Q4 2021 D R Horton Inc Earnings Call
[music].
Good morning, and welcome to the fourth quarter 2021 earnings conference call for D. R. Horton America's builder, the largest builder in the United States.
I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton.
Thank you Tom and good morning, welcome to our call to discuss our fourth quarter and fiscal 2021 financial results before we get started today's call includes comments that constitute forward looking statements as defined by the private Securities Litigation Reform Act of 1995, Although D. R. Horton believes any such statements are based on reasonable.
Assumptions there is no assurance that actual outcomes will not be materially different.
All forward looking statements are based upon information available to 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 factors that could lead to material changes in performance is contained in D. R. Horton the annual report on Form 10-K, and subsequent reports on Form 10-Q, all of which are or will be filed with the securities and Exchange Commission.
This morning's earnings release can be found on our website at investors that yogurt in dot com and we plan to file our 10-K towards the end of next week.
As referenced in our press release, we realigned the aggregation of our homebuilding operating segments into.
Six new reportable segments this quarter to better allocate our homebuilding operating segments across our geographic reporting regions.
As a result in addition to our standard updated investor and supplementary data presentations. We will also be posted to our Investor Relations site three years of quarterly sales closings backlog homes and locked out at that conforms to our new geographic region presentation. All of this can be found at investor.
<unk> dot Dr. Horton Dot com 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.
I am pleased also be joined on this call by Mike Murray, Our executive Vice President and co Chief operating officer.
And Bill wheat, our executive Vice President and Chief Financial Officer.
Today, we also have Paul alumina ask here with us.
Recently promoted to executive Vice President and co Chief operating officer.
Paul has been with D. R Horton since 1999.
<unk> is a regional Florida.
As our Florida, South Division President for 15 years, and most recently as our Florida region President for seven years I'd like to take a brief moment to have Paul introduce himself before we get started Paul. Thank you, David and Hello, everyone I'm excited for the opportunity to serve.
In my new role on the D. R. Horton management team and I look forward to getting though our investors and analysts in the coming year.
Thank you Paul given that Paul is new to Israel.
And not be an active participant today, but we are glad to have him with us and believe his extensive homebuilding experience.
Strengthened our executive team.
D. R. Horton team finished the year with a strong fourth quarter, which included a 63% increase in consolidated pre tax income.
One 7 billion.
And a 27% increase in revenue to $8 1 billion.
Pre tax profit margin for the quarter improved 480 basis points to 21, 3% and our earnings per diluted share increased 65% to $3 77.
For the year consolidated pre tax income increased 80% five 4 billion, a 27 $8 billion of revenue pre.
Pre tax profit margin for the year improved 460 basis points to 19, 3% and our earnings per diluted share increased 78% to $11 41.
We closed a record 81965 homes this year, an increase of over 16500 homes or 25% from last year.
While also achieving a historical low homebuilding SG&A percentage up seven 3%.
Our homebuilding return on inventory was 37, 9% and our return on equity was 31, 6%.
These results reflect our experienced teams in their production capabilities, our ability to leverage D. R. Horton scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Our homebuilding cash flow from operations for 2021 was $1 2 billion.
Over the past five years, we have generated $5 $9 billion of cash flow from homebuilding operations while <unk>.
Our consolidated revenues by 128% and our earnings per share by 383%.
During this time, we also more than doubled our book value per share reduced our homebuilding leverage to under 20% and increased our homebuilding liquidity by $2 8 billion.
All while significantly increasing our returns on inventory and equity.
I don't think market conditions remain very robust and we are focused on maximizing returns and increasing our market share further.
However, there are still significant challenges in the supply chain, including shortages in certain building materials and tightness in the labor market.
As a result, we've continued restricting our home sales pace during the fourth quarter by selling homes later in the construction cycle to align with our production levels and better ensure certainty of one closing date for our homebuyers.
We expect to work through the supply chain challenges and ultimately increase our production capacity.
After starting construction on 22400 homes this quarter, our homes and inventory increased 26% from a year ago to 47800 homes as of September 32021.
In October we started more than 8000 homes further positioning us 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.
We plan to maintain our flexible operational and financial position, while generating strong cash flows from our homebuilding operations and.
In managing our product offerings incentives home pricing sales pace and inventory levels to optimize our returns.
It.
Diluted earnings per share for the fourth quarter of fiscal 2021 increased 65% to $3 70 per share and for the year diluted earnings per share increased 78% to $11 41.
Net income for the quarter increased 62% to $1 3 billion and for the year net income increased 76% to $4 2 billion.
Our fourth quarter home sales revenues increased 24% to seven 6 billion.
21937 homes closed up from $6 1 billion on 20248 homes closed in the prior year.
Our average closing price for the quarter was $346100 up 14% from last year and the average size of our homes closed was down 1% net.
Net sales orders in the fourth quarter decreased 33% to 15949 homes and the value of those orders was $6 billion down 17% from $7 3 billion in the prior year.
A year ago, our fourth quarter net sales orders were up 81% due to the surge in housing demand during the first year of the pandemic. When we had significantly more completed homes available to sell and prior to the supply chain challenges that arose in 2021.
Our average number of active selling communities decreased 5% from the prior year and was down 3% sequentially.
Sales price on net sales orders in the fourth quarter was $378300 up 23% from the prior year.
Cancellation rate for the fourth quarter was 19% flat with the prior year quarter.
As David described new home demand remains very strong and our local teams are continuing to restrict our sales order pace where necessary on a community by community basis based on the number of homes in inventory construction times production capacity and lot position.
They also continue to adjust sales prices to market, while staying focused on providing value to our buyers. We are still restricting the pace of our sales orders during our first fiscal quarter, but to a lesser extent than during our fourth quarter. As a result, we expect our first quarter net sales orders to be approximately equal to or slightly higher than our 20.
418 sales orders in the first quarter last year.
Our October net sales order volume was in line with our plans and we remain confident that we are well positioned to deliver double digit volume growth in fiscal 2022 with 26200 homes in backlog 47000 homes in inventory, a robust lot supply and strong trade and supplier relationships Jessica.
Gross profit margin on home sales revenue in the fourth quarter with 26, 9% up 100 basis sequentially from the June quarter. The increase in our gross margin from June to September reflects the broad strength of the housing market and benefited from the better alignment of our sales order pace to our construction schedule.
The strong demand for our limited supply of homes has allowed us to continue 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 7% sequentially, while our stick and brick cost per square foot increased seven 5% and our lot cost increased 2%.
We expect both our construction and lot costs will continue to increase however, with the strength of today's market conditions, we expect to offset any cost pressures with price increases.
We currently expect our home sales gross margin in the first quarter to be similar to the fourth quarter.
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 adjust to local market conditions and new home demand.
In the fourth quarter homebuilding SG&A expense as a percentage of revenues was six 9% down 70 basis points from seven 6% in the prior year quarter.
For the year homebuilding SG&A expense was seven 3% down 80 basis points from eight 1% in 2020.
Our homebuilding SG&A expense as a percentage of revenues is at its lowest point for a quarter and per year in our history and we are focused on continuing to control our SG&A, while ensuring that our infrastructure adequately supports our business David.
We have increased our housing inventory in response to the strength of demand and are focused on expanding our production capabilities further.
We started 2004 hundred homes during the fourth quarter and 91500 homes during fiscal 2021.
Which is an increase of 21% compared to fiscal 2020.
We ended the year with 47800 homes in inventory up 26% from a year ago.
<unk> 1700 of our total homes at September 30 of them were unsold of which 900 were completed.
Although we have not seen significant improvement in the supply chain, yet we expect the current constraints to ultimately moderate at some point in 2022, Mike at.
At September 30, our homebuilding lot position consisted of approximately 530000 lots of which 24% were owned and 76% were controlled through purchase contracts, 24% of our total owned lots are finished and at least 47% of our controlled lots are or will be finished when we purchase them.
Growing and capital efficient portfolio is key to our strong competitive position and will support our efforts to increase our production volume to meet homebuyer demand.
Our fourth quarter homebuilding investments in lots land and development totaled $1 8 billion.
Of which $1 billion was for finished lots and $331 million was for land and $440 million was for land development Bill.
<unk>. Our majority owned subsidiary is a publicly traded well capitalized residential lot manufacturer operating in 56 markets across 23 states.
<unk> continues to execute extremely well on its high growth plan as they increase their lots sold by 53% to 15915 loss during fiscal 2021 compared to the prior year.
Four starts pre tax profit margin for the year improved 400 basis points to 12, 4%, excluding an $18 $1 million loss on extinguishment of debt.
At September 30, <unk> owned and controlled lot position increased 60% from a year ago to 97000 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.
$370 million of D. R. Horton was land and lot purchases in the fourth quarter were from four star.
Four stores separately capitalized from D. R. Horton and had approximately $500 million of liquidity at year end with a net debt to capital ratio was 35, 2%.
With its current capitalization strong lot supply and relationship with D. R. Horton four star plans to continue profitably growing their business Jessica financial services pre tax income in the fourth quarter was $103 million and $243 million of revenue with a pre tax profit margin at 46, 1%.
For the year financial services pre tax income was $365 million on $824 million of revenue, representing a 44, 3% pretax profit margin.
For the quarter, 98% of our mortgage company's loan origination related to homes closed by our homebuilding operations and our mortgage company handled the financing for 66% of our homebuyers.
Jay and VA loans accounted for 45% at the mortgage company's volume.
<unk> originating loans with DSM mortgage this quarter had an average FICO score of 722, and an average loan to value ratio of 89%.
First time homebuyers represented 59% of the closings handled by our mortgage company this quarter, Mike or.
Our multifamily and single family rental operations generated combined pretax income.
43, $74 3 million in the fourth quarter and $86 $5 million in fiscal 2021, our total rental property inventory at September 30 was $841 million compared to $316 million a year ago, we sold three multifamily properties totaling 960 units.
In fiscal 2021 for $191 9 million all of which were sold in the fourth quarter compared to two properties totaling 540 units sold in fiscal 2020.
We sold three single family rental communities totaling 260 homes during fiscal 2021 for $75 9 million.
Including one sale of 64 homes during the fourth quarter for $21 million in revenue.
In fiscal 2022, we expect our rental operations to generate more than $700 million.
And revenues from rental property sales, we also expect to grow the total inventory investment in our rental platforms by more than $1 billion in fiscal 2022 based on our current rental projects in development and our significant pipeline of future single and multifamily rental projects, we are positioning our rental operations to be a significant contributor.
<unk> to our revenues profits and returns in future years Bill.
Our balanced capital approach focuses on being disciplined flexible and opportunistic through fiscal 2021, our cash provided by homebuilding operations was $1 2 billion.
And our cumulative cash generated from homebuilding operations for the past five years was $5 9 billion.
At September 30, we had $5 billion of homebuilding liquidity, consisting of $3 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. This.
This level of liquidity provides significant flexibility to adjust to changing market conditions.
Our homebuilding leverage was 17, 8% at fiscal year end with $3 1 billion of homebuilding public notes outstanding of which $350 million matures in the next 12 months.
At September 30, our stockholders equity was $14 9 billion.
And book value per share was $41 81 SaaS.
Up 29% from a year ago.
For the year, our return on equity was 31, 6% an improvement of 950 basis points from 22, 1% a year ago.
During the quarter, we paid cash dividends of $71 6 million.
For a total of $289 $3 million of dividends paid during the year during.
During the quarter, we repurchased two 3 million shares of common stock for $212 6 million and our stock repurchases during fiscal year 2021 totaled $10 4 million shares for $874 million.
Our outstanding share count is down 2% from a year ago, and our remaining share repurchase authorization at September 30 was $546 2 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 based.
Based on our financial position and outlook for fiscal 2022, our board of directors increased our quarterly cash dividend by 13% to $22 five per share.
And we look forward to the first quarter of fiscal 2020, we are expecting market conditions to remain similar with strong demand from homebuyers.
<unk> supply chain challenges that will delay home construction completion and closing.
We expect to generate consolidated revenues in our December quarter of six 5% to $6 8 million.
And our homes closed by our homebuilding operations to be in the range between 17000 518500 homes, we expect our home sales gross margin in the first quarter to be 26, 8% to 27% and homebuilding SG&A as a percentage of revenues in the first quarter to be approximately eight <unk>.
<unk>.
We anticipate our financial services pre tax profit margin in the range of 30% to 35% and we expect our income tax rate to be approximately 24% in the first quarter.
Looking further out we currently expect to generate consolidated revenues for the full fiscal year of 2022 of 32, 5% to $33 5 billion.
And to close between 90090 thousand homes.
We forecast an income tax rate for fiscal 2022 of approximately 24%.
Object to changes in potential future legislation that could increase the federal corporate tax rate.
We also expect that our share repurchases will reduce our outstanding share count by approximately 2% at the end of fiscal 2020 as compared to the end of fiscal 2021.
We expect to generate positive cash flow from our homebuilding operations in fiscal 2022 after investments in homebuilding inventories to support double digit growth.
We will then balance our capital utilization priorities and then increasing the investment in our rental operations, maintaining conservative homebuilding leverage and strong liquidity pain.
Paying an increased dividend and consistently repurchasing shares David and.
In closing our results reflect our experienced teams and production capabilities.
Industry, leading market share broad geographic footprint and diverse product offerings across multiple brands.
Our strong balance sheet liquidity and low leverage provide us with significant financial flexibility.
Capitalize on today's robust market and to effectively operate in changing economic conditions.
Plan to maintain our disciplined approach to investing capital to 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 for your focus and hard work.
Our efforts during 2021 were remarkable.
We closed the most homes in a year in our company's history, achieving 10% market share with record profits and returns and we are incredibly well positioned to continue growing and improving our operations in 2022.
This concludes our prepared remarks, we will now host questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
In the interest of time, we remind participants to please limit themselves to one question and one follow up each we also add that while posing your question. Please pickup your handset if listen on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
And the first question is coming from Carl Reichardt from BTG. Carl Your line is live. Please go ahead.
Good morning, everybody welcome Paul Thanks for taking my questions.
I wanted to ask about.
Your sort of internal plans for 'twenty two for orders.
Perhaps talk a little bit about <unk>.
What do you see your community count doing relative to your absorptions in which you'd lean on more for growth in the next fiscal year.
Well, yes.
For our sales absorptions and community Count I think we're still believing that community count.
<unk> flat to up.
Single digit low single digits.
And as far as our sales numbers.
Good.
We are projecting to deliver 90 to 92000 homes.
We've got to have some sales pace that matches up.
Again Carl.
The key to us.
He is making sure that when we sell a home we know when it's going to it's going to deliver.
It is what I believe is as the market continues.
And to 'twenty two.
Youre going to see stabilization on the material side first.
And then the labor side, we've been working on expanding our labor base.
For the last 10 years and.
The consistent level of starts.
Has allowed us to.
The drive in efficiency, there that has allowed us to deliver more houses and we just plan on continuing to do that.
And really rather than a focus on community count.
Adds and flows quarter to quarter, if we start a house, we're going to ultimately sell.
Really focused on our homes and inventory and our lot position.
Sure Thanks, Jessica and thanks, Dan.
Well both of which are in very very good shape right now yeah. Okay. I appreciate that thank you and then.
I wanted to go back to something that.
Dr. Horton has talked about in the past, we don't hear too much from others is this idea of getting cash out of land investments within 24 months and when you put it in.
And I'm curious really on two fronts, one the significant shift to options is probably allowed that to improve.
But on the other hand, the delays entitlement and approval processes and finding dirt.
Probably hurt that so can you talk about that that goal of getting your cash out of your land investments within 24 months and how you see that changing over time and thanks a lot.
Well.
I would say, it's that's more of a requirement not a goal.
Carl.
That's something that we put in place coming out of the downturn that we have not wavered off.
And that is probably the toughest underwriting hurdle.
At our divisions have to face.
It's a non negotiable.
Graham.
Because we saw what filling longwall owning.
Long positions had land does to your balance sheet.
Your risk level.
What are unforeseen events that might happen in the future.
The 24 month cash back is still a part of every deal we underwrite and has been a primary factor in I think in.
Driving our option lot position because.
We have to find partners we have to.
The controllable launch we want to control.
So we've got to be good partners for these guys.
And that's been a focus through this entire cycle and I think a major major factor in that.
Just the unrelenting underwriting requirement that you got to get to cash off the table and 24 months.
To your point about extending delays and things like that that applies when we do own Orlando, we're self developing it doesn't necessarily affect our cash return when we're working with a third party and buying buying lots because we're not buying lots until we're ready to start homes and those approvals are in place I would say more recently one thing that is impacting R. R.
Turns in our ability to actually return on our cash and 24 months is the extension of our construction times with the supply chain delays, we have seen further elongation of our of our construction times I believe on a year over year basis. Our closings. This quarter were the construction times were longer by about seven weeks, which is a bit longer than we would've reported last quarter and so that is.
A factor that is causing a bit of friction in our inventory turns right now, but hopefully as we achieved some stabilization on the materials side over the coming year, we will see that stabilize and hopefully be able to contract again.
Thank you Bill and thanks, everybody I really appreciate the answers.
Yes, Sir thanks, Ralph.
And your next question is coming from Stephen Kim from Evercore ISI. Stephen Your line is live. Please go ahead.
Okay. Thanks, very much thanks, guys for all the info.
I guess my first question relates to that.
Your company your company's comments about affordability.
I guess first am I right to think that Youre driving affordability, primarily through construction and the design efficiencies.
Or should we think that this operator is going to imply a lower gross margin all things held constant.
And then related to your margin.
Imagine you got peak lumber come into your full year December quarter. So if lumber stays where it is right now I mean would it be reasonable to think that the December quarter margins as maybe likely to be the low point for the fiscal 'twenty two year.
Well in terms of lumber cost that they are still rising.
Further in our fiscal Q4, we've seen them rise further into into October. So we do believe that we are seeing the.
The peak of lumber cost. However, other costs are increasing as well, we're seeing costs really increasing across the board. So even when we see perhaps some relief from lumber as we move further into fiscal 'twenty. Two I think that will be offset by by other cost increases as far as the net effect on gross margin ultimately that will depend on the.
A strength of the demand environment as we move into the spring season, and our ability to continue to offset cost with prices right now are short term.
Our view is that we should be able to offset cost with price and maintain our margins at or around the level that we just reported in the fourth quarter, but truly as we move through fiscal 'twenty two will depend on the strength of the demand environment.
And our ability to continue to achieve affordability is really across a multitude of things. It's not any one thing we would point to clearly our size and our scale and the construction efficiencies that we've been very focused on particularly in our express homes brand Wyndham floor plans limiting options and being able to control a trade at our job.
Site All day long has to has to house repetitively doing the same thing over and over and over again.
It's been a benefit in that regard and then to a lesser extent. We have also continued to see our average square footage come down and Thats. The way, we can focus on affordability as well is building more of our smaller floor plans.
Steve.
Globally constantly trying to drive a more affordable.
Total occupancy cost.
For our buyers.
And that effort is never going to stop.
Well listen right and I think Mike.
I think that just to my question was that none of that implies a necessarily a lower gross margin all else held constant right now.
Okay.
We're not seeing that.
Alright, that's what I wanted to clarify okay.
And then secondly regarding sales restrictions.
Again I think.
Really encouraging we do an analysis of your starts and your inventory and it's certainly we agree we saw a really big positive inflection in your production metrics that we can see externally and so I wanted to ask you.
Your comment about the sales restrictions because.
A lay person or somebody listening from the outside could hear you say, hey, we are reducing our sales restrictions and things that themselves. Yeah. That's because demand has weakened and so therefore, there aren't as many people on waiting lists and things like that and so I was wondering if you could clarify.
With maybe a little more detail are you. These sales restrictions, which are starting to get alleviated or being relaxed.
Is that a sign of slowing demand or increasing supply.
<unk>.
Assuming it is not a weakening of demand I just wanted to go back to what you said in March I think Jessica you did a stress test of your backlog I thought that gave a lot of comfort about affordability I was wondering if you did that recently.
So the last question, yes, we did update.
Dress testing, we look at that every quarter and our backlog and found no real change in fact, it may be a slight improvement from the March quarter to what we saw in September quarter backlog.
And the sales restrictions is certainly a function of supply.
Seeing that we have been able to pull more homes through the production process to points.
Where we are able to give that buyer a more confident delivery date and give them a better experience in the process.
Don't think of it in any way its sales have been reflective of the demand environment, we have consciously chosen not to push our sales contracts.
And take advantage of that demand until we can meet those customer expectations properly.
We've seen that are completed homes in inventory that are unsold are still below 1000 homes.
Thats scattered across the country. So it's not like we're seeing any pile up of available inventory. It's when we're releasing homes, we're able to sell those homes in the normal course of business.
And as a reminder, but may not have heard the stress test and the commentary last quarter and just to quantify that.
I said that we've done on our backlog is if interest rates were to raise rise 100 basis points, what that at risk and buyer would look like and it's generally mid to high single digit percentage.
A potential at risk with a full 100 basis point move and Thats really just at risk we would not expect a total fall out in that regard we'd look to document additional income, let's put those buyers and I guess and then different mortgage product in there currently.
<unk>, so we feel pretty comfortable still with the ability of our buyers from an affordability perspective.
Thanks for all the info.
Shannon.
Your next question is coming from Matthew Bouley from Barclays.
Your line is live please go ahead.
Hey, good morning, everyone. Thanks for taking the question and congrats on the results here in a pretty tough environment.
So on the on the order outlook Bill.
Bill you spoke to the Q1.
Uptick I think suggesting basically 28% higher sequentially versus Q4, which is certainly well above historical norms.
Not surprising as you release, those sales restrictions and the inventory homes are there does this kind of atypical uptick get you back to equilibrium for lack of a better term or or should we understand that just given your inventory position ahead of the spring that we can perhaps see yet another.
I guess I'd call. It unusual uptick as you kind of release those sales and continue to lessen the sales restrictions. Thank you.
Yes, Thanks, Matt I think we're still in an unusual environment.
Prior year trends really don't apply to where we are today, our sales order pace and the sequential pace of ourselves is really driven by supply.
The homes that we have started that we have in production that reached the stage that we are ready to release them for sales and so our sales volumes are really governed by or constrained by our homes and inventory and where they stand and so right now with the visibility that we have to Q1, we believe we're in a position where we will deliver sales that are equal to.
<unk>, maybe slightly better.
Then last year's level, which isn't unusual sequential pattern versus where we were in Q4. When we were restricting sales and then as we move into the year I think the pattern will still be governed by our inventory levels I think what youre going to see in our forward expectation on sales, it's kind of aligning with our growth in starts that we've had over the past few quarters and as Bill said as those homes come through production.
And reach production stages that we're confident in the delivery date, then we were able to release those to the marketplace for sales.
That's great. Thank you both for that.
Secondly on Asps I think.
The revenue guide if I'm doing the math right. It implies maybe mid to high single digit.
Increases in Asps.
In fiscal year, 'twenty, two give or take obviously your order asps have been.
North of that for two consecutive quarters if not.
Well north of that here in Q4 or is there just any assumptions around geographic or product mix that we should be aware of that might temper closing asps into next year.
Well I think.
We're looking at the year as a whole and.
What our Asps will be for the year will ultimately be dependent on the spring selling season, and so the assumption that <unk>.
Prices for the year will be up mid to high single digit I think that's fair.
We're not going to assume that prices will continue to increase as fast as they have and so our base assumption will be there'll be some moderation in sales prices.
We're going to continue to be focused on affordability from an intentional perspective.
For our business.
And so far our initial guide going into the year prior to seeing what the spring will look like prior to seeing what the supply chain challenges will continue to be and what that will do to us over the course of the year.
We've set our ASP target is as you've seen.
Great well, thank you all and good luck.
Thank you.
Your next question is coming from Mike Rehaut Jpmorgan, Mike. Your line is live. Please go ahead.
Thanks, Good morning, everyone.
First question I was hoping to get a little bit of a sense of how youre thinking about gross margins.
Yes at least perhaps directionally through fiscal 'twenty, two and even longer term.
Understanding obviously a lot in flux, but.
As you look through the rest of the year.
Obviously, a lot of people are focusing on the reduction of lumber cost.
As a tailwind at the same time you have some.
Other headwinds in terms of additional cost inflation.
I guess.
Sumit.
Incentives and discounts are steady.
I'm just trying to get a sense of how you think at this point between lumber and other areas of cost inflation in the current pricing that you have in place.
How things might progress.
Throughout the rest of 'twenty two.
And like we really don't have much visibility to our gross margin is half the quarter assumes that you heard our specific gross margin guide for fiscal Q1, which is essentially relatively in line with Q4 as Don mentioned continued lumber headwinds.
In that December quarter.
Some of that does back off as we move throughout next year, but ultimately the gross margin that we achieved for fiscal 2022 as a whole is going to be dependent on the strength of the spring selling season, which were pretty far out.
But I think we do feel with the strength in today's market.
In a very good position to continue to hopefully at least maintain gross margins from here.
Update as necessary as we move throughout the year and see how this brand folds in some of these supply chain pressures. They are continuing to drive some cost increases.
Right.
Sure.
I guess also just longer term.
You are kind of in a new.
The state of play here in terms of.
Plus or minus around <unk>.
27%.
Just three years ago, you were at closer to 20%.
Versus the last cycle.
I think your peak was around 25 and a half in 2005.
Over the next 234 years as you're underwriting deals today.
And just kind of curious obviously, you kind of underwrite them for returns, but there isn't gross margin component in that.
How should we think about a quote unquote normal or even a new normal.
Again, assuming that we don't have this over the next 12 to 18 months like complete mean reversion to a.
Let's say, a fuller incentive type backdrop or whatnot.
I appreciate that it's a great 0.1, we do focus first and foremost on returns and not just the margin you're right. It is a component of the return equation and three years ago. As you mentioned, we were around 20% and if we had said at the time, we think three years from now we'll be at 27% I don't think we would have gotten a lot of credibility for that prediction.
So it's really hard as Jessica mentioned before to really give us any great degree of confidence in predicting accurately what margins will be several periods out I do think in our forward underwriting is that we have.
We're encouraged by what we see and what we'll be able to achieve.
In margins going forward and ultimately, it's the return and the cashback, that's driving our investment decisions today.
Sure the things that we can point to.
A lot of the questions have been about are there structural changes in the business that can lead to maintaining a higher gross margin over the long term than what we've historically seen.
There are not enough to keep it at 27%, but the two things we would point to and that we believe we can maintain our the scale advantages there we would expect it to maintain some level of.
Yeah.
And our margin from that but then also less interest in our cost of sales with what we've done with our balance sheet in terms of reducing our leverage.
We will be flowing through cost of sales consistently going forward.
And the trade.
Morning, guys consolidate its a maturing industry.
My anticipation is youre going to see more stability than typically is.
Associated around prior cycles.
I think that there is a consistency.
Discipline in the industry today.
<unk> existed.
One last quick one if I could sneak it in how should we think about community count and sales pace.
In 'twenty two versus 21 in terms of I think over.
So is it just growth from both aspects.
It's going to continue to be mainly driven by absorption rather than community count and we would expect for the full year to have them.
A modest increase in our community count, but I think as I referenced in the carload to outside of the call.
We have the houses and what we're going to ultimately sell and close the house and Thats generally the better indicator of where our business is going and just what our absolute community count is doing.
Great. Thank you.
Thanks, Mike.
Your next question is coming from Deepa Raghavan.
Your line is live please go ahead.
Hi, good morning, everyone nice quarter and thanks for taking my questions.
My first one is on your.
Scott space in October Okay.
Our higher homes.
Pretty solid rate, perhaps with some timing benefit here.
But can you walk us through some of the puts and coke through a normalized pace near term or is this a good run rate for 2023 deliveries with perhaps.
Upside when supply chain improves.
I think the run rate that we're targeting is pretty well established.
For the first.
4% to six six months of this year.
That's a consistent run rate we're targeting.
<unk>.
I think that.
We are basing our guidance and everything and what were <unk>.
<unk> for the year on the way the supply chain exists today.
And we have to carry more houses in inventory.
To support that double digit growth and we typically have had to do in the past.
We're positioning for it we will see what the spring break season.
Let's see what the.
Labour supply issues, either resolved mitigate or get worse.
It's a lot easier to slow down our start.
It is to speed it up so we consistently adjust our start.
And based on what our forward outlook.
What we control is our.
Our liquidity and our process and our targets.
We're very focused on the liquidity.
So there is a risk mitigated or and it allows us to be more flexible.
And what we target and how we operate.
We've already talked on this call about where an unusual time in terms of how our sales pace looks were also an unusual time in terms of historical measures of our homes in inventory relative to what we can close with extended construction times and all the disruptions as David said, we have to hold more homes in inventory to deliver the same number of closings today versus a few years ago.
The offset to that.
In terms of your supply that we're still driving very impressive returns.
Well again, we're very focused on liquidity and maintaining that flexibility.
That is.
Key competitive advantage I think.
Whatever happens in the market.
All I'll say our comments thanks for that my follow up is a pretty high level question to the extent you just willing to discuss.
How do you think the supply chain is going to play out.
Do appreciate the visibility is not great beyond a quarter or more.
But just.
Just given the current state.
What are your thoughts on a realistic best case worst case scenario playing out in fiscal 'twenty thing too.
Even if you don't want to go all out to 2022.
What are some of the scenarios as we enter the spring selling season. Thank you.
From a supply chain standpoint, I think <unk> got some of the best companies.
Got it ever existed in the history of the World.
Just on that.
And I think theyre going to get it figured out.
And the people that we do business with are.
The best of the best in that industry. So.
I'm very confident.
That was it.
Q1, Q2, Q3, I don't know that but I am very confident.
At the <unk>.
People.
That are that are working on it we're going to get resolved.
Yes.
When that happens I think are.
We will return to an inventory conversion rate.
Consistent with what we've done in the SaaS, maybe even a little better.
Okay.
Alright, Thats, great I will pass it on thanks, very much and good luck. Thank.
Thank you very much.
Your next question is coming from Anthony Pettinari from Citigroup. Anthony Your line is <unk>. Please go ahead.
Hi, this is al.
Astro Sonet on for Anthony and I, just wanted to ask you mentioned that you need more homes in inventory now to deliver the same number of Av homes.
Are you able to articulate a target maybe your normalized that account for this.
A new normal and then when supply chain do clear up do you expect to reduce that kind of eventually or because it would be kind of like the new normal going forward.
Absolutely when we get back to a more normalized time, we would expect our inventory turns to return back to historical norms as David said or better. So historically, if you looked at the beginning of the year for us, but you could take our homes and inventory and you can pretty well double that and that's what we would close the next year, sometimes we've done a little better than that sometimes a little worse.
The current environment, if it remains as tough as it is right now, we probably would not be able to do that our guidance, obviously would imply that but absolutely when we get back to a more normal time, we would we would expect to.
Our spec count and turn on inventory and focus on generating the best returns that we possibly can this is simply a reflection of the current environment. We're in the elongated construction times, we're seeing.
Great Great and then as a follow up just understanding that the sales declines in the quarter as kind of a function of supply, but I'm. Just curious have you any have you seen any markets, where maybe prices are starting to get a bit proud. The year that you are concerned around affordability, maybe seeing some buyers start to walk away around the margin.
I think it's pretty clear that the market is not as white Hot right now as it was in the spring.
But we're still seeing very strong demand and the homes that we're releasing for sale are still being absorbed quite well with very historical low levels of incentives in place.
And so we're seeing very few homes complete construction that are not being sold part of that completion process.
And I'd also say that even though our ASP has gone up.
And.
It's not a sustainable.
Brian is corner to corner to corner.
It is something that.
Think indicates the level of demand out there when you restrict clinical houses.
Yourself.
Okay.
Hi.
It's a good time there'll be cell analysis.
Demand still exceeds supply yes.
In terms of Mike's comment it's not it is white hot.
Spring, we are seeing I think somewhat of a return to normal seasonality as well, we wouldn't expect the market to be as strong today as it has during the spring selling season.
So we still feel very good as we move throughout fiscal 2018 is that the market is going to remain robust.
Those 900 homes, we have that are completed and unsold less than 100 had been completed for an extended period of time.
Out of almost 50000 homes.
Okay.
Thanks, that's very helpful. I'll turn it I'll turn it over.
Thank you. Your next question is coming from Jade Rahmani from Tw J. Your line is live. Please go ahead.
Thank you very much on the land side.
You said that sequentially lot costs were up 2% quarter over quarter, how much do you think they are up year over year.
Give me one second.
Habit.
They are up to about a mid single digit percentage, which has been pretty consistent Apple last year on a year over year.
Okay, that's somewhat surprising because I think historically land usually appreciates in line with depreciation or perhaps at a faster clip do you expect.
<unk> costs too.
Again, accelerating as the moderate pace of growth.
<unk> the timing at which you acquired these locks.
That's got a lot to do with the data. It's the homes. We're delivering this quarter are delivered on a.
Large variety of vintages, a lot acquisitions of one we contracted for the land and contracted for the lots and so youre seeing a big blend. So generally we are seeing cost inflation in our lot cost than what we're currently buying and but it takes it's a muted impact in the near term and it takes several years for those costs to be full.
We reflected through.
Our closings and this is one of the strengths of our long life locked pipeline and our controlled lot position because we've got we've got land and lots of controls generally at fixed prices or a known prices.
And so we reap the benefits of that by having a strong controlled lot position.
Thanks for taking the questions.
Your next question is coming from Truman Patterson from Wolfe Research your.
Your line is live please go ahead.
Hey, good morning, everyone. Thanks for taking my questions and Paul Congratulations on the promotion.
Just wanted to follow up on a prior question, but your 'twenty two closings expectations.
Up about 11% year over year at the midpoint.
You will.
Mentioned material shortages in multiple products currently but David you've made a couple of comments that you expect improvement in 2022, I'm just trying to understand.
What are your suppliers telegraphing to you with respect to 2022 capacity.
Are they adding employees lines et cetera, just what sort of level of growth do they think they can support.
We've got commitments from.
All of our major materials.
They're going to they're going to support us.
Our numbers I know, what we're trying to accomplish.
They see our stock base for the last six months in the next six months so.
And they are really good companies.
Yes.
I'm not going to pull out a bunch of names because I'll forget about half.
Yeah.
Oracle came in and met with Don Horton myself.
The entire executive team.
It's a level of partnership.
<unk>.
Our commitment to each other I think that just hasn't existed in the past.
And I think as a result of the consolidation of the industry.
The significant 10% market share in the home housing is a real number.
And in our conversations they are they are hiring there.
Lines.
Unemployment benefit going away is expected to have.
Some impact I think some of that.
An extended impact from the Texas freeze and is also expected to be worked through as we move into calendar 2022.
As David said I mean, these things are taking a while to work through but they are doing what they need to do to help support our business and as always we expect them to support D. R. Horton business first.
And for a lot of those pressures to diesel and with smaller builders versus us.
Having scale significant scale in these markets is a huge benefit for us.
And I think really gives us.
More access and better service.
Some of the smaller less people with less scale, having a forward pipeline of over half a million locks makes it pretty powerful.
As a conversation piece and talking with the large suppliers.
Okay, Okay fair enough and in your capital allocation priorities I don't believe that I heard anything about M&A.
Could you just discuss.
Any interim or.
The level.
In your pipeline that Youre seeing our valuation stretched at this point then.
Just.
Second question I am sure its well deserved but could you I'll just run through the decision behind creating the co COO chair.
Sure I'll take the first question and then let David handle the second question.
Yes.
The M&A landscape is pretty similar to where it's been the past few quarters. It's anecdotal we're.
We're not looking for any any major transformational M&A opportunities it would be hard for us to accomplish one of this at the scale. We're at today, but we are looking at tuck.
Tuck in acquisitions to add great platforms and people to the team across the country, where we may maybe looking for growth and it's an ongoing conversation with people in that process, but don't look for any major use of capital on that front today.
And on the COO.
<unk> CFO program.
Yeah.
And looking at our platform.
Basically have doubled in the last five years.
And trying to during Covid trying to get places.
Not only.
On an executive officer standpoint.
From a regional Presidents' standpoint.
You were asking gas to get on planes.
Really.
Became less and less comfortable with that.
I think on the last call I might have.
Statement about infrastructure and immediately had a quick kind of quit talking about it because the infrastructure I was talking about was our platform.
Which was.
Dual seal rose rolls.
And then doubling our <unk> count.
So we're continuing to scale up our platform to make.
To coincide with the scale up in market share that we're gaining.
And we got we got great people.
Performed at exceptional levels, but as you move up that next step the world.
Changes in the skill set changes so you've got to get young guys in a position in <unk>.
My mind anyway, and what we've talked about here.
You've got to get to a younger guy into a position.
Regional role, where he is working through divisions instead of on top of it positions.
And it's a training process.
Well, we've got a great market, while we are scaling up in absorptions.
We need to scale up and people.
And Paul gives us the ability to touch the regional Dennis Moore more consistently and to be in the markets more consistently.
As he travels Mike travels I travel.
And.
Bye.
Increasing the number of regions. We were then able to elevate people within divisions to leadership roles.
It's just kind of a consistent.
When we get more people access to that role and give them a chance to learn that job before.
Nothing happens and you are forced to make a change so.
It is.
It's a part of.
Continuing to scale for our mix.
Five years of growth.
And it's.
We've got great people.
We've got incredibly strong management team.
That's simply going to be on.
Honest with you I think about all the time.
<unk> of our people.
Division level and region level compared to when I started the company of our compared to when we went public or even compared to the last cycle.
What I call Super cycle levels.
Yes.
Yeah.
The company has an incredibly good position with incredibly good people.
And Paul is going to help us make it even better.
Perfect. Thank you all.
Your next question is coming from Eric Schlosser from Cleveland Research Eric Your line is live. Please go ahead.
Thank you.
Two things.
First of all in terms of the spring selling season I know that.
You don't have visibility to it.
So there is by definition to some degree of uncertainty, but if you look at your position and what Youre seeing in the market now.
Could you identify these are the areas of.
Notable uncertainty that you just won't know until you get to the spring.
That's sort of the.
No no no.
Always a great question and that's one of the things we're always trying to ponder appear around the quarter and figure out what's going to happen, but one of the big Big unknowns going into the year is not from a demand side, but from a production capacity side as David said before is it going to get better stay the same or get worse I mean, it may different parts of it may be.
All three over the next six to nine months and being prepared to handle those challenges is what we deal with every day as we say when people want to and can buy homes. We can solve the rest of the problems that's our job.
Still see good demand trends out there still see very good traffic. This fall in the models quality of traffic interest of traffic and our realtor participation has been really strong.
Starting to fall so thats for us that would be a good sign for continuing what happens.
What we can control it Eric.
Eric.
Inventory and how we position that.
To be in front of that spring market.
And that we feel very good about.
We can.
That is where.
We can have targets, we can have a plan.
To that plan and then we'll respond to the market as it comes.
Okay.
Helpful and then secondly.
A lot of talk about affordability earlier in the call and I know there's.
A lot of components of affordability, but ultimately.
Your customer.
Then paying the price for the house.
And the order Asps.
Coming out of <unk> is now 380000, which is.
Certainly different than it was two or three years ago for the company I'm just curious how you think about that.
Especially how you think about it relative to the different products that you have and relative to markets.
How do you think consumers respond to that customers respond to that and the path forward.
It's something we talk about and try to stay focused on providing more affordable homes and being the relative affordable choice in a given marketplace.
Look at our mortgage company statistics, and we can see that almost.
Almost 60% of our buyers. This quarter were first time homebuyers and almost 60% of our buyers had a combined household income reported income for mortgage purposes at least of $90000 or less and so we still think thats.
Yeah.
A good target market for us to continue to look to serve and while we have seen pricing come up in.
And average loan size come up the.
The debt to income ratios that we're seeing across the loans, where our underwriting has not really budged, it's been pretty consistent and as the industry. As a whole has continued to increase sales prices relatively speaking we still do have.
The lowest average sales price generally than almost all the large public builders.
Okay. That's helpful context, thank you.
Thank you.
And the final question, we have time for today is coming from Alan Ratner from Zelman and associates Alan.
Alan Your line is live please go ahead.
Hey, guys. Good morning, Thanks for squeezing me in here.
So I'd love to drill in a little bit on the rental operations.
Breaking it out this quarter and certainly I think over $700 million of revenue clearly got some.
<unk> growth plans there so yes.
Focusing first on the single family rental side I'd love to hear.
Your your thoughts kind of on the rollout there and maybe what you've been surprised on or maybe whats reaffirmed your views up to this point as you start leasing up communities and selling them.
Are you seeing any interesting trends on who these renters or are they longer term renters, who are choosing to rent are they people waiting for a new home. It would be built any kind of either anecdotal or data you can provide there and I guess that.
Longer term, how big of a piece of the business to you do you want to target.
I would say.
The renters are not terribly different than first time homebuyers.
Sure.
People moving into areas looking for housing.
They're looking for a better lifestyle.
Things it probably has surprised us.
Level of demand.
And the lag.
Not only from a rental standpoint, but from a.
But what I consider an institutional type investor base.
That has bought the three that we saw.
Yes.
It might not be a white hot for sale business.
This year compared to last year.
It is a white hot.
Pete.
Bill.
Business, especially the way we're positioning.
These projects kind of only affordable Liam.
Self contained not intermixed with for sale housing.
Got it so I don't know David.
As strong as demand has been I guess first off is the 35% margin that you guys generate that that business is that a realistic kind of intermediate term margin on that 700 plus million of revenue.
Is the plan still to do the merchant build approach you mentioned the institutional capital a lot of your peers have either partnered up with some of those investors and established joint ventures or some ongoing investment there. It seems like you're kind of choosing more of the merchant build approach. So.
Profitability and longer term and any any reason why maybe the strategy changes there.
We've got a small sample size, thus far on those that we've closed and very pleased with the profit levels we have seen.
We will still see some projects that will generate those level of profits, but as we grow the platform and as we build the infrastructure in place to support a larger volume across the country, we wouldn't necessarily expect to continue to generate the same.
Margin that we've shown in these first few but do expect pre tax profit margins to be higher on the rental business than on our for sale business and to generate an accretive return it needs to be a little bit higher because the assets are held a little bit longer. So so do we still expect to see very attractive.
<unk> levels.
On the rental business.
The current sample size is still a little bit small and as we've said before as we learned the business then we would make our capitalization decisions about how to go about capitalizing the business. So we're still evaluating that looking at options there.
Yeah.
I will say that.
Everything we work on everything we think about.
We want to we want to do things that are sustainable and scalable.
I can tell you the rental side of this market.
Certainly seems sustainable and with our platform.
It's scalable.
We're pretty excited.
Great. Thanks for all the color there guys.
Thank you.
Does conclude today's question and answer session I would now like to turn the floor back to David for closing comments.
Thank you Tom we appreciate everybody's time on the call today and look forward to speaking with you again in January on our first quarter results.
And finally, congratulations to the entire D. R Horton team.
You are the first homebuilder to close more than 50000 homes.
You are now the first to close greater than 80000 homes in a year.
And you're well on your way to becoming the first homebuilder to close more than 100000 homes in a year.
Hey, humbled stay hungry and stay focused.
Compete and continue to win every day. Thank you.
Thank you.
Ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.