Q1 2023 D R Horton Inc Earnings Call
Good morning, and welcome to the first quarter 2023 earnings conference call for D. R. Horton America's builder, the largest builder in the United States.
There will be an opportunity to ask questions on todays call.
Please press star one on your phone at any time to enter the Q&A queue.
During today's Q&A, we ask that participants limit themselves to one question and one follow up.
I will 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 first quarter of fiscal 2023 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 in our report on Form 10-K, which is 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 you Jessica and good morning.
I am pleased to also be joined on this call by Mike Murray and Paul wasn't asking our executive Vice Presidents and co chief operating officers.
And Bill wheat, our executive Vice President and Chief Financial Officer.
But Dr. Horton team delivered a solid first quarter highlighted by earnings of $2, 76%.
Diluted share.
Our consolidated pre tax income was $1 3 billion.
3% increase in revenue with a pre tax profit margin of 17, 5%.
Our homebuilding return on inventory for the trailing 12 months ended December 31.
39, 5%.
And our consolidated return on equity for the same period was 31, 5%.
Beginning in June 2022, and continuing through today.
<unk> seen a moderation in housing demand due to affordability challenges challenges caused by the significant rise in mortgage rates, coupled with high inflation and general economic uncertainty.
Despite these pressures we still closed over 17000 homes.
So more than 13000 homes in what is typically.
Seasonally smallest quarter of the year.
We have seen increased sales activity in the first few weeks of January .
While higher mortgage rates and economic uncertainty may persist for some time.
The supply of both new and resale homes at affordable price points remains limited.
And the demographic supporting housing demand remain favorable.
We are well positioned to navigate the cow.
Current challenging market conditions with our experienced operators affordable product offerings flexible lot supply and great trade of supplier relationships.
Our strong balance sheet liquidity and low leverage provide us with significant financial flexibility. We will continue to focus on turning our inventory and managing our product offerings incentives home pricing sales pace and inventory levels to meet market optimize returns consolidate marketshare in general.
Increased cash flow from our homebuilding operations, Mike <unk>.
Earnings for the first quarter of fiscal 2023 decreased 13% to $2 76 per diluted share compared to $3 17 per share in the prior year quarter net income for the quarter decreased 16% to $958 $7 million on a 3% increase in consolidated revenues to <unk>.
Seven $3 billion.
Our first quarter home sales revenues were $6 7 billion.
17340 homes closed compared to $6 7 billion an.
18396 homes closed in the prior year, our average closing price for the quarter was $386900 up 7% from the prior year quarter and down 4% sequentially. Paul during the quarter. We continued to sell homes later in the construction cycle to better ensure uncertain.
Of the hang close date.
Mortgage rate for our homebuyers with almost no sales occurring prior to start of home construction.
Cancellation rate for the first quarter was 27% down from 32% sequentially, but still elevated from our typical levels. Our net sales orders in the first quarter decreased 38% to 13382 homes and our order value decreased 40% from the prior year to $4 9 million.
Our average number of active selling communities increased 4% from the prior year quarter and was down 1% sequentially. The average sales price of net sales orders in the first quarter was $367900 down 4% from the prior year quarter, we are continuing to offer mortgage insurer.
Rate locks and buy downs and other incentives to drive traffic to our communities and we are reducing home prices where necessary to optimize the returns on our inventory investments our second quarter sales volume will depend on the strength of the spring selling season, and we currently expect significantly higher levels of net sales orders in.
In the second quarter as compared to the first quarter based on historical seasonal trends current market conditions, and our inventory of completed homes available for sale Bill.
Our gross profit margin on home sales revenues in the first quarter was 23, 9%.
Down 440 basis points sequentially from the September quarter on a per square foot basis home sales revenues were down 4% sequentially stick and brick cost per square foot increased 2% and locked costs were flat.
The decrease in our gross margin from September to December was in line with our expectations and reflects the increased construction costs, we incurred during 2022, along with higher sales incentives and home price reductions.
We expect both our average sales price and home sales gross margin to decrease further in our second quarter fiscal 2023.
We are continuing to work with our trade partners and suppliers to reduce our construction costs on new home starts we are making progress in these efforts that we do not expect to see much benefit from lower costs on homes closed in fiscal 2023, Jessica in the first quarter, our homebuilding SG&A expenses increased by 6% from last year.
And homebuilding SG&A expense as a percentage of revenues was seven 8% up 30 basis points from the same quarter in the prior year, we are controlling our SG&A during this market transition, while ensuring our platform adequately supports our business Paul.
We slightly increased our home starts from the last quarter to 13900 homes and ended the quarter with 43200 homes in inventory down 21% from a year ago and down 7% sequentially 27800 of our homes at December 31 were unsold of which seven.
100 were completed we are focused on improving our housing inventory turnover with more completed homes now available for sale, we expect our mix of homes sold and closed in the same quarter to increase back toward our normal historical levels for homes. We closed this quarter, our construction cycle time only.
Increased by a few days compared to fourth quarter, which reflects lingering supply chain issues. However, we are seeing some stabilization in cycle times on homes. We have recently started and we expect our cycle times to improve during fiscal 2023.
We will continue to evaluate demand and adjust our homes and inventory and starts pace based on current market conditions. Our homebuilding lot position at December 31 consisted of approximately 551000 lots of which 25% were owned and 75% were controlled through purchase contracts.
Our total homebuilding lot position decreased by 22000 lots from September to December 32% of our total owned lots are finished and 53% of our controlled lots are or will be finished when we purchase them.
Our 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 future expected home prices and cost we are actively managing our investments in lots land and development based on current market conditions during the quarter, our homebuilding segment incurred $4 8 billion of <unk>.
Inventory impairments and wrote off $19 $4 million of option deposits and due diligence costs related to land and lot purchase contracts, we expect our level of option cost write offs remained elevated in fiscal 2023, as we manage our lot portfolio.
Our first quarter homebuilding investments in lots land and development totaled $1 7 billion.
Down 21% from the prior year quarter and up 16% sequentially. Our current quarter investments consisted of $900 million for finished lots.
$690 million for land development and $130 million to acquire land Bill.
Financial services pre tax income in the first quarter was $18 2 million on $137 million of revenues with a pre tax profit margin of 13, 3%.
The lower profitability of our financial services business. This quarter was primarily due to lower gains on sales of mortgages increased competitive conditions and the lower volume of interest rate locks by homebuyers during the December quarter.
We expect our financial services pre tax profit margin for fiscal 2023 to be higher than the first quarter, but lower than the full year of fiscal 2022.
During the first quarter, 99% of our mortgage company's loan origination related to homes closed by our homebuilding operations and our mortgage company handled the financing for 77% of our homebuyers.
Jay and VA loans accounted for 45% of the mortgage company's volume.
Borrowers originating loans with DHL mortgage this quarter had an average FICO score of 722.
And average loan to value ratio of 88%.
First time homebuyers represented 55% of the closings handled by our mortgage company this quarter.
Mike.
Our rental operations generated $328 million of revenues during the first quarter from the sale of 694 single family rental homes, and 300 multifamily rental units, earning pretax income of $110 million.
Our rental property inventory at December 31 was $2 9 billion.
Which included approximately $1 $9 billion of single family rental properties and $1 billion of multifamily rental properties.
We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023, as our platform matures and expands across more markets for the second quarter. We currently expect no multifamily rental sales and to close fewer single family rental homes than in the first quarter Paul.
<unk> our majority owned residential lot development company reported total revenues of $216 $7 million.
<unk> 2263 lots sold and pre tax income of $27 9 million for the first quarter.
<unk> owned and controlled lot position at December 31 was 82300 lives.
57% or four stars on lots are under contract with four subject to a right of first offer to D. R. Horton.
Hundred $90 million of our finished lots purchased in the first quarter were from four star <unk> is separately capitalized from D. R. Horton and had more than $580 million of liquidity at quarter end with a net debt to capital ratio of 28, 7% four star is well positioned to meet the current <unk>.
<unk> market conditions with its strong capitalization lots supply relationship with D. R Horton Phil.
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 the first three months of the year, our cash provided by homebuilding operations was $313 9 million.
And our consolidated cash provided by operations was $829 1 million.
At December 31, we had $4 billion of homebuilding liquidity.
Listing 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 12, 8% at the end of December and homebuilding leverage net of cash was four 4%.
Our consolidated leverage at December 31 was 22% and consolidated leverage net of cash was 13, 3%.
At December 31, our stockholders' equity was $22 billion.
And book value per share was $58 71 up 33% from a year ago.
For the trailing 12 months ended December a return on equity was 31, 5%.
During the quarter, we paid cash dividends of $86 1 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in February .
During the quarter, we repurchased one 4 million shares of common stock for $118 1 billion.
Jessica.
As we look forward, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates the capital markets and general economic conditions that may significantly impact our business we.
We are providing detailed guidance for the second quarter as is our standard practice, but it is still too early to know what housing market conditions will be during the height of the spring selling season. So we are not providing specific guidance for the full year yet.
We currently expect to generate consolidated revenues in our March quarter of $6 three to $6 7 billion and homes closed by our homebuilding operations to be in the range of 16000 to 17000 homes.
We expect our home sales gross margin in the second quarter to be approximately 20% to 21% and homebuilding SG&A as a percentage of revenues in the second quarter to be approximately eight to eight 3%.
We anticipate our financial services pre tax profit margin of around 20% and we expect our income tax rate to be approximately 23.5% to 24% in the second quarter.
We are well positioned to aggregate market share in both our homebuilding and rental operations. Our goal remains to generate consolidated revenues in fiscal 2023, it was slightly higher than fiscal 2022.
However, it is realistic to expect that our full year revenues will decline year over year, given the environment and pricing actions we are taking.
The low end of our current range of expectations includes consolidated revenues down from fiscal 2022 by mid teens percentage, which is unchanged from last quarter.
We forecast an income tax rate for the year of approximately $23, 5% to 24%, we expect to generate increased cash flow from our homebuilding operations and on a consolidated basis in fiscal 2023 compared to fiscal 2022.
We also plan to repurchase shares at a similar dollar amount as last year to reduce our share count during this year with the volume of our repurchases dependent on cash flow liquidity market conditions and our investment opportunities.
We have $700 million of senior notes that mature during the remainder of fiscal 2023, which we are currently preparing to repay from cash.
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 paying an increased dividend and consistently repurchasing shares David.
Closing our results and position this electronics business teams industry, leading market share Rodrigo ethic footprint and diverse product offerings.
Our strong balance sheet liquidity and low leverage.
US with significant financial flexibility to effectively operate in changing economic conditions and continued aggregating marketshare.
We 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.
We're incredibly well positioned to continue improving our operations.
Abiding homeownership opportunities to North American fans.
This concludes our prepared remarks, we will now host questions.
Thank you.
Floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pickup your handset is listening on speaker phone to provide optimum sound quality.
We also ask you today that participants limit themselves to one question and one follow up please.
Please hold while we poll for questions.
On the first question is coming from Carl Reichardt from BTG.
Karl Your line is life you May go ahead.
Thanks, Good morning, everybody.
I just wanted to ask about inventory unsold inventory. So about two thirds of the inventory that you've got now is unsold I think normally it's about half when I went back and look so I just want to make sure we or should we be optimistic because you've got product ready to go for the spring.
And then the supply chain, perhaps is normalizing a little which is allowing you to get that ready or should we be more pessimistic because you haven't necessarily price that inventory to move yet.
First question.
Carl as you know I'm always optimistic.
Yeah.
We feel very good about our inventory position.
Through the.
Through the last three four quarters, we limited sales.
To better align inventory cost demand and our ability to deliver.
We are now positioned more in what I would consider a normalized.
Inventory position.
Again feel very good about.
Well positioned and where we're heading into this call.
Normally coming into the spring selling season would be a little heavier than our normal 50%.
Yes spec ratio, but feel really good about what we have in front of US right now for for demand.
Okay.
And then.
I was looking at the market Count now were about 109 markets and say four years ago. I think you were about 80 or so that's a lot and obviously you all benefited.
Post COVID-19 by entering a lot of smaller markets that saw a fair amount of demand.
Post the pandemic now that that wave is potentially crested can you talk about how some of the new especially the smaller what I call. The tertiary city markets are performing over the course of the last six months or are they are they better.
And then then some of the major markets less competitors, whereas that growth beginning to wane now that we've seen a little more return return to office back to the large cities. Thanks guys.
Carl we've seen these these newer markets and secondary markets performing well for us due to limited competition in those markets. We certainly saw a strong push to all of the secondary markets with the pandemic.
Moving people and making them more mobile, but we've been happy with the progression in those secondary markets and glad that we undertook.
Yes.
One.
Even before the pandemic.
We did very well in the smaller markets.
And ultimately.
It comes back to SG&A in control and the ability to deliver houses.
Incrementally.
Our competitive advantage to what anybody else customers I'm going to do so.
That's been a part of our program and I think youre going to see it continue to be a part of our program.
Thanks, David.
Thank you and the next question is coming from Matthew Bouley from Barclays. Matthew Your line is nice.
Good morning, everyone. Thank you for taking the questions.
Wanted to ask about the construction cost environment I think I heard you say at the top that you were.
Making some progress but.
I'm paraphrasing, but perhaps not expecting to see as much benefit on the construction cost side on homes closed through fiscal 'twenty. Three obviously some of your peers have sort of quantified.
Some of the benefits they might already be seeing on the construction cost side. So just curious if you can.
Parse that out a little bit as you guys sort of aggregate market share how should we think about your ability to press on costs here. Thank you.
We've been really successful working with a lot of our trade partners and lowering our cost and we've gotten a little bit of a tailwind from certainly from a lumber price reductions that have occurred but it just takes a while for those cost changes on the front end to actually show up in our closing, especially with the more recently prolonged build times. So we just it's just the.
<unk> of the calendar working those new cost structures through the pipeline. So the deliveries we see in 'twenty three we're largely at all.
First half of the year, especially started in fiscal 'twenty, two and a different cost environment and typically lumber prices go up as we move throughout the spring. So all of that we're seeing the benefit from lumber today and its typical seasonality holds lundberg would actually be a headwind against the cost reductions that we are seeing him on his new home starts that Mike just alluded to.
Okay Gotcha. Thank you for that color and then.
Second one.
And just kind of following up around the pricing environment.
As you've seen sort of some of your peers have.
That I guess different strategies are.
Around pricing versus pace here, and perhaps as we get into the spring we might expect to see.
Some builders on the grounds react more aggressively on the pricing side versus I would I would argue you guys have been.
Leading that.
First I guess, so as we get into the spring sort of sort of what are your expectations or perhaps what are you seeing on the ground right now around.
Your competition and price reductions and it would you.
Back to see sort of another leg lower on the pricing and margin side through all of that thank you.
We have still still.
Addressed our incentives.
Balance of.
Rate buy downs.
<unk> incentives along with adjusting price community by community to drive the returns that we're looking for.
As we enter into the spring selling season.
We are seeing.
Some seasonality that we're happy with as the market.
Starts to lead.
And we will continue to adjust to drive the absorptions.
By community.
Alright, Thank you very much and good luck.
Thank you and the next question is coming from John Lovallo from UBS, John Your line is nice.
Good morning, guys and thanks for taking my questions. The first one is you mentioned the first few weeks of January saw increased activity can you, maybe just elaborate a little bit on that and maybe frame it sequentially or year over year and how were incentives.
In the first few weeks of January relative to December .
Yeah. So we talked about on the call that we do expect to see normal seasonality in terms of the move from Q1 to Q2 sales and so what we saw in terms of the increased sales activity in the first few weeks of January .
It was a positive early indicator it is still too early to ultimately say, what's going to happen. This spring, but it gave us the confidence to say that we could see normal seasonality, which typically would be about 50% up from Q1 to Q2 in terms of net sales orders. We also did see a slight improvement.
Few weeks, which doesn't make a quarter, but we've seen a slight improvement in our cancellation rate in January as well, which also helped to give us the confidence to say and an increased level of net sales orders in Q2 versus Q1.
Got it that's helpful. And then maybe can we talk just about cash flow expectations. It seems like it's going to be pretty robust here. When you are buying back stock paying.
Dividends paid out $700 million in debt.
So maybe just your expectations for cash flow and what the expectation for rental investment might be.
Yes, we still expect increased cash flow from our homebuilding operations in fiscal 'twenty three versus fiscal 'twenty two.
We saw our inventory step down slightly this quarter, we will be increasing our starts pace as we move into the spring and then adjusting that to what we see in market demand. So we may not continue to see the same pace of cash generation as we did in our first quarter, but we do still expect to see robust cash.
And then we're going to continue to take a balanced approach to deploying that first and foremost of the homebuilding business.
To the rental business that we will still see a substantial increase in our assets in the rental business. This year, we were not guiding to a specific growth number.
They are quite yet for fiscal 'twenty three because we are still evaluating the market and evaluating investments as we move through the year, but we do expect.
That level of inventory to increase while we see a significant increase in revenues in that business and then past that we will continue to.
Pay dividends and continue to repurchase shares we expect to repurchase shares at a similar dollar volume as last year.
Which would would indicate greater than $1 billion.
Share repurchases for fiscal 'twenty, three and then finally on the on the balance sheet front, while we're very pleased with our leverage level. We do have $700 million of senior notes that mature in fiscal 'twenty three $300 million in February $400 million in August .
Currently just given the overall environment and our cash flow expectations, we're preparing to pay those.
Debt maturities off with from cash, but obviously, we will evaluate the capital markets along the way to determine whether we want to refinance or not but right now preparing to pay those from cash.
Great very helpful. Thank you.
Thank you and the next question is coming from Stephen Kim from Evercore ISI Stephen Your line is live.
Great. Thanks, very much guys lots of good information I wanted to follow up on I think Matt's question regarding the cost negotiations though.
I think last quarter, you had suggested that you could see the benefit starting to certainly from repositioning your product at least to benefit you by your fiscal third quarter.
Wondering whether or not that processes, maybe taking a little longer or if that was sort of separate from your comments on.
The labor and product negotiations and then in your answer to him. I think you also sort of mentioned or volunteered that you were sort of assuming lumber costs, we're going to increase.
And I just wanted to get a sense.
How much of an assumption how much of an increase are you assuming you might see in lumber are you sort of just conservatively modeling it might go like halfway back to where it was last year.
Give us a sense for what you're incorporating in your outlook for lumber knowing that you don't know yet obviously.
Most importantly, we don't know and we're taking a probably a conservative stance and looking at the fact that seasonally.
Seasonal environment, we do see lumber cost increase through the spring and if we do are seeing some normalized demands coming back with spring selling season seasonality, we'd expect that to drive lumber prices higher which would offset some of the efforts. We've made on like for like cost reductions, we have been able to get.
New product starts out new home starts out that are more reflected to today's environment smaller homes.
More affordable homes that should help but in terms of a like for like cost benefit increase it's going to take a little walk for that product to move through the system in a material way.
I didn't hear a number there.
Getting ready to write a number down I didnt hear a number you're going to give us a sense for sort of like how much of the way back.
Just sort of thinking lumber might increase.
Yeah.
We don't have a sense for a number Steve I'm sorry, we're not that good at predicting we're just taking a conservative approach that seasonally lumber tends to go up in the spring and Thats, probably going to have an impact on our cost and our deliveries later in the year. It does even look it does feel Stephen like.
There's some normalcy returning to the market.
And so you go back pre pandemic.
When you look at what happened.
Just cost get inflated during the.
Last year 18 months, yes.
We are fighting to get that back yes.
Uh huh.
Commodity price like lumber May go up and they go down my stay the same.
What are we going to be conservative in our guidance.
Absolutely we are.
Yeah, no no complaints here and I will say that if lumber goes up because of normalization I think I will take it.
In regards to your lot count.
I noticed that your owned lot count in numbers are numbers of lots went up a little bit I think quarter on quarter. It.
It had declined I believe.
And in the last two quarters preceding that so I'm curious are you.
Or at least in the last one last sorry, the last two quarters preceding that are you do you feel like Youre your lot cost.
Sorry, your lots owned will increase from here or do you think we might actually see a further reduction in your actual number of owned lots just trying to give us or give us a sense for what that number might be not in your supply, but more like an absolute units.
Yes, Stephen we have worked hard for the lot position that we have and the relationships that we've built and with those developer relationships.
We're continuing to is still hard to get a lot on the ground and so our lot count as a percentage of bound and total numbers, we expect to continue to increase.
And some of that will depend on what we see with the spring selling season and through the rest of fiscal 2023, but.
We don't expect that to go down.
And we expect to see potentially our.
A lot of supply as a percent increase marginally through this market and as a reference again.
There's a lot finished percentages only 32%, which is roughly 43000 lots. So we're by no means oversupplied from a finished lot perspective, which is what we're trying to continue to position ourselves for a community by community.
Gotcha. Thanks, so much guys.
Yeah.
Thank you. The next question is coming from Mike Rehaut from Jpmorgan, Mike Your line is live.
Thanks, Good morning, everyone. Thanks for taking my questions.
I just wanted to circle back to.
More recent.
Trend and demand comments.
Obviously, you mentioned that the first few weeks of January .
Got some increased activity.
That you could see.
Yeah.
A typical 50% improvement in orders.
In Q2 versus <unk> that would imply.
Take that.
On a straightforward basis, an order decline of only roughly 20% down year over year, So I'm curious around.
If that's kind of and I know you haven't given.
Hard guidance or a range, but directionally, if that's how we should be thinking about things and also.
To this point around the improvement that you saw in January .
I was curious also if you could kind of give any color around.
Trends intra quarter during the first quarter, if that improvement in January was a continuation of perhaps.
A change in trend that you saw.
During your December quarter.
I'd say during the December quarter is as we mentioned on the call as you know Mike is the seasonally slowest quarter of the year. So we generally don't extrapolate anything that happens in October November and December .
And we don't generally give a whole lot of monthly color, but we felt like based on current market conditions warranted talking about the first few weeks of January .
And that's what we're pleased with as we've seen what we would typically expect to see as we move through these first few weeks in terms of the math that you laid out if we do see that normal seasonality. Yes. It's still would result in net sales down year over year, but but up very nicely sequentially.
Right Alright.
Secondly.
I know theres been a couple of questions around the construction costs and the impact there I think that's kind of been.
Covered pretty well.
Yeah.
Obviously, another big part is.
The gross margin guidance for the second quarter, you're expecting further declines.
I wanted to also focus though on on pricing trends in the market and.
It seems to kind of give us some sense.
On a total basis, how much net pricing has come down from.
June of last year to today and you know how much of that has occurred in the last month or two.
In terms of just pricing really our net sales orders in the quarter and the average sales price on that is the best indication or net sales order price. This quarter was around 367000, I believe and of course, we peaked last year a little over 400000, so you're already looking at roughly a 10% decline in our net sales orders.
And as we look at our margin guide going forward, we're taking recent pricing into effect.
We're hopeful that if we see some normal seasonality in normal demand during the spring that further significant pricing reductions.
It would not be necessary, but we're going to assess that week to week and month to month as we go through the through the spring.
But our gross margin guide takes into account recent pricing along with the cost trends that we've already been discussing.
Just add it is very hard to put a lot on the ground, it's very hard to build houses.
And the overall market is still under supplied.
Long term I think we got a great a great outlook.
And the next quarter, we're going to deal with the market as it comes.
Oh.
Alright, thanks, so much.
Thank you. The next question is coming from Truman Patterson from Wolfe Research. Your line is live.
Hey, good morning, everyone. Thanks for taking my questions.
So first has the land market started to capitulate at all on take down pricing with your alls.
Asps down kind of 8% quarter over quarter or are you actually starting to see the land market correct. It all with more meaningful price declines or is it still just a.
Too early to tell.
I think generally it's still a little too early <unk> land is typically one of the stickier parts of the process and as David and Paul Both mentioned earlier in the call. It is it is increasingly difficult to get a lot of entitled and on the ground and so that is something that has held up pretty well, but anecdotally there are situations, where we're able to make.
Some progress on the land residual with with some of our land sellers.
But not not broad trends yet for sure.
Okay. Okay. Thanks for that and then.
You all made a recent acquisition in Arkansas.
Could you all just kind of walk through the drivers of that purchase and are you seeing.
You know more small privates their.
Their willingness to sell it.
Relatively attractive.
Valuation kind of pop up given the market slowdown.
Yes.
The acquisition of rig into northwest, Arkansas gave us.
No I wont say an entrance into the market. We were in there with a couple of communities, but gave us a solid position and a market that has remained strong with good employment growth and limited housing supply again to the to the earlier question of these secondary markets as solid market and we are happy to be in a good.
Acquisition and tuck in for Us with a well established community with a great lot supply and so gave us immediate.
Inventory in homes and progress well.
Well respected builder in the market that we're happy to have as part of the family.
As far as other acquisitions, we continue to look at those.
And where we have tuck in opportunities similar to this with things that we would explore but no broad based change in how we look at builders in the market.
Alright. Thank you all appreciate it.
Thank you. The next question is coming from Eric Bosshardt from Cleveland Research, Eric Your line is live.
Good morning, two things first of all the 40% reduction in starts I'm curious if there is.
With the discipline or logic is what youre not starting if there's if there's buckets of this you've mentioned.
Trying to change the product a bit to fit a price point, but curious if theres something to learn from how you're making those decisions.
Where are you reducing starts.
A lot of our starts decisions are made within the quarter on the basis of what the sales trends are occurring at that point in time, and certainly through late summer and into the fall on our first quarter mortgage rates spiking up cancellations, increasing looking at our current inventory positions neighborhood by neighborhood relative to reach.
<unk> sales paces.
Certainly led us to slow down our starts.
Coming into this fiscal this calendar year into the second quarter seeing some improvement in our cycle time in the supply chain issues Unsnarl ing and we feel like we'll be able to start homes and complete them in a more timely fashion. This year. So we did we are trying to meter our starts out a little bit.
To more closely match, our sales demand right now.
And Erika.
I think it's just indicative of the entire industry.
And lessons learned in the last downturn.
I mean I do believe.
There is.
A disciplined around the industry and it's not just short term chase every market.
Every day so.
We're trying to align inventory levels with demand.
And.
Ultimately it comes back.
If you look at the long term position of the industry.
Enough.
<unk> or houses.
The population.
And in demand.
We see taking place.
Over the next three to five years.
Okay, and then related to this.
The inventory per community number it looks like it's up and I guess the follow on would be the path forward with starts from here as you know.
<unk> 40 of pace you maintained for another quarter and then lift your heads up or how do you think about the pace of managing.
The supply path going forward.
I think we saw the starts kind of align with our sales pace in the quarter and I think we're going to look to try to maintain that relationship through this time of the year as we are seeing good sales demand in the <unk>.
Early spring selling season will be replacing those homes with new starts.
To continue having inventory in the shelf available to sell we are certainly seeing.
Home selling later in the construction process certainty of delivery date certainty of mortgage rate and payment are big important factors for our buyers.
And we're also focusing very heavily on recovering.
Our housing inventory turnover metrics and getting more efficient with those inventory dollars.
We gotta get returns back up on our housing inventory and so as with everything our starts are managed community by community market by market by our local operators to focus on not piling up excess completed homes that had been sitting there for an extended period of time.
Okay. That's helpful. Thank you.
Thank you.
And the next question is coming from Anthony Pettinari from Citi. Anthony Your line is live.
Good morning.
Can you talk about the tenure of buyers who canceled this quarter.
Were those contracts that were signed in fiscal <unk> or maybe even earlier.
Is there a larger cohort of buyers who may be placed orders in the fall, but are still at risk of cancellation with rates rising I'm. Just wondering if you can give any color around kind of cancellation trends there.
I think as you've seen our cancellation trends moderate and cancellation rate moderate.
As we have younger backlog that have signed contracts and more recently as Mike spoke to.
Certainty of home closed date in mortgage rate is very important so as we have cycled through.
And we're improving our housing inventory turns I think thats, where youre seeing a reduction in cancellation rate.
Okay. That's helpful. And then just in terms of renegotiating prices for homes in backlog is that sort of normalized or died down now that rates have stopped rising and to your point cancellations would come down.
Hopefully with the rate stabilization, we've seen we will see stabilization and incentives and pricing environment going forward.
Okay. That's helpful I'll turn it over.
Thank you. The next question is coming from Buck Horne from Raymond James Your line is live.
Hey, Thanks, good morning, guys.
Wonder if I could dive in a little bit more on the incentives that are out there.
The tools that you're using out in the field. It sounds like a lot of builders are having some success with the mortgage rate buy down program.
You know where you are buying down.
The mortgage rate below market for.
For the life of the loan it seems to be popular out there I'm wondering if you could.
Maybe elaborate on are you using mortgage rate buy downs, how does that mechanically work and kind of what does that cost you in terms of upfront.
Margin hit or as a percentage of sales.
Yeah Buck.
Do ordinary course use mortgage rate buy downs and many of those are for the for the life of the loan that's been a program. We've had in place for quite some time the cost to do vary from time to time, depending on market conditions and timing of when you.
Tie up those positions, but thats something that we try to make sure that we have in the toolbox for our salespeople is to be able to offer an attractive mortgage rates to buyers who come in.
Okay, what did you say that the.
Most effective sales tool at the moment is a buy down or are you using some other level of incentives.
It's been a very community by community and over time as to what the most attractive incentive is and we tried to put a lot of tools in our division operators hands to make the best decisions about what's going to motivate and drive their realtor and buyer traffic into their communities and excite our sales agents with a reason to call in a region.
To drive some traffic this week, so it might be a little bit of pricing adjustment on a few homes it might be.
The rate buy downs, the mortgage financing incentives had been very popular very heavily utilized and it might be that supply chains working back out that we're back to a washer dryer Wednesdays I mean, theres plenty of incentives out there that we're going to use to drive a pace to hit our return we need to hit at every given neighborhood.
Okay. Thank you and one quick separate topic on single family rentals and the it sounds like the guidance quarter over quarter is slightly lower in terms of.
Projected sales of single family rental homes I'm wondering if that's a strategic to kind of hold back.
The pace of those sales and just curious what the demand is like in the marketplace for.
The pricing for stabilized desktop our homes these days.
It's just timing of projects and when they will be ready completed and ready and through a sale process.
Just have a few fewer this quarter ready to close then.
Then we had this past quarter and the first quarter benefited from a few projects that were lined up to close in the fourth quarter of fiscal 'twenty two had some storm impact and delays in timing of a few closings. There so that that <unk> number was probably a little higher than the original production sales schedule is set up for the business model is still complete lease up.
Market itself.
And you're starting to see some level of closings each and every quarter, but it is still choppy and here in the earlier stages, and we would expect that to become more consistent over time as we get further along with the the lots and the houses we have under construction.
Awesome all right. Thanks, guys appreciate it.
Thank you. The next question is coming from Alan Ratner from Zelman and Associates. Your line is live.
Hey, guys. Good morning, Thanks for taking my questions.
Firstly I was hoping maybe you could just help me a little bit reconciling kind of the closing results versus the orders.
The closings for this quarter came in well above your guidance the orders were a bit lighter versus what you. What you signaled in mid November and I thought I heard you say that cycle times have been relatively stable, maybe even ticked up a little bit. So how did you drive the upside to closings without <unk>.
Stronger order activity was it just that much of a greater mix of completed sales versus homes that we're a month or two out from completion than you than you were anticipating.
I'm sure that ties into the <unk> guidance as well with your delivery guidance above your beginning backlog. So I'm, just maybe looking for a little bit more color to understand what's going on there.
Yes, as we see marginal improvement in our inventory turns and home construction times Youre, starting to see and you see that in our numbers a larger.
Percentage of our inventory homes on the completed side, which allows us to meet the market, which quite frankly is available to us today, which is shorter term close and so we're seeing more homes sell and close in the quarter getting back more towards historical norms, and we expect to see that on a go forward basis with the majority of the home inventory that we.
Yeah.
Got it okay. That's helpful.
Second question kind of related but tying in maybe the margin conversation as well so.
When you look at your your 7000 completed specs are you able to provide a little bit more detail on how many of those are you know maybe less than 30 days completed what's what's more than 30 and how is your pricing strategy differ on completed specs as it hits kind of certain thresholds.
Is there a level or a point, where you get more aggressive on price adjustments or do you kind of just look at it more holistically.
So generally we talk about a completed spec where we have a pretty.
Aggressive definition of what's completed it's when it gets into the final flooring stage. So typically from a home hitting that completion milestone for us normal conditions, it's probably going to take between two weeks to four weeks for that home actually to be move in ready and more likely to the four week side of that so if we look at how many houses we have out there that are kind of <unk>.
<unk> in the buckets, we have about 190 houses that have been passed our completion date.
By more than six months by six months or more so we still feel very comfortable about the freshness of that spec inventory and this is the exact right time of the year to have that inventory, especially with the backdrop of very low.
Existing home sale inventory available in the marketplace and Thats something we manage very closely obviously, we've been building specs for a very long time, we have a lot of discipline around that and so we do watch those those completed specs as they start to age and they get longer if they get longer than 90 days then yes, we will start to step up the efforts to ensure that we move them.
But right now we still have a very fresh fresh batch of completed specs out there for the spring spring selling season.
Great I appreciate that thanks, guys.
Thank you. The next question is coming from Mike Dahl from RBC capital markets, Mike Your line of size.
Great. Thanks for taking my question.
The first one just to follow up on the margin discussion I understand theirs.
Yes, not a lot of forward guidance youre going to get beyond this next quarter and the level of uncertainty I'm wondering just.
As you see it today, if you look at your current.
Orders as you look at where you are expecting to sell in the quarter versus kind of the timing of some backlog still coming through in that gross margin that will be reported in fiscal <unk>, how should we be thinking about the likely cadence.
Margin beyond Q is it still.
Barring some quick improvement in the market going to be lower as you cycle off your backlog in.
And to the recent sales as you get into fiscal <unk> or any color on that.
We're only guiding to Q2 margin and the reason we're only got into Q2 margin is we don't know what margins or what the environment will be beyond Q2.
The spring selling season, obviously, we've got some early.
Encouraging signs, but we don't know what those conditions will be at the height of the spring selling season, So we have visibility to where our margins and our sales on our backlog and our pricing and our costs are today heading into the quarter, but even Q2 has some level of uncertainty to it we would expect to sell and close 40% of our closings in the same quarter.
<unk> in the coming quarters, so while we believe that there is some.
The possibility of some stability in the market with mortgage rates stable that could change this afternoon.
So right now, we're giving you what we get while we have so our guidance for margins of $20 to 21% is what we can see today for Q2, there is some risk both upside and downside there I would say it's possible we could beat that range.
But it is certainly possible that we might not.
But past Q2, we simply don't have the visibility right now we're going to continue to meet the market and do what we need to do to maximize returns community by community.
Okay Fair enough and then my son.
Ask the question.
There's been a lot in the press around.
Arizona in particular, a tightening up on some of the.
Some of the water.
Right and kind of permitting or a lack of lack of issuing permits in certain parts of the Phoenix Metro area.
Given some of the requirements around water usage you guys. Obviously had your fiddler acquisition last year I think they do have some projects in Arizona can you give us a sense of if.
If the counties are municipalities or just outright.
Refusing to issue.
<unk> to certain areas does your.
Does your ownership of Midler and the projects in those regions exempt you from that are you able to still get permits.
For your planned projects or any color on what youre seeing there would be I think interesting in light of some of the press that's been out there.
Well, Yeah, I think there has been a lot in the press on water and water is and will continue to be a headwind throughout the west.
Not just in Arizona and certainly are.
Our acquisition and integration of <unk> has helped our positioning and Thats really some some benefit to the short term, but mostly a long term strategic decision on our part knowing that we're going to head DS facing these headwinds for <unk>.
For the foreseeable future.
There's been a significant change on a local basis, it's still difficult to get lots on the ground to get into.
The entitlement through the process and to get those permits it has been for a while and that continues so we feel good about our position a lot positions we have in the Phoenix market.
And we've got a great team on board there that continues to navigate through that environment.
Okay, great. Thank you.
Thank you and the next question is coming from Jay Mccanless from Wedbush. Your line is live.
Hey, good morning to everyone.
Bill going back to what you talked about looking to close 40, or so and closed 40% of the two two closings I guess how.
And say pre Covid times.
What would that percentage had been in a normal Q2.
Sure Jay our typical percentage marine just pretty consistently.
Up until the last year or two in the 35% to 40% range and a quarter ago. We were in the high teens a year ago. It was even lower than that and this quarter. We were roughly 34%. So when we talk about reverting to normal we started to see that reversion in the first quarter, but we expect that to continue to tick up so whether it's actually.
<unk> 40 or closer to that 35 36.
No, but typically 35 to 40 would be a pretty consistent range for us.
Okay.
Then the second.
Second question I had.
Assuming you pay down the $1 billion in debt like you've talked about any idea of what benefit that might be the gross margin since it's going to be less amortize interest or interest being amortized.
Yes, Jay we have $700 million of homebuilding notes that mature this year and Rodney I would plan to do.
To pay those off with cash that's out of just under $3 billion of homebuilding debt. So so roughly 25% of the balance would be paid down that if we do not replace that debt that would that would reduce our our interest carry in time that benefit would really primarily be probably noticed in fiscal 'twenty four and beyond because it.
Takes time for the interest to be capitalized and move their inventory.
But it would it would take our interest carry down probably 2030 basis points as a percentage of of margin longer.
Term benefit.
Okay, great. Thanks for taking my questions.
Thanks Jay.
Thank you Annie and the interest of time today. The last question will be coming from <unk> Chandra <unk> from Bank of America race. Your line is live.
Hi, good morning, Thanks for taking my question.
I just wanted to ask on the rental side. What are you seeing in terms of demand and margins have been really strong last year and obviously this quarter do you anticipate any type of normalization going forward or do you think youll have to hold those properties longer as demand comes back.
Yeah.
I think we're still seeing demand for the properties I think the pricing and the margins we realized on our early project sales benefited from construction and lower construction cost environment, coupled with a very attractive rate environment. When we when we sold those and that continued to some degree into our first quarter deliveries, we would expect it.
See some kind of a more normalized reversion to demand to a mean and I think we will see our margins come back in line to be closer to slightly above on what we're seeing on the for sale side. The traditional core sales side, but our business model is to develop the communities and sell them into the marketplace.
That's that's what we do best.
Finding the land building homes.
And bringing people to those communities is what we've been very successful so far.
Phil learning still going to get better, but but we do like that business.
And then just one more on the.
In terms of the improvement in demand.
In the quarter and quarter outlook for orders.
In the second quarter relative to the first quarter.
Can you talk about what you think is driving the stronger demand is it the fact that mortgage rates have.
<unk> come down a little bit is there anything happening with consumer confidence.
What's sort of giving you that confidence in supporting the view that we're going to get back to normal seasonality. After what's been sort of a very tough housing market at the end of 2022.
I do think.
Credit markets have stabilized somewhat.
<unk>.
Paul.
Consumer confidence a handful.
Moved a little bit.
Job growth continues to be very good.
Overall.
You look at.
So enough demand.
Just a general economy.
Becoming less bad.
Good science four wall for housing.
And.
We monitor ourselves can monitor cancellations.
You can wait a week to week and so when we see.
That trend Retold marine returning to more of a <unk>.
Normalized market initiatives.
It's hard not to be optimistic although the level, we're going to have a good spring.
So that's the way we're positioned.
And we get up every day and respond to what.
Happens.
Listen.
Yes.
Yes specific to Horton does or the <unk>.
Industry reasons specific to Horton, our inventory position puts us in a more confident place to be able to say, we're going to see that pick up with the level of completed homes. We have in the stage of construction now is behind those are at because what we're seeing the most success in today as buyers, who do you want to how quickly because they can get that certainty of not only close date than most importantly interest rate.
And so that is the majority of our buyers today and that's why we feel very confident and are very happy with our inventory position right now.
Great I appreciate all the color.
Thank you.
I'd now like to hand, the call off to David Holmes for some closing remarks.
Thank you Paul we appreciate everyone's time on the call today and look forward to speaking with you again to share our second quarter results.
Yes.
And finally.
Congratulations to the entire D. R. Horton team, while producing a solid first quarter, while navigating changing market conditions.
They compete.
Continue to win every day. Thank you.
Yes.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.