high Sixteens for express and also and.
And in terms of our first time buyer of percentage, just and our deal of Horton brand. Our FICO scores stayed extremely stable as have our debt to income levels. So it is showing us that the buyer and the consumer is healthy today and there are still plenty of people out there that can afford to buy a house that being said, it's something that we recognize that could ultimately become.
On an issue and we still have an average sales price that I think is.
Compared to most people about $100000 lower than most of the rest of the public builders and.
So that puts us in a very strong competitive position to continue to accommodate buyers who really are looking for affordable product offerings.
Yeah.
Okay.
Excellent great. Thanks, a lot guys good job.
Thanks Pete.
Yes.
Thank you. Our next question comes from the line of Anthony Pettinari with Citi. Please proceed with your question.
Good morning.
The follow up on pricing, if it's possible to generalize or are you seeing price increases among competitors as being steeper than the D. R Horton communities and.
If so is it possible to quantify how much you know, whether that's half of point or a point.
Is that continuing to kind of drive your value proposition versus customers or do you think that the rate of increases is maybe more in line with some of your large competitors here.
So theres a lot of variability is I think David alluded to earlier markets the market community by community, but even if you just listen to the other builder of conference calls, which I have generally they're talking about higher price increases and.
And at a minimum on average versus an individual floor plan and then we are in most cases. So I think we do believe that we're continuing to maintain that competitive advantage and.
And by not necessarily pushing price and in some communities as much as others and and in some communities I'm sure. We're keeping pace with the market. If the ability is there to do so.
I kind of that.
Disagree with Jessica.
You know our goal isn't to sell one house of SSL communities and so we probably are not as aggressive as some of the other builders have them and raising prices.
And our margins are greater returns are phenomenal.
But we're in this for the long haul and.
It's a we're not we're not doing anything short term debt. We don't think is sustainable.
Overtime so.
Yeah.
And just who we are we like being affordable, we like being the price point later, we like competitive advantage.
We think that drives more consistent.
Sustainable results over time, which is how we think about things and our lot position and our production capabilities allow us to continue to do what we're doing from an affordable product offering perspective, whereas other builders don't have and as deep of a lot position as we do in many markets and.
And I also can't start as many homes and we can today. So there's really no need for us to push price as much as from other builders are doing is as David said, you know our returns have been improving I think at or better than the industry as a whole, even while staying and affordable we do take a long focused all of this and we do want to be sustainable and continued to grow our market share where commodity.
And growing our market share, we're committed to returning capital to shareholders and dividends and share repurchases and of me.
And the full manner.
Okay, that's very helpful.
And then I apologize if I missed this but did you see any impact.
Either from a sales side or from a cost side from the winter storm and in February.
And in Texas, and other parts of the country I mean from the outside of it doesn't look like it but I'm just curious.
And what the impact of was to your business.
Yeah, I think there was some supply chain disruption some of the petrochemical plants on the the Gulf Coast, probably are creating some some ripples of by and large our teams in the field did a phenomenal job of working through that and protecting the make the loans, we had and production as well as trying to make up the <unk>.
Delivery days, and we May have lost to get those homeowners into their homes as quickly as possible.
Okay. That's helpful I'll turn it over.
Thank you.
Thank you. Our next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys good morning, and congrats on the great performance.
And I'd love to dig a little bit deeper on the price and affordability conversation and you know one of the things that really struck me was you know, it's pretty amazing and your average price over the last five or so years has been remarkably consistent you know kind of roughly around 300000 and prices have been going up over that time period, but you guys have obviously been able to offset that.
Through either growing the share of express or maybe moving a little bit further out into the the tertiary submarkets and you know it seems like now that that price is clearly breaking out of the range up to 330 and you know I guess the question for you is how comfortable are you or how high are you comfortable taking that that number when you think about the lots.
And you're acquiring today, what those costs look like what the material costs look like what the consumer can afford.
Is there a benchmark and mind recognizing the 300 seems to have been kind of the the.
The fishel benchmark over the last five years, where that debt price could go before you start to get a little bit uncomfortable.
Well the the 300 price was not the result of any top down directed approach. It all happened at the subdivision level of the sub market level and the communities and we can't make as good of decisions from a centralized basis here as our teams and the field make.
Multiple times a day every day of the week and responding to the market conditions, which includes.
Existing homes are selling for other new home alternatives environment have as well as their cost inputs to that process.
And we work closely with.
Our mortgage partners and the field to understand what the buyers are coming in with in terms of.
Loans qualification process, and and have their underwriting and and all of that factors in.
On a daily and weekly basis and determining what the home is worth and can train four at that point in time, So what we're seeing as a result of.
Individual decisions made by people, who are very experienced and the field very close to the customers and.
And we're selling homes, we're delivering homes, we're originating and delivering mortgages 12 qualified buyers today. So yes, and then we're seeing the upside of that is that our aggregate average sales price has increased substantially bolt and deliveries for the quarter and and the new sales for the quarter, but it's the result of whats actually.
Happening and the marketplace, we have so many.
Model homes, and touch points and market and communities. We're just seeing the result of that rolling up so youre seeing strong consumer as Jessica mentioned before that really wants to own a home.
Understood Gotcha.
And then kind of related on that point, because you brought up your the feedback from the field one thing that we hear a lot from builders lately is there share of buyers coming from out of the state has really increased pretty dramatically since before the pandemic.
And I think some some analysis, we've done that share is roughly doubled.
And from builders, we talked to so I'm curious if you've looked at that or quantify it you know the share of your business that buyers are buying from out of state versus where that was pre COVID-19 and you know I guess on on the flip side to that and if that were to slow at all does that put any.
Pressure on affordability, recognizing a lot of people are moving from higher tax states higher cost states to more affordable markets.
We don't we don't have anything that we've aggregated to track that anecdotally.
We've heard in my travels David struggles, we've heard about people relocating into the market, but we also have and I've talked to agents and the models, where your buyers coming from all of the they are coming from.
ZIP code over or at school district over and Theyre looking to get a slightly different element of the different stage of their life for their first home.
Coming out of and apartment and that market. So.
I hear what Youre, saying, Alan and I understand a lot of the national numbers and then we have not necessarily corrected to give you a quantitative answer here in Texas, and Florida continue to be our two largest states and and where I think you've seen a lot of and migration and and relocation, but that was happening before COVID-19 and so I'm not sure that you know as a REIT.
<unk> of the pandemic easing and and whatever changes from a work from home and pursue.
But that really does anything to slow that down and because we really think about that trend as having been pre pandemic and there's been a very friendly states. The generally have more affordable housing.
Where people wanted to live and where a lot of business isn't relocated tis. So their employees can have a good cost of living and find the good quality home at the right price and.
And actually the.
The builders that are positioned higher and the year.
The price scale.
And probably experienced more of that than we do I mean ours is how we're selling the people forming housing it.
Household formations and and I do I do think that.
A lot of that is just local market.
Buyers.
Of which might be and insulates us somewhat from them.
People moving back and forth.
Got it and that makes sense alright, guys. Thanks, a lot and good luck. Thank.
Thank you Alan.
Thank you. Our next question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions.
I appreciate all of the color so far the the pricing commentary and particular on a relative basis.
And that tracks with what we've been seeing and our work, but I guess the important thing is it's still very healthy price increases as you have alluded to the question is really about implications for.
For margins and unless I missed it you only give three Q, but conceptually when we think about.
The fiscal for Q4 or even beyond that when you look at maybe cost increases continuing to accelerate but your price increases.
Picking up and some of that flowing through the P&L and more.
Would you expect <unk> to be at least similar to the three Q would you expect it to be higher or any other moving pieces, we should be thinking about.
Call, it two quarters or or or further out.
Sure, Mike and we really only have the best visibility the one quarter out which is why we stuck to the guidance for just Q3, specifically and the clearly market conditions remained very strong and and we've been very pleased with our operators and you've heard us say every quarter for several quarters, our gross margins have exceeded our expectations and because of it.
Done such a great job controlling costs and and we have been able to push through some price to offset some of that cost as well I think our base case would be if market conditions remain the strong we're hopeful that we get enough price to offset any cost increases and and is there potential upside and due to continued market strength share but.
It's not something we can sit here and say today about our fourth quarter margins or anything further out it's going to continue to be dependent on market strength affordability and our ability to push through price.
Okay got it thanks, Jessica that's helpful and and then my second question is also still of affordability related and just with the rapid level of increases I guess, the birth of an existing home market and.
New home market of really across price points are you seeing anything from an appraisal standpoint, where you're starting to see appraisals lag behind the price increases that have been implemented just any any color from the field on that.
Sure you typically will see and a rising price environment like we're in today that the appraisals are often backwards looking and it's.
It does tend to damp.
Dan and maybe where it would go but what you are seeing and our closed loans are of homes that had been fully underwritten and appraised meeting of appraisal valuations and so we do hear about it anecdotally. There is oftentimes more education, you can provide and that process and more information you can make available that can help with the appraisal process, but it's not.
And the significant impediment to our to the prices that we're contracting for homes are closing of those prices generally.
Okay, great. Thank you.
Okay.
Thank you. Our next question comes from the line of Truman Patterson with Wolfe Research. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my questions.
The first just wanted to talk a little bit more on the cost increases and especially lumber and lumber has just really started to spike here over the past months or so and you know.
I appreciate the literally every day the futures are.
And moving target, but could.
Could you give us a big picture Big picture macro overview do you think that there is any relief in sight going forward.
Any new.
New saw mills opening.
A lot of robust demand.
And where do you think this level of <unk>.
And of lumber pricing as kind of here to stay.
And with that I wanted to follow up on on.
On Mike Dahl's question, do you think theres enough pricing and the industry to really offset.
This lumber inflation and especially that.
And we'll probably hit the kind of calendar <unk>.
Yeah.
As of lower pricing here to stay.
And like a lot of it was driven by mills.
The shutting down there and go but I do think as they reopen these mills and.
The increase in the capacity to deliver would.
Youre going to see some some improvements from a little less pressure on it.
And I think.
Opening up of international trade.
And relieve some of some pressure on it.
But.
And right now today the demand is so strong.
A lot of people over.
Over the last.
So many years.
If on buying a house now.
The house has been formed and the cancer comment on.
And the pelvic showed the living and at a farm and downtown Metropolitan area and May not be the lifestyle you want so a lot of factors driving demand.
And I don't know Linda and her.
And your question.
It is complicated and we continue to have the focus on efficiency and regardless of what's going on and the cost environment. We're trying to become more efficient every day, and we want and be able to put and affordable house on the ground, regardless of our input costs and I think we've proven and there are operators and our scale are allowing us to do that kind of regardless of one of our fluctuations here over the the.
Last couple of years and and.
And we will see where it's headed but we adjust that as necessary and do the best we can and manage the lumber costs as they come through.
Okay. Thank you.
And then another one just on affordability and pricing I mean, very robust pricing so far this year.
And especially on a year over year basis, and I know a lot of entry level of builders really try to stay below the FHA loan limits with them on the specific metro but could you just generally talk about how much wiggle room, you have the possibly pushed pricing going forward before really bumping up against.
And those loan limits and appreciating that.
You're probably attempting to continue to switch to a smaller square footage.
I think trim and that we're continually looking to make sure were affordable to the to the markets that we serve and it on the neighborhood by neighborhood basis, and we're seeing that today that we're not getting any resistance to the pricing.
And coming through you can just see that five of the <unk>.
Level of <unk>.
Facts that we have on a 26% of our homes and inventory our unsold today and.
And probably most of those are fairly recently started and may not even have been released for sale yet.
As we're working our way through the production process.
As we see.
The sign of of softening demand would be an increase and our completed specs and right. Now those are down I think about 700 homes that are completed and unsold today, which as you know.
And we probably haven't been that low.
Since 1992.
[laughter] that's unusual that's usually the number of Dallas.
Usually on a given market we may have that many of them.
And by intention and so.
We are we see very strong demand and we're not seeing any resistance yet on the of affordability side, because as we've talked about before we do try to position ourselves as an affordable value choice against the competitive set we have at any given the neighborhood versus other new homes and the compelling buy against the existing homes.
Asked another way are you all comfortable going above the FHA loan limits today, just given how strong demand is.
And in some markets, we are and just as a risk level two of the underwriting.
One of the things when we look at on every every project.
The way put under contract is <unk> against that and thanks, Jay and his.
If its over FHA and as of the risk.
But are we comfortable to say, yes and defense it's all.
The project driven market driven.
Alright. Thank you good luck on the upcoming quarter. Thank.
Thank you thank you from.
Thank you ladies and gentlemen, our final question today comes from the line of Jay Mccanless with Wedbush Securities. Please proceed with your question.
Hey, good morning. Thanks for sneaking me on first question I had you talked about the cycle times and moving up a little bit could you talk about where they are now versus last year.
Theyre, probably probably about two to three weeks longer on the build process and what.
And what we have seen the on the flip side of that is of historically with our spec production model that.
We would have a period of time from one of the home is completed until it finally closed and sold and closed.
With the.
Sales and deliveries we've had of our completed unsold homes over the past year, our time from the completion of the home to delivery of the customer has greatly shortened and.
So we've maintained a lot of capital efficiency and great inventory turns and that process, but we have seen an elongation of our build times.
Okay got it.
And then the the other question I had.
When you when you think about the getting more starts out there getting the only on the entitled I mean is the pinch point right now on the labor side that you don't have enough people to pour foundations et cetera, or you still having to deal with some <unk>.
Headwinds on the municipal side to get the.
The lots entitled et cetera.
What's the bigger issue right now on a national basis.
I don't know that you could point to any one issue, it's all of challenge and the execution of the business and so that's what we do that's what our job is to get out. There every day identify sites that are going to make great neighborhoods worked with local municipalities and the land sellers there.
And third party developers to get the entitlements in place.
Generally anecdotally you hear it takes longer than it used to and people and some markets will complain and then youll share story of out of market, maybe one of the coastal markets and how many years it takes to get through something and then the like Wow. This is pretty good here.
And then in terms of of production capability, we have focused on expanding our production capability through of sustained disciplined starts program that lets the share of that information with our subcontractor partners that there the plant full and their business and allocate the resources to it.
They really appreciate working with us and that they can be they know what's coming at them and what the expectations are and so simplifying our product.
<unk>, our starch processes has been a big win for us and grabbing more production capacity and the markets and then hanging on to it by keeping the lots coming so we can keep starting the houses.
It sounds great. Thanks, again for taking my questions and congrats on a great quarter.
Thanks James.
Thank you, ladies and gentlemen that concludes our time allowed for questions I'll turn the floor back to Mr. Auld for final comments.
Thank you Melissa.
We appreciate everybody's time on the call today and look forward to speaking with you again to share our third quarter results in July.
And until the D R Horton family on.
Horton and the entire executive team. Thank you for your continued focus and hard work.
And I'm going to remind you again stay humble.
The hungry.
And they are and that's.
And let's close out this year and and unbelievable fashion. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time, thank you and your participation.