Q4 2022 D R Horton Inc Earnings Call
Good morning, and welcome to the fourth quarter 2022 earnings conference call for D. R. Horton America's builder, the largest builder in the United States. At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the <unk>.
<unk>, if you'd like to join the queue at any time, you May press star one on your telephone keypad to enter the queue should you wish to remove yourself from queue. You May press star two.
I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton Jessica the floor is yours.
Thank you Tom and good morning, welcome to our call to discuss our fourth quarter and fiscal 2022 financial results 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 outcome.
I will not be materially different.
All forward looking statements are based upon information available to D. R. Horton on the date of this conference call and D. R. Horton does not undertake any obligation to publicly update or revise any forward looking statements.
Additional information about factors that could lead to material changes in performance is contained in D. R. Horton the annual report on Form 10-K, and subsequent reports on Form 10-Q, all of which are 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-K towards the end of next week. After this call we will post updated investor and supplementary 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.
The D. R. Horton team finished the year with a solid fourth quarter, which included a 20% increase in consolidated pretax income to $2 1 billion and a 19% increase in revenues to $9 $6 million.
Our pre tax profit margin for the quarter improved 10 basis points to 21, 4% and our earnings per diluted share increased 26% to $4 67 zones.
For the year consolidated pretax income increased 42% to seven 6 billion.
$33 5 billion of revenue, which increased 21%.
Pre tax profit margin for the year improved 350 basis points to 22, 8%.
Our earnings per diluted share increased 45% to $16 51.
We closed.
A record 83518 homes issue and our homebuilding and single family run the operations and our homebuilding SG&A as a percentage of revenues of six 8% was at all time low.
Return on inventory for the year was 42, 8%.
And our consolidated return on equity was 34, 5%.
Our strong financial performance during a year of significant challenges and volatility reflects the strength of our experienced teams industry leading market share.
Geographic footprint and diverse product offerings.
Cash flow from operations for 2022 was $1 $9 billion over.
Over the past five years, we have generated $7 5 billion cash flow from homebuilding operations.
Growing our consolidated revenues by 138% and our earnings per share by 503%.
During this time, we also more than doubled our book value per share consistently kept our homebuilding leverage under 20% and increased our homebuilding liquidity by $1 8 billion.
While significantly increasing our returns on inventory.
During most of the year demand for our homes was strong.
In June we began to see a moderation in housing demand that has continued and accelerated through today.
The rapid rise in mortgage rates, coupled with high inflation and general economic uncertainty have made many buyers pause in their home buying decision or choose to not move forward with their home purchase.
However, the supply of both new and resale homes at affordable price points remains limited and the demographic supporting housing demand remain favorable.
The uncertainty of this market transition may participate <unk> for some time.
And could get more challenging if mortgage rates continue increasing however.
However, we are well positioned positioned to meet changing market conditions with our experienced teams affordable product offerings flexible lot supply and grain trade and supplier relationships.
Our strong balance sheet liquidity and low leverage provide us financial flexibility.
We'll continue to focus on turning our inventory and managing our product offerings incentives oil pricing sales pace and inventory levels to meet the market optimized returns.
<unk> market share and generate increased cash flows from our homebuilding operations.
Diluted earnings per share for the fourth quarter of fiscal 2022 increased 26% to $4 67 per share and for the year earnings per share increased 45% to $16 51.
Net income for the quarter increased 22% to $1 6 billion.
And for the year net income increased 40% to $5 9 billion.
Our fourth quarter home sales revenues increased 23% to $9 4 billion on.
23212 homes closed up from seven $6 billion on 21937 homes closed in the prior year, our average closing price for the quarter was $403700 up 17% from last year and up 3% sequentially.
We closed fewer homes than we expected during the fourth quarter due to a slower sales pace increased cancellations and continued construction delays. In addition, we estimate that approximately 730 home closings in Florida, and South Carolina were delayed from September due to hurricane here Paul.
During the quarter, we continued to sell homes later in the construction cycle to better ensure the certainty of the home close date and mortgage rate for our homebuyers with almost no sales occurring prior to start of home construction.
Our net sales orders in the fourth quarter decreased 15% to 13582 homes and our net sales order value was down 10% from the prior year to $5 4 billion.
Our cancellation rate during the fourth quarter was 32% compared to 19% in the prior year quarter and 24% in the third quarter. Our average number of active selling communities increased 8% from the prior year and was flat sequentially. The average sales price on net sales orders in the fourth quarter was three <unk>.
<unk> hundred $99600 up 6% from the prior year, but down 4% sequentially from the June quarter and October as mortgage rates continue to increase our net sales orders were below prior year levels and our cancellation rate remained elevated as a result, we currently expect our <unk>.
First quarter net sales orders to be down approximately 25% to 35% year over year Bill.
Our gross profit margin on home sales revenue in the fourth quarter was 28, 3% up 140 basis points from the prior year quarter, but down 180 basis points sequentially from the June quarter on a per square foot basis, our revenues were up 4% sequentially, while our stick and brick cost per square foot increased 8% and our lot.
Cost increased 3%.
The decrease in our gross margin from the third to fourth quarter reflects the increase in our stick and brick costs and increased incentives provided to homebuyers to ensure the closings of our homes and backlog during the rapid rise in mortgage interest rates.
We are offering mortgage interest rate locks and buyouts and other sales incentives to address affordability concerns and to drive traffic sales traffic to our communities.
As we adjust to market conditions and focus on turning our inventory to maximize returns our incentive levels have continued to increase and we are adjusting base home prices, where necessary. We expect our average sales price and home sales gross margin to decrease from current levels in fiscal 2023.
As a result, we are working with our trade partners and suppliers to reduce our construction costs on new home starts and are pleased with our early progress Jessica in our fourth quarter homebuilding SG&A expense as a percentage of revenues was six 7% down 20 basis points from six 9% in the prior year quarter for the year.
SG&A expense was six 8% down 50 basis points from seven 3% in 2021.
Our annual homebuilding SG&A expense as a percentage of revenues is at its lowest point in our history and we will continue to control our SG&A, while ensuring that our platform adequately supports our business in fiscal 2023, our homebuilding SG&A as a percentage of revenues will likely increase from current levels.
We started fewer homes this quarter as we work to position our inventory with an appropriate number of homes relative to market conditions. We started 13100 homes during the quarter in our homebuilding operations as we began negotiations to lower our construction costs feature new home starts we ended the year with $46000.
400 homes in inventory down, 3% from a year ago and down 18% sequentially 27200 of our total homes in September 30th were unsold of which 4400 were completed.
For homes, we closed this quarter, our construction cycle time increased by a week compared to the third quarter, which reflects continued lingering supply chain issues. However, we are beginning to see some stabilization in cycle times on homes. We have recently started and we expect our cycle time.
To improve in fiscal 2023, we expect our starts pace in the first quarter of fiscal 2023 to increase versus our fourth quarter pace and we will adjust our starts in homes in inventory to meet the level of demand in the market.
At September 30, our homebuilding lot position consisted of approximately 573000 lots of which 23% were owned and 77% were controlled through purchase contracts. Our total homebuilding lot position decreased by 25000 lots from June to September .
29% of our total owned lots are finished and 50% of our controlled lots are or will be finished when we purchase them are capital efficient and flexible lot portfolio is a key to our strong competitive position.
We continually underwrite all of our lot and land purchases based on current and expected home prices and cost we are actively managing our lot and land pipeline and our investments in lots land and development to meet our needs. During this transition and the housing market.
During the quarter, our homebuilding segment wrote off $34 million of option deposits and due diligence costs related to land and lot option contracts, we terminated or expect to terminate in the future.
We expect our level of option cost write offs to remain elevated in fiscal 2023, as we manage our lot portfolio. Our homebuilding segment had no inventory impairments during the quarter for the year.
Our fourth quarter homebuilding investments in lots land and development totaled $1 5 billion.
Down 19% from the prior year quarter and down 15% sequentially. Our current quarter investments consisted of $780 million for finished lots $560 million for land development and $150 million to acquire land Paul for the fourth quarter four-star our majority owned residential lot developed.
The company reported total revenues of $381 4 million.
<unk> 3914 lots sold and pre tax income of $66 4 million.
For the full year for Star delivered 17691 loss generating $1 $5 billion of revenues with a pre tax profit margin of <unk>.
<unk>, 5%.
September 30, <unk> owned and controlled lot position was 90100 lives.
59% of <unk> lots are under contract with D. R Horton or subject to a right of first off too.
$250 million of D. R. Horton slot purchases in the fourth quarter were from <unk>.
<unk> is separately capitalized from D. R. Horton and had approximately $620 million of liquidity at year end with a net debt to capital ratio of 26, 9% <unk> is well positioned to meet changing market conditions with a strong capitalization lot supply and relationship with D. R. Horton.
Bill.
Financial services pre tax income in the fourth quarter was $2 4 million on $134 million of revenue with a pre tax profit margin of one 8% as expected our financial services pre tax profit margin decreased this quarter, primarily due to a significant pull forward of revenue from rate lock commitments in the third quarter as we discussed on the <unk>.
Last quarter's call.
Also during the fourth quarter, there were increased competitive pressures in the mortgage market and increased cost of rate locks provided to customers due to rising rates for the year financial services pre tax income was $291 million on $795 million of revenue, representing a 36, 6% pretax profit margin, we expect our financials.
Services pre tax profit margin for fiscal 2023 to be higher than the fourth quarter, but below the full year of fiscal 2022.
During the fourth 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 73% of our homebuyers.
And VA loans accounted for 42% of the mortgage company's volume borrower.
Borrowers originating loans with DHL mortgage this quarter had an average FICO score of 724, and an average loan to value ratio of 87%.
First time homebuyers represented 57% of the closings handled by our mortgage company this quarter, Mike during fiscal 2022, our rental operations generated $510 million from the sale of <unk>.
775, multifamily rental units and 774 single family rental homes, earning pretax income of $202 million in the fourth quarter, our rental operations generated $21 million of revenues from the sale of 96 single family rental homes and incurred a pretax loss of $13 million, which.
Were below our expectations going into the quarter, we had several single family rental projects in Florida totaling 562 homes that were scheduled to close in September but were delayed due to hurricane in these projects closed in October and will be reflected in our first quarter results also one multifamily project in multiple single family.
Our rental projects that were expected to be sold and closed in the fourth quarter were delayed due to changes in the capital markets that affected the timing of buyers financing.
Our rental property inventory at September 30 was $2 6 billion.
Which included approximately $900 million of multifamily rental properties and $1 $7 billion of single family rental properties.
As a reminder, our multifamily and single family rental operating results are separately reported in our rental segment and are not included in our homebuilding segments homes closed revenues our inventories, we expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 as our platform mature.
Errors and expands across more markets Bill.
Our balanced capital approach focuses on being disciplined flexible and opportunistic we are committed to maintaining a strong balance sheet with low leverage and significant liquidity to provide a firm foundation for our operating platforms during changes in market conditions and to support our ability to provide consistent returns to our shareholders during fiscal 2022.
Our cash provided by homebuilding operations was $1 9 billion.
And the cumulative cash generated from our homebuilding operations for the past five years was $7 5 billion.
At September 30, we had $4 billion of homebuilding liquidity, consisting of $2 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.
Our liquidity provides significant flexibility to adjust to changing market conditions.
Our homebuilding leverage was 13, 2% at fiscal year end and homebuilding leverage net of cash was four 4% our.
Our consolidated leverage at September 30 was 23, 8% and consolidated leverage net of cash was 15, 4%.
We repaid $350 million of senior notes at maturity this quarter and we have $700 million of senior notes that mature during fiscal 2023.
At September 30, our stockholders' equity was $19 4 billion.
And book value per share was $56 39.
Up 35% from a year ago.
For the year, our return on equity was 34, 5% an improvement of 290 basis points from 31, 6% a year ago.
During the quarter, we paid cash dividends of $78 2 million.
For a total of $316 $5 million of dividends paid during the year during.
During the quarter, we repurchased three 6 million shares of common stock for $251 7 million for a total of 14 million shares repurchased during the year for $1 1 billion.
As a result, our outstanding share count is down 3% from a year ago.
Based on our strong financial position, our board of directors increased our quarterly cash dividend by 11% to <unk> 25 per share Jessica.
We look forward to the first quarter of fiscal 2023, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rate the capital market and general economic conditions that may significantly impact our business as we've already mentioned, we are utilizing more incentives in today's market and a rig.
<unk> home sales prices, where necessary, which will impact our average sales prices and gross margins more in the first quarter and the quarter. We just completed.
We are providing detailed guidance for the first quarter as is our standard practice, but due to the current uncertainty in the market our ranges for expectations are wider than normal.
We currently expect to generate consolidated revenues in our December quarter of six to $6 8 billion and our homes closed by our homebuilding operations to be in the range of 15000 to 16500 homes.
We expect our home sales gross margin in the first quarter to be approximately 23% to 24% and homebuilding SG&A as a percentage of revenues in the first quarter to be approximately eight to eight 4%.
We anticipate our financial services pre tax profit margin of around 20% and we expect our income tax rate to be approximately 23% in the first quarter.
Looking further out into fiscal 2023, we have less visibility due to the macro level uncertainties. We have mentioned it is too early to know what housing market conditions will be three to six months from now during the spring selling season. So we are not providing specific guidance for the full year yet.
We will reassess each quarter and give more color on our expectations as we can.
We are well positioned to aggregate market share in both our homebuilding and rental operations, our fiscal 2023 home closings volume pricing and margins will be determined by future market conditions and our efforts to meet the market and improve our inventory turns construction cycle times and costs.
Our goal is to generate consolidated revenues in fiscal 2023, they are slightly higher than fiscal 2022. However, the low end of our current range of expectations includes consolidated revenues potentially down from fiscal 2022.
Mid teens percentage.
We forecast an income tax rate for fiscal 2023 of approximately 23%.
We expect to generate increased cash flow from our homebuilding operations in fiscal 2023 compared to fiscal 2022, and we plan to consistently repurchase shares to reduce our share count during the year with the amount of our repurchases depending on cash flow liquidity market conditions and our investment opportunities.
We plan to continue to balance our cash flow utilization priorities, among our core homebuilding operation our rental operations, maintaining conservative homebuilding leverage and strong liquidity payment increased dividend and consistently repurchasing shares David.
Housing Ah results and position reflect our experienced teams industry, leading market share broad geographic footprint and diverse product offerings are.
Our strong balance sheet liquidity and low leverage provide us with significant financial flexibility to operate effectively in changing economic conditions and continuing to aggregate market share.
Plan to maintain our disciplined approach to investing capital to enhance the long term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis.
Thank you to the entire D. R. Horton team for your focus and hard work.
Our efforts.
2022 were remarkable.
This was a year in which we face construction and operational challenges, we have never faced before with periods of unsustainably high demand followed by historic rise in mortgage rates. Despite these challenges and market volatility we closed the most homes in a year in our company's history.
Our 21 year.
As the largest homebuilder largest builder in the United States.
A record profit and returns and we are well positioned to continue improving our operations and providing homeownership opportunities to more of American families in 2023.
This concludes our prepared remarks, we will now host questions.
Thank you ladies and gentlemen, the floor is now open for questions. We do ask that while asking your question you limit yourself to one question and one follow up if you'd like to enter the queue. At this time you May press star one on your telephone keypad to enter the queue should you wish to remove yourself from.
Queue, you May press star two once again as a reminder, ladies and gentlemen to please limit yourself to one question and one follow up please hold a moment, while we poll for questions.
And the first question today is coming from Stephen Kim from Evercore ISI. Stephen Your line is live. Please go ahead.
Thanks, very much guys and thanks for all the information, obviously pretty solid performance in a tough environment I wanted to ask you specifically about your starts outlook.
Could you give us a sense for how much of an increase in starts we might expect in.
In the December quarter, maybe year over year or quarter over quarter.
And maybe alternatively, how many finished specs or a total specs per community.
Are you expecting to have as you enter the new calendar year.
Steven looking into into the first quarter.
We are.
Finishing the year with 46000 homes in inventory.
And positioned for our goals as we look forward to the year and looking to maintain a similar balance as we work through the first quarter. So expect that our starts will keep pace with our closings through the first quarter.
Gotcha, and then Paul Hamm.
Yes in terms of Covid completed specs, Steve we're in a more normal position now with having some completed specs across more of our communities that puts us in a good position to sell in the current environment. Given that buyers are are concerned about what their interest rates are going to be so if we have homes that are ready to move into quickly.
They can lock the rates of with confidence and close on a on a known schedule.
So the level of completed specs you have now as youre comfortable with sort of maintaining that level right, that's what you're saying.
Yes.
Okay and then the second question relates to your comments about navigating a difficult environment or the uncertain environment by managing your product offerings and negotiating lower costs.
Certainly the negotiation of lower costs I understand that's going to be ongoing but the managing of your product offerings can you give us a sense for how quickly youre able to swap out.
Models or at least floor plans that you're offering in your communities is that something that we could expect you to do in communities that are currently open or are we really looking at communities that are going to be new communities opening up maybe give us a sense for like what share of.
The of the communities you will have open let's say for the spring selling season, we will have a revamped product line.
And most of our communities across the country, Steve we will be able to start back smaller homes, primarily and change specification levels in those in those homes that we start had been starting in the most recent quarter and we will be starting in the first quarter. There are some communities that are a little more locked in on product and plan.
Neighborhood phases that it may take three to six months to work through some changes in the product offerings, but by and large most of our communities. Those changes are starting today and we will continue to see that roll out through the next six months six to nine months.
Stephen even with them or product lines that we've been offering.
There is a spec builder, we released certain houses.
And so when the market is running red Hot like it was.
First half plus over the last year.
You have a tendency to release the bigger houses because your net dollars of profit per house is higher.
Yes.
When the price of oil it becomes much.
Much more important to the buyers.
The release they go from.
23.
Two story down to the six to 800 square foot ranch, which drops the overall ASP that community without really changing the product or impacting valuations within the community.
Yeah.
Great. That's really helpful. Thanks, so much guys.
We control that by which houses we release into production.
Yes.
Yeah, great. Thanks, very much guys.
Thank you. The next question is coming from John Lovallo from UBS.
John Your line is live please go ahead.
Good morning, guys. Thank you for taking my questions first one is the first quarter order guide implies quarter over quarter improvement, which would sort of Buck normal seasonality can you just help us with some of the puts and takes there.
Well it really we're just looking at.
Our plans and what we're seeing right now week to week, we're already five weeks into our quarter. So we've got one month in the books and as we just look at our pace that we're seeing right now in that.
We believe that that's where we're going to wind up.
Obviously seasonality if you look at history has been a little bit unusual in the last couple of years.
And I think we're still in a little bit of an unusual time with with what has happened with rates, but with our positioning across the board with our community count.
Increasing we feel like our order position in Q1 is in line with what we guided.
And as our productions that further along as well we felt more comfortable loosening up a lot of the sales restrictions you've heard us talk about and even though we're continuing to sell later in the process with them.
Negligible improvement our cycle times that getting further along in the construction cycles, we have more homes available for sale going into Q1 than we've had.
Makes sense, Okay, great and then the ASP in the fourth quarter down about 4% sequentially, how much of that was like for like pricing versus mix.
Okay.
Okay.
Yes at this point, it's like for like I mean, we're as we said were increasing incentives.
Then where necessary community by community, we're adjusting prices and so I don't believe theres necessarily been a big change in mix yet.
And so it's more likely.
From like for like.
Got it thank you guys.
Thank you.
The next question today is coming from Carl Reichardt from <unk>.
<unk>. Your line is live please go ahead.
Good morning, everybody.
You talked about cutting based prices where necessary can you give me a sense of how.
Often it's been necessary, then maybe percentage of communities or percentage of orders. This quarter were based prices were cut in and what level of cuts are creating some elasticity in unit demand.
Carl I don't know that we can get specific on terms of communities or by area. We are we are finding the market community by community and market by market.
Those cuts on base have not been significant to this point.
Of that.
That focused on financial incentives and interest rate.
And where needed to we've been able to adjust price and find the market to drive additional traffic and sales.
A lot of our guided coming from what we know we're going to put into the market in terms of when we open a.
New communities or new phases, we can reset our base pricing that way and then so we do expect our AFP to shift down throughout the year, but as Paul mentioned to date has been more heavily incentivize than it has been based price cuts.
Okay. Thank you guys. Thanks, Paul and then.
On cycle times.
I'm, starting to see a little bit of easing and working with the trades and suppliers would your guess be that your cycle times could get to sort of normal pre pandemic levels in fiscal 'twenty, three or is that too much to hope for at this point.
Anecdotally I was talking to a builder last week. He said he started a house in late August and he is going to close it in December . So he was pretty excited about that so that's one story one house out of a lot of houses.
And builder equals construction superintendent.
And he was he was really excited about that so I think we're making the right progress we're starting to see a little bit of progress pick up in the numbers of October completions, we got a little bit of time back they're getting all the way back to where we want to be pre pandemic levels. It might be by the end of the year for the starts that we have later in the year that we're pushing it through but we're going to make that.
<unk> this year.
Colorado.
We've talked about it I think for a while.
Just the discipline in the industry today.
As it.
It has translated into.
Across the board slowdown in starts.
I think it will allow.
Great base material suppliers to kind of get their feet under them.
And.
Industry space discipline.
We will get back into a situation, where we can sell a house.
It's going to cost and what are you going to be able to deliver.
And that will be a good thing.
Well it starts with one house so I appreciate the color guys. Thanks, so much.
Thanks Scott.
Thank you.
Your next question is coming from Mike Rehaut from Jpmorgan, Mike. Your line is live. Please go ahead.
Great.
Thanks very much.
I appreciate you taking my questions.
First off just wanted to get a sense of.
The cadence.
Progression.
<unk> works through your <unk>.
Fiscal fourth quarter and into October and perhaps even into November .
Obviously.
A lot of that I would presume as were being reflected in the.
In the first quarter gross margin guidance.
But what I'm trying to get a sense as just.
The degree of magnitude of the change in trend.
And how we should be thinking about.
Perhaps where incentives are today versus where they were three or four months ago.
I'll start with just looking taking a step back and looking at where interest rates were at.
The end of the last quarter mortgage rates were still in the low to mid fives and by the end of the quarter. There were in the high sixes and subsequent to the end of the quarter Theres now stepped into the sevens and so we have been adjusting to reflect that.
A lot of our incentives have been on the financing side with interest rate locks in and buy downs to try to address the payment shock there from the interest rates and that has increased sequentially through the quarter and has continued into October . So the levels have continued to increase we were focused on ensuring that we can close our backlog.
Because we did have a lot of homes scheduled to close in September and so I believe we did hold off on some price adjustments to ensure that we could close that backlog and so price adjustments have started to fold in a little more commonly as we've stepped into Q1. So it's been a sequential increase along the way.
And then what it will be going forward will depend largely on what happens with rates in the market and then our efforts to meet the market. We are looking at community by community to make adjustments in order to hit our sales space and turn our inventory and maximize our returns and so we're looking to find the market and find that pace community by community.
<unk>.
So.
Yes.
I appreciate that answer I know, obviously projecting gross margins beyond the first quarter is somewhat difficult, but it would seem like given the trends that we're not yet at a point of stabilization.
I guess my second question.
You have any thoughts on that that'd be great.
Yes.
Second question on the SG&A guide for the first quarter.
With.
Consolidated revenue being.
A little bit below obviously, it's not a surprise to see.
The SG&A come up I'm also wondering if there is anything in that number around increased.
Broker commissions to the market as part of <unk>.
No.
In closing the broker community in a software environment and how we should be thinking about that line item within SG&A over the next year.
Sure Mike.
We are important those things separately or differently I should say brokerage mentioned threats are actually in gross margin. So that is contemplated is one of the increased incentives in our gross margin guide and not an impact for us and particularly on SG&A and in terms of SG&A overall.
With our Asps.
<unk> to come down with revenues down a bit.
That's driving an expected increase in our in our SG&A as a percentage of revenues were coming off of all time lows, there and and are still positioning ourselves to continue to.
Gain market share and so with essentially SG&A spend staying relatively stable with the exception of <unk>.
Variable SG&A, then moves with revenues are with profitability.
That's resulting in the expected increase from from all time lows too a little bit higher level as a percentage of revenues in Q1.
Great. Thanks, so much.
Thank you.
And the next question today is coming from Matthew Bouley from Barclays. Matthew Your line is live. Please go ahead.
Good morning, everyone. Thank you for taking the questions and for all the detail.
Just a follow up on the incentive side I think I heard you say at the top that.
That within financial services, you were including.
Some I think you said rate buy downs and things like that so in the incentive comments you just made around reaching six or seven I think I heard you say is that all in the gross margin and is there additional incentives on the financial services side that we should look out for or is that kind of all in thank you.
Theres always some of those costs on both sides Matt.
And that can vary a bit.
Depending on the nature of the incentives.
Yes, both of our guidance the guidance for financial services margins going into Q1 as well as the guide for for our gross margin on the homebuilding side reflect our anticipation for our level of incentives related to financing.
Understood. Okay. Thanks for that clarification and then.
Just secondly.
You mentioned that you would I think I heard you say you would expect.
The option.
Abandonments that occurred this quarter to kind of continue to occur I mean should we expect the magnitude of that increase and then just kind of any update on actual impairment thoughts around your own land portfolio.
With the option write off cost as we evaluate projects at various decision points will be working with various land sellers and developers and where we can't reach an agreement on the accommodation, we're not going to move forward with a bad deal. So if it doesn't make sense and what we expect the market conditions are or will be over.
The life of the project. That's the reason we have the option arrangement. So we may have an increase in those costs, but we do take a pretty.
Accurate look at those things very realistic expectation and we'll be very quick to move on those.
You said, both when the market was accelerating annelida sent a pause.
We are very disciplined in how we approach.
Every economic decision on the land side.
It's all about.
Creating optionality inefficiency of capital.
And that's been our our program is going to continue to be our program.
In terms of your impairment question and even with our guide for gross margins today, we're still projecting gross margins to remain at very healthy levels and that would signify that we're a long way off from any sort of broad based impairments were also in a completely different financial position this cycle to prior cycles, which allows us some flexibility.
In terms of how we look at the land and that we have on our balance sheet and what we plan to do with it going forward and that being said, we do expect there to be some impairments along the way and weaker submarkets.
Now don't expect anything broadly based in the near term.
Makes sense, thanks, Jessica thanks, everyone.
Thank you.
Next question is coming from Eric Boston from the Cleveland Research Company. Eric Your line is live. Please go ahead.
Thanks <unk>.
Text, if you could around two things first of all that the.
<unk>, 23% to 24% gross margin and <unk>.
Obviously, a component of that is what's going on with incentives and pricing you talked today about.
Savings on the cost side or changing the product mix and so what I'm trying to understand is is is is that a baseline.
The changes that youre, making to support gross margin or change mix.
Can that number improve can you just give us a little bit of sense of whats.
What's contributing to that and in terms of the things youre doing to some <unk>.
Protect gross margin.
The path forward might look like.
Yes, Eric I think as we are out in the market with our trade partners and suppliers.
Working to reduce cost to provide the best value, we can to our homebuyers and we provided visibility into the first quarter with those gross margins what we're seeing.
Which is encouraging early on and that isn't going to come through in homes that close for the next six to nine months towards the end of the year. So we've still got the homes that we have in the ground with that cost structure, but as we continue to define the market.
We expect to see see gross margins like we have.
We have guided to in the first quarter.
And we did so.
Further extended bill cycle times.
Houses will be closing.
In Q1, our houses that were started.
And bear the cost of.
Hi lumber cost.
Really.
Cried shortages.
You've got you've got the double whammy of.
High cost then.
A more normalized.
Great.
And just and just within that.
I think today can you comment is that is that the floor or is there both upside and downside through the rest of the year relative to the <unk> gross margin.
It depends on what the capital markets and interest rates I mean, it if we see stabilization in interest rates.
I feel very optimistic about what we can do this year.
If we continue to see 100 basis point increased quarter to quarter to quarter.
Thank you.
It's going to be a very challenging year.
Okay, and then secondly, you've mentioned single family for rent.
Both of what Youre doing and buyers of home of your homes.
From others, just curious if you can give us a sense of.
How much of the business.
<unk> family for rent and what the expectation is and in 'twenty three.
There is any risk or volatility around around that buyer group.
So our approach to the single family rental tool business is to build communities of traditional single family homes.
Rent those up and stabilization and then sell them to typically institutional owners of that sort of a residential asset class.
It's about $1 billion seven I think is our current investment in the single family rental platform.
We expect that's going to grow during 'twenty three depends.
Depending upon market conditions, probably not more growth than we had from from the end of 'twenty one to the end of 'twenty two but we do expect growth in 'twenty, three and we still see that when we complete the homes and they go to market to lease there is still good demand and people are needing a place to live and they are choosing to live in these communities.
Okay. Thank you.
Thank you.
The next question is coming from Alan Ratner from Zelman and Associates. Alan Your line is live. Please go ahead.
Hey, guys. Good morning, Thanks for all the great detail.
Difficult market to forecast out here. So we appreciate it.
I guess first question just trying to triangulate all the comments you made about the margin outlook the goals as far as revenue are concerned in 'twenty three so if I look at your <unk> margin guide, it's down about 6% to 700 basis points from the peak a couple of quarters ago, and I think that's largely consistent with kind of the net price.
Since we've seen across the industry.
Do you think about that versus your goal to grow revenues for the year or even maybe the low end of that range.
What's the price sensitivity to achieving that goal how low are you willing to take that margin in the near term recognizing that maybe longer term you have some potential cost relief coming or other things that could be offsets, but in order to hit your 23 target there.
How low could that margin go before you kind of hold back and say you know what we're just going to slow the start pace, we're not going to chase that that revenue growth because of the price environment is too difficult.
Yes, there's always a balance we're always balancing what we're doing on pricing and incentives and what that results in margin versus pace and turning inventory to generate the best return and so we will be trying to strike that balance across all of our communities throughout the year.
It's too early and too uncertain to know what the year may bring in terms of the macro environment in terms of rates in terms of the general economy.
No exactly what those decisions may need to be and so that's why we're we're trying to provide as much color as we can around how we're looking at things, but in reality, we don't have really any specificity or visibility to what those conditions may be into the spring and into 'twenty. Three so in terms of where the line is on where margin or pricing might need to go.
Or what were willing to do to push push pace I think we're basically saying, we're going to be making those decisions day to day week to week as we as we March forward here and as you know.
No we don't push a dictate that from a high level. It really is managed community by community market by market. So we can make sure we're maximizing our returns at the local level and then blended overall.
Okay I appreciate the thoughts there.
I guess on the rental segment so.
I hear the delays in Florida, but I thought I also heard maybe a couple of projects that you thought would close this quarter that got pushed out because of presumably the higher borrowing costs that that your counterparties are experiencing and how that impacts the underwriting. So I guess I'm just thinking out loud here.
You do expect growth in that segment and certainly the inventory that's been building, but how.
How concerned are not concerned are you about what's going on with.
Borrowing costs for those investors I mean, we're hearing that there's a bit of a.
Stalemate, if you will or at least a widening bid ask spread on the rental side as well given the difficulty underwriting to the new the new borrowing cost. So what's the sensitivity for you to achieve that growth is there any risk to that if if borrowing costs remain elevated.
Alan we have certainly seen from that buyer base.
The credit markets and their ability to borrow soften, but theres still plenty of buyers out there.
Like our buyers on the homebuyer side, they are taken a bit of a pause in some cases just to evaluate the market, but we've got about 7400 homes in production on the single family for rent side and Thats from beginning to those that are complete.
We still expect to see people in that market.
Everyone needs to needs to be in the credit markets are borrowings to purchase.
In our single family rental communities tend to be on the lower end side relative to apartment sizes and so we still feel good about that business, but.
We certainly did see.
Communities that we expect it to be sold and closed in the fourth quarter pushed into the second quarter. So.
And when you look at your deals that are under construction or completed or close to complete and if you underwrite those deals as if youre a buyer today youre still seeing those penciling in other words, you can make the math work.
Assume that a buyer theoretically can as well.
Yes, and we have been concerned very conservative on our underwriting we are really looking at each of those communities as we would on the for sale side and so the performance we saw on the ones that we sold in the market.
A year ago and through last year.
Far outperformed our underwriting and so we still feel good about the position and the active communities that we have.
We will adjust as the market adjusts in terms of that business on a go forward and more of the issue I think Alan related to a change in that buyer.
They were.
Just to say they were very excited what would be an understatement to get their hands on the communities early in fiscal 'twenty two.
We experienced some of the same construction delays and those products that we did in our single family for sale business, and we had expectations and buyer indications of interest willing to close on the projects prior to completion and prior to full stabilization.
The markets come back to a more normalized now and they expect the expectation is is that we get to a stabilized point before there.
We're going to get a good valuation.
If I could just sneak in one last one and I apologize, but it's relevant to this topic here.
In the environment, where the capital markets remain tough and the borrowing costs continue to rise here, but youre still seeing good fundamentals at the community level. Good occupancy. Good rents are you willing to kind of shift the strategy in the near term and kind of hold on to more of these assets on your balance sheet and wait for the transact.
The environment to improve or is the goal here really to turn to capital and youre not looking to necessarily grow.
Our portfolio of stabilized assets.
Our base business model is to sell the assets. That's still generally we will generate the best return, but we're going to make sure that we stay in a position from a capital perspective to be able to manage timing to manage a bit of a slower process if necessary due to some disruptions in the capital markets, which typically don't last that long.
But we do want to make sure we stay in a flexible position to be able to manage timing when necessary.
Okay perfect. Thanks for thanks for all the time guys I appreciate it.
Thank you. Your next question is coming from Buck Horne from Raymond James Your.
Your line is live please go ahead.
Thank you appreciate that I was wondering if you could add anything you mentioned the cancellation rate in October remained elevated I'm. Just wondering if directionally you could indicate whether that was the cancellation rate was higher or lower than than what happened in the fourth quarter.
In October .
Yes, we typically add volatility month to month and our can rate throughout the quarter. So we don't give it specifically for the month.
Anything for us above that call it low twenties high teens to low twenties is elevated and we certainly did not see any market improvement in October as compared to Q4.
Okay I appreciate that.
And can we talk about any regional differences in terms of how buyer traffic and interest levels have behaved.
The progression of interest rates kind of marched higher during the quarter through October just kind of just kind of walk us through the map and just kind of where things are.
How buyers are behaving in different geographies.
We've seen.
Still see a lot of traffic in our models, we still see people coming in looking to get into a home.
More challenging with the affordability, sometimes to get them qualified.
But.
As we see stabilization in rates and when we see periods when rates have stabilized and that demand is there.
We're able to meet it we do see in our sales process is that we're selling.
The large majority of our homes passed a certain stage of construction not just from our restriction of that sale, but from the buyer wanting certainty of what that interest rate payments can be within the lock window that can be afforded to them and so that's that's been important for us to accelerate the cycle times have more inventory later.
And the production process that we can deliver within the interest rate lock window.
Alright, I'm just curious.
Pockets of strength geographically.
Just just from geographically.
It's the same markets that are that are experienced inflow.
Inflow of buyers I think are.
Relocate percentage of relocation Myers picked up picked up again last quarter again.
There is.
Yes.
The market.
As.
I think evolving maybe is the best word.
There is there are steel and migration.
Urban or out of.
Urban into the suburbs.
And there are still housing formation taken place.
<unk>.
The supply.
Yes.
It's easy.
If you get caught up in the short term goal here is to stay focused on the long term.
And I can tell you our efforts are in positioning.
For now.
Now Q2 Q3 Q4.
'twenty four and 'twenty five.
We're trying to stay out of the.
Short term reaction.
Or do we want to be.
As this platform continues to develop.
Improve and get built out.
Alright, thank you.
Thank you.
And the next question is coming from Susan Mcclary from Goldman Sachs. Susan Your line is live. Please go ahead.
Thank you good morning, everyone.
My first question is going back to the land market a bit can you talk about what youre hearing from the sellers and how are the renegotiations of some of those option contracts coming together what is the pushback that you're getting if there is any and how is that progressing and changing as the market is changing.
Yes, Susan we have.
Been very proactive with our land sellers and development partners.
And realistic in terms of expectations with the market as it moves so largely they have been understanding and working with us to keep those deals alive, where we can to the extent that it just the underwriting doesn't make sense then we're having to make the decisions that we are and we will.
<unk> have to walk away from.
Some of those options, but thats why we have the option contracts in place and have made that shift with our land strategy, but by and large.
Reading the headlines like everyone else and understanding of where the market is they ultimately want to be in a position to move through those lots and.
So.
Relatively well received and receptive to come to the table top.
We create our attempt to train our development partners.
Like they're a part of the family I mean, we're very transparently.
They understand where we're headed.
And what our start basis.
And what are expectations for that community.
Coming out of the last downturn.
We bill.
Relationships.
That are still existing today in.
Our goal in every community every division yes.
He used to be kind of the favored nation builder.
And we are going to treat them better so.
We really do believe.
The transparency and governance.
<unk> and <unk>.
Honest and direct communication and Thats.
How do you build relationships.
Yes, Okay, and then can you talk a bit about capital allocation as the market is changing how you're thinking about the different uses of cash and especially maybe any thoughts on buybacks as we think about 2023.
Yes.
We will continue to take a balanced approach.
Two at all we're in a good flexible position to be able to continue to provide returns to our shareholders. Both in terms of increased dividends and share repurchases.
Obviously, we will be adjusting in our business and how much we invest into the land and to help home starts and into our rental business based on market conditions and but.
At a base level, we do expect to generate an increase in our.
Homebuilding cash from operations in fiscal 2023.
And with that that gives us even more flexibility.
To make those relative decisions, but continue with more of the same in terms of the balance and the consistency in the approach.
Okay. Thank you good luck.
Thank you Sir.
Thank you and that is all the time, we have for questions. This morning at this time I would like to turn the floor back to David Auld for closing remarks.
Thank you Tom.
We appreciate everybody's time on the call today and look forward to speaking with you again to share our first quarter results in January .
And finally, congratulations to the entire D. R Horton family.
Another remarkable year.
Stay humble.
We stay focused.
Compete and win every day. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day.
You for your participation.