Q1 2022 D R Horton Inc Earnings Call
Our average sales price on net sales orders in the first quarter was $383600 up 22% from the prior year quarter. The cancellation rate for the first quarter was 15% down from 18% in the prior year quarter.
New home demand remains very strong despite the recent rise in mortgage rates. Our local teams are continuing to sell homes later in the construction cycle. So we can better ensure the certainty of the home close date for our homebuyers with virtually no sales occurring prior to start of home construction, we plan to continue managing our sales pace.
<unk> in the same manner during the spring and we expect our number of net sales orders in our second quarter to be equal to the same quarter in the prior year or up by no more than a low single digit percentage.
Our January home sales and net sales order volumes were in line with our plans and we are well positioned to deliver double digit volume growth in fiscal 2022.
With 29300 homes in backlog 54800 homes in inventory, a robust lot supply and strong trade and supplier relationships.
Our gross profit margin on home sales revenues in the first quarter was 27, 4%.
Up 50 basis points sequentially from the September quarter.
The increase in our gross margin from September to December reflects the broad strength of the housing market.
The strong demand for homes combined with a limited supply has allowed us to continue to raise prices and maintain a very low level of sales incentives and most of our communities.
On a per square foot basis, our home sales revenues were up three 4% sequentially.
While our cost of sales per square foot increased two 9%.
We expect our construction and lot costs will continue to increase however, with the strength of today's market conditions, we expect to offset most cost pressures with price increases in the near term.
We currently expect our home sales gross margin in the second quarter to be similar to or slightly better than the first quarter. Jessica in the first quarter homebuilding SG&A expense as a percentage of revenues was seven 5% down 40 basis points from seven 9% in the prior year quarter, our homebuilding SG&A expense as a <unk>.
Percentage of revenue was lower than any first quarter in our history and we remain focused on controlling our SG&A, while ensuring our infrastructure adequately supports our business Paul.
We have increased our housing inventory in response to the strength of demand and are focused on expanding our production capabilities. Further we started 25500 homes during the quarter up 12% from the first quarter last year, bringing our trailing 12 months starts to 94200 homes we are.
Ended the quarter with 54800 homes in inventory up 30% from a year ago 25600 of our total homes at December 31 were unsold of which only 1000 were completed our average cycle. Our average construction cycle times for homes closed in the first quarter has increased.
By almost two weeks since our fourth quarter and two months from a year ago, Although we have not seen much improvement in the supply chain. Yet we are focused on working to stabilize and then reduce our construction cycle times to historical norms Mike.
At December 31, our homebuilding lot position consisted of approximately 550000 lots of which 24% were owned and 76% were controlled through purchase contracts, 23% of our total owned lots are finished and at least 47% of our controlled lots are or will be finished when we.
<unk> that are growing and capital efficient lot portfolio is a key to our strong competitive position and is supporting our efforts to increase our production volume to meet demand.
Our first quarter homebuilding investments in lots land and development totaled $2 2 billion.
Of which $1 $2 billion was for finished lots $570 million was for land development and $390 million was to acquire land Paul.
<unk> our majority owned residential lot manufacturer operates in 55 markets across 23 States four star continues to execute extremely well and now expects to grow its lot deliveries. This year to a range of 19500 to 20000 lives with a pre tax profit margin of 13.
And a half to 2014%.
At December 31, <unk> owned and controlled lot position increased 33% from a year ago to 103300 lives.
58% of <unk> owned lots are under contract with D. R Horton or subject to a right of first offer.
<unk>, an executed purchase and sale agreements $330 million of our finished lots purchased in the first quarter were from four star.
<unk> is separately capitalized from D. R Horton.
<unk> had approximately $500 million of liquidity at quarter end with a net debt to capital ratio of 33, 9% with its current capitalization strong lot supply and relationship with D. R. Horton four star plans to continue profitably growing their business Bill.
Financial services pre tax income in the first quarter was $67 1 million.
With a pre tax profit margin of 36, 4% compared to $84 1 million and 44, 9% in the prior year quarter.
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 homebuyers.
FHA and VA loans accounted for 44% of the mortgage company's volume.
Borrowers originating loans with DHL mortgage this quarter at an average FICO score of 721, and an average loan to value ratio of 88%.
First time homebuyers represented 55% of the closings handled by the mortgage company this quarter Mike.
Our rental operations generated pre tax income of $70 1 million on revenues of $156 5 million in the first quarter compared to $8 $6 million of pre tax income on revenues of $31 8 million in the same quarter of fiscal 2021, our rental property inventory.
At December 31 was $1 2 billion.
Compared to $386 million a year ago.
We sold one multifamily rental property of 350 units for $76 $2 million during the quarter. There were no sales of multifamily rental properties during the prior year quarter. We sold two single family rental properties totaling 225 homes during the quarter for $83 million.
Compared to one property sold in the prior year quarter for $31 8 million at December 31, our rental property inventory included $519 million of multifamily rental properties and $642 million of single family rental properties.
As a reminder, our multifamily and single family rental sales and inventories are reported in our rental segment and are not included in our homebuilding segments homes closed revenues or inventories in fiscal 2022, we continue to expect our rental operation to generate more than $700 million in revenues.
We also expect to grow the inventory investment in our rental platform by more than $1 billion. This year based on our current projects and development and our significant pipeline of future projects. We are positioning our rental operations to be a significant contributor to our revenues profits and returns in future years Bill.
Our balanced capital approach focuses on being disciplined flexible and opportunistic.
During the three months ended December our cash used in homebuilding operations was $115 million as we invested significant operating capital to increase our homes and inventory to meet the current strong demand.
At December 31, we had $4 $1 billion of homebuilding liquidity, consisting of $2 1 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 scale and activity of our business and to provide flexibility to adjust to changing market conditions are.
Our homebuilding leverage was 17, 3% at the end of December and homebuilding leverage net of cash was six 9%.
Our consolidated leverage at December 31 was 25, 1% and consolidated leverage net of cash was 15, 2%.
At December 31, our stockholders' equity was $15 7 billion.
And book value per share was $44 25.
Up 29% from a year ago.
For the trailing 12 months ended December a return on equity was 32, 4% compared to 24% a year ago.
During the quarter, we paid cash dividends of $80 1 million.
And our board has declared a quarterly dividend at the same level as last quarter to be paid in February .
We repurchased two 7 million shares of common stock for $278 $2 million during the quarter, our remaining share repurchase authorization at December 31 was $268 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.
We look forward to the second quarter of fiscal 2022.
<unk> market conditions to remain similar with strong demand from homebuyers that continuing supply chain challenges.
We expect to generate consolidated revenues in our March quarter of seven three to $7 7 billion and homes closed by our homebuilding operations to be in a range between 19020 thousand homes.
We expect our home sales gross margin in the second quarter to be approximately 27, 5% and homebuilding SG&A as a percentage of revenues in the second quarter to be approximately seven 5%.
We anticipate our financial services pre tax profit margin in the range of 30% to 35%.
Our income tax rate to be approximately 24% in the second quarter.
For the full fiscal year, we continue to expect to close between 90090 2000 homes, while we now expect to generate consolidated revenues of $34 five to $35 5 billion.
We forecast an income tax rate for fiscal 2022 of approximately 24% and.
And we also continue to expect that our share repurchases will reduce our outstanding share count by approximately 2% at the end of fiscal 2022 compared to the end of fiscal 2021.
We still expect to generate positive cash flow from our homebuilding operations. This year after our investments in homebuilding inventory to support double digit growth.
We will then continue to balance our cash flow utilization priorities among 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 <unk>.
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 to capitalize on today's robust market and to effectively operate in changing economic conditions. We plan to maintain our disciplined approach to investing capital to enhance the long term value of the company, which.
<unk>, 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.
We are incredibly well positioned to continue growing and improving our operations in 2022.
This concludes our prepared remarks, we will now host questions.
Okay.
How late can you open the line for questions. Please.
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.
I'd like to remind participants to please limit themselves to one question and one follow up each.
We also would like to ask that while posing your question you. Please pickup your handset listening on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from John Lovallo with UBS John Your line is live.
Good morning, everyone and thank you for taking my questions.
First one gross margins across the industry have risen to levels that are probably not sustainable over the longer term I guess the question is do you believe that this kind of mid to high 20% margin range persistent DHA for maybe a couple of years and then as we move forward what has structurally changed in your opinion that would allow.
Tap trend margins that are maybe 100 to 200 basis points above the historical average.
Sure John we're very pleased with where our gross margins have gotten into this cycle and certainly the strength in the market has been a large driver of that.
Probably would never sit here today and say that those are sustainable at these levels through cycles.
Typically gross margin does get somewhat competed away when.
Market soften that being said, we're extremely strong levels today and can still generate very strong returns even with some margin compression and we will continue to meet the market overtime in terms of what we believe is sustainable though compared to our historical averages certainly we're carrying less interest in our cost of sales today.
And with what we've done from deleveraging and our balance sheet focus we would expect that to be a sustainable cost advantage and then their scale advantages with where we've gotten in terms of our volume and our building efficiencies with our labor labor trades in our materials suppliers, we would expect some component of that scale advantages to be sustainable as well.
And Joe we talk a little bit about this.
We talk a lot about it.
The industry is changing it's just a much more disciplined.
Industry than it was through the last cycle.
As we gain in market share as the other publics gain in market share.
Theres just less at least in my mind my expectation is there'll be less volatility in the cycle up and down.
It's just a real businesses today.
Not speculators.
Yes that makes a lot of sense okay.
Then my second question in an environment, where rates are likely to rise here, what do you view as the strategic advantages of implementing a predominantly spec focused building model and targeting entry level buyers, perhaps maybe versus a build to order model targeting better financed buyers.
First of all John what we would say is that we're able to more closely.
Time, the application for the mortgage the qualification for the mortgage and the closing of that mortgage to the buyers spending less time in backlog when they are buying a house that has already started their production process that allows us to have fewer bad things happen to their potential credit profile, where they may fall out of backlog and no longer qualify less interest rate risk while there.
In that cycle and then finally, just a continued focus on affordability I mean, we're going to continue to seek to be affordable for our homebuyers and in our markets.
Got it thank you guys.
Thanks, John .
Your next question is coming from Stephen Kim with Evercore ISI Steve.
Steven Your line is live.
Yes, thanks, very much guys I appreciate all the all the color here.
I was particularly intrigued by your comment about the number of homes you have under construction six $656 6000 I think.
And I think you also mentioned that your cycle time increased about two weeks. So correct me, if I'm wrong, but that would imply I think that yours time from start to close its about seven five months first of all is that correct.
Roughly yes, yes.
Yes, so if I think about your 56600 homes and assume that youll.
I assume it's basically a seven five months.
Cycle time that would imply that you should be able to close 45280 over the next two quarters.
Your guidance for the second.
Second quarter. This next quarter is I think for 19% to 20000 homes, so considerably less than half of that amount and so I'm curious as to is there anything wrong with the way I'm thinking about how your homes under construction should ultimately result in closings over the next few quarters.
Given your cycle time of seven five months.
And therefore, we should be thinking that there might be an acceleration in <unk> closings on that basis or if you're if this represents some conservatism about extending cycle times.
Thank you Steve I think one of the things you need to look at is how long those houses had been in production. We started a substantial number of those homes in the most recent quarter I think we stepped up our starts from Q4 to Q1 by about 3000 homes. So those homes are obviously going to take a little longer to deliver and the process and as we're looking at the remains.
Here are the year the guidance, we're providing for Q2 is based on where the homes are in construction today, but but but yes as we look at the full year based on when we started the homes and we look at where our guidance is for the full year, we are a bit more backend loaded in terms of our closings in Q3 and Q4 that historically, we are part of that is because of the elongated.
Construction times that we have not seen improve yet.
It's based on where our homes and construction currently said in terms of the construction cycle.
Yes, great that's very helpful.
My second question relates to your initiatives in the rental area, which I think you've talked about growing that inventory and therefore I would assume the associated revenues.
Pretty significantly on a longer term basis, my question's twofold one.
Is there a rule of thumb that we could bank.
What let's say every billion dollars of inventory on a steady state basis might yield in terms of our level of revenues that we could be forecasting and then secondly, conceptually do you think that.
The demand for selling your rental properties.
Likely to be more resilient in the face of a rising rate environment than perhaps sales too.
Folks who would be looking to actually move and I know that your core business, but nevertheless, there is so much concern that that many people have about rising rates and the impact on the entry level buyer.
I was curious as to whether you felt like there was a backstop behind that buyer.
For rental operators that are sort of getting in line and would love to buy the homes that you are building for rent.
Well I'll start Steve.
First.
We're still growing this business and learning this business.
Still a little bit early for us to be able to generalize on on averages in terms of what level of revenue we might see per unit. We are building across our entire homebuilding footprints. So every every property is unique in terms of size and the product in the market and which is in which it's in so were individually underwriting each one relative.
Two whether it's better for a for rent community versus.
For sale community, obviously, we've been very pleased with the value that we've been able to generate thus far and very excited about the opportunity of growing this business and adding value over time and been very pleased with the demand that there has been four for our communities, thus far and the execution that we've seen in terms of in terms of ourselves thus far.
Yes, Stephen we see such strong demand today for this product in this low interest rate environment and I think to your question, if we see rates tick up do.
Do we see that shift we like the ability to.
Be in the market with this rental platform and be able to adjust to those shifts in market conditions. We do believe that we're going to continue to see strong demand maybe not as strong as it is today with such a new category, but we feel good about our position and the number of communities we're planning.
Sounds good thanks, very much guys.
Your next question is coming from Mike Rehaut with Jpmorgan, Mike Your line is live.
Sure.
Great.
Thanks, Good morning, everyone.
First question I had was with <unk>.
On the SG&A side.
You came in nicely below your prior guidance at 75% versus 8% before.
Brazil, you, 8% guidance.
And down 40 bps year over year.
Youre also.
We are guiding for.
I guess.
<unk> guidance to be down only 10 bps year over year I was just curious around what were the sources of the <unk>.
Inefficiently better than expected results in the first quarter and.
Why you don't expect.
Further leverage.
<unk>.
In the second quarter similar to the first.
Sure. Thanks, Mike.
In the current environment, where we're seeing such significant average selling price increases that certainly one driver of the SG&A leverage on the P&L.
Little difficult to predict exactly where the average ASP may fall in a particular quarter.
The trend over time has been has been upward over the last several quarters, though and that's certainly a contributor to it. So I would say, we're probably a little bit conservative.
And projecting out the level of increases in our Asps.
We are very actively building infrastructure to support the significant increase in scale that we have seen across our business over the last year and that we're projecting for the rest of the coming year and so we are anticipating significant increases in our SG&A spend to support that and so we're just basically balancing that.
Versus our expectations for our closings and with our closings expectations essentially.
Roughly flat with last year in Q2 based on our guidance, we're not getting the volume leverage, but we are still seeing the leverage from our selling price increases.
Okay Bill so before I just hit on the second question just to make sure I understand.
Given the expectation for the.
Stronger revenue growth on a full year basis.
Yes.
It seems like it's safe to assume maybe more than like 10 bps.
G&A leverage for the full year.
Thinking about that right given you have the higher confidence lets say around.
And ASP for the full year at least.
If you could comment on that that'd be helpful. And then secondly, just on the rental income side that was a source of upside I believe relative to our expectations I believe relative to the guidance as well if I'm not mistaken.
45%.
Our margin.
Is that the right that 45%.
Any guidance or thoughts around how to think about the remainder of the year.
Relative to the revenue generation you continue to expect.
Okay, well first the wrap up the SG&A.
Question, we're not guiding specifically to the full year on SG&A, however, with the.
Kind of heavier volume expected on our annual guidance in Q3, and Q4, we would expect to see more leverage on SG&A, probably than 10 basis points in Q3, and Q4 versus versus Q2.
With respect to the rental expectations.
Guided annually to more than $700 million of revenue, we've been very pleased with the margins and the executions we've seen on the sales.
Recently the margin this quarter, obviously was very strong.
Some projects will continue to generate those margins others could certainly be short of that.
We haven't specifically guided through the margin on that business as of yet because each project is unique in terms of volume in the coming quarter. We would expect Q2 volume to be relatively similar to Q1 in which we closed two single family properties and one multifamily property and then for the year basically.
Lining that out to the $700 million of revenue.
Okay. Thanks, so much.
Your next question is coming from Alan Ratner with Zelman Allen Your line is live.
Hey, good morning.
Great quarter, Thanks for taking my questions.
First one might be parsing the comments a little bit too much here. So I just wanted to get some clarification. I think you guys said earlier that you expect to offset most cost increases with price increases and.
Obviously up to this point it's.
Based on the margin trajectory, you've been able to offset more than than the cost increases. So I'm. Just curious if that's a change in your in your thinking whether youre going to be maybe a little bit less aggressive pushing prices as 22 progresses or am I reading too much into that comment.
I'll just.
As we continue to.
Increase our star score.
<unk>.
I would tell you at some point, there's going to be more of an equilibrium.
And at that point margins and Asps fees should.
Mitigate somewhat.
We don't know.
<unk>.
Again were.
Return base absorption targets start targets.
Being able to.
Sustain a level of starts drives efficiencies through the entire process.
We don't know what the future is.
We do know that we can operate within the future.
And maximize the results both returns.
Market share gains and part of that thought process also Allen is our continued focus on affordability and so although the market is really strong today and we continue to take price and we're probably not out there like some other builders trying to take every last dollar of price and we're doing what we can to meet the market and try to stay affordable in spite of.
Rising cost condition.
Got it yes, both of that makes a lot of sense and Jessica Youre. Your follow on comment there was actually something I was going to ask next and that's that.
Your price increases, especially on the order side have been very strong and we're starting to hear from some builders talking about their desire to actually bring that average price back down a little bit over the next year or two as they introduce new communities and maybe they're a little bit further out or maybe the floor plans are a bit smaller so should we think about.
Similarly, with you guys are you actually kind of looking at that average price and kind of your standing in the marketplace and trying to actually bring that down Ana.
At least in absolute basis going forward.
We're always focused on affordability.
We talk internally.
<unk>.
Sustainable run rate in these communities and that involves not.
<unk> <unk>.
Over pricing.
Yes.
At any point in time so.
Yes, we're looking at product we're looking at.
Communities land, how do we how do we how do we drive more and more efficiency into the process.
So that we can maintain a more affordable level okay.
And Thats.
To me that's market scale is consistency of starts.
As we.
Continue to drive market share gains consolidated labor, we're in a better position.
To acquire land.
It's just.
Ongoing continuous effort to get a little bit better every day.
It makes a lot of sense.
If I can sneak in one last one just on January .
You and others have obviously highlighted very strong demand continue in January I'm curious, if you've seen any notable shifts in sentiment or activity across your price points given the uptick here and rates are you seeing maybe more discretionary buyers jumping in because they're concerned rates are going to continue climbing so like in your activity.
<unk> business or Emerald.
Or has the strengths being pretty consistent with what <unk> seen prior to this move.
Alan I don't think we've seen in the last month, a real discernible difference, we still have more buyers in all of our markets than we have homes available and so we are continuing to release those homes at a later stage of construction and so meeting that demand with the inventory as it gets to that point.
And its construction cycle, so hard to gauge whether it has any significant shift of any sort and we still are seeing strong demand across all of our markets and across all.
All demand basis.
Perfect Alright, thanks for the time guys I appreciate it.
Thanks Alan.
Your next question is coming from Carl Reichardt with <unk> Carl Your line is live.
Thanks, everybody.
Paul I think.
One said this.
We're working to stabilize and then reduced cycle times.
Mattikalli spin.
Specifically do you do to make that happen given that builders outsourcers effectively and why and how do you do that better at Horton than say up here would.
Okay.
Karla.
I think a lot of.
The things that Horton is just because we just work harder.
Hello, everybody.
But our people are just phenomenal problem solvers, and it's a part of our culture decentralized nature.
Yes.
They take ownership and they saw from.
What what we have tried to do.
As guide the divisions too.
<unk>.
Understand the capacity within communities and consistently start homes to meet that capacity.
And when they do that that capacity increases because of the people in those communities to get a little better in building those.
And we're seeing that.
<unk>.
I don't know what the industry averages, but I got to believe.
We are we are completing homes.
Even though it is not to our historical norm.
Norm steel more rapidly than our peers out there.
But it's a consistent starts.
<unk> product limited options, making it easier for these trades to get in and get out.
Reducing the skus.
That we're asking our suppliers to home.
And in some cases ordering early in some cases stock.
Anything everything that we can do to eliminate our break a bottleneck.
The people in our in the field are doing.
And I can tell you 100 stories.
I'm not going to.
Yes.
Okay Fair enough. Thanks, David and then I wanted to ask about lot count and you're over 550000 under control now and the buildup spin significant right. I mean, I think was up 40% last year. So at some point. These lots got to come to market. So if you think about how they might is this.
You could have bigger communities going forward you could have more communities going forward in existing markets you could have new new new markets can you sort of break out as you look at your lot position now sort of.
As you grow where those different elements fit into the long term puzzle here kind of bigger communities more communities in existing markets I E potentially more share or new markets. Thanks.
Yes D all of the above.
It will be one already.
But in terms of sort of the long term split is kind of what I'm asking.
I don't know that we'd see a big change in our long term split we are continually evaluating new markets and at the same time the mandate is to the to the teams in the field aggregate your market share we feel that local scale drives a lot of value in the business for us.
And a lot supply is a key part of it I will tell you. The frustration it takes longer just like it is to build a house it takes longer to get a neighborhood approved it takes longer to get lots built today than it did a year or two years ago and so so we're continuing to challenge that so just like our housing supply has increased relative to <unk>.
Current delivery levels are lot controlled lot position has increased to support those lots coming on just taking longer to get them to the finish line and our market Count has continued to expand so we're in a 102 markets today.
Just for market sequentially, and we continue to fill out kind of the more Midwestern Ohio Valley part.
Our footprint.
And continue to look at additional markets that would make sense to expand into as well.
Thanks, everybody.
Thank you.
Your next question is coming from Matthew Bouley with Barclays. Matthew Your line is live.
Good morning, everyone. Thank you for taking the questions.
Question on cancellations and interest rates, just given how low cancellations are at this point I know you did the stress tests on the backlog and have talked about sort of flexing of 100 basis point increase in mortgage rates, but I guess to what degree does the speed of rates rising.
Bold with these extended cycle times play into all of that I mean, we had a 50 basis point rise in just four weeks when you've got buyers in backlog that may have to wait several months at this point. So how do we think about risk to an uptick in cancellations here. Thank you.
Well I think as you look at.
Look at the stress test that we do.
And we've run it again and seeing a slight uptick.
And it but still nominal and.
The interest rate increases we have seen today.
Further demand.
Much more so than not people out of qualification and ability to qualify.
Mike mentioned earlier, but that's also part of the key to selling homes later in the construction cycle is theyre not having locked for longer or be worried about what an interest rate moved ads. So for selling closer to the time of completion and home closing there is less risk in that regard as well.
Yes got it okay that makes sense.
And then the second one on the cycle times again.
Maybe they improve at some point, maybe they don't but assuming there is not a significant amount of new building products capacity coming online. This year are there any structural changes you're making to the supply chain. Even if it is not possible. In every single building material is there anything you can do with more prefab packages for example, I heard just.
Say earlier simplification of Skus and to any of these changes youre, making today or the structural in nature or is it simply adjusting to whatever the market is at any point.
I think as David mentioned before it's everything everywhere, we definitely empower our local.
Business leaders to solve the bottlenecks that are unique to their market and there are some that are that are broader in nature and our national purchasing team and regional purchasing teams do a great job of partnering with those manufacturers and our trade partners to give them more forward visibility to our expected demands.
And then help to understand how that product gets from point of manufacture through distribution kind of get the product thats being earmarked for us into the distribution chain through it onto our job sites when we need it not always a perfect process.
We would certainly like it to be faster, but it's increased communication simplification of product and a lot of anything we need to do market by market.
Great well, thank you for the color.
Thank you.
Your next question is coming from Susan Mcclary with Goldman Sachs. Susan Your line is live.
Thank you good morning, everyone.
Good morning first question is this.
About the potential use for more incentives in the market given the fact that the inventory is so low do you think that the likelihood of us seeing any real meaningful increase there is actually much more is actually much lower than it has been in the past do you think that we would need to see just a lot more on the.
And in order for anything to meaningfully change.
I don't see any change in the incentives coming.
I'm sure at some point inventory, we will catch up with demand.
It is still significantly out of balance.
Especially if you are looking at the areas, where the Florida, Texas, Arizona.
Even across the Midwest.
What you have.
Job growth and an influx of people.
You never say never but.
The difficulty of getting lots on the ground and then getting houses built.
As.
It is going to be very difficult to catch up with demand anytime.
In the next couple of years.
Okay.
Susan you touched on it with the level of inventory out there that use of incentives I think you'd have to see a significant increase in the level of unsold inventories, especially unsold completed inventories and today we're at.
1000, unsold completed homes at the end of December very low for us at this time of year to be carrying that a few homes.
Right. Okay. Thank you for that and then my follow up is.
Speaking about the operational pressures in the industry.
If the supply chain on the materials side does eventually catch up and things normalize do you think that we could be facing an overall tighter labor environment and construction relative to where we were before COVID-19 .
How do you think about your ability to overcome that and continue to increase the level of production that you can deliver.
It goes back to market scale, and even within sub markets being able to control our labor base and keeping him busy keep them in the same location.
I just can't over I can't oversell that advantage.
<unk> got a program we are releasing 15 2030 houses every month month after month after month after month.
The aggregation of labor in those kinds of communities.
Is.
It's very advantageous in today's world.
And it also gives you the ability to kind of direct some of that labor to the two or three or four.
Month absorption communities.
It's market scale.
Again, everything that we've done and simplifying the product trying to maintain affordability.
And then.
Having well located communities with long run rate run.
Raul.
Long run times.
<unk>.
Okay. That's very helpful. Thank you and good luck.
Thank you Sir.
Your next question is coming from Eric plus hard with Cleveland Research Eric Your line is live.
Good morning.
Good morning.
A couple of things first of all on the outlook.
Costs.
You could just provide some clarity on where that goes and especially trying to figure out.
The movement in lumber how that is flowing through.
Where we're at trough lumber and lumber impact goes going forward, especially on the cost side.
Sure. So I'll start with lumber and then somebody else can chime in on the rest of our cost structure.
<unk> remained really volatile.
I know you are aware, Eric and we have had some opportunities to purchase at costs that were well below the peaks, we saw I guess last spring and into the summer and however.
However that is reductions in prices and lasted a shorter period of time than we really expected and really probably hoped and lumber has been on the rise again for the last few months and so theres been other supply chain delays that also caused the volatility in lumber prices, we do hope that we'll see a mix that leans towards.
Slightly lower costs in Q2, which is baked into our Q2 gross margin guide for flat to slightly up gross margins and then we do expect our lumber costs and trend back up in our closings starting in Q3.
And other costs.
It's kind of a mixed bag, but we would generally be seeing slight cost pressures in most places and so thats been offset by by price increases I think some of the lumber relief. We should see in Q2 early Q3 will help with some of that as well, but as Jessica mentioned lumber prices have gone back up and so those will be flowing through.
Through closings later this fiscal year.
And really with home prices continue to increase I mean generally archive typically follow and so we really wouldnt expect to see much in the way of cost relief until you see some sort of slowdown in home price appreciation.
Okay, and then secondly.
It seems like just a math equation, but there's more to it than that but the incremental the.
Modest increase in the revenue guide for the year with the same deliveries.
It appears that it's just looking at price and extrapolating that out, but what else, where the considerations and taken a bit more optimistic position on a full year revenue growth.
Actually in front of the selling season.
Yes, Eric It really is just an extrapolation of where we see prices now we've got a few more months of visibility into our selling prices.
And where our closing prices moved up to in Q1, and what our visibility is going into Q2 that we felt like with the sales prices that are baked in and that we have visibility to that justified increasing a pretty nice increase in our annual revenue guide, but obviously with the continued challenges on the supply chain and construction cycle times elongate.
<unk>, we didn't really feel like we have any more room on the on the volume side.
As of yet so is really solely.
The price and we feel good about that guidance for the year.
Okay that makes sense. Thank you.
Okay.
Your next question is coming from Ross <unk> with Bank of America Ravi Your line is live.
Hi, its Rick.
Good morning, Thanks for taking my question.
I wanted to.
Start on the rental business.
Can you talk a little bit about the returns you are targeting in the rental business and how that could compare to homebuilding longer term and then will you be targeting different markets in the rental business compared to the homebuilding segment.
So what we're seeing is we're growing that business pretty aggressively and we've been very pleased with actually the returns that that business has produced on trailing 12 month basis, the profits that segments generated relative to its inventory investment have been about 20% and thats in a heavy growth ramp. So we would expect to see that continue.
To increase, especially when we get to have more of the projects delivering on a more consistent basis and I would say that the markets. We seek to serve with that its kind of lineup very well with our homebuilding for sale footprint as well we've seen a lot of markets.
Except the product very well and the Investor base very excited about.
Those projects as well.
Okay.
And then on <unk>.
Terms of the piece of your home starts obviously, the average picked up a lot.
The first quarter compared to the fourth quarter I think.
Kind of month.
What's allowing you to increase that pace sequentially and then how should we think about that going forward.
Yes, I think that that's in line with our plans.
What we have set forth across all of our divisions in communities, we target an absorption pace per community plan well ahead to make sure that we have those permits in hand and lots in front of us.
It's not easier.
Today to put lots on the ground anymore than it is easier to build a home, but we have incredible operators in the field to stay ahead of this and it's allowed us to continually sequentially quarter over quarter increase our starts basin and that's the cadence that we hope to continue the real key to our ability to do that as our lot position, having that long lot position controls.
And in a strong supplier relationships a little on the developer side puts our operators and physicians to continue to start to increase our storage space.
Great. Thank you.
Your next question for today is coming from Mike Dahl with RBC capital markets. Mike Your line is live.
Good morning, Thanks for taking my questions.
Just a couple of follow ups here, maybe first one ties into the last one a little bit, but the order guidance for Europe .
Fiscal <unk> being flat to up low single digits. It seems like you've been pretty successful in getting some inventory rebuild both sequentially and year on year your comps get a little easier.
In <unk> versus <unk>. So can you just talk about the moving pieces on.
On that order guide and why.
There could be some upside there.
I think we're still seeing a restriction on sales relative to where the inventory is getting to in production. So we're still waiting to sell the homes.
Mostly to the delivery date.
And so that's kind of what's really the real driver is on our sales expectation our comp is still up against a 35% increase last year in the second quarter.
It does certainly get to be a much easier comp in Q3 and Q4 this year from a sales perspective.
Got it okay.
My second question.
I wanted to follow up on one of Steve's questions from from earlier around rentals being potentially a backstop.
For sale and it is.
Kind of an interesting concept, especially as you scale.
That side of your business and the partnerships you have.
With buyers of those assets and so.
The idea is at some point in time.
For sale demand were to slow there could be.
Institutional buyer that would be looking at additional communities that you may have currently built as for sale, but somewhat may want to buy wholesale and turned to rentals can you talk a little bit more about how you would view opportunities like that.
The economics and the returns can look very different so maybe just.
Even conceptually what it would have to take in terms of what the moving pieces around the return dynamics. If you were to look at.
Bulk sailing a community that was not intended for bulk sale.
At some point in the future.
Mike I've always we've always believed that the.
Rental platform and when we get it built out.
We will derisk our land portfolio.
Because it does give us another another lever.
But from a.
Yes.
Philosophical standpoint, we believe in the <unk> business, we believe homeownership in the country is very important.
Today.
Our goal is to deliver more because the demand is there and it's.
It's hard to believe.
Five years from now on is going to be more affordable than they are today.
So every family we can get at home, we fell I believe is a win for us and for that phenomenon.
Yes.
When we look at the risk.
The rental platform.
The ability to scale that up.
That's going to create.
It's going to be a real business all in the zone.
And because of them.
The geographic platform and the embedded divisions within that geography.
Our ability to scale that and touch every market is.
We see us.
And just a great opportunity for us.
For our shareholders and for our people internally.
Thanks, Dave.
You bet.
Your next question is coming from Ken Zenner with Keybanc, Ken Your line is live.
Good morning, everybody.
Hey, Ken.
That you guys were better because you paid for your own phone.
I have two simple questions, one obviously with insatiable demand.
How you guys are approaching the cycle time of construction.
Basically it looks like your.
Investments in your inventory units are slowing rate cycle time of about 5% sequentially.
You guys rose inventory, 14% is that pretty much.
The move that you guys well.
Pursue into the second half if the cycle time.
Continue to compress that Youll, just throw more units into the ground to compensate for that slower cycle time.
We have star targets.
And we talk about.
Consistent sustainable starts.
Driving ultimately sales and closings.
And it's in it's based upon the capacity within divisions to deliver those home.
Okay.
That's fine.
I mean, it seems to be that's the way you are you are approaching it and I guess realizing conference call US along already David could you just we spoke about this in the past that interest rate paid on your first home you highlighted obviously, the very strong demand strong job growth.
Can you guys just comment I mean, we recently wrote about it but can you comment on the fact.
With your perspective about your comfort with that.
Real rates being negative now compared to when you took your first mortgage rate just as a.
Kind of a broad thought appreciate it.
It's a great time.
Housing is more affordable today.
It certainly was in the eighties.
Okay.
The ability to get into a house locked down your homeownership from your housing cost.
The next 20 years.
<unk> is a.
Significant.
Driving force and what's going on because as.
As overall cost inflation.
Interest rates continue to move up the <unk>.
<unk>, even if it setup.
Price is 15% to 20% higher than it was last year.
I mean, it's just a great thing so.
The other thing the other thank you.
And we really don't talk much about.
Got it.
When I was.
<unk>.
That was just that was what was expected you figured out a way to buy a house.
And that became less cool.
For.
Our use of a stupid.
Yeah.
As of millennials came into their twenties.
But what what I'm seeing and what my.
Millennium, daughter is telling me.
Is it now.
That's a big part of the.
The narrative on social media.
People want to own homes again.
And.
It's just.
Sure.
It's.
I'm amazed sometime at some of the.
Conversations around housing.
And I look at when it wasn't look at what it is I look at the <unk>.
Just a demographic demand that's out there I look at the wealth effect.
With everything that's happened.
Over the last.
10 years.
The American public is.
They are in a good place.
And from an affordability standpoint.
Ownership is better than it was in the eighties.
So.
I am very optimistic about what's going on I'm very optimistic about this company and I am just in all of our people and what they are accomplishing out there.
Thank you I don't know if I answer your question, but I thought one of them.
Always clear thank you.
Your next question is coming from Truman Patterson with Wolfe Research Truman Your line is live.
Hey, good morning, everyone. Thanks for taking my questions here. So David just wanted to follow up on one of your prior comments about the public screening.
Market share and I know it might be difficult to generalize, but I'm, hoping to understand what you are hearing on the ground from local operators.
Regarding some of your private builder competitors are they expecting their home inventory to jumped significantly through 2022 expecting strong activity or strong active land or community count growth or are you.
<unk> more of the same.
Pretty constrained.
Environment for your private builder peers.
Im also asking this.
In light that you won't make up 10.
10% plus.
The market you all had really nice order growth in the quarter.
But when you look at.
New home sales in the fourth quarter, it was down more than 20% plus so I'm really hoping you can help us think through this as we move through 'twenty two.
We actually were talking about this and getting ready for the call.
The private builders and even some of the smaller public builders.
We're going to have very difficult time delivering houses.
I mean, we're having it is hard for us.
102, complete and finish in house today.
It's been in my career and homebuilding.
And as these private guys, who don't have our scale who don't.
I don't have our.
Our ability to.
To drive our results.
Their houses are setting.
And.
That's going to cut off their access to the next house they start.
And anecdotally.
We are talking to the builders end markets.
They're just tired.
They don't.
Okay.
708 banks there.
Ways with two of them.
No.
They're looking to us to take out their lot supply and then maybe become.
A developer for us in that market.
So it's.
Yeah.
If the supply chain Don.
Loosen up.
I think youre going to see.
The consolidation accelerate on the market by the Big box.
Because what is the biggest constraint on on on them on the market on housing is.
The ability to get lots in front of me.
And the private guys.
They don't have that ability to publics do.
And Thats.
So when you look at new home sales decline.
That doesn't have anything to do with demand that has to be built 60% of the homes being built on therapy and built by nonpublic.
And I.
I think all of this cycle, you're going to see.
Net group's ability.
Start houses continue to deteriorate.
And that is going to get picked up by the pilots.
Well, even if the overall housing market, new home housing market declines and I think the.
The top.
Top tier publics are going to pick up market share and theyre going to continue to grow.
So that's one.
Okay.
Interesting.
There's clearly been a lot of discussion with the fed likely raising rates this year.
We can debate what sort of impact that might have on demand versus.
Lack of supply and everything but hypothetically.
Let's say demand does soften which consumer segment.
Do you all think holds up relatively better.
Between entry level move up luxury active adult.
And are there any geographies that you all think might underperform.
This is probably I know somewhat of a contrarian view of the way the market, sometimes react to entry level builders that we generally continue to think about an entry level buyer as a buyer out of need rather than discretion.
So although prices continue to rise and our rates are to increase an affordability gets negatively impacted you do lose a subset of entry level buyers that can qualify for them we.
We do expect over the long term that to continue to be the lion's share of the demand, which is why we continue to focus on affordability and because as I said, there's buyers are buying out of need whereas the further at the price curve you guys Thats, a more discretionary buyer and maybe a little bit more financially savvy that is more focused on.
Timing of an interest rate versus just an absolute monthly payment.
Okay. Thanks for taking my questions.
Okay.
In the interest of time. Your final question is coming from Deepa Raghavan with Wells Fargo Security Deepa. Your line is live.
Okay.
Alright, Thank you very much for squeezing me in.
A couple ones for me.
So.
Let me ask on the affordability issue.
We look at trend it just doesn't correlate to the concern that's out there on a portability.
And Dave like you pointed out philosophically low it looks like we could end up having the whole of.
The industry the homebuilders could end up having good pricing power this year too.
My question is this.
This is affordability issue being raised two ahead of its time.
Do you believe 2022 or 2023 can be structurally impaired.
Are impacted from some buyers being priced out.
Continually tight imbalanced environment.
As we've seen in our sales offices in demand.
Not seeing people being priced out to any.
Turning to reach today and were generally focused at a price point lower than most of our competitors in the markets that we serve.
But what I would say is that going forward you see very good household income growth.
Inflation is certainly out there it's across the board and that someone touched on before we can be a negative real interest rates to own a home. So it is a very powerful.
Economic decision to go ahead and buy a house today and lock in that interest rate relative to current inflation expectations. So still feel very good about the demand we're seeing into 'twenty too hard to predict much beyond that because you just don't know, but we do like what we see in 'twenty two for sure.
Okay. That's helpful.
Yes, David we met to your last summer.
You mentioned, expanding in Ohio Valley and parts of Midwest.
Newer market.
But can you talk through what's the economic engine that will drive job growth there.
It's hard for us to conceive that post Covid people decided to pack their bag will move to a higher debt because they can work remotely.
Yes.
Big population base there now.
<unk> got some of the best universities in the country that are there.
Hana migration out of.
Uh huh.
Historically been the tech areas and or the.
I think tank areas financial areas.
Into these.
Incubators, which are these major universities.
I'm, a big believer that long term.
The quality of life.
Just the access to.
Really smart people is going to drive companies and growth companies.
These markets you see it in Austin, you see it in Nashville.
Columbus just across Indianapolis.
They're there.
There are brilliant people, starting what are going to be great big companies.
I find that that.
Environment, just a better place to be than some of the what has historically been high Tech high high income markets.
And.
The population of the U S.
Yeah.
Yes.
No don't cities are Grayson and they offer a lot.
And Thats, one alright, thanks, Mike.
Yes, thanks, very much I appreciate I appreciate the color and good luck.
Thank you.
That is all the time, we have for questions today, I would like to turn the floor back over to David <unk> for any closing comments.
Thank you Holly.
We appreciate everybody's time on the call today and look forward to speaking to you.
In our second quarter results in April .
And then the D R Horton family.
And the first quarter.
It's amazing what.
Our people are accomplishing out there.
And Don Horton and the entire executive team.
Our humbled with the opportunity to represent you. 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.
You for your participation.