Q3 2021 D R Horton Inc Earnings Call
[music].
Good morning, and welcome to the third quarter 2021 earnings call for D. R. Horton America's builder, the largest builder in the United States. At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
We ask that you please limit yourself to 1 question and 1 follow up during the Q&A portion of the call. So I didn't want to.
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I'll now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton.
Thank you Carol and good morning, welcome to our call to discuss our results for the third quarter of fiscal 2021 before we get started today's call includes 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.
Actual outcomes will not be materially different.
All forward looking statements are based upon information available to D. R. Horton on the date of this conference call and Dr. Horton does not undertake any obligation to publicly update or revise any forward looking statements.
Additional information about factors that could lead to material changes in her farm income.
James and Dr. Horton never report on form 10-K, and its most recent quarterly report on form 10-Q, both of which are filed with Securities and Exchange Commission.
The earnings release can be found on our website at Investor day, Dr. Horton Dot Com and we plan to file our 10-Q early next week.
After this call we will post updated investor and supplementary data presentations to our Investor Relations site on the presentations section under news and events for your reference.
Now I will turn the call over to David Auld, our president and CEO. Thank.
Thank you Jessica and good morning.
Please 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.
Dr. Horton team delivered an outstanding third quarter highlighted by a 78% increase in earnings to $3.6 per diluted share.
Our consolidated pre tax income increased 81% on a 35% increase in revenues to $7.3 billion and our pre tax profit margin improved 490 basis points to 19, 4% our homebuilding return on inventory for the trailing 12 months ended June 30 was $34.
9% and our consolidated return on equity for the same period was 29, 5%.
These results reflect our experienced teams to the production capabilities, our ability to leverage Dr. Horton scale across our broad geographic footprint.
Our product positioning to offer homes at affordable price points across multiple brands.
I'll take market conditions remained very robust and we are focused on backup maximizing returns and increasing our market share further.
However, multiple disruptions in the supply chain combined with the improvement in economic conditions and strong demand for new homes have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction time to become less predictable.
As our top priority is to consistently fulfill our commitments to our homebuyers, we have slowed our home sales pace to more closely align.
Aligned to our current production levels and our selling homes later in the construction cycle. When we can better ensure the certainty of home close date for our homebuyers.
We expect to work through these issues and increasing our production capacity. We started construction on 22600 homes this quarter at our homes and inventory increased 44% from a year ago to 47300 homes at June 32000.2021.
Finishing us to finish 2021 strong and to achieve double digit growth again in 2022.
We believe our strong balance sheet liquidity and low leverage position us very well to operate effectively through changing economic conditions.
Plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings incentives home pricing sales pace and inventory levels do optimize return on our inventory investments Mike earnings for the third quarter of fiscal 2002.
<unk> increased 78% or $3 <unk> per diluted share compared to $1.72 per share in the prior year quarter net income for the quarter increased 77% to $1.1 billion compared to $637 million, our third quarter home sales revenues increased.
35% to $7 billion on 21588 homes closed up from $5.2 billion on 17642 homes closed in the prior year.
Average closing price for the quarter was $326100 and the average size of our homes closed was down 2%.
The value of our net sales orders in the third quarter increased 2% from the prior year to $6.4 billion.
While our net sales orders for the quarter decreased 17% to 17952 homes. Our average number of active selling communities increased 1% from the prior year quarter and was down 3% sequentially.
Sales price on net sales orders in the third quarter was $359200 the cancellation rate for the third quarter was 17% down from 22% in the prior year quarter.
As David described and there's very strong demand environment. Our local teams are restricting the sales or the face and each of their communities based on the number of homes in inventory construction time and lot position. They continue to adjust sales paces prices to market on a community by community basis, while staying focused on providing value to our buyers.
Based on the stage of completion of our current homes in inventory production schedules and capacity, we expect to continue restricting the pace of our sales orders during our fourth fiscal quarter as a result.
We expect our fourth quarter net sales orders to be lower than the third quarter. However, we are confident that we will be well positioned to deliver double digit volume growth in fiscal 2022 with 32200 homes in backlog 47300 homes in inventory, a robust lot supply and strong trade and supplier real.
<unk> Jessica our gross profit margin on home sales revenue in the third quarter was 25, 9% up.
130 basis points sequentially from the March quarter, the increase in our gross margin from March to June exceeded our expectations and reflects the broad strength of the housing market.
Strong demand for our limited supply of homes is allowed us to continue to raise prices or lower the level of sales incentives in most of our communities.
On a per square foot basis, our revenues were up 4.7% sequentially, while our stick and brick cost per square foot increased 3.5% and our lot cost increased 1.7%.
We expect both our construction and rock costs will continue to increase on a per square foot basis. However, with the strength of today's market conditions, we expect to offset any cost pressures with price increases with.
We currently expect our home sales gross margin in the fourth quarter to be similar to or slightly better than the third quarter. We.
We remain focused on managing the pricing incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjusted local market conditions and new home sales.
In the third quarter homebuilding SG&A expense as a percentage of revenues was 7.1% down 80 basis points from 7.9% from the prior year quarter, our homebuilding SG&A expense as a percentage of revenues is lower than any quarter in our history and we remain focused on controlling our SG&A, while ensuring that our.
Actually adequately supports our business David.
We have increased our housing inventory in response to the strength of demand and we expect the current constraints on our supply chain to ultimately subside. This quarter. We started 22600 homes up 33% from the third quarter last year, bringing our trailing 12 months starts to 19.94500.
M.
We ended this quarter with 47300 homes in inventory up 44% from a year ago 15400 of our total homes at June 30th 30th were unsold of which 500 work complete.
Mike.
At June 30, our homebuilding lot position consisted of approximately 517000 lots of which 24% were owned and 76% were controlled through purchase contracts, 25% of our total owned lots are finished and at least 44% of our controlled lots are or will be finished when we purchase them are.
Growing and capital efficient lot portfolio is a key to our strong competitive position and it will support our efforts to increase our production volume to meet homebuyer demand.
Our third quarter homebuilding investments in lots land and development totaled $1.8 billion.
Of which $910 million was for finished lots $540 million was for land development and $350 million was to acquire land.
$300 million of our total lot purchases in the third quarter were from Forrester.
<unk>. Our majority owned subsidiary is a publicly traded well capitalized residential lot manufacturer operating in 55 markets across 22 States 4 star is delivering on its high growth expectations and now expects to grow its fiscal 2021 lot deliveries by approximately 50% year over year to a range of $15.
500 to 16000 lots with a pre tax profit margin of 11, 5%, 12%, excluding the $18.1 million loss on extinguishment of debt recognized during the quarter.
At June 34 stores owned and controlled lot position increased to 91% from a year ago to 96600 lots or 61% of <unk> owned lots are under contract with D. R Horton or subject to a right of first offer under our master supply agreement.
<unk> is separately capitalized from Dr. Horton and had approximately $470 million of liquidity at quarter end with a net net capital ratio of 37, 8% with a strong lot supply capitalization and relationship with D. R. Horton.
First our plans to continue profitably growing their business Jessica financial services pre tax income in the third quarter was $70.3 million with a pre tax profit margin of 37, 3% compared to $68.8 million and 43, 9% in the prior year quarter day.
The year over year decline in our financial services pre tax profit margin was primarily due to lower net gains on loans originated this quarter caused by market fluctuations and increased competitive pricing pressure in the market.
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 66% of our home buyers.
P J and VA loans accounted for 45% from the mortgage companies volume.
Borrowers originating loans with DHL mortgage this quarter had an average FICO score of 721, and an average loan to value ratio of 89%.
First time homebuyers represented 58% of the closings handled by the mortgage company. This quarter, Mike at June 30, our multifamily rental operations had 11 projects under active construction and an additional 4 projects that are completed and in lease up phase based on leased occupancy in our marketing process, we expect to sell 2 or 3 of these price it.
During the fourth quarter of fiscal 2021 from multifamily rental assets totaled $458.3 million at June 30.
Last year, we began constructing and leasing homes is income producing single family rental communities. After these wrong communities are constructed and achieve a stabilized level of leased occupancy each community is marketed for sale during the third quarter. We sold our second single family rental community for $23.1 million in revenue and 11.
$4 million of gross profit at June 30, our homebuilding inventory included $303.1 million of assets related to 44 single family rental communities compared to $87.2 million of assets related to 10 communities at the beginning of the fiscal year.
We are pleased with the performance of our single and multifamily rental teams and we look forward to the growing contributions for future profits and returns.
Our balanced capital approach focuses on being disciplined flexible and opportunistic during the 9 months ended June our cash provided by homebuilding operations was $276 million.
Even while we have reinvested significant operating capital to expand our homebuilding inventories in response to strong demand.
June 30, we had $3.7 billion of homebuilding liquidity, consisting of $1.7 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.
We believe this level of homebuilding cash and liquidity as appropriate to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions.
Our homebuilding leverage was 16% at the end of June was $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months.
At June 30, our stockholders' equity was $13.8 billion and book value per share was $38.54.
27% from a year ago for.
For the trailing 12 months ended June our return on equity was 29, 5% compared to 19, 9% a year ago.
During the quarter, we paid cash dividends of $72.1 million.
And our board has declared a quarterly dividend at the same level as last quarter to be paid in August.
We repurchased 2.6 million shares of common stock for $241.2 million during the quarter for a total of $8.1 million shares repurchase fiscal year to date for $661.4 million.
Our remaining share repurchase authorization at June 30 was $758.8 million.
We remain 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 in the fourth quarter of fiscal 2020 line based on today's market conditions, we expect to generate consolidated revenue of 7.9 to $8.4.
$1 billion and our homes closed to be in a range between 23020.4500 Tom.
We expect our home sales gross margin in the fourth quarter to be in the range of 26 to 26, 3% and homebuilding SG&A as a percentage of revenue in the fourth quarter to be approximately 7%.
We anticipate our financial services pre tax profit margin in the range of 40% to 45% and we expect our income tax rate to be approximately 23, 5%.
For the full fiscal year of 2021, we now expect consolidated revenues of 27, 6 to $28.1 billion and to close between 83080.4500 times.
This year, we have prioritize reinvestment of our operating capital to increase our housing and land and lot inventories to support higher demand.
Other cash flow priorities remain balanced and then increasing our investment in our multi and single family rental platforms, maintaining conservative homebuilding leverage and strong liquidity.
Paying the dividend and repurchasing shares to reduce our outstanding share count by approximately 2% from the beginning of fiscal 2021 David.
In closing our <unk>.
Also reflect our experienced teams and production capabilities industry, leading market share broad geographic footprint and diverse product offerings across multiple brands.
Our results also illustrate the growth opportunity in front of us as we increase production capacity and response to homebuyer demand.
Our strong balance sheet liquidity and local average provide us with significant financial flexibility to capitalize on today's robust market.
Effectively operating change in changing economic conditions.
Plan to maintain our disciplined approach to investing capital enhance the long term value of the 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 from your focus and hard work.
As a result of these efforts.
We're incredibly well positioned to continue growing and improving our operations.
<unk> prepared remarks, we will now host questions.
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Our first questions come from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yeah, Thanks, very much guys on.
Impressive results and really interesting times here I wanted to talk a little bit about this restriction of sales you know, which we've been seeing you and others do throughout the June quarter. You indicated you expected that to continue in the September quarter. I was wondering if you could provide a little bit more color around that and are you expecting the restrictions to be similar.
In severity in the September quarter do you think those restrictions might continue past September to a meaningful degree and I guess, it's really really related to your starts and so in that regard. Your starts were down I think 5% sequentially or so was curious when you thought that that could could grow.
You talked about building the infrastructure needed to do higher level of housing starts I wanted to see if you could provide a little more color around that so more color on the the starts outlook and are you going to be continuing to restrict sales.
At the same degree in September and maybe past September.
Well on the starts outlook.
We have a we have a plan and our plan is.
To consistently be out their community by community increasing production overtime.
If you look at our quarterly run rate.
We're in the 22.23 total starts each quarter that was the plan for this year.
Our plan is to take that up next year.
And we position land large people.
To affect that plan so.
Demand out there as just unlike anything I've ever seen.
And I think.
Our focus is.
How to meet that demand in the most efficient manner.
And injecting a homeowner and to the process.
Sooner rather than later.
<unk>.
Our ability to get the hospital and extends that time.
And it makes it harder for our trade and auction from <unk>.
I can tell you is.
Yeah.
Through our history to have somebody walk into our model.
And to tell them, we don't have a house for you to buy today is something that is foreign to us.
As difficult as anything I've ever seen on our salespeople.
And that's it.
It is it is a tough environment can be on a sales office for a day.
And then.
I I talked in our travels I've talked to our people.
Organic or gone up we're going to provide a home for everybody walking in and we just need to we just need to keep on patients.
And understand their frustration, but that's just.
This is a market I've ever seen.
It's just unbelievable today.
Okay, that's great.
Sure.
I can't remember the rest of the question.
[laughter].
Largely they were too.
Look ahead and the restrictions are they likely to continue to the same degree in the September quarter and will they do you anticipate continue past September.
Yes.
We are continuing to put things in place to expand our production capability, we've increased the pace of our lot deliveries.
Because we see.
In my history of buyer walked into our model.
And you hadn't figured out how to get them under contract.
A week 10 days I had bought somewhere else.
I've got an email this month.
From a buyer who has been in our models at every release.
Last year, it hasn't been able to buy a house and he still weighted.
And that's I mean, you can multiply that thousands and thousands of times across the country, what multiple builders out there.
We.
We did not restrict sales.
As soon as a general market net.
And what's just.
<unk> increased our demand.
Again, we're all managing from a market.
But none of us I've ever seen it.
And.
Uh huh.
Probably the difference in this cycle.
In the prior Super demand cycle that I was a part of.
Yes.
The builders are disciplined this cycle.
We're all focused on capital efficiency were all focused on the improve.
Improving returns.
And it's.
I think it's going to extend the cycle can scale and but you know.
Again, we're in uncharted waters from advance demand estimate from now and Steve in terms of just specifically restricting sales those decisions are going to continue to be made on a community by community basis, So where we can get to starts accelerated is where we'll open up for more sales more quickly where we can get the starts accelerated as well as give better certainty too.
Production timelines the worst thing we wanted to do is put a homeowner homebuyer into the backlog and then not be able to deliver on our commitment to them as to what their home is going to be ready. It's very disruptive we want them to have a great experience and be very happy with their house and they move into it. So as we've worked through a lot of the supply chain disruptions, we've adopted some of our <unk>.
<unk> sharing more information earlier in the process with our trade partners, helping us with longer lead times, that's helping to work through some of the supply chain issues. We're hopeful that those things are resolving as we worked them through but for the fourth quarter I can foresee us continuing to restrict sales again the decision made community by community.
Upon current local conditions, but those restrictions will likely remain in place in the fourth quarter.
Okay I appreciate that.
Your order ASP was remarkably up about 10% sequentially from the March quarter I was wondering how much of that increase and order a S. P. A was actual price do you think versus mix shift and as you look at that order ASP flowing into your.
Gross margin in.
In the next quarter or 2 I was curious if you could help us understand what kind of lumber cost cadence, we should be thinking about you know obviously its gyrated quite a bit here over the year past year. So if you could give us a sense for was.
Was it this quarter.
Zorba peak lumber cost you know or is it next quarter just help us understand how the lumber cost cadence fits in as well as the mix shift effect in your order a S. P.
Steve I'll take the lumber cost I don't think we saw peak lumber costs coming through in our June quarter closings I'm expecting.
Tier where gyrating with a good word for the lumber market seeing the higher lumber costs coming through in our September quarter deliveries and early into our fourth quarter deliveries.
And I am very confident that the the order price trends that we've seen have more than offset the lumber cost and we've been able to absorb that well into margins that we will see in our fourth quarter deliveries.
Yeah and in terms of mix, Steve I mean, our sales orders are a good indicator of our forward closing price, but it doesn't typically flow through.
Directly like that so we wouldn't expect our closing price next quarter to be at the same magnitude or equivalent to our sales orders.
But we havent seen a whole lot of mixed I mean, we are seeing and you can see it flowing through on our closings in our gross margin a lot of like for like price improvement.
Great. Thank you very much guys.
Thank you.
Thank you. Our next question is come from the line of Carl Reichardt with <unk>. Please proceed with your questions. Thanks, Good morning, everybody in.
In the release, you mentioned that you're building out infrastructure to support the higher level of housing starts going forward and can you expand on that a little bit David So are there incremental costs. What specifically are you referring to there and when is your expectation that such infrastructure will be in place to support that to start simple and I guess really what I'm asking is how much of this.
Is really in your control versus the demand side of the supply chain side that isn't.
Okay.
I think.
What we can control we are controlling Carl.
We can control the number of lots that we.
We are pushing.
Into the phase.
We can control.
Communication with our.
Our trade partners and make sure they understand the levels and timing.
What we're doing.
We're pushing out.
And.
Our staffing levels.
Generally the.
That's been that's been the least of the problems because.
Its absorption per community.
You have to add support to the communities.
It's.
It's just a very efficient process.
So that's.
It really just has to do with field operations.
For us driving that capacity and aggregating and consolidating trade base within those Submarkets, which is a process that we go through every day.
I mean, we did start almost 95000 homes.
And trailing 12 months of net.
I don't think anybody else's ever done that and it's true.
As a result of scale and just.
Incredibly hard work thank you.
Gone out in the field.
Thanks, David and then.
I've been in the past and this cycle too we've seen builders he's sales price to try to put a break on on turnover rates and I think there's some concern in the market, which I share that that pricing dynamic maybe beginning to negatively impact sales range I'm curious if that's something you felt that you saw you said.
A lot of positive things about demand and and whether or not now.
Restriction on sales it looks like it's far more important to you to manage absorption pace than pricing is and I. Also know that's made that decision is made at a local level. So can you sort of help untangle that for me.
Not using price and just using price to cover cost and because demand is good or you still feel like you're using price as a brake on on sales.
Well I think.
Good day.
We're seeing very little price.
Pushback.
It's the.
I don't know that you can I don't know that you could impact <unk>.
Demand with price today.
So go ahead, our restriction on sales is not being driven by and large by just let's just increased pricing until people stop buying we are not releasing homes for sale until we're through a certain stage in the production process, which varies by community, but it's not it's not just using price.
This to adjust the pace that we're going we're actually not re leasing the homes for sale when the homes do get released for sale. We're seeing very quick absorption of those particular homes by buyers that are waiting to buy homes and to go under contract and then take delivery of those.
Still very focused on affordability, Carl even with increases in our ASP, it's still significantly lower than.
And then the rest of the public builders by and large and that's a focus that we don't want to lose Lee do you want to maintain affordability and we've seen the credit profile of our buyers continued to keep pace with where asps are gone and so really you know even when we do stress tests on our backlog.
It looks like our buyers are in very good shape, even in spite of the price increases we've seen in the market.
Okay. Thanks, so much everyone appreciate it.
Thank you.
Thank you. Our next question is come from the line of Deepa Raghavan with Wells Fargo Securities. Please proceed with your questions.
Hi, Good morning, all thanks for taking my question.
Can you talk to some of the early outlook on pricing and margin into 2022, so able to.
It feels like you should get good leverage from your double digit revenue growth outlook and hopefully commodities may moderate.
Into that into 'twenty 'twenty 2 early just given that you know they're all all the builders are pacing sales here.
Giving the breathing time for supply chain to catch up.
And you may not feel compelled to give all of that benefits back.
Should we think about flat to up gross margins or would they still be pressures to gross margins from a tough 2021.
Sure. Thanks, Thanks Deepa.
We have commented and guided to a slightly up gross margin into our Q4 and into our September quarter of 26 to 26, 3% and based on what we can see today in our backlog with the pricing that has already been taken in our in our sales orders over the last quarter or 2 we believe we're in a position certainly to maintain or slightly.
See increases in our gross margin over the over the next quarter or 2 in excess of the cost increases that we're seeing come through so in the short run the next quarter or 2 we do expect stability or maybe a slight upside to 2 our current gross margin obviously beyond that we don't have as much visibility but.
Clearly, we feel like we have good stability in our margins for the near term.
Okay, that's fair.
Also mentioned, some new or incremental supply chain constraints in the quarter can you. Please elaborate on those and and.
And also.
You know as we talk about the supply chain Mackinac constrained any any new M.
Any new ones that cropped up in the prior quarter in India and in the quarter, 1 and 2 have you seen any easing on the flip side as well.
So on the supply chain, if anything was construed as there were new constraints.
I don't want to imply that there were any new constraints I think we referenced last quarter that the supply chain challenges had been a bit of a lack of mall and that 1 pops up in the teams jumped on it and.
And work with the suppliers in that particular category to solve those issues.
1 of the things we have done is adjusted internally with a lot of our lead time, how far in advance of actual production start that we're communicating with with the supply chain partners to make sure that product is available for us.
I could not point to any 1 particular items as new or incredibly acute right now there's just a series of issues that we solve every day in the business. That's part of what we do it's how we've delivered over 20000 homes. This last quarter.
Thanks, I'll pass it on.
Okay.
Thank you. Our next question is come from the line of Michael Rehaut with J P. Morgan. Please proceed with your question.
Hi, Thanks, good morning, everyone.
I wanted to get a better.
Better sense, a little bit.
<unk> approach to orders relative to production pace and supply constraints.
Obviously, a bit of discussion here already on the call, but 1 of them.
Little confused on is.
You know you had said that.
Your starts pace.
It's kind of tracking to plan at 22 to 23000, you. Just said that also there are no really new constraints out there, it's more ongoing supply constraints yet.
Your orders were down 17%.
And that's in contrast to prior commentary of flat to down single digits. So just wanted to understand what really has been a difference in approach and if it if there's something that really changed during the quarter.
That's driving that.
Different results on the order side.
Relative to your prior commentary.
Well, Mike I think what we have seen is an elongation of our construction times beyond what we were seeing previously so which is really a cumulative effect of a number of things that have been ongoing that are impacting supply chain, which are manifesting themselves in longer construction times and so as we are managing that and trying to manage the customer experiences.
As best we can that has resulted in us and us.
Releasing sales and more communities later in the construction cycle than we were previously so it's been a I would say on the incremental reach.
A restriction.
Our sales this resulted in probably a bit more of a.
Sales order restriction than than we would've anticipated a quarter ago, but it's something that as we work through the supply chain issues and start to have better visibility and get more of our production later in the construction cycle and essentially catch up a bit.
And then we will be able to.
Probably resume a better pace in sales orders.
Our goal being to have our customers in backlog for a shorter period of time at the time from when they signed the contract we deliver the home.
We're consciously trying to compress that timeframe.
To give them more certainty in the process and give us more control of when we deliver the home to them.
When do you.
When you move the release date on a particular house.
Slab to frame 2 windows installed.
That is an extended period of time right now.
And so.
Rating breathing demand.
Or any significant change in that.
This quarter adjustment as we have pushed health net release date.
Uh huh.
To me.
Just not indicative of what is out there in the market.
And we really are trying to improve the experience.
Of the homebuyer and when.
When we give somebody a day to close.
We intend to keep because their own life.
Also around that.
And as the.
The certainty of close day was impacted by Windows cancellation.
And everything that Oh.
Appliances.
Uh huh.
What's taking place through the last 6 months.
It just became obvious to us.
Uh huh.
Right.
We needed to be more restrictive than what would've known Trust me.
It is it is it is sole crushing to our sales people to have somebody walk in ready willing able to buy.
<unk>.
In total debt.
We have houses that will be coming available in 30 to 45 days.
And we will be glad to call you.
And what.
What is it different to me this market cycle than any other than I've ever been a part of it.
Is it 30 or 45 days later, you call that person and yes. They are still trying to buy a house.
Oh, yes, yes.
A tough market to be environment.
Right No no I appreciate those comments, David and obviously not disappointing our customers is a key part of it.
Second question I, just wanted to circle back a little bit to the order ASP.
You know essentially around $3.60.
Up over 20% to 22% year over year.
Backlog is up over 13% year over year.
It stands obviously in Stark contrast to new 2018 through 2020, where you also had periods of home price appreciation not anywhere near the same level, but you were able to maintain that average closing price right around 300 for 3 straight years. So the question is.
What are you doing you know going forward too.
You know obviously you have a price that maybe below most of your peers, but still that that monthly payment has been selling these guys pride pride.
Yourselves on.
Is there any actions that you can take over the next year or 2 to perhaps a reverse that trend either through.
Building slightly further out or maybe slightly different footprints or more cash products whatever it might be.
To perhaps a reverse that trend, particularly to the extent that rates from that rates might rise.
You know the real concerns here in the marketplace is that the.
Current price maybe it's okay in the current backdrop, but it might be more vulnerable.
And the next year or 2.
That youre doing in terms of your product mix or geographic mix that might help solve those issues.
Well.
We have decreased our square footage.
You will probably continue to see that take place.
We are reducing the number of.
2 story homes that we offer in communities.
And my offer I mean.
We have a production model, where we're detailing for picking the houses we're going to build and the latest schedule that we're going to go from sort of the market.
Is it again.
We are very sensitive to price point, we are very sensitive to that.
Jay.
Loan limit.
But net to US yes, yes.
As a risk mitigated or because that's where the vast majority of buyers are.
I think when we services.
M.
I Trust my we're monitoring we're tracking it and.
We do believe that.
Yes.
Our production capabilities continue to improve and increase.
And we consolidate flavor.
In these markets.
We will we will continue to be able to offer a free.
All of our homes.
For it to tick up and yes more pressure on price.
We will make that make that challenge when it comes.
Thank you.
Yes.
Thank you. Our next question is come from the line of Matt Bouley with Barclays. Please proceed with your questions.
Good morning.
Thank you for taking the questions I guess not to belabor the point, but just back on the on the restricting of sales pace.
It seems like it was affected too.
Really similar degree consistently.
Across your markets. Despite these.
Local community by community decisions.
So can you sort of go over the mechanics, I guess of how you all Horton management really communicate the strategy to I believe you said earlier these sort of frustrated individual operators and sales folks.
What are you telling people to look for in terms of I think you said homes in inventory and extended cycle times.
Today versus ideally, where you want them to be.
In order to begin releasing those sales again, thank you.
I think what we're looking for.
Just to get a level of inventory.
In front of the bars tips.
Typically this time of year, we'd be sitting on 40, 45%.
Thanks.
Today, the only specs we have our assets our houses we haven't released to the market.
So again it's.
Uh huh.
We're trying to drive efficiency in the process.
And by controlling wasn't that house is sold.
It does help.
Well.
Meet customer expectation.
And it also.
Eliminates a lot of frustration on the building side.
We're a buyer is coming out and they had been told maybe they bought a house in January.
They have been they've been moving in a job.
And in.
So allison ready to prevent or so that are out there every day monitoring the progress of their house I've got some progress from every other home and the community and it just adds a level of.
Difficulty that to.
To be honest with you right now today.
Uh huh.
We don't we don't want and we don't need and it's.
Somebody gets frustrated in the mill processed last night from Australia for a very long time very hard to meet the expectation once they get upset.
So by limiting that.
Pushing the <unk>.
Majority of our inventory further down the process before we inject the buyer into it.
You know, we're trying to take some of the pressure off our trades in our builders.
And when does that process take place.
I will tell you M and some divisions. It started in January and then at what other divisions in February.
And really by April into April 1st denied it took hold and in some of our very large divisions.
I understand the taxes.
Is it just you just got to the point.
We were spending more time on.
We were spending a significant amount of time dealing with the customers' frustration on the close date of their house.
At the expense of other things, we could be doing that.
Would drive future efficiency and production capabilities.
Again, it's it was a process that took place over multiple months.
Begin again.
1 division and anything really and again I am and taxes. So.
You know Don Horton many times never thought we'd see a day when he couldnt Bob He couldnt built every house seek itself and a sign of Texas.
Can tell you today.
There's not enough lots or trying to punish the day to meet demand in the state of Texas I don't care, if you Don Horton or.
Any of the other public builders out there.
It's very difficult in a hospital today.
Doing a better job than anybody else and we're going to get better at what we're doing.
Uh huh.
Uh huh.
There is a tremendous amount of demand out there.
No that that's that's really helpful color there.
And it's actually a segue into my follow up which.
Which is when you talk about how strong demand is exceeding your current capacity and youre clear around your own restrictions.
What are you looking at it your communities that.
Finally, I guess that that gives you the confidence to say that in fairness you know.
When you when you look at the I guess traffic perhaps in your communities or are you also seeing traffic slipped more than you might expect seasonally and was that part of the of the shortfall in orders or is it really just simply what you previously said that demand is just far exceeding capacity.
This week.
We can look across it and see the stage of construction of our unsold homes are at and by and large they are at early stages of construction and likely not available are released for sale so and.
And we're not writing sales contracts by and large for free sales for anything we haven't started yet and generally reaching a more mature stage of construction. So we can deliver with certainty of closing day to that fire at the time, we signed the contract with them and.
And so many of our communities have waitlist or interest lists that far exceed even what we have under construction, which is why you continue to hear US answer every single question. So far that the demand is still there and the demand is extremely robust and this was an internal decision that was based on our production capacity and taking care of our owners and homebuyer.
Sure.
Perfect well, thank you for the color and congrats on the results best of luck in the next quarter.
Okay. Thanks, Matt.
Thank you our next questions come from the line of Alan Ratner with Zelman and Associates. Please proceed with your questions.
Hey, guys. Good morning, Thanks for taking my question.
So first question Jessica you made a comment earlier that I'd love to drill down a little bit.
In regards to the credit profile of your buyers I think Dan you know obviously a lot of questions on the home price increases and what impact that could have on affordability.
Said, you've seen the credit profile of your buyers keeping pace with the home price increases even instituted up to this point, which I was a little surprised that just given the fact, we know incomes are not up 20% year over year and rates are pretty stable now after obviously gone down quite a bit in the second half of last year or so.
Should I interpret that to imply that maybe the mix of your buyers are the buyers in your interests lists are kind of slowly shifting maybe towards more of a move up buyer or at least a more affluent first time buyer than you've historically seen over the last few years.
We really haven't seen a change in our Mexico Cross our brands, which would be our best indicator of entry level versus new that and really even if we look at the credit profile across all of our brands. We really saw that we've seen this year in improvement in FICO score.
A slight reduction and debt to income even with a higher average loan amount as a result of the higher average sales prices that we're experiencing so no I don't I wouldn't attribute it to that I mean, we still have almost 55% to 60% of our buyers are first time buyers. It's just a very large number of of unsatisfied buyers out there.
1 of my own that have not been able to buy a home because they could not get all.
And we look at the existing home inventory levels that are available and given marketplaces, they're just not there and so you know.
Moving on to the specs, we had that were completed.
Last year, obviously, they were absorbed very quickly into the marketplace. We have restricted the sale of a lot of our homes to give better certainty to that to the homebuyer and the process of their delivery date.
And with that in a rising price environment. When we're restricting the sale day, we're able to price to market at the time.
We signed the contract, which is then closer to the delivery day.
Got it okay and I appreciate that extra color there so.
Yes the.
A follow up to that point, then is obviously, it's an incredibly tight supply environment today.
You guys are holding back sales restricting sales.
A lot of other builders are kind of doing or saying the same things. So it would seem like if you kind of connect the dots here a lot of homes are being started today not a lot of those homes. Yet are released for sale. So at some point in the future you would think inventories going to come to the market in a pretty meaningful way.
And the question then of course as will the demand be sufficient to absorb that because right now, it's probably a little tricky to get a firm grasp on what that demand is when you are turning buyers away. So are you tracking that on your on your kind of a local basis. What other builders are doing in terms of restricting sales, but starting homes in and how would you anticipate responding.
If let's just say later this year or in your fiscal <unk>.
You start releasing more homes for sale other builders did the same thing and the demand is not quite what you expected. It to be are you willing to accept a lower absorption pace are you going to start at that point to maybe discount a little bit what would the thought processes.
It's going to be a different answer community by community and usually our first read Alan is on existing home side, So and our local guys are very in tune with what's going on with both existing home inventory and the other public builders in their market.
And as always we can adjust our start schedule up or down based on market conditions. So if its what you are saying you know where to come true and they'll start to be signs of some sort of increased supply in the market that the demand is not going to be there for them, which right now feels like we are a long ways away from them, we would be able to adjust our starts to occur.
<unk> community by community, where we saw those signs like we always do to make sure. We don't end up with an excess supply of completed specs, but with 500 completed homes across the country. Today, we're just so far from having that conversation on a national level.
But those are things that are local operators certainly pay attention to them all the time when they're looking at their business plan and what theyre going to do going forward. Our plan would be to continue to consolidate market share regardless of market conditions.
And we believe we're going to continue to be the best positioned to do that kind of regardless of what the demand profile looks like in future periods.
And again.
We're focused on.
The lower end of the price.
And I can assure you that you know even if we look at the other.
Public builders out there.
Uh huh.
Their price points are ours are higher and.
And any slowdown in the market at least in my opinion. This is.
He's going to be driven by.
Uh huh.
The house payment.
Hum.
He just does not feel like that is anything on horizon right now.
I don't think now they look at what we have available for sale today, what we've started and what we plan to start I don't believe thats going to satisfy the demand that we're seeing in our sales offices today.
And I don't believe any of the other builders have near the amount of inventory coming at them and starts coming at them that we do so I just don't see that in the new home builders being able to push a lot of inventory into the marketplace available for sale.
Any kind of a short to medium term horizon, that's gonna Dent significantly this demand that's why as Jessica said, we watch at a local level, what's happening in the existing home market.
Got it that's very helpful. I appreciate the thought process, there and it'll be interesting to see over the next few quarters.
Can I sneak in 1 last 1.
David You mentioned, obviously many times. This is unlike anything you've seen in terms of having to turn buyers away.
When I look at your business and obviously the 1 big thing that's changed in terms of your strategy now versus prior cycles is on the land strategy you own a lot fewer lots or a much smaller supply of land on your supply basis than you have in the past and you're more reliant on third party developers through option contracts et cetera, So I'm curious.
What youre seeing from the developers are are they facing outsized pressure on their development timelines you know vis vis perhaps what you're seeing on your own portfolio and is that in any way slowing the process down and it's not just you obviously the whole industry is shifting more towards that strategy, but I'm curious with a smaller supply of own land does that.
Inhibit your ability to grow perhaps more than it had in the past.
You know these these third party developers are great partners of ours I mean, we.
We've worked with these guys day in day, and we've been working with them day in day out for multiple years now we know these guys. We know their capabilities and if 1 of them gets in trouble I mean, we step in and help and Oh.
We've done that a couple of times this year.
Where are our local guys I don't know where schemes and we had to step in and bring a lost market share and that's.
Uh huh.
Are we talking about the flexibility of our capital structure and our balance sheet.
Liquidity that we maintain that's why we do that.
And then and then we've got the added benefit of a very close relationship with force store, who has been but they have done an exceptional job of building out their platform over the last 5 years and they have really good people.
Trolling Uh huh.
Operations developments of these laws and and you know we are their biggest customer.
And so you know we.
Yeah, I was thinking about that this morning, when you look at the embedded.
Lot counts that we own and control.
And our ability to actually have a production.
Planned to drive a set number of starch M.
Every week and every market on a consistent and growing basis.
And as you know in today's world.
That is an incredible competitive.
The advantage.
And it allows us to communicate with our trades.
So Dana what we're gonna start you know are the vast majority of our key trade partners right now knows our start pace in October.
Remember December and January.
And that's what we're going to start the homes.
And since they are.
They are aligned with our vision of what we're trying to accomplish.
And I mean, there's been a lot of work into this position.
There's never been a platform in this industry that.
And if anything like what the Dr. Horton platform is today.
And we're very proud of that and.
We think we're going to deliver outstanding results as a result of it and just for reference our controlled lot position. So in addition to what we own is up 78% from a year ago. So we have got the what's in front of us.
We feel very comfortable about our lot position not being a hindrance to our ability to grow its actually what's supported us being able to grow like we have and to continue to do so in the future.
I appreciate that guys and just to clarify I wasn't implying you don't control the lots it was more.
There's lots developed yeah understood, but thank you Jessica I appreciate it guys. Thank you good luck.
And that's a pilot that's a valid concern and it's something that we monitor and whether we own the lots of hard work.
Final 1 option we have.
Have people in those divisions working with on every community.
To make sure those lots get delivered.
Yeah.
Thank you.
Question is come from the line of Anthony Pettinari with Citi. Please proceed with your questions.
Hi, good morning.
Last year, the pandemic kind of through seasonality out the window.
As you look at home buyer behavior in terms of underlying demand are you seeing any return of seasonality or should we expect another year of people looking to buy homes. The week of Thanksgiving week of Christmas and then your cancellation rate I think is extremely low by historical standards, but I think it ticked up very modestly sequentially in the.
Quarter was there anything behind that it sounds like price wasn't an issue, but just wondering if there was anything you saw there that just kind of noise.
But nothing that nothing to point out on the cancellation rate I mean, that's still at a historical low typically we're very comfortable and our normalized range is in the low twenties versus the 17 I think that we mentioned today. So nothing of note there.
So the first question.
So usually seasonality yes.
Again.
If we improve.
I don't know how you define seasonality that space from a number of houses you start and when you release from personnel.
We're building that process Oh program.
That is.
To improve that I think youre going to see our.
Our sales.
Correct.
Our inventory of leases and as we've released in warehouses from somewhere else.
Sales historically has been a very good indicator of demand in the marketplace. As we've had a broad range of homes at various production stages available for sale and free sales available and that would be a good indicator of demand in the marketplace today.
Our supply of homes is indicating what we're going to be able to sell and deliver and with almost 50000 homes in production.
And the starts we've had over the past 12 months.
Great place to continue to deliver double digit growth in our deliveries.
We feel really good about fiscal 'twenty 2.
Great Great. That's that's very helpful. And then just as a follow up I mean, I think in the past you've talked about community count rising low single digits as you pivot to selling homes a little bit later is there any change to that estimate or it's intact.
Our goal as we focus on gaining market share.
As holiday market share, we would expect over the longer term our community count to continue to to grow.
Obviously today with the strong demand, but there are some communities, where we have sold out sooner and so youll see some quarterly fluctuation in there but over the longer term, we'd expect the trend to be for our community counts to continue to grow at a modest space at a low to mid single digit pace over the longer term.
Okay. That's very helpful I'll turn it over.
Yeah.
Thank you. Our next question is come from the line of Truman Patterson with Wolfe Research. Please proceed with your questions.
Hey, good morning, everyone. Thanks for taking my questions. So first question on you know you alluded in your press release about double digit unit growth into 2022.
My question doesn't really pertained to demand or the demand outlook really but I'm just hoping to understand what are some of the biggest risks to achieving that growth on the supply side. You know we've heard issues with lot developer development availability community approvals material shortages, a little bit of labor.
Issues I'm, just hoping that you can explain some of these risks that might impede that double digit growth and how some of those constraints you see playing out into 'twenty 2.
Chairman It really is a little bit of everything you you mentioned, but it's nothing new it's it's all things as Mike said earlier on we've been working through this entire time. So if we didnt feel confident in the double digit and the ability to continue to manage through that is and ramp up our production to more adequately meet the demand that's in the market.
We wouldn't be saying that here in July.
But there are constraints and and we wouldn't say, it's any 1 thing it's it's everything you outlined.
Varies by market essentially on a daily basis, what the constraint is but our operators are doing a fantastic job of navigating through that.
Positioning we can see in our inventory our inventory did increase by about 1000 units this quarter up 44% over the year over year on a trailing 12 months basis. We've started 94500 homes that in and of itself is double digit growth over what our planned deliveries are this year. So we are already in position to deliver double digit and working to improve on that in <unk>.
And on that as we move into 'twenty..2 so we feel like we're in great position to do that there'll be challenges there'll be unknown challenges that we haven't dealt with yet, but we're confident in our teams and our ability to continue to maintain the current pace and incrementally improve on it as we move into 'twenty 2 on our starts and I know that's a relatively high level comment today. We are sitting in July we haven't finished our fiscal year.
So we would expect in November to give more specific guidance. In addition to just the double digit closing target.
Oh, Okay really what I'm kind of looking at is on the material side. You know we've heard of shortages kind of across the board, but especially windows doors concrete I mean, it depends which market right, but do you actually have.
Contracts in place with your suppliers to actually.
Get that level of product.
We have relationships with our suppliers I mean, no matter what the contract says youre going to get what Theyre going to give you and they're going to deliver who they want to deliver to and so we work very hard to be a good trade partner with our suppliers in both materials and labor and making sure they understand what our production.
<unk> plans are.
And our commitment is to them and they've made the commitments to us.
And again it goes back it goes back to scale within those markets I mean, we're a very important customer.
Just about every material supplier handled from a lucky so.
Mike's right. It is about our relationships, but it is.
Future relationships as well so.
Is it going to be difficult absolutely is can be difficult.
Because they are saying no to somebody we just don't want them to be saying no to that.
[laughter].
Understood and then my follow up question.
To follow up very strong the order Asps, you know 10% quarter over quarter.
We've just seen a lot of builders starting to employ.
A final 1 best bidding process.
Hoping to understand either what portion of your communities.
Or the portion of that price I came from the bidding process and then on the other side of it you know.
With affordability you know theres been some talk.
Some believe in the industry that there's been some incentives picking up.
Have you seen that in any of your local markets.
Certainly I havent seen any incentives picking up.
Okay.
We have used.
Use the final investing.
In certain communities, where we have a very limited lot supply.
But that's not a giant component of what we're seeing in sales price or margin.
Okay, certainly is impactful and assortment happening.
As you know an extended longer communities.
Especially at the price.
Price points.
We have we're offering in the entry level.
We don't like that.
Personally don't like that that process because it.
Oh, 5 or 6 so it was a false demand, but people running around putting putting houses under contract, but they never intended to clubs I don't want our operators to have a false expectation about the pricing that's achievable in the market by having a guy from California.
The house.
Blue collar Guy in Texas.
Yeah Holliston every houses worthless.
I've got a transferring in from California is willing to pay.
Yes.
We're trying to stay very close to these markets.
Mr son, everybody walks into our house them all.
Into our model from a home.
Uh huh.
We're not there right now, but we're certainly going to get to.
Okay. Okay. Thank you all for your time I appreciate it.
Sure.
Thank you our next questions come from the line of Ken Zenner with Keybanc capital markets. Please proceed with your questions.
Okay.
Good morning, everybody.
Good morning, Ken.
And don't pick up on the California folks there.
Okay.
We're making a lot of money in California, right now.
You can make more alright so.
But.
All the stocks that are reporting today across all the categories record margins record.
Demand limited supply right. What's different this cycle is that we have very low interest rates amid COVID-19.
A very high consumer credit right governments and printing all the money.
And structurally and housing is a very high propensity for.
Institutional buyers right I mean, it's coming from builders like new.
Are there large builders.
Something 5.6 billion dollar portfolios all the time buying 15.20000 unit property. So.
Well look I think you guys, obviously have the best.
The business model in many ways and you're working on you know your land supply so I understand all that.
Where are they.
As an operator I mean.
Your whip is less capitalized.
You know unison inventoried by the way with.
Than it has historically and your leverage is so low I mean.
What is what are you going to look for them I.
I guess to see.
When.
Yes.
Seems like you're over earning obviously you guys Theres nothing that'll indicate your margins are going down you actually got.
But I mean, what do you think it will be there or are you looking at how are you looking at the existing side.
How are you looking at.
People bidding on properties Thats, maybe not an individual investor, but all of this institutional money that's coming in because the cap rates are still good.
What is it that youre looking at separate from the operations on the macro that that causes you.
Yeah, I don't know if theres a factor to the to look at rather than the operational side. That's it. Thank you.
I think from a from looking at what macro storm clouds might be the things that might happen in.
In the next 6 months or a year that we never anticipated like a worldwide pandemic that we didn't anticipate 2 years ago. There. There are certainly things like that that can happen that could impact the business rising interest rates always are a significant cost input into the value of the homes in the monthly payment. We monitor obviously that very closely and looking at affordability.
I think Jessica touched on it before with 2 points in the stress testing we did the backlog.
Backlog can withstand some interest rate.
Upward movement right now in addition, the DTI debt to income levels, we're seeing in our borrowers. This most recent quarter actually ticking down a little bit. Despite the average loan size going up so so the credit quality of our buyers are good.
Looking at our <unk>.
<unk> sales communities the vast majority of the buyers of those homes are owner occupied homes.
We don't have any any institutional relational uptake programs that are for sale.
For sales communities, our institutional focus would be on the build to rent communities, which are separate and apart from from the 4 sales side of our business.
It's it's hard to know all the things that may change in the future can be.
But 1 thing we do focus on and have focused on for many years is maintaining a very strong flexible balance sheet. As you said, it well, where we have great low leverage strong equity capitalization and very good liquidity that allows us to take advantage of the market conditions as they change and consumer continued to consolidate market share.
Especially at a local level, where we can turn that local market share leverage can do outperformance.
Thank you.
Ken.
Thank you that is all the time, we have today for the question and answer session I would now like to turn the call back over to management for any closing remarks.
Thank you Darryl we appreciate everybody's time on the call today and look forward to speaking with you again to share our fourth quarter and full year results in November.
And does the D R Horton family.
Horton and the entire executive team. Thank you for your focus and hard work.
Tremendous accomplishments in delivering the first 3 quarters.
<unk> finished strong and.
Putting numbers on the board that nobody's ever seen thank you.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.