Q3 2022 D R Horton Inc Earnings Call
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I'll now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton.
Thank you Paul and good morning, welcome to our call to discuss our results for the third 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 1095, Although D. R. Horton believes any such statements are based on reasonable assumptions. There is no assurance that actual outcomes will not be materially different all forward looking statements are based upon information available to D. R. Horton on the date of this conference.
Call and D. R. Horton does not undertake any obligation to publicly update or revise any forward looking statements.
Additional information about factors that could lead to material changes in performance is contained in D. R. Horton <unk> annual report on Form 10-K, and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
This morning's earnings release can be found on our website at Investor <unk> D. R. Horton Dot com and we plan to file our 10-Q tomorrow.
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.
I am pleased to also be joined on this call by Mike Murray and Paul enrollment.
Our executive Vice President and co Chief operating officers.
And Bill wheat, our executive Vice President and Chief Financial Officer.
The D. R. Horton team delivered a strong third quarter highlighted by a 53% increase in earnings to $4 67 per diluted share.
Our consolidated pre tax income increased 54% to $2 $2 billion on a 21% increase in revenues.
And our consolidated pre tax profit margin improved 540 basis points to 24, 8%.
Our homebuilding return on inventory for the trailing 12 months ended June 30 was 41, 7%.
And our consolidated return on equity for the same period was 35, 1%.
These results reflect our experienced teams that production capabilities and our ability to leverage D. R. Horton scale across our broad geographic footprint.
Housing market demand remained strong during most of the quarters.
In June we began to see a moderation of demand and an increase in cancellations due to the rapid rise in mortgage rates.
And continued inflationary pressures across most of the economy.
The supply of both new and resale homes at affordable prices remains limited.
Although demand has slowed from the frenzy pace, we experienced over the past year.
They are qualified buyers in the market today is household formations continue and inflationary pressure to drive rents higher.
54% of the homes, we closed in the past 12 months were priced under $350000.
And our average sales price is approximately $100000 lower than the average of the public homebuilders.
Positioning us to continue aggregating sure.
There are still disruptions in supply chain and tightness in the labor market that continued to delay the completion of our homes under.
Under construction.
These construction delays and changes in demand environment led us to reduce our full year closing guidance for physical 2022.
We will remain purposefully.
We purposely slowed our number of homes starts in the third quarter to position our inventory to align with market conditions.
Although the uncertainty of this market transition may persist for some time.
We believe we are well positioned to meet changing market conditions with our experienced teams affordable product offerings flexible lot supply and our strong trade and supplier relationships.
Strength of our balance sheet liquidity and low leverage provide us significant financial flexibility and we will continue managing our product offerings incentives home pricing sales pace and inventory levels to optimize returns.
Earnings for the third quarter of fiscal 2022 increased 53% to $4 67 per diluted share compared to $3 <unk> per share in the prior year quarter net income for the quarter increased 48% to $1 6 billion.
Consolidated revenues of $8 8 billion.
Which was in line with our expectations, our third quarter home sales revenues increased 18% to eight $3 billion on 21308 homes closed up from $7 billion on 21588 homes closed in the prior year.
Continued construction delays caused by disruptions in the supply chain and tightness in the labor market caused us to close fewer homes than expected during the quarter. Our average closing price for the quarter was $391200 up 20% from the prior year quarter Paul.
During the quarter, we continued to sell homes later in the construction cycle to better ensure the certainty of the home close date for our homebuyers with almost no sales occurring prior to start of home construction in June our sales pace slowed at our cancellation rate increased when mortgage interest rates rose significantly the cancellation rate for the third quarter.
Was 24% compared to 17% in the prior year quarter as a result, our net sales orders in the third quarter decreased 7% to 16693 homes in our total net sales order value increased 8% from the prior year to $6 9 billion.
Our average number of active selling communities increased 5% from the prior year quarter and was up 1% sequentially.
Average sales price of net sales orders in the third quarter was $415800 up 16% from the prior year quarter Bill.
Our gross profit margin on home sales revenues in the third quarter was 31% up 120 basis points sequentially from the March quarter.
On a per square foot basis home sales revenues were up three 9% sequentially, while stick and brick cost per square foot increased two 4% the.
The increase in our gross margin from March to June reflects the broad strength of the housing market. We experienced most of this year the strong demand for homes combined with a limited supply allowed us to raise prices and maintain a very low level of sales incentives and most of our communities.
We have already mentioned demand has moderated in June and to date in July .
As we adjust to current market conditions, we expect the pace of our sales price increases to slow during the fourth quarter and for our incentive levels to increase from historical lows to address affordability.
Affordability concerns we are offering mortgage interest rate locks and buy downs to our buyers and we are beginning to offer other sales incentives as necessary on selected homes in inventory and to drive sales traffic to our communities.
We currently expect our home sales gross margin in the fourth quarter to be lower than the third quarter, Jessica in the third quarter homebuilding SG&A expense as a percentage of revenues was six 6% down 50 basis points from seven 1% in the prior year quarter.
This quarter, our homebuilding SG&A expense as a percentage 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 purposefully slowed our home starts to 17900 homes this quarter as we work to position our inventory.
With an appropriate number of homes relative to market conditions. We ended the quarter with 56400 homes in inventory up 19% from a year ago and down 6%.
Only 27200 of our total homes at June 30th were unsold of which 1400 were completed for homes. We closed this quarter. Our construction cycle time increase by roughly one week compared to the second quarter as supply chain issues remained challenging as they have for the past year.
However, we are beginning to see some stabilization of cycle times on homes. We have recently started during the quarter, we will evaluate demand and adjust our homes and inventory and starts pace to meet current market conditions. Mike at June 30, our homebuilding lot position consisted of approximately 600000 lots of which 22%.
Owned and 78% were controlled through purchase contracts, 24% 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 and flexible lot portfolio is a key to our strong competitive position.
Our third quarter homebuilding investments in lots land and development totaled $1 $75 billion.
Of which $890 million was for finished lots $680 million was for land development and $180 million was to acquire land Paul.
For the third quarter forced our majority owned residential lot development company reported total revenues of $308 5 million and pre tax income of $52 7 million for the full year <unk> now expects to deliver 17000 lots and generate $1 $4 billion of.
Revenue with a pre tax profit margin of greater than 14%.
<unk> owned and controlled lot position at June 30 totaled 97000 lives essentially flat with a year ago.
9% of <unk> owned lots are under contract with or subject to a right of first offer to D. R. Horton $258 million of our finished lots purchased in the third quarter were from four star <unk>.
<unk> is separately capitalized from D. R. Horton and had approximately $500 million of liquidity at quarter end with a net debt to capital ratio of 32, 8% <unk> is well positioned to meet changing market conditions with a strong capitalization lot supply and relationship with D. R. Horton.
Financial services pre tax income in the third quarter was $128 3 million.
With a pre tax profit margin of 55% compared to $70 3 million and 37, 3% in the prior year quarter the.
The increase in our financial services pre tax profit margin. This quarter was primarily due to a significant acceleration of interest rate lock commitments during the third quarter, a majority of our buyers in backlog for expected fourth quarter closings entered into interest rate lock commitments. These lots were executed earlier than normal due to the increase in mortgage rates.
Which resulted in higher than normal financial services revenue in the third quarter. This revenue acceleration will likely cause our financial services revenues and profits to be lower than normal in the fourth quarter.
For the quarter at 99% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 69% of our homebuyers.
And VA loans accounted for 41% of the mortgage company's volume.
Borrowers originating loans with DHA mortgage this quarter had an average FICO score of 724, and an average loan to value ratio of 88%.
First time homebuyers represented 56% of the closings handled by the mortgage company this quarter, Mike our rental operations generated pre tax income of $43 million on revenues of $110 million in the third quarter related to the sale of one multifamily rental property consisting of 298 units and one.
Single family rental property totaling 84 homes. During the nine months ended June 30, our rental operations generated pre tax income of $215 million on revenues of $489 million or.
Our rental property inventory at June 30 was $2 billion compared.
Compared to $760 million a year ago rental property inventory at June 30 included approximately $700 million of multifamily rental properties and $1 $3 billion 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. We continue to expect that our rental operations will generate approximately $800 million in revenues during fiscal 2022, we plan to continue growing our rents.
Inventories as we position 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 June 30, we had $2 $8 billion of homebuilding liquidity, consisting of $1 2 billion of unrestricted homebuilding cash and $1 6 billion of available capacity on our homebuilding revolving credit facility.
Our homebuilding leverage was 17% at the end of June and homebuilding leverage net of cash was 12, 1%.
Our consolidated leverage at June 30 was 24, 9% and consolidated leverage net of cash was 19, 3%.
At June 30, our stockholders' equity was $18 1 billion.
And book value per share was $52 up 35% from a year ago for.
For the trailing 12 months ended June our return on equity was 35, 1% compared to 29, 5% a year ago.
During the first nine months of the year, our cash provided by homebuilding operations was $125 million.
During the quarter, we paid cash dividends of $79 2 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in August .
We repurchased $4 7 million shares of common stock for $310 million during the quarter for a total of $10 5 million shares repurchased fiscal year to date for $854 2 million, an increase of 29% compared to the same period a year ago.
As a result, our outstanding share count at June 30 was down 3% from a year ago.
We still expect our outstanding share count will be approximately 3% lower at the end of fiscal 2022, and the end of fiscal 2021, Jessica we are providing guidance for our fourth fiscal quarter. However, due to the current uncertainty in the market the ranges for our volume and margin guidance are wider than normal.
Based on the projected completion dates of our homes under construction in current market condition, we expect to generate consolidated revenues in the fourth quarter at 10 to $10 8 billion.
And homes closed by our homebuilding operations to be in the range of 23500 25500 homes.
We expect our home sales gross margin in the fourth quarter to be in the range of 29% to 29, 8% and homebuilding SG&A as a percentage of revenues to be around six 3%.
We anticipate our financial services pre tax profit margin in the fourth quarter to be less than 20% due to the timing of revenues from interest rate lock commitments as we discussed earlier.
We expect our income tax rate to be approximately 24% in the fourth quarter.
We plan to continue to balance our cash flow utilization priorities, among our core homebuilding operations, our rental operations, maintaining conservative homebuilding leverage and strong liquidity and consistently paying dividends and repurchasing shares David.
In closing our results and position, reflecting our experienced teams.
US capabilities industry, leading market share broad geographic footprint and diverse product offerings across our multiple brands are.
Our strong balance sheet liquidity and low leverage provide us with significant financial flexibility.
Effectively operate in changing economic conditions and continued aggregating market share.
We plan to maintain our disciplined approach to investing capital to enhance long term value of the company, which includes returning capital to our shareholders through dividends and share repurchases on a consistent basis.
Thank you to the entire D. R. Horton team for your focus and hard work.
Credibly well positioned to continue improving our operations and providing homeownership opportunities to more American families. This concludes our prepared remarks, we will now host questions.
Thank you ladies and gentlemen, the floor is now open for questions if you'd like to enter the queue to ask a question. Please press star one on your telephone keypad now if listening on speakerphone today. Please pickup your handset to provide.
Quality.
So today, we ask each participants to limit yourself to one question.
One follow up.
Please hold while we poll for questions.
And the first question is coming from John Lovallo from USB.
John Your line is live.
Great. Thanks, guys good morning.
First question is.
Early June you had mentioned needing about 18000 orders to hit the full year delivery target.
Market has obviously changed since then but you've delivered 59000 year to date. There is another 29000 in backlog, which would give you 8000 deliveries without even converting any of the fourth quarter orders. So what I'm trying to understand is does the lower delivery outlook reflects concerns about cancellations construction delays or or both.
Okay.
So we have had continued construction delays, but we also recognize the market has softened.
And so we feel like we're very well positioned to deliver on what our new guidance for closing that as I alluded to I mean, our ranges are bigger than they normally would be because of some of the uncertainty in the market and so there is upside to our closing guide. There's also downside I mean, we really are going to see how it plays out as we work throughout the quarter, but we're confident in our people are getting <unk>.
We need to improve and we will ultimately see some improvement in our construction cycle times and start converting houses to closing.
Great. Thank you and then.
What has been your ability to resell the cancellations and has there been a meaningful ASP or margin hit to those sales.
It's been still been very strong John we've still been able to to resell those cancellations just doesn't happen immediately.
By the time, you resell it and re qualify a buyer through the mortgage process it could be.
A four to eight week to 12 week process, sometimes but.
But we're still seeing good demand for the homes that we have.
Great. Thanks, guys.
Thank you and the next question is coming from Carl Reichardt from BTG.
Your line is live.
Good morning, everybody.
I wanted to ask about that.
Engine cancellations as you guys look at this.
But this is really just a mathematic issue high rates higher prices folks can afford.
Is this is this more psychological in other words folks are a little scared of what the value of their house might do if they were concerned about the economy or their jobs, just like sort of your sense, especially compared to past cycles of how you see the acceleration in cans, which you would attribute that to.
I think it is.
Probably a little of both I think payment shock.
It was part of it.
Well at the end of June Middle of June .
At 100 basis point increase in long term rates over about a three or four day period.
That impacted it.
Most people still remember 2008 910.
<unk>.
Warehousing market I've ever seen.
I use deteriorated.
Which again.
Not typical.
History of our country.
So.
I'll pause.
I feel very good about where we're headed market wise.
The response, we're getting.
<unk> continue to sell houses out there so.
Okay.
Okay.
You increase rates 100 basis points in four days.
It does it does impact.
Psyche.
Yeah. Okay. Thanks, David and then second question just on the on the delays Youre seeing in terms of the vertical construction.
Our delays related to Horizontals so.
Are you seeing issues that would prevent you from <unk>.
Getting the communities open that you have internally in your plan or if that were to change would that be more a function just a bit.
Slowly market. Thanks.
I think it's a little bit of both but yes, I mean, we have seen delays.
And the permitting process in bringing communities online.
In addition to the the delays that we've seen on the vertical side and so if you look at that in aggregate and hence our guide to lower than what we had previously.
<unk> been guiding to.
I don't think that its getting necessarily better today.
Any different than we.
We're starting to see it stabilize some on the vertical side the horizontal side I think we will continue to be a challenge in terms of bringing new communities online on time.
Thanks, a lot thanks, Hey, Greg.
Thanks Carl.
Thank you and the next question is coming from Stephen Kim from Evercore ISI, Stephen Your line of lines.
Great. Thanks, very much guys.
Yes, I wanted to talk a little bit about your inventory management you gave a lot of statistics that are very helpful. In terms of spec levels. Your finished specs or I think 1400 still pretty well below normal.
Your under construction specs are quite high and I assume that's due to the cycle time so.
And then you gave some numbers around land inventories land spend so I wanted to just ask.
Where should we be thinking.
Your finished specs.
The desired level that you want to get too.
And as that number increases.
What should we expect to see for your under construction.
Spec levels.
And with the.
The overarching view to try to get a sense for where your construction your CIP construction in process inventory in dollars May go over the next couple of quarters as you see it.
Well sure Steve in terms of our completed spec homes, we're always looking to sell those as quickly as we can we've been at abnormally low levels still a 2500, whereas today is still relatively low but if you look historically, we've typically been at levels quite a bit higher. So I think we're seeing a return to a more normal level of uncompleted spec.
But the goal will always be to not have more than one or two completed specs to the community and continue to make sure that we move through those and that they don't age.
In terms of our overall production.
Historically, when we had historically normal cycle times, you could anticipate us turning our housing inventory our number of homes in inventory twice each year, we have been a little slower than that of this year with elongated cycle times, but we're looking to into next year.
Hopefully, we will see improvements in cycle times, it could get back to a more normal level, there as well and so we're adjusting our starts to reflect the current moderation in demand and we'll be monitoring demand very closely to determine the appropriate level of starts going forward, but then as part of that total production that we look to <unk>.
Twice historically, our spec levels as a percentage of that total have ranged from the low <unk> to the low fifty's and so right now we're kind of in that normal total spec range overall and so we will just be we'll just be adjusting our sharp space looking at our overall homes in inventory and our spec levels.
Alongside demand over the coming months to position ourselves as best we can through the current market.
So just to clarify on that so do you think that your construction in progress.
Dollar is likely to rise as we go forward here over the next couple of quarters.
I think on a on a cost per home basis, we have been seeing that rise with cost inflation.
And so I think there is an element of that but yes that will remain but our homes and inventory. Our total number of homes in inventory are expected to decline in the fourth quarter from the current level and that's fairly normal for us on our fourth quarter as well as we deliver more homes. Typically then we start in the fourth quarter.
Okay. So you've got some seasonal factors there.
Shifting gears to the incentive levels.
Amidst this buyer's strike that we got right now I guess I'm curious where the level of incentives are versus what is normal in your business recognizing that recently its been.
Incredibly low, but where are we now relative to what you would consider normal and how much higher than normal do you expect to.
To go near term, meaning in the next quarter or so.
I would say right now we're probably still.
Lower than what we'd consider a normal.
Incentive.
There is still a lot of buyers out there chasing chasing homes.
And qualified buyers a little more difficult.
<unk> actually.
Reopening in.
Speaker 6: Times and can get back to a more normal lel there as well. And so we're we're adjusting our starts to reflect the current moderation in demand, will be monitoring demand very closely to determine the appropriate level starts going forward. But then as part of that total production that we look to turn twice historically our spec levels as a percentage of total range from the low forty's to the low 50, and so right now we're kind of in that normal total spec range overall and so we'll just be, we'll just be adjusting our startarch base, looking at our overall homes and inventory in our spec levels and and alongside demand over the coming months to position ourselves as best we can through the current market. Such just a clarified on that. Do you think that your construction in progress, you know, in dollars is likely to rise as we go forward here over the next couple of quarters? I think on a on a cost for hhome basis. We have been seeing that rise with cost inflation and so I think there's an element of that that. Yes, that will remain. But our homes and inventory, our total number of homes inventory, expect to decline in the fourth quarter from the currentlevel and that's fair, normalfor usin fourth quarter as well. As we deliver morehomes typically that we start in the fourth quarter know OK, So that's some seasonal factors there. Shifting gears to the incentive levels, you know M this this buyer strike to we got right now I guess I'm curious where the level of incentives are versus what is normal in your business, recognizing that you know, recently it's been incredibly low.
Some of our sales efforts.
Has been has been interesting so.
But overall.
I'd say the incentives.
Program today is probably less than normal.
I anticipate at some point it will return to normal.
Sure.
There is still.
Not a lot of inventory out there for people to buy and where they go will ultimately be tied to market demand and we will do what we typically do which is manage it market by market community by community to maximize returns.
Absolutely well, thanks, very much guys I appreciate it.
Yes.
Thank you and the next question is coming from Eric Bosshardt from Cleveland Research Company Eric.
Eric Your line of sight.
Good morning, Thank you.
Just curious if you could drill down a bit more into the last.
30, or 45 days, where you've seen.
Election, and I guess specifically.
I understand the comment there is still a lot of buyers out there, but curious what has happened with cancellation rates. Obviously, the 24 in the quarter. It feels like Thats more elevated isn't this more recent period of time.
Where has that been and what is the expectation for that as you look at the <unk>.
Cancellation rates during the quarter and the first part of the quarter that were in the normal range for US we had been for a while below normal. So is in the normal range and then it did.
Definitely increase sharply in June , which then brought the overall average for the quarter up as far as to date in July I would still say it's elevated.
Not continued on a trend much higher but its still is at an elevated level and so we're monitoring that along with our gross sales activity and responses to incentives and other affordability measures. We're trying to provide for our homebuyers and we'll be monitoring that very closely going forward, but like we've said, thus far we're still seeing a very good level of core demand.
Speaker 6: But where are we now relative to what you would consider normal and how much higher than normal do you expect to go near term, meaning in the next quarter, or SOI would say you. Right now we're probably still lower than what would consider a normal incentive. There're still a lot of buyers out there chasing, chasing homes. I think all ified buyers were more difficult.
Out there we're refilling our cancellations.
Rather rather smoothly, thus far and so we're hopeful that we'll find some stability here in the demand environment and our sales in Canada environment over the next.
Speaker 8: Actually reopening and.
A few months.
And then secondly, if you could.
Speaker 8: Some of our sales efforts, as has been, has been interesting. So but overall.
In terms of either mix or geography.
Curious, if there's any variation or any difference in behavior.
Speaker 8: I'd say the incentive.
Sort of entry level versus.
Speaker 8: Program today is probably less than normal. I anticipate at some point it will return to normal.
Within the move up or higher end of your price points or from a geographic standpoint is there any differentiation or is the higher rates had a similar impact across price points products and geographies.
Speaker 8: They're still.
Speaker 5: Not a lot of inventory author. For people to buy and where they go will ultimately be tied to market demand, and we'll do what we typically do, which is manag market-by-market communities by communities to maximize returns.
I think they are certainly more impact potentially on the buyers that are mortgage rate sensitive, but we still saw a 56% of our closings were first time homebuyers in the quarter and we closed a substantial number of homes in June to those first time homebuyers at near place to live we've been able to provide some interest rate lock.
Speaker 6: Absolutely well. Thanks very much guidance, appreciate it.
Speaker 6: Guys to appreciate it.
Speaker 4: Thank you. The next question is coming from Eric Bosshard from Cleveland research company, Eric lanosles.
Products from our mortgage company, that's given those buyers comfort and certainty around payment.
Speaker 6: Good morning, Thank you. I just curious if you could drill down a bit more to the last.
But they are still buying a home out of need and necessity.
Speaker 6: 30 or 45 days where you've seen the inflection and I guess specifically understand the comment. There's still a lot of buyers out there. But curious, what has happened with cancellation rates? Obviously the 24 in the quarter, feel I. that's more elevated in this more recent period of time. Where has that been and what is the expectation for that? As we look at the four Q.
Buyers that are more discretionary in nature.
And as.
Question earlier alluded to qualification versus value expectations. They were probably more in the value expectation side of of taking a pause this summer and seeing where the housing market goes but the biggest part of our business is focused primarily in the first time buyer first time move up and providing an affordable home.
Speaker 6: Cancellation rates during the quarter. The first part of the quarter. They were in the normal range for us we had been for a while below. Normal So was in the normal range and then it did definitely increase sharply in June which then brought the overall average for the quarter up as far as today in July would still say it's elevated had not continued on a trend much higher but it still is at an elevated level and so we're monitoring that along with our gross sales activity and.
So we're still seeing people buying our homes out of need.
That's helpful. Thank you.
Thank you.
The next question is coming from Mike Rehaut from Jpmorgan, Mike Your line is live.
Thanks, Good morning, everyone.
All the comments and guidance.
I wanted to drill down a little bit if possible.
On the gross margin guidance in the current rate of incentives that we've heard.
Have increased over the last one or two months when we have heard in our conversations with different private builders incentives are up anywhere from 100 to 300 basis points.
On your guidance.
Midpoint is down only about roughly 100 bps sequentially, so seeing that.
Speaker 6: And then secondly if, if you could, in terms of either mix or geography, I'm curious if there's any variation or any difference in behavior, sort of entry level versus, you know, within the move up or or higher end of your price points, or from a geographic standpoint, is there any differentiation or is the higher rates had a similar impact across price points, product to geographie? S.
You are at the lower end of that.
Let's say if that range is accurate.
The 100 to 300, so I just wanted to make.
Does that make sense to you in terms of.
Those comments that makes sense in terms of what we've heard.
And do you think.
The <unk>.
The increase that you've had in the last one or two months.
In effect kind of brought sales pace back into.
Speaker 6: I think there's certainly more impact potentially on the buyers at are mortgage rate sensitive, but we still saw 56% ofourclosings were first-time homebuyers in the quarter and we close a substantial number of homes in June . To those first-time home buyers at need of place to live we've been able to provide some interest rate lock products from our mortgage company. That's given those buyers comfort and certainty around paymentbut there're still buying a home out of need and necessity.
Desired level or are you seeing kind of continued to rise as we're working through July .
Mike I'll start with the gross margin guide and these guys may chime in a little bit more on trends on incentives going forward.
Gross margin guide itself it starts with our backlog as we entered the quarter and as we mentioned we had a lot of buyers that locked in their mortgage rates that they are expecting to close in Q4, and so we have more visibility to those homes that we expect to close in Q4 into the margins, we expect to see there. So thats the biggest piece of our visibility into our guide.
Speaker 6: Buyers that are more discretionary in nature and as.
Speaker 6: Question earlier alluded to qualification versus value expectations. They're probably more in the value expectation side of taking a pause this summer and seeing where the housing workket goes. But the biggest part of our business is focused primarily in the first time buyer, first time move up and providing an affordable home. So we're still seeing people that buying our homes out of need.
We do still have some homes that we are selling in the current quarter that we will close in in those homes are more likely to be a little more exposed to the current incentive environment and so we'd expect there to be a few more incentives.
And some of those homes, which has been factored into the guide as well.
Thank you your comments around your comments in the market around level of incentives.
Speaker 9: In chopple. Thank you.
I wouldn't say those are.
Inaccurate at all but our closings in the coming quarter will partially reflect some of the current environment, but will also reflect some buyers that are in backlog and have the rates locked in are marching towards closing.
Speaker 4: Thank you, and the next question is coming from Mike rhart, from JP Morgan. Mike, your line of life.
Speaker 10: Thanks good morning everyone.
Speaker 10: Appreciate all the comments and guidance. I wanted to drill down a little bit of possible on the gross margin guidance and the current rate of incentives that we've heard have increased that over the last one or two months when we've heard in our conversations with different private builders incentives are up anywhere from one hundred to 300 basis points.
In Q4, the margin guidance, we talked about earlier is also reflective of the cost environment that we faced over the past six to nine months as we started homes at different times and at different lumber pricing frankly, it was a big big driver of it general inflationary pressures across most of our.
Cost categories, but certainly the lumber has had a great deal of variability over the past 12 months.
Rose significantly fell off a bit it went back up again and now it's back down so as those homes pushed through the production process and deliver theyre going to have an impact on the gross margin as well.
Speaker 10: You know, your guidance midpoint is down only about roughly 100 bps sequentially, So it's seeing that.
Speaker 10: You know you're at the lower end of that. You let's say if that range is accurate.
Great.
Very helpful appreciate that color.
Secondly.
Speaker 10: The 100 to 300 So just want to make. Does that make sense to you in terms of those comments, that make sense in terms of what we've heard, and do you think the this increase that you've had in the last one or two months has that in effect kind of brought sales pace back into a desired level, or are you seeing that it's continued to rise as we're working through July ?
You highlighted earlier in your prepared remarks about the continued levels of share repurchase.
How should we I know its a little forward looking and you have been on a pace.
Couple of years, where you've been reducing your share count low single digits.
Yes.
But we're in obviously, a little bit of a softer market.
Moderately softer levels continue.
Speaker 6: Like I'll start with the gross margin guance these guys I a little bit more on trends, on incentives, going forward. Gross margin guidance itself. It starts with our backlog as we enter the quarter and so we mentioned we had a lot of buyers that locked in their mortgage rates that they're expecting to close in Q4 and so we have more visibility to those homes that are we expect to close in Q4 into the margins we expect to see there. So that's the biggest piece of our visibility into our guide. We do still have some homes that we are selling in the current quarter that we will.
How should we think about share repurchase.
For fiscal 'twenty, three and assuming.
Things don't fall off a cliff, but there are obviously still at a more moderate rate would you dial it back or given the strength of your balance sheet and still strong cash flows then.
Very healthy margins.
We expect some level of continued share repurchases.
In 'twenty three.
Our plan from day, one has been consistent over time.
Balanced with.
Supporting the homebuilding inventories.
Sure.
Funding the funding the growth I don't see that changing in 'twenty three 'twenty four 'twenty, we just.
Our goal is to.
Okay out there operating consistently growing our market share expanding home ownership opportunity for as many families. Soon as we possibly can.
Some buyers that are in backlog and have the race locked and are margin getorwards, closing in Q4. The margin guidance we talked about earlier is also reflective of the cost environment that we faced over the past six to nine months as we started homes at different times and a different lumber. Pricing frankly was a big, big driver of general inflationary pressures across most of our cost categories, but certainly the lumber had had a great deal of variability over the past 12 months. You know.
I don't see that changing.
Great. Thanks, so much.
Thank you and the next question is coming from Matthew Bouley from Barclays. Matthew Your line is live.
Good morning, everyone. Thank you for taking the questions.
Just another one on gross margins asked a different way here.
I know that visibility to 'twenty three is limited here.
But I guess in an environment where incentives.
Do return to normal as.
As David alluded to earlier, just curious if you could outline kind of how the gross margin of the business might look in such a scenario.
Well anytime we see a change in market conditions.
And right now we do expect the level of price increases to moderate and start to flatten out we've already talked a bit about incentives rising the topline is impacted quicker than our costs are so we usually see two or three quarters, where our higher costs are still coming through and that put some pressure on near term margins, but then.
How should we know? It's a little forward looking and you've been on a pace the last couple of years where you've been reducing your share count low single digits. Know to the extent that we're in obviously a little bit of a softer market, that moderately softer levels continue.
Is that inflection begin that opens the door to be able to start addressing on the cost side, we've already seen some relief from lumber, which that will start to be more of a tailwind for us in coming quarters and in other categories really beginning with labor.
How should we think about share repurchase for fiscal' 23? Mean, assuming things don't fall for Cliff, but there are obviously still at a more moderate rate? Would you dial it back? Or, given the strength of your balance sheet and still strong cash flows and a very healthy margins, can we expect some level of continued share repurchase in' 23?
As an opportunity as well and so our goal will be to do as much as we can on the cost side to offset the impact that we see from <unk>.
Prices flattening in incentive levels to maintain as good a margin as we can balance with pace to generate the best returns.
We can we can generate where that will be will dependent on will be dependent on the.
Our plan from daywo end has been consistent over time, balanced with.
The strength of the housing market and demand.
Ultimately, it's going to come down to what price the best return for that individual flat same formula we've been working on working with.
Supporting the homebuilding inventories and.
Funding the funding the growth I don't see that changing in 23 and 24 porttwent we just.
It sounds like out of a downturn.
Yeah.
Our own <unk>.
Our goal is is to.
Mrs.
Be out there operating consistently, growing our market share, expanding homeownership opportunity for as many families as we possibly can.
Returning the best we can with the inventory that we put out there.
And that's not going to change.
We deemphasize gross margins.
And uh, I don't, I don't see that Chang.
We can deliver every house, we wanted to bill.
Great Thanks so much.
Yes.
Construction process became more and more challenging we expanded margins.
Thank you, and the next question is coming from Matthew booy, from barleclay's Matthew Orlando size.
We will delivery every house, we possibly can.
At the end of the day is three times, it's an ROI.
Yes.
Got it that's really helpful gentlemen, thank you for that and then.
The second one I have to ask the impairment question, which obviously at a 30% gross margin, we're not near or anything like that at this point, but given it is an investor concern here.
So I guess the way to ask the question is within your portfolio.
Certainly theres going to be communities below the average by definition, but is there any.
Would you be able to highlight or point to any portion of the portfolio that might be more vulnerable to something like impairments, where the home price declines.
Yeah.
May not be as severe as he might look on a national average.
We're just basically what portion of the portfolio would you consider to be potentially more vulnerable to impairments the longer that this type of.
Softness in housing process. Thank you.
Sure Matt I think you led with the most important point, which is we're starting at a 30% gross margins. So that really signifies that we're a long way off from any sort of broad based impairments. It would take significant margin erosion from declines in home prices and we don't have any projects right now that are what we deem internally on our watch.
<unk> list, because they're approaching a gross margin that we would have to do a more thorough impairment analysis.
And to really see even any sort of tick up in our watch list before we even get to the point of impairments, we would have to be pretty pretty big home price decline. So I wouldn't say, there's any one piece of our portfolio right now that we would point to.
At higher risk than others, but certainly as we continue to move through a market transition. If there are certain markets, where home prices come down further than the others. It would be the ones we'd point to first.
Alright, Thank you Jessica thanks, everybody.
Thank you and the next question is coming from Alan Ratner from Zelman and Associates your line of glass.
Hey, guys. Good morning, Thanks for taking my questions.
First one on incentives and I know, it's early innings as far as any meaningful.
Increases there, but curious what you are seeing on the elasticity of those incentives were you are offering them are there certain markets, where perhaps the incentives have been more effective at driving increased traffic and orders and are there markets where.
Based on what Youre seeing so far demand seems less elastic or maybe even in the elastic to to any increase in incentives.
Alan I don't think we've seen a definite pattern as of yet I think that the incentives that we have put out as we've stated are still.
Still at this point below.
Historical norms.
Being effective in terms of driving the traffic traffic in total is slow just based on the market conditions and the change in that we've already talked about.
But generally speaking those incentives have accomplished what we have been trying to do in terms of driving additional traffic and converting the homes as our cancellation rate is right now.
We've been able to convert those homes that are completed and we still have a lot of buyers with a near term need to get into a house.
We will adjust.
As the market needs due to flag by flag community by community drive the returns we're looking for and the pace is the driver of that.
Got it I appreciate that.
Second question I would love to drill in a little bit on your build for rent business only.
Only one community sold this quarter, which was a bit lower than the last few quarters, but yes.
A lot of people have kind of talked about the maybe the ballpoint, where if if kind of the core demand does soften for an extended period of time that there is all this capital on the sidelines targeting built for rent that perhaps.
Might be able to fill at least part of that void. So curious what you're seeing in your conversations.
It's built for rent investors and the parties that you are selling these communities to have you seen any shift in their appetite and as you market. The next round of communities. I know you have some guidance for sales in the fourth quarter or maybe even thinking about early 'twenty three.
What's your expectation for the demand in the BFR space.
We still see very strong interest when we take communities to market.
And still very encouraged by that certainly the valuation equation is heavily impacted by long term financing cost for those investors. So in periods of volatility in those in those costs in our underwriting.
It's a little longer to get the process completed with these transactions, but there is still tremendous demand for them and they are still on the front end of it as we see these communities.
Begin to complete units and we opened up the leasing we're still seeing strong demand for people moving into the to the homes and so thats ultimately very encouraging as we're creating cash flow assets that there is as you mentioned a lot of capital interested in investing in those assets today.
A follow up on that if I could have you shifted any communities that are earlier in the planning process from for sale before rent. When you look at your total lot pipeline pushing 600000 lots if youre selling 80000 homes, a year, which is kind of your run rate for the year roughly.
It would seem like that's a lot of land probably more line that you need and perhaps there's an opportunity to shift some of that to be a far more so than perhaps you thought a quarter or two ago.
We certainly evaluate that in terms of demand for the for sale in our portfolio.
If if pace slows down in a given market and our land position gets a little longer in that market looking for ways. We always thought build to rent is a great way to more rapidly monetize land positions without cannibalizing.
For sale business, because it's a different user of that real estate in different owner of the real estate. So it brings to their capital pools to bear. So we certainly have repurposed projects that we originally may have identified three to four years ago is for sale.
Today, they are being executed as for rent and that process continues I mean, we we underwrite our land buys on the basis of a for sale purpose purchase.
We do not look at the valuations from a build to rent aspect and underwriting land buys.
I appreciate that color. Thanks, a lot guys.
Thank you.
Thank you and the next question is coming from Truman Patterson from Wolfe Research. Your line is live.
Hey, good morning, everyone. Thanks for taking my questions.
<unk>.
Hoping you all could just given.
An update on your June order exit rate.
As well as what Youre seeing in July and then.
Following up on Eric's question.
One of your peers kind of gave a lay of the land based on metro or even regional performance just hoping you can give some color on.
The outer or underperforming metros.
And I think we're looking at can you specify your first question on exit rate again, so we make sure we answer the right question.
Yes your June orders.
Just trying to get an update there.
The decline was in how July is trending.
Okay.
Never speak 10 monthly orders specifically.
That being said we did guide at a conference in early June we expecting our sales to be essentially flat.
For the quarter on a year over year basis, and we came in down 7%. So that would tell you that.
Most of June because rates spiked pretty quickly after we made those comments.
Most of June we did see softening in June would have been our worst sales month of the quarter.
As a result of both the moderation in demand in the tick up in cancellation rate that we've already talked to you and then I think bill said earlier and wanted to Q&A responses that are keen rate hasn't necessarily gotten worse since June but it has stayed elevated into into July .
And sales.
It continued to be a challenge, but we do still see a decent level of demand in the market and our selling and closing them.
Every day so far in July .
Okay, perfect and then.
Any color on any kind of problem metros or metros youre seeing outsized strength.
Texas, Florida.
We'll continue to the national numbers.
Carolinas.
<unk> continued to be stable.
And strong for us.
We're really.
From a historical known from my history with the company and my history in the industry.
It's a good mark.
I've talked about.
Some areas being stressed or problematic just doesn't exist today.
Or a pause is there a reset in Canada.
Our expectation, yes, absolutely.
Payment shock when rates go up 100 basis points.
Four days, yes, absolutely.
But demographics.
The.
Desire to get out of the various all of those are.
Also our enforced and continuing.
Our expectations for next year.
Or that we're going to get back home pass back on pace.
Yes.
No.
All good and D R Horton.
Okay, Okay, perfect and then.
Matt Matt asked about kind of owned land impairments.
I wanted to ask a little differently, you all really transformed your balance sheet compared to the prior cycle heavy option land position.
Have you all started to rework any of those deals and.
What sort of market conditions would you really need to see in order to.
Perhaps walk from any of the more recent contracts.
We're constantly evaluating the land portfolio.
One of the benefits of having the option.
Position, we have is that we get the chance to continue to make decisions about project as we move through them.
Those land projects that we have in neighborhood projects that we've identified in the portfolio very important to the future deliveries of the company and we're going to continue to work through those those neighborhoods but.
Everybody, who we work with understands that that we're all working together in the same market conditions and a change at the front end of selling homes to homebuyers will ripple all the way through the value chain and it starts ultimately we can land. So we will continue to rework our portfolio as needed and we are always.
Our continually making adjustments to reflect current on the ground conditions, whether it's an acceleration or deceleration of a given project.
Okay. Thank you all.
Thank you once again, ladies and gentlemen to remind you to please keep your limit yourself to one question one follow up.
Participants.
The next question is coming from Susan Mccrory from Goldman Sachs. Susan Your line is live.
Thank you good morning, everyone.
My first question is going back to lumber, there's some changes that are coming through in the futures better aligning them with how builders actually take the lumber and given the volatility that you're seeing in the uncertainty in demand are you considering or would you think about perhaps starting to hedge some of those costs.
Yes.
Susan is that a sales pitch for Goldman.
Not at all.
Alright.
Yes.
No.
We have historically not tried to hedge any of those positions and we worked with our local suppliers and partners to bring the lumber to the job site. The best value possible, we have not yet seen how those markets are going to function or evaluated yet if that's a possibility for us.
But we will certainly look at things that make sense to offset risk in our business.
Okay. Okay I appreciate that.
Second question is on land spend you obviously talked about on either what you allocated in the quarter as you think about the upcoming year any initial thoughts on where that May go in and how to think about it relative to where you've been this year and perhaps last year even.
Susan we only own about 130000 lots today. So we are constantly buying lots more and more a larger percentage of our purchases are of finished lots and we essentially put into production almost on adjusting time basis. So we'll be continuing to replenish our owned lot supply along the way as Mike said adjusting our option.
Portfolio on a constant basis, so I would expect there'd still be a steady reinvestment and replenishment of our of our land pipeline.
Obviously as we see how the current market conditions transition here, we'll be evaluating the depth of demand the strength of the demand and then positioning or our land and lots in our homes and inventory too.
To match those conditions as we go into next year and our spend will then aligned with the plans that we set.
Okay, Alright, great. Thank you good luck with everything.
Thanks Lee.
Thank you and the next question is coming from Deepa Raghavan from Wells Fargo Securities. Your line is nice.
Hi, Good morning, everyone. Thanks for taking my question.
I had a follow up on the prior question asked the two men on market color wasn't clear if that was.
Volume comments that you provided on pricing.
I had a question on pricing.
Can you talk to any surprise elements within your orders pricing trends.
Moderation or declined.
Or were you surprised the resilience in some of your markets.
Okay.
Surprised I don't know if it surprises probably agree Greg.
We're responding to.
And it's my belief and I think I believe.
Buyer demand is okay.
There are still more.
Housing formations job creations.
Our homes being built so.
I think we've talked about elongated cycles in the past this.
Pause disruption could it get worse absolutely.
But.
I've been doing this a long time.
In conversation with one of our original presence a couple of days ago.
We're talking about the market.
DNI both have been doing this a long time, both admin and sales models.
Selling loans was very difficult.
This is probably the second best market so.
So I guess.
I understand that there is uncertainty out there.
When you have people that want to buy homes.
More than just we're going to figure out how to put those people in homes, that's what we do.
So that's.
Market by market plagued by division.
Division by Division, However, you want to Canada.
Bill so far.
We're going to start bill.
And close homes.
And create homeownership opportunities.
That's what the mission of this company. So that's what we're going to them.
But just in the current trends, it's still very early to determine exactly what magnitude of adjustments may occur were still evaluating that on a week by week basis, when as David said earlier when when rates spiked. There is an adjustment period and we're in that adjustment period, right now where buyers are theres, a little bit of a rate shock or a payment shock in so just.
Expectations are.
We're figuring out how to how to adjust with them to make sure we can get them into the homes that they want to purchase.
Fair enough.
My follow up is on stock space this quarter the 17 K.
Scott space, how much was trimmed by supply chain issues and any thoughts on what could be a reasonable start Scott space near term frankly.
I'm aware you are unable to provide quality of thoughts into 2023, but under what circumstances would you expect to grow over the 85 K units guided here for 2022, and just based on the stock split.
You have been printing recently.
But looking at our starts and we purposefully reduced that start pace over the last quarter again to meet the market and thats largely from production and production capacity, we had to add big Star space.
Prior quarters, leading into this and with continued.
Challenges in the supply chain and labor markets.
Giving our chance, giving our people and our vendors the ability to catch up and move those homes forward.
And on a go forward basis, we'll adjust those star space to market conditions. So as we've mentioned we're still early in this pause period, an adjustment and as we find our base will.
<unk> maintained our space that we want to drive.
Drive units and deliveries were looking for and too early to say anything on fiscal 'twenty three.
Reassess in November if we have a little bit more certainty in the market. Then hopefully we will be in a position to give some high level guidance for the full year, but it's going to depend on the market and if it settled out and we feel comfortable doing that or not we're always going to position ourselves to grow and consolidate market share.
But it's really going to be up to market conditions and what makes the most sense in terms of that is maximizing our returns part of the positioning going into next year as our number of homes in inventory, we have 56000 homes in inventory today, and we're guiding to closing between 23, 5% and $25 five in the coming quarters. So.
We're going to go into the year with inventory as well and we will supplement it with our starts pace in Q4 and beyond to then drive to the volume levels.
That will drive next year.
Sure.
Fair enough, thanks, very much and good luck.
Thanks.
Thank you and the next question is coming from Anthony Pettinari from Citigroup Anthony Your line is live.
Hi, This is Asher stone in on for Anthony and I, just wanted to ask I think youre currently selling homes on land that was largely largely or at least partially put under control prior to the pandemic. So just looking at the prices for lots that youre, putting under contract now and trying to hold all else equal would it be possible to sort of quantify that.
Gross margins on these new laws might compare to your current gross margins and just generally very roughly how long before you start to exhaust that favorable cost basis.
Land prices vary across the country and the rate of increases in land prices have varied so we've talked to each quarter.
What our lot costs are done on a square foot basis, and we've really not seen more than a low to mid single digit increase in terms of what's flowing through our closings each quarter and with the vast amount of land, we are buying on a quarter to quarter basis and it all being contracted for at different dates over maybe in the last year and maybe in the last.
Three years that we contracted for it we would expect to continue to see a relatively modest increase in <unk> trailing in a future quarter closing.
Understood. Thanks, and then you slow start this quarter at a better sort of match anticipated demand if I heard correctly. So just on a strategic level do you see I don't Gary Horton is maybe trying to gain share in the housing slowdown or how do you think about the level of discipline around supply demand may be among your peers and competitors.
To prior cycles.
I think compared to prior cycles. The entire industry is much more disciplined much more focused on cash flow much more focused on return.
Speculating on.
Accelerating land prices.
So you look at our stores should look at the industry stores.
<unk> I think.
Very very fast reaction to.
The rate increases.
We'll see what happens in July and August .
Our expectation is that.
Youre going to see starts.
<unk>.
Disciplined.
And when the rates stabilize and we can adjust pricing and offerings.
Two.
The buyers and they're comfortable bottom and I think youll see starts to pick back up.
Yeah.
It's just a different world today than it was an overall level six.
You've got a real business is building houses today.
And then specific to market share gains that's always a core part of our strategy.
Okay. Thanks, I'll turn it over.
Okay.
Thank you and the next question is coming from Rafe <unk> from Bank of America. Your line is flat.
Hi, good morning, Thanks for taking my question.
To follow up on some of the comments on the July trend.
In June you talked about the moderation with the affordability shock and the spike in mortgage rates has demand sort of continue to decelerate or have we seen sort of a stabilization and reset.
Hard to say, it's early in the quarter as to where we are the past few summers we've not seen much seasonal falloff. This year I think we're seeing a little more seasonality.
But we still see traffic in the models, we still see people out buying homes.
It's not a zero.
Environment people are still moving into the homes that we complete and close it.
It's probably coming back to a little more normal seasonality, where the middle of the summer gets a little bit slower from a traffic perspective.
Okay. Thank you that's.
That's helpful. And then you commented on on the material cost out work and labor potentially coming down are you seeing land prices come down.
Any relief on that side.
With the slower demand in the market.
No we really I think as you look at this.
This process.
And again, we're really at a pause in the market and one of the last things, we see to come down.
It's going to be the land is.
Slower to react then firstly, you should probably see it in the labor on a localized basis, and then materials and then land will adjust over time based on market conditions, just like it always has is going to rise and flow.
Little behind housing demand.
I will say, we have a very deep pipeline.
<unk> plan that we have.
Controls.
Multiple years.
And it does put us in a position where.
If we see the imbalance in land pricing versus future market expectations.
We don't have to buy we've got.
We've got the ability to.
Pause in our land acquisition.
Sure.
And extended period, if if if.
We think thats.
The prudent decision.
That makes sense. Thank you.
Thank you and ladies and gentlemen, that's all the time, we have for questions today I would now like to hand, the call back to David Auld for closing remarks.
Thank you Paul.
We appreciate everybody's time on the call today and look forward to speaking with you again to share our fourth quarter results in November .
And to the D R Horton family.
You are a driving force.
And the creation of affordable housing in this country.
What you do is important.
Don Horton and the entire executive team. Thank you for your focus and hard work will finish.
Finished this year and move on to 2020.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.