Q2 2022 D R Horton Inc Earnings Call

Good morning, and welcome to the second quarter 2022 earnings Conference call for D. R. Horton America's builder, the largest builder in the United States.

This time, all participants have been placed on a listen only mode and the floor will be opened for your questions and comments after the presentation.

I'll turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton.

Thank you Holly and good morning, welcome to our call to discuss our results for the second quarter of fiscal 2022 before we get started today's call includes forward looking statements as defined by the private Securities Litigation Reform Act of 1995, Although D. R. Horton believes any such statements are based on reasonable assumptions. There is no issue.

Laurence 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 annual report on Form 10-K , and its most recent quarterly.

Our report on Form 10-Q , both of which are filed with the Securities and Exchange Commission.

Mornings earnings release can be found on our website at Investor <unk> D. R. Horton Dot com and we plan to file our 10-Q in the next day or two.

After this call we will post updated investor and supplementary data presentations to our Investor Relations site on the presentations section under news and events for your reference now I will turn the call over to David Auld, Our president and CEO . Thank.

Thank you Jessica and good morning.

Hi, Lee.

<unk> to also be joined on this call by Mike Murray and Paul <unk>, Our executive Vice President and co Chief operating officers.

And Bill wheat, our executive Vice President and Chief Financial Officer.

D. R. Horton team delivered an outstanding second quarter highlighted by a 15% increase in earnings of $4.03 per diluted share.

Our consolidated pre tax income increased 60% to $1 9 billion on a 24% increase in revenues and our consolidated pre tax profit margin improved 520 basis points to 23, 5%.

Our homebuilding return on inventory for the trailing 12 months ended March 31 was 43% and.

And our consolidated return on equity for the same period was 34%.

These results reflect our experienced teams the production capabilities and our ability to leverage D. R. Horton scale across our broad geographic footprint.

Housing market demand remained strong despite the recent increase in mortgage rates and we are focused on maximizing returns while continuing to aggregate market share.

There are still significant challenges in the supply chain, including shortages in certain building materials and a very tight labor market.

Our construction cycle times were extended further this quarter and we continue to work on stabilizing and then reducing our cycle times to historical norms.

After starting construction on 24800 homes this quarter.

Our homes and inventory increased 30% from a year ago with only 600 Huntsville completed homes across the nation.

With 33900 homes in backlog.

9800 homes in inventory.

Robust lot supply and strong trade and supplier relationships, we are well positioned for consolidated revenue growth of greater than 25% this year.

We believe our strong balance sheet liquidity at all leverage position us to operate effectively through changing economic conditions, we plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations.

Managing our product offerings.

Incentive home pricing sales pace.

Inventory levels to optimize returns Mike earnings for the second quarter of fiscal 2022 increased 59% to $4 <unk> per diluted share compared to $2 53 per share in the prior year quarter net income for the quarter increased 55% to $1 4 billion.

Third to $930 million, our second quarter home sales revenues increased 22% to seven 5 billion.

19828 homes closed up from $6 $2 billion on 19701 homes closed in the prior year, our average closing price for the quarter was $378200 up 21% from the prior year quarter, while the average size of our homes closed was down.

1% Paul.

Our net sales orders in the second quarter decreased 10% to 24340 homes, while the value increased 10% from the prior year to $9 $7 billion. Our average number of active selling communities increased 1% from the prior year quarter and was up 4% sequentially. The average sales price of.

Net sales orders in the second quarter was 400 $600 up 23% from the prior year quarter. The cancellation rate for the second quarter was 16% compared to 15% in the prior year quarter, New home demand remains very strong. Despite the recent rise in mortgage rates, we are continuing to sell homes later and.

The construction cycle to better ensure the certainty of the home close date for our homebuyers with virtually no sales occurring prior to the start of home construction, we expect to continue managing our sales pace in the same manner for the rest of the year Bill.

Our gross profit margin on home sales revenues in the second quarter was 28, 9% up one 150 basis points sequentially from the December quarter.

The increase in our gross margin from December to March reflects the broad strength of the housing market.

Demand for homes combined with 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 home sales revenues were up four 8% sequentially, while stick and brick cost per square foot increased two 5% and our lot cost increased two 8%.

We expect our costs will continue to increase however, with the strength of today's market conditions, we expect most cost pressures to be offset by price increases in the near term.

We currently expect our home sales gross margin in the third quarter to be slightly better than the second quarter, Jessica in the second quarter homebuilding SG&A expense as a percentage of revenues was six 8% down 80 basis points from seven 6% in the prior year quarter. This quarter, our homebuilding SG&A expense as a percent.

<unk> of revenues with lower than any quarter in our history and we remain focused on controlling our SG&A, while ensuring that our infrastructure adequately supports our business. Paul we started 24800 homes during the quarter up 5% from the second quarter last year, bringing our trailing 12 months starts to 95.

300 homes, we ended the quarter with 59800 homes in inventory up 30% from a year ago.

26000 of our total homes at March 31 were unsold of which only 600 were completed our average construction cycle times for homes closed in the second quarter increased by almost two weeks since our first quarter in over two months from a year ago, Although we have not seen improvement in the supply chain yet.

We continue working to stabilize and then reduce our construction cycle times to historical norms Mike.

At March 31, our homebuilding lot position consisted of approximately 570000 lots of which 23% were owned and 77% were controlled through purchase contracts.

83% of our total owned lots are finished and 47% of our controlled lots are or will be finished when we purchase them are large capital efficient lot portfolio is a key to our strong competitive position.

Our second quarter homebuilding investments in lots land and development totaled $2 1 billion.

Of which $1 $2 billion was for finished lots $630 million was for land development and $260 million was to acquire land Paul.

Four-star a majority owned residential lot development company continues to execute well during the second quarter <unk> reported total revenues of $421 6 million and pre tax income of $63 2 million for the full year four-star expects to deliver 19 five.

20000, lots and generate $1 7 billion of revenues with a pre tax profit margin of 14% to 14, 5% at March 31, <unk> owned and controlled lot position increased 14% from a year ago to 96500 lives 57%.

<unk> have four stars owned lots are under contract with or subject to a right of first offer to D. R. Horton.

$390 million of our finished lots purchased in the second quarter were from four star <unk> is separately capitalized from D. R. Horton and had approximately $580 million of liquidity at quarter end with a net debt to capital ratio of 29, 9% four star strong capitalization lots of <unk>.

Fly and relationship with D. R Horton positions them to continue their profitable growth.

Financial services.

Services pre tax income in the second quarter was $92 8 million.

With a pre tax profit margin of 41, 8% compared to $107 7 million and 47, 8% in the prior year quarter.

For the quarter, 99% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 68% of our homebuyers FHA.

And VA loans accounted for 41% of the mortgage company in volume.

Borrowers originating loans with DHL mortgage this quarter had an average FICO score of 724, and an average loan to value ratio of 88%.

First time homebuyers represented 55% of the closings handled by the mortgage company this quarter.

Our rental operations generated pretax income of $103 million on revenues of $223 million in the second quarter. During the quarter. We sold one multifamily rental property consisting of 126 units for $50 million.

We sold three single family rental properties totaling 368 homes for $173 million.

Our rental property inventory at March 31 was $1 5 billion.

Compared to $544 million a year ago rental property inventory at March 31 included approximately $600 million.

Multifamily rental properties and $900 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.

During the quarter, our rental operations subsidiary DRA torrential entered into a four year $750 million senior unsecured revolving credit facility availability under the rental revolving credit facility is subject to a borrowing base calculation based on unrestricted cash in the book value of DRA rental real estate assets.

There were no borrowings outstanding on the rental credit facility at quarter end.

We now expect our rental operations to generate more than $800 million in revenues during fiscal 2022, our third quarter rental sales will be lower than the second quarter and fourth quarter sales will be the highest of the year. We also now expect our total rental platform inventories to grow by more than $1 5 billion in.

In fiscal 2022 based on current projects and development and a 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.

At our March 31, we had $3 $2 billion of homebuilding liquidity, consisting of $1 2 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.

Our homebuilding leverage was 16, 4% at the end of March and homebuilding leverage net of cash was 11, 2% our consolidated leverage at March 31, 2024, 9% and consolidated leverage net of cash was 18, 9%.

At March 31, our stockholders' equity was $16 8 billion and book value per share was $47 60 success up 33% from a year ago.

For the trailing 12 months ended March our return on equity was 34% compared to 27, 1% a year ago.

During the first six months of the year, our cash used in homebuilding operations was $416 million, which reflects our increased homes in inventory to meet demand and the impact of extended construction cycle times.

During the quarter, we paid cash dividends of $79 1 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in may.

We repurchased $3 1 million shares of common stock for $266 million during the quarter for a total of $5 8 million shares repurchased fiscal year to date for $544 2 million, an increase of 30% compared to the same period a year ago.

Subsequent to quarter end, our board authorized the repurchase of up to $1 billion of our common stock, replacing our prior authorization the new authorization has no expiration date.

We now expect to reduce our outstanding share count by 3% during fiscal 2022.

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 as we look forward to the third quarter of fiscal 2022, we expect market conditions to continue to reflect strong demand from homebuyers with continuing.

Supply chain challenges, we expect.

To generate consolidated revenues in our June quarter at $8 $6 billion to $9 billion and homes closed by our homebuilding operations to be in a range between 21000 522500 homes.

We expect our home sales gross margin in the third quarter to be in the range of 29 to 29, 5% and homebuilding SG&A as a percentage of revenues in the third quarter to be around six 6%.

We anticipate our financial services pre tax profit margin of approximately 40% and we expect our income tax rate to be roughly 24% in the third quarter.

For the full fiscal year, we expect to generate consolidated revenues of $35 three to $36 1 billion and homes closed by our homebuilding operations to be in a range of 88000 to 90000 homes.

We forecast an income tax rate for fiscal 2022 of roughly 24% and we now expect that our share repurchases will reduce our outstanding share count by approximately 3% 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 and we will continue to balance our cash flow utilization priorities, among our core homebuilding operations, increasing our rental inventory maintaining conservative homebuilding leverage and strong liquidity paying an increased dividend and consistently repurchasing shares.

David and closing.

<unk> and position reflect our experienced teams and production capabilities.

Industry, leading market share broad geographic footprint and diverse product offerings across our multiple brands.

Our strong balance sheet and liquidity and low leverage provide us with significant financial flexibility to continue aggregating market share and effectively operating in changing economic conditions.

To maintain our disciplined approach to investing capital to enhance long term value of the company.

Which includes returning capital to our shareholders through both dividends and share repurchases.

<unk> basis.

Thank you to the entire D. R. Horton team for your focus and hard work.

We're incredibly well positioned to continue growing and improving our operations during the remainder of 2022 and in future years.

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.

We would like to remind participants to please limit themselves to one question and one follow up.

We also ask that while posing your question you. Please pickup your handset leasing on speaker phone to provide optimum sound quality.

Please hold while we poll for questions.

Your first question for today is coming from Carl Reichardt with <unk>.

Carl Your line is live.

Thanks, very much good morning, everybody.

I think at the end of Janney.

In January talked about orders being flat, maybe up slightly in the quarter downturn can you talk a little bit about the progression of orders over the course of the quarter end and when I am assuming you recognize that.

Production side was was not catching up and in fact was deteriorating.

Decided to slow order pace or is there a demand component to this as well.

Carl I think it was all our decision to slow sales orders based on production capacity I think we saw and continue to see very good demand and more buyers qualified buyers out there for our homes today, when we released them for sale, but we did see during the quarter that our cycle times continued to expand and we made.

The decision in several of our geographies to delay the release of homes until we could give a better delivery day to those customers and provide a better experience for them in the backlog process. So we saw very strong demand in the quarter, but we did see the cycle times elongate I think we added two weeks this quarter. Unfortunately.

And we wanted to make sure we did not create more buyers in backlog with an unhappy experience.

Great. Thanks, Mike and then we.

Didn't discuss the did lower water transaction.

I would just like you to give sort of an overview of the strategic rationale for that deal and whether or not this is a function of the assets related to water rates or if this is a business that you think potentially could could grow thanks very much.

Sure.

Put out pretty much what we're going to say about midler and in the press release in terms of owning a portfolio of premium water rights and other water related assets across several of our southwest markets and generally lack adequate supply and we mentioned the total value of the transactions of approximately $290 million and we do expect it to close in the next month or two.

But considering it's subject to the successful completion of the tender offer we don't have much more to say at this time.

I look forward to talking about that in coming quarters. After it closes.

I'd try thanks, guys. Thanks, everybody.

Your next.

Next question is coming from John Lovallo with UBS, John Your line is live.

Good morning, guys and thank you for taking my questions. The first one is <unk>.

Activity at some point, we will likely moderate given higher rates and higher prices.

The question I have and I think the concern that some investors have is that if and when activity does moderate how does this sort of change if at all your thoughts on capital allocation I mean will you sort of back off on.

Take the foot off the pedal on buying land and maybe switch more towards share buybacks things of that nature.

Yeah. Thanks, John .

We're always focused on aggregating market share and we're positioning ourselves to continue to do that through any economic cycle certainly at some point of impact of rates and the impact of affordability will have some impact on demand and we certainly will adjust our capital allocators.

At that time, but we believe we are in a strong position to continue to grow.

Certainly.

Those impacts on demand would impact our investment decisions and land at that point in time.

Okay. That's good to hear and then on the option percentage getting up to 77% I mean, that's much higher than I think anyone thought it.

When the <unk> acquisition occurred and see even going back a few years ago.

Could this get much closer to call it 90%.

That's just a random number, but just 90% plus we're getting closer to where the MBR does and how does this impact the strategy with four star.

It's grown and.

Become spread across a lot of your of your communities. I mean, you do have the option to bring that ownership position down pretty significantly.

Maintaining the favorable contract terms, so just curious how youre thinking about for start longer term.

From a from the overall option lot percentage.

We have been focused on it and we're going to continue to focus on.

There is.

Obviously, it's going to be capped at 100% but.

Our goal is just to continue to get better and more efficient.

And.

<unk> very happy with <unk>.

At some point, yes, it will be consolidated.

There is still a.

We have a lot of markets.

We think we can help scale four-star into.

Yes.

If you look at just the.

Earnings were making our shareholders are making all of our stock.

Very good investment.

And kind of.

Not a bad place to be but yes at some point it'll be consolidated but it's more geared towards their platform build out that it is a higher desire to.

To liquidate.

Liquidate some percentage of our shares.

Thanks, guys.

Thanks Ross.

Your next question for today is coming from Stephen Kim with Evercore ISI Stephen Your line is live.

Yes, thanks, very much guys congratulations on the strong results.

Obviously with the big rise in rates everyone's concerned that things.

Not going to slow I think John mentioned that.

People's expectations, I guess two questions with respect to the.

Rising rates.

One is.

Is there anything that you are planning in terms of the communities, which would likely come online in the next year or two let's say the next year.

New communities openings, where you're making adjustments to your planned home sizes amenity levels or anything like that and would that have an impact on the gross margin.

And then secondly.

Can you just sort of talk about.

Or why do you think we have not seen in your communities. Despite obviously affordability being more stressed why do you think we haven't seen it yet in terms of your.

Conversations with customers.

Are you are they are they can you talk about the role of rate locks or just anything that would be helpful. For understanding why we maybe haven't seen anything yet.

Steven I think to your first question in terms of community design plan design I think we are going to continue to focus.

The affordable range.

And work towards those buyers.

I don't see a significant change in how we build what we bill but.

If it continues to be a push on affordability.

Then we will put the appropriate homes in place. It may mean, some smaller homes, but not a significant shift from from where we are today.

In terms of in our communities and in our sales offices certainly there is concern from the buying public over rates.

But selling later in the process like we do we don't have as much exposure.

Measures, we could if we were selling far out to the shifts and right conditions and that's why we've continued to restrict our sales to a later time frame. So that we're putting people in backlog is closer to the rate that they're going to close it.

That makes a lot of sense.

In this quarter can you give us a sense for how many of your <unk>.

Closings were done with a.

With a rate lock that the closings I'm, referring to not be orders.

Yes, so I looked at it actually on a forward looking basis and we have essentially no. Our next month's till April 100% locked and then as you would expect that percentage tick down, but it's the majority of the quarters closings. They are locks and you've got to get say four plus months out before that the more de minimis percentage.

Okay, great. Thanks, very much guys.

Your next question for today is coming from Ivy Zelman with Zelman and associates your.

Your line is live.

Thank you good morning, and congrats on the strong result.

Maybe you guys can just give us some perspective on the rental business with both the.

Merchant built single family rental communities as well as your multifamily projects can you talk about how many of them and.

And you're developing them are already pre sold and have you seen any changes in valuation as it relates to selling with the surge in rates as we hear chatter that values at least within multifamily.

Are they starting to be pressured in just the overall buying.

Appetite that's out there with so much capital still.

Here's to be chasing this asset class.

Thank you I mean, we do see a lot of very strong demand and strong execution on the pricing, we do not sell any of our communities at this point during the development phase, we're selling them at in the lease up phase at stabilization.

So we're seeing still very good demand.

And very good pricing execution on those transactions that we have closed on.

The current outlook.

You would expect cap rates could be affected.

By rising interest rates, but we're also seeing very strong leasing demand and very strong rental growth, which certainly affect cap rate outlooks and had a 40% to 50 plus percent margin on these sales if the market were to soften a bit we still expect to generate very strong profits and returns.

Great and then just secondly, with respect to the delays that you've seen and obviously.

The industry is impacted can you walk us through on the development side with municipalities like specifically where that those components.

The overall <unk>.

<unk> is related to like the difference versus sourcing materials casino. Some materials are not a problem anymore. So everyone talks about <unk>.

All but what's it like on the development side.

As well as on the municipality side and how much of that is impacting the two month year over year increase in cycle time.

Well I think you've got certainly municipality challenges through the entitlement process in terms of bringing new lots to the market and we still haven't seen.

Full return of municipalities when Youre talking about permitting <unk> inspection process. So it certainly is impacting some of that as we work through the supply chain challenges and then you finally move homes onto the next stage. It is we do see some delays in inspections and some of the municipalities serve.

Mrs that we receive so it's certainly been part of the impact to our cycle time extension.

And let me just sneak in one last one if I could just with respect to the inflation that we've seen can you be more specific on recognizing your.

Land is predominantly controlled via option like what has changed on the pricing to tying up and controlling land and how much overall are a lot of inflation that you are buying outright are you seeing relative to a year ago, and maybe ITD be just general because it's obviously different by market.

Yeah.

I'd say the overall land market.

Yes.

No.

Tracks the sales price of homes.

So it's.

It is good to be in a position, where we control 550000 lots.

And prices contracted.

Two years ago, three years ago four years ago.

And.

Not in a position today, where we have to go buy something.

Sure.

We are we are looking at that we're monitoring it.

Tim.

I believe liquidity is going to is going to drive market share gains.

And the ability to.

Not be at risk.

The credit markets and our banks.

<unk> is a huge competitive advantage for us.

And we're going to protect that we're going to be conservative in our in our land searches and there are good deals out there that we put under contract this year.

We will take to close but we are we are not in a position where we have to go buy anything.

<unk>.

We're going to I think see.

A significant benefit of that as we proceed through this market.

Thank you good luck.

Thank you.

Your next question for today is coming from Matthew Bouley with Barclays. Matthew Your line is live.

Good morning, everyone. Thank you for taking the questions.

Just another question on what you do from a.

Sort of medium term perspective from what you can control.

In a scenario where housing activity were to slow.

We're talking about this morning, what does D. R. Horton do from a supply perspective to what degree does.

Sort of your own plans for community replacement replenishment or starts kind of flex with these changes in interest rates and demand.

Just thinking again kind of medium term sort of annual volume growth how should we think about how you all are reviewing that thank you.

Matt we're very much a bottom up community level, driven company and we're going to evaluate demand we see at each individual community and sub market and look for homes starts to match that demand that our local operators are seeing.

And that coupled with community of replacement needs in those submarkets based upon demand we see in real time in the field.

<unk>.

In the in the near term.

Parts in the more medium term, we will look at subdivision openings and face sizing and then as well as Paul touched on before we may be adjusting some product to some smaller sizes, if that's appropriate for the given market.

Got you Okay. That's very helpful. And then secondly, just.

Zooming in back to the very near term.

I think you've seen maybe in some of the housing data, maybe a little bit in our own survey work. It seems like some trends in the housing market might have become a little more choppy in recent weeks, perhaps not surprising given the move in interest rates.

But just anything youre seeing kind of on the leading edge on the margin.

Whether thats any sort of pockets of changes in demand or again incentives appearing in.

Various markets just anything you're kind of seeing in later into March and into April . Thank you.

Yes.

Rate increase.

Yeah.

It's eliminating some people from the from the home buying experience.

Yes.

We still have more people track qualified buyers trying to buy homes and we can produce today.

One of them.

One of the thinks it really I think.

As impressed me.

Back in 2018, when you saw a rapid rise in rates.

Demand just.

Was significantly reduced.

And then after the rate shock.

Yes.

Sure.

After the rate shock was.

Kind of met.

Mitigated.

We saw demand come back and come back strong.

But through this cycle, which is an even.

More rapid rate increases yes.

Yes, we've had people that don't qualify anymore.

The demand side is still very strong.

Just the desire to own homes and it may be the fact that prices have escalated very fast and rents are escalating even faster than the price of new homes.

All the talk about inflation and then locking in your housing costs for 20 years.

It is.

It is.

Homeownership is a is a cherished thing today.

And the people coming out of.

The millennials coming out or even individuals relocating from other markets too.

Kind of where the growth is taking place.

Okay.

Just want to own a home they want to lock in their housing costs.

And I want to get into neighborhoods.

I can raise families.

Well, thank you for that David and thanks, everyone. Good luck.

Thank you.

Your next question is coming from Anthony Pettinari with Citigroup Anthony Your line is live.

Good morning.

Cancellation rates I guess kicked up a 100 bps maybe from record low levels would you characterize that as more kind of noise or maybe more clearly customers no longer able to secure mortgages would you expect.

Cancellations, maybe decline again in <unk> if rates stay at their current level.

I think in the past you provided kind of a sensitivity analysis around sort of mid single digit high single digit of backlog that potentially could be at risk with a 100 bps ryzen rates any sort of.

Thoughts on how that has shaken out now that we're above 5% now on on rates.

Sure Anthony I mean, we look at a 1% change in our cancellation rate is essentially flat still abnormally low.

Historically low we typically run in the high teens to low twenties and thats. The can rate, we're very comfortable running at the main reason continues to be the buyers can't ultimately qualify and for the home purchase so that $15 $16, 17% wherever it followed that each quarter really no concerns from us on that and in terms of the rate.

Sensitivity analysis, we did run the same.

<unk> as we've talked to each of the last few quarters and I think rates have already kind of run up to where that was run at a couple of weeks ago as we prepped for this call, but it only ticked up to call it roughly 10% of buyers in backlog today.

Would be at risk as I mentioned earlier in answer to another question. You know all of April is already rate locked if theyre going to a mortgage company. So there's that piece wouldn't be at risk and then we also would workday look to move people from a different loan product or see if they can document additional income and then to kind of second some things that the guys have already said today.

And for those buyers that you. Unfortunately fallout because they cant qualify there is no shortage of buyers behind them to take their place.

Okay, that's very helpful.

And then just with higher rates are you, making any strategic shifts to target a different mix of buyers are you seeing buyers that you wouldn't normally talk to kind of moving down market to more affordable offerings.

Understanding your entire offering is fairly affordable like which of your buyer types. Do you think is best positioned to maybe weather rising rates as it move up or any thoughts there.

Hi.

We haven't made any significant shift and don't see a need to as rates rise.

It's going to be more of that shocked the payment for folks when they have to reset the.

Size home or price that they can then qualify for so we're going to catch those people that have been buying up that may fall down the price curve and our size of home.

And still be able to pick them up in the majority of our communities. So no no real shift in what we're doing with any of our buyer demographics, we're still seeing strong demand as everyone's mentioned across the across the spectrum.

Okay. That's helpful I'll turn it over.

Your next question is coming from Mike Rehaut with Jpmorgan, Mike Your line is live.

Yes.

Hi, Thanks, Good morning, everyone and thanks for taking my questions.

I just wanted to revisit the can rate, which I think.

As you mentioned, Jessica it's essentially flat.

And extremely low.

We've kind of thought of it as a key metric.

To understand the potential impact.

The rate move over the last 60 to 90 days and I was curious.

If you've seen any change throughout the quarter.

Obviously, it was up 100 basis points versus a year ago, and I think a 100 basis points I believe sequentially.

But anything.

Throughout the quarter that maybe perhaps you ended the quarter at a higher number than at the beginning.

Yeah.

If theres been any change in the April .

Curious around that.

It really was it was relatively flat throughout the quarter give or take a 1% change sequentially.

Sequentially, we were I guess were those.

A year ago and.

In the last quarter, we were at 15% this quarter, we're at 16% and it was right around that range for the duration of the quarter.

Okay.

Also throughout the quarter, you kind of said that demand has remained strong more demand than supply.

I would presume then that as a result, your pricing power and the incentives that you've had in the marketplace really haven't changed at all obviously your gross margins continue to improve in.

Do you expect further margin improvement in the third quarter.

Just wanted to make sure that was the case as well and.

If that was the case for yourselves as well as if you witnessed any changes in the broader marketplace.

We have seen consistent ability to raise prices through the quarter Cds consistent increases in our sales order pricing then flow through our backlog and through our closing pricing Thats what gives us the confidence to say that our margins are going to be slightly better next quarter, because we can see those sales prices coming through in our closings.

And the next quarter. So to date, we have not seen a change in our ability to raise prices I think naturally as we look a little bit longer term with the impact of rates and an impact of overall price increases at some point, we would expect that to moderate but at this point, we have not seen any signs of that as of yet.

Okay.

One last quick one if I could just the 3% reduction of year end share count versus 2% previously.

Sorry, if I missed this earlier.

But.

Just wanted to make sure is that a function of a greater amount of dollars dedicated to share repurchase or.

In part driven by the recent reduction in share price.

In the market over the last.

A couple of months.

It's a little bit of both Mike as we looked at our capital allocation for the year.

Expectations for how much we would utilize every dollar we would utilize the share repurchase has gone up versus our prior estimates, but there is certainly the current valuation of our stock does allow us to buy more shares per dollar as well. So so it's a little bit of both and that's allowed us to increase our estimate from a 2% reduction to a 3% reduction.

Great. Thanks, so much guys I appreciate it.

Your next question for today is coming from Truman Patterson with Wolfe Wolfe Research Truman Your line is live.

Hey, good morning, everyone. Thanks for taking my questions.

Just wanted to follow up on one of John's questions previously.

I realize that cycle times have been extended you have 60000 homes under construction, which.

Ties up net working capital, but we're now halfway through the year I'm, just hoping you can give.

And update or possibly a number around your 2022 operating cash flow expectation.

And then.

Just on the capital allocation decision.

A decision based on rates, increasing it seems like youre going to be a bit more or youre going to continue with programmatic share repurchase but.

How do you balance this with potentially even increasing liquidity given all the commentary from the fed and possibly having a rainy day fund if you will.

It is a constant balance trimming.

We're not giving specific dollar guidance regarding our operating cash flow other than we do expect to generate positive cash flow from our homebuilding operations on a consolidated basis. Our operating cash flow also includes the investments, we're making are rental platform, which obviously are a significant increase in those by 1 billion and a half this year and then certainly one factor.

Today that is.

Tying up some of our capital is the extension of our of our build times being longer than two months longer than a year ago. So it does tie up a significant significant amount of capital, but certainly we are working towards stabilizing that in an improving those cycle times, which.

We would expect would start to bring that cash back some towards the end of fiscal 'twenty, two and then certainly into fiscal 'twenty. Three so it is a balance and as we plan our.

Capital allocation, we plan our liquidity targets, we're just seeking to make sure we stay in as a strong and flexible position as possible to to handle the what we see in the market today and position ourselves for further growth aggregation of market share and generating returns for our shareholders.

Okay. Thanks for that and then.

One final one on just current market conditions. Just are you seeing any metros that are maybe.

A little bit slower than the others and then.

For the buyers purchasing today.

I realize this might be somewhat of an unfair question, but how long they've been in the market, where they really searching before.

Rates started to move.

Or are we seeing incremental buyers continuing to come in after the higher rate.

Environment that are kind of.

More recently entered if you will.

I think on the markets we see.

Markets have varying levels of performance and demand, but theyre all very strong.

Relative to where they've been certainly the migration patterns within the country and the areas that are gaining population have incredibly strong demand but markets.

Ross our footprint, we still see more buyer demand and we have production capacity for today.

And so we're still very encouraged by that.

Some of those buyers have been in the marketplace for quite a while others are more recent entries, but we don't have any hard data. We can share with you on how exactly all of them they have been conducting their search.

Okay. Thank you and good luck in the upcoming year.

Thanks.

Your next.

Question for today is coming from Deepa Raghavan with Wells Fargo Deepa. Your line is live.

Thanks, everyone for taking my question.

Good morning.

Of the supply chain incremental headwind is that a way to think about how much were omicron bladed.

Im assuming that should be probably behind us now and how much is kind of carryforward.

I think we are in.

Going with it is are you baking in any sequential improvement off of that two weeks the elongated cycle time.

There must have been some relief come on the corner.

Yeah, I think we would agree with you on the Omicron front I mean, there is certainly still labor challenges in labor and manufacturing facilities distribution centers is still harder to come by but it does seem to be slightly improving drivers continue to be a really big area of need to be able to get products to job sites.

In terms of.

Baking in any incremental improvement in our build times I think I would tell you for us to achieve the high end of our guidance range and certainly to do any more of that we would need to see improvement in our build times from what we've seen today, but we do feel like we're maybe in the early stages of that to where we felt comfortable still although we lower.

Third our closings guide and we did leave 90 in the range of closing 88 to 90, because we have the houses.

Just a matter of getting them completed and across the finish line with the buyer.

Got it.

Staying on the topic of the guide.

I don't think you had guided for the full year gross margins unless I missed it but it does definitely look like you have some good tailwind that can extend into Q4 and give you. Some good gross margin visibility.

To provide any color on that for Q4.

Yes.

We do only guide one quarter out on gross margin, but I would agree with you that currently we do have some tail winds with the average prices that are that have been in our backlog and in our recent sales orders that some of which will be homes that would close into Q4 I think we do have some tailwind, but as we've said many times our true visibility to margin.

Really doesn't go far beyond the quarter. So we only guide specifically to Q3.

We do feel like we're still going to see very good gross margins through Q4 as well.

That's very helpful color, thanks, very much and good luck.

Your next question for today is coming from Susan Mcclary with Goldman Sachs. Susan Your line is live.

Thank you good morning.

My first question is on the SG&A I mean, obviously the gross margin has been impressive but so has your SG&A performance. This year you continue to to come in well below where we are modeled in and where you have guided to can you talk to the potential to continue to see that coming down now that we're solidly in that 6% range.

And maybe where we can get to over time there.

Thank you Sue.

Obviously, an important part of our culture and our business model. We are very focused on ensuring that we stay very efficient with our overhead while still making sure where we're building our overhead and our infrastructure to support the growth.

But with the price appreciation that we've seen along.

Alongside that that is certainly aided in dropping the SG&A percentage as a percentage of revenue a bit faster than honestly than we would've modeled as well.

We've been very pleased with that certainly want to make sure we continue to position ourselves adequately there, but but with the prices that we have seen and that we see coming over the next quarter or so we do expect to still see very good.

SG&A leverage with the guidance that we're providing for Q3 that assumes another 50 basis points year over year improvement in SG&A. So so yes, we do see ourselves.

With an SG&A rate getting down into the sixes in for at least the near term staying there.

Okay Alright. Thank you and then my second question is is a bit longer term David made the comment earlier around consumer confidence.

Overall, the sort of desirability around homeownership today, and how that perhaps is very different relative to where we were certainly coming out of the last cycle can you talk to what sustains that level of confidence in homeownership and what that perhaps could mean, even as rates do rise.

In terms of keeping that demand pool, there and people's willingness to sort of continue to extend and really try and make that effort to get into the home.

Okay.

I've been doing this for a long time.

Uh huh.

Desire to own a home.

I think kind of an American are part of the American culture.

It gives you a sense of.

Safety and.

Yeah.

<unk> build your family.

So I think so.

Okay.

Downturn in Lakeman Dan.

Home values will just decimated.

I put a big pause on.

The desire to own homes.

As this cycle continues and I think he is going to continue to elongate.

Yeah.

<unk> formation.

Desire to get close to neighborhood schools all of those things.

And kind of returned homeownership too.

Kind of the American Dream again.

No.

It's.

Getting into one device or another.

But it's not nearly as hard as it was one of them upfront so.

It feels.

Like.

It's almost a cultural shift from.

From our return too.

Family.

Community.

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And I think the demand is significantly higher than the homes.

Can be produced.

Okay, well, thank you for those thoughts and good luck with everything.

Thank you.

Your next question for today is coming from Jay Mccanless with Wedbush J. Your line is live.

Hey, Thanks for taking my questions just wanted to clarify I think you've discussed this already but the reduction in the closing guidance for the full year, that's not a shift to homes into the rental operation. That's just you guys slowing down production and the fee or slowing down orders in the field to keep up with production.

Okay.

When our homes are going to be completed and the ability to close those in what quarter.

Yes, there is no transition to build for rent in those numbers, we've kept our humbling for sale completely separate from what we're reporting on a rental basis, we have a plan for both businesses one for the for sale side of the business and one for the rent side of the business and the change in the guidance is has nothing to do with transitioning communities from one to another.

So we're dealing with completion of homes, putting the buyer into a a completed good looking house when that houses ready.

Got it okay. Thank you for clarifying that.

And then my second question I think David earlier was talking about liquidity being the competitive advantage, especially with land prices moving up I mean, when when does this lack of liquidity I think especially for some of the smaller private builders when does that really force bigger wave of M&A than what we've seen so far.

Post COVID-19 .

Yes.

No that is going to fall.

A larger M&A.

Graham.

I do think.

That their inability to secure financing to move forward.

On different projects or even to start houses.

Is he is going to open up the market opportunity for us.

Both.

Our ability to.

Aggregate market share on the sales side.

And the ability to control longer and longer land positions at <unk>.

Very favorable numbers.

So it's.

When you look at the impact.

<unk>.

Two plus months expansion of our cycle time, and what that's done to our liquidity.

And then.

I understand that we are still building houses much faster than anybody else and we started.

And are going to continue to protect.

Very strong liquidity position.

It's.

I got to believe there is tremendous pressure.

On the especially the private builders.

And then at some point.

So it made a lot of money over their careers.

And our guarantee loans.

At some point, you're just not going to put everything at risk.

So I do think it's going to open up market share gains for us.

And we are very well positioned.

To take those market that market when it does.

Got it that's great and if I could sneak one more in bill was encouraged to hear the community count was up year on year and sequentially. How are you guys feeling about that for the full year just on a percentage change basis.

Yes.

We're still looking at the low low single digit increase but it has been good to see more communities get get opened starting to basically replenish our communities from we ran them down a bit early.

Year to 18 months ago, So still we still see a solid incremental increase in communities and organic growth in our core markets is still going to be the biggest driver, but we did add a few more new markets and to our market count. This quarter. We're now in a 104 markets and have.

Our list of markets behind that that were planning to expand into as well.

Okay. That's great. Thanks for taking my questions.

Yes.

Your next question for today is coming from Dan Oppenheim with Credit Suisse. Dan Your line is live.

Thanks, very much just a quick.

Given the success that you had in terms of the express homes.

Sure generally.

What youre seeing in terms of buyers coming in from.

Competition now and so just essentially.

Sure for express in this environment.

Yes.

A little bit there.

Breathtaking market.

Sorry in Germany gains.

<unk> for express in terms of market share given the efficiencies.

Before we go there how youre seeing that in terms of what's happening with consumer right now.

I think the.

Great value at the lower end.

He has a tremendous advantage that we have.

The buyer pool significantly deeper their qualification may be a little tougher.

But.

That's kind of referenced before.

People really want to buy a home and.

Especially as their first home.

I see that segment of our business just continues to get stronger.

And whereas somebody may have pushed up in price.

Very low rate.

Which we had a lot of first time homebuyers buying handler and the Horton brand.

Yes.

Ultimately it comes down to payment.

If their desire is to own the home and in a very very nice community location.

Our competitive advantage just gets better and better.

Great. Thank you.

Yeah.

Ladies and gentlemen, that's all the time, we have for questions I would now like to turn the floor back over to David for closing remarks.

Thank you Ali.

We appreciate everybody's time on the call today and look forward to speaking with you again.

To share our third quarter results in July .

And to the D R Horton family, Don Horton and the entire executive team. Thank you and congratulate you on delivering an outstanding second quarter.

We are in.

Incredibly well positioned today.

You once again have proven you are the best of the best in this industry. Thank you.

Thank you ladies and gentlemen, this does conclude today's event.

May disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.