Q2 2023 D.R. Horton Inc Earnings Call
Speaker 1: What.
Speaker 2: Good morning, and welcome to the second quarter 2023 earnings conference call for D. R. Horton, America's builder, the largest builder in the United States. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Speaker 2: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for DR Horton. Good morning, everyone.
Speaker 3: Thank you, Holly, and good morning. Welcome to our call to discuss our results for the second quarter of fiscal 2023.
Speaker 3: Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
Speaker 3: 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.
Speaker 3: All forward-looking statements are based upon information available to D.O. Horton on the date of this conference call, and D.O. Horton does not undertake any obligation to publicly update or revise any forward-looking statements.
Speaker 3: Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and its most recent quarterly report on Form 10-Q , both of which were filed with the Securities and Exchange Commission.
Speaker 3: This morning's earnings release can be found on our website at investor.dohorton.com and we plan to file our 10-Q early next week.
Speaker 3: After this call, we will post updated investor and supplementary data presentations to our investor relations site on the presentation section under news and events for your reference.
Speaker 3: Now, I will turn the call over to David Auld, our President and CEO .
Speaker 4: Thank you Jessica and good morning. I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice President and Co-Chief Operating Officers, and Bill Wheat, our Executive Vice President and Chief Financial Officer. We are excited to announce that we recently closed our one millionth home.
Speaker 4: A first for any homeowner.
Speaker 4: We are both humbled and proud to have been a part of a million families achieving their dream of home ownership over the past 45 years.
Speaker 4: For the second quarter, the D.R. Wharton team delivered solid results, highlighted by earnings of $2.73 for the loaded chair.
Speaker 4: Our consolidated pre-tax income was $1.2 billion on $8 billion in revenues with a pre-tax profit margin of 15.6%.
Speaker 4: Our home building return on inventory for the trailing 12 months in March 31st was 35.1%. And our consolidated return on equity for the same period was 27.2%.
Speaker 4: Spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter.
Speaker 4: Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions.
Speaker 4: Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.
Speaker 4: We are well positioned to navigate changing market conditions with our experienced operators, affordable product offerings, flexible lot supply, and great trade and supplier relationships. Our strong balance sheet, liquidity, and low leverage provide us with significant financial flexibility.
Speaker 4: We will continue to focus on managing our product offerings, incentives, home prices, sales pace, and inventory levels to meet the market, consolidate market share, optimize returns, and generate increased operating cash flow. Mike? Earnings for the second quarter of fiscal 2023 decreased 32% to $2.73 per diluted share.
Speaker 4: compared to $7.5 billion on 19,828 homes closed in the prior year. Our average closing price for the quarter was $378,800, down 2% sequentially, and essentially flat with the prior year quarter. Paul.
Speaker 4: Our net sales orders in the second quarter decreased 5% to 23,142 homes. And order value decreased 11% from the prior year to $8.6 billion. Our cancellation rate for the quarter was 18%, up from 16% in the prior year quarter, but down 27% sequentially.
Speaker 4: Our average number of active selling communities was up 3% both sequentially and year over year. The average sales price of net sales orders in the second quarter was $372,900, down 7% from the prior year quarter, and up 1% sequentially.
Speaker 4: To adjust to changing market conditions and higher mortgage rates, we have continued offering incentives and reducing the prices and sizes of our homes where necessary to provide better affordability to home buyers and to optimize the returns on our inventory investments.
Speaker 5: We expect to continue offering a similar level incentives throughout 2023 and we are seeing indications that our average sales price and incentive levels are beginning to stabilize.
Speaker 5: Our sales volume in the third quarter and for the rest of the year will depend on the continued strength of the spring selling season in general market conditions, which can be significantly affected by changes in mortgage rates and other economic factors. We will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share.
Speaker 5: Our gross profit margin on home sales revenues in the second quarter was 21.6%. Down 230 basis points sequentially from the December quarter.
Speaker 4: The decrease in our gross margin from December to March reflects the impact of higher sales incentives and home price reductions.
Speaker 4: On a per square foot basis, home sales revenues were down 1% sequentially, stick and brick costs per square foot increased 1%, and lot costs were up 5%.
Speaker 4: We are continuing to work with our trade partners and suppliers to reduce our construction costs on new home starts. We are making some limited progress in these efforts, but are also still experiencing some cost increases due to the overall inflationary environment. However, with the benefits of lower lumber costs, the average cost of our homes closed is beginning to stabilize.
Speaker 3: and we see indications that our home sales gross margin is also starting to stabilize around current levels. Jessica? In the second quarter, our home building SG&A expenses increased by 8% from last year, and home building SG&A expenses a percentage of revenues with 7.3%, up 50 basis points from the same quarter in the prior year. We are controlling our SG&A while ensuring our platform adequately supports our business.
Speaker 6: Cold.
Speaker 5: We started 19,900 homes this quarter and ended the quarter with 43,600 homes in inventory, down 27% from a year ago and up 1% sequentially. 24,800 of our homes on March 31 were unsold, of which 6,400 were completed.
Speaker 5: For homes we close this quarter, our construction cycle time decreased 12 days from the first quarter, reflecting our efforts to improve our cycle times and improvements in the supply chain. We will continue to evaluate demand and adjust our homes in inventory and starts base based on current market conditions. Mike?
Speaker 5: Our home building lock position at March 31st consists of approximately 547,000 lots of which 25% were owned and 75% were controlled through purchase contracts. 32% of our total own locks are finished and 53% of our controlled locks are or will be finished when we purchase them.
Speaker 5: Our capital efficient and flexible lot portfolio is a key to our strong competitive position.
Speaker 5: We are actively managing our investments in lots, land, and development based on current market conditions.
Speaker 5: During the quarter, our home building segment incurred $900,000 of inventory impairments and wrote off $13 million of option deposits and due diligence costs related to land and lock purchase contracts.
Speaker 4: We expect our level of option cost write-offs to remain somewhat elevated in Fiscal 2023 as we continue to manage our lot portfolio through changing market conditions.
Speaker 5: Our second quarter home building investments in lots, land, and development totaled $1.7 million, down 19% from the prior year quarter and flat sequentially. Our current quarter investments consisted of $980 million for finished lots, $590 million for land development, and $150 million for land acquisition. Phil?
Speaker 5: Financial Services pre-tax income in the second quarter was $86 million on $216 million of revenues with a pre-tax profit margin of 39.6%. During the second quarter, 99% of our mortgage companies loan originations related to homes closed by our home building operations.
Speaker 7: our mortgage company handled the financing for 76% of our buyers.
Speaker 7: FHA and VA loans accounted for 46% of the mortgage company's volume.
Speaker 7: Borrowers originating loans with DHI mortgages this quarter had an average FICO score of 723 and an average loan-to-value ratio of 88%. First-time homebuyers represented 55% of the closings handled by our mortgage company this quarter. Our rental operations generated $224 million of revenues during the second quarter from March 2020.
Speaker 5: dollars of multifamily rental properties. We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 as our platformer chairs and expands across more markets.
Speaker 5: For the third quarter, we expect our rental revenues to be similar to our first and second quarters. Paul. For Star, our majority-owned residential lot development company reported total revenues of $302 million on $2,979-lots sold and pre-tax income of $36 million for the second quarter.
Speaker 7: 4 stars owned and controlled lot position at March 31st with 76,400 lots.
Speaker 7: 54% of four-star own lots are under contract with or subject to a right of first offer to the R-Hort.
Speaker 5: 220 million dollars of our finished lots purchased in the second quarter were from 4 star
Speaker 7: Forstar is separately capitalized from DR Horton and had more than $650 million of liquidity at quarter end with a net debt to capital ratio of 25.2%. Forstar is well positioned to meet changing market conditions with its strong capitalization, lots of supply and relationship with DR Horton. Bill?
Speaker 8: Our balanced capital approach focuses on being disciplined, flexible and opportunistic.
Speaker 8: We are committed to maintaining a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions. During the first six months of the year, our cash provided by both our consolidated and home building operations was $1.5 billion.
Speaker 8: At March 31st, we had $4.4 billion of home building liquidity consisting of $2.4 billion of unrestricted home building cash and $2 billion of available capacity on our home building Revolving Credit Facility.
We repay $300 million of 4.75% senior notes in February at maturity, and we have $400 million of senior notes that will mature in August . Our home building leverage was 11.5% at the end of March, and home building leverage net a cash was 1.5%.
Our consolidated leverage at March 31st was 22.4% and consolidated leverage net of cash was 12.3%. At March 31st our stock flow executive was 20.7 billion dollars and book value per share was 60.73 cents, up 27% from a year ago. For the trailing 12 months in March our return on equity was 27.
five million shares repurchased fiscal year date for $421 million.
Subsequent to quarter end, our board authorised the repurchase of up to $1 billion of our common stock, replacing our prior authorization. The new authorization has no expiration date. Jessica? As we look forward, we expect current market conditions to continue with uncertainty regarding mortgage rates.
the capital markets and general economic conditions that may significantly impact our business. We are providing detailed guidance for the third quarter as is our standard practice. We are also providing incremental guidance for the full year now that we have seen the beginning of the spring selling season with good home buyer demand and signs of stabilization in pricing, incentives and cost trends.
We currently expect to generate consolidated revenues in our June quarter of 8 to $8.5 billion, and homes closed by our humble in operations to be in the range of 20,000 to 21,000 homes.
We expect our home sales grows margin in the second quarter to be approximately 21 to 22 percent, and humbling SGNA as a percentage of revenues in the third quarter to be in the range of 7.2 to 7.5 percent.
We anticipate a financial services pre-text profit margin of around 30% and we expect our income tax rate to be approximately 24 to 24.5% in the third quarter.
We are well positioned to continue aggregating market share in both our humbling and windtall operations. For the full year we currently expect to close between 77,000 and 80,000 homes in our humbling operations and between 4,000 and 5,000 homes in units in our rental operations.
We expect our consolidated revenues for fiscal 2023 to be in a range of $31.5 to $33 billion. We forecast an income tax rate for the year of approximately 24%. We expect to generate increased cash flow from our humbling operations and on a consolidated basis in fiscal 2023 compared to fiscal 2022.
We also plan to re-purchase shares at a similar dollar amount as last year to reduce our share count with the volume of our re-purchases dependent on cash flow, liquidity, market conditions, and our investment opportunities.
We have $400 million of senior notes to mature during the remainder of the year, which we are positioned to repay from cash.
We will continue to balance our cashflow utilization priorities among our core home building operations, our rental operations, maintaining conservative home building leverage, and strong liquidity, paying an increased dividend and consistently repurchasing shares. David?
In closing, our results in position reflect our experienced teams industry leading market share, raw geographic footprint, and diverse product offers a strong balance, liquidity and low leverage about us with significant financial flexibility to effectively operate in changing economic conditions.
and continue advocating market share. We plan to maintain our disformed approach to investing capital, to an as 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 DR Horton team for your continued focus and hard work. And a special thank you from Don Horton, our founder and executive chairman, to the countless DR Horton employees and trade partners over the past 45 years.
who participate in the countless DR hoarding.
We participated and contributed to our journey to build, sell, and close 1 million homes. This concludes our prepared remarks. We will now host questions.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We do ask to please limit yourself to one question and one follow-up question.
One moment while we pull for questions.
Your first question for today is coming from John Lovolo at UBS.
Good morning, guys, and thank you for taking my questions. The first one is, you know, to the extent you can comment on April trends. I mean, it sounds like from what we can gather from our checks that April has trended along pretty nicely. And along those same lines, if we think about the third quarter, you know, typical absorption declining, you know, it's called 10 percent sequentially. Um.
as we would like to see. In terms of what our Q3 sales look like versus our Q2 sales, typically it can go either way. A lot of times it's dead on within a few houses, so we could be slightly up, we could be slightly down. Failed-wise, sequentially, it's gonna be dependent, though, on the continued strength of the spring, what happens with mortgage rates and anything else.
companies going out and trying to buy more land as maybe expectations reset a bit more positively. So you know, looking into 2024.
I think you can look across the board and see that most builders have a pretty good lot portfolio out in front of them on a week. We're over 500,000, roughly 550,000 lots, controlled, and we're owned. So we feel really good about the positioning we have for handling increased demand as well as if we needed, if demand moderates.
We've got flexibility in that portfolio. We will look to continue to add on to our portfolio where it makes sense on a deal-by-deal market-by-market basis. Haven't seen evidence of a big land grab yet. Got it.
Your next question is coming from Stephen Kim at Evercore ISI.
Thanks very much guys. I got to start off with a comment which is that if you do the high end of your guide for closings this year, effectively you'll have had pretty stable closings in 21, 22 and 23 which is a pretty remarkable achievement given the volatility and the adverse environment we saw last year. So congrats to you guys on that.
Now, regarding the market, I want to talk about market share. One of the things that we've seen as I see as an emerging trend is that, you know, builders such as yourselves are going to be able to gain share, particularly from some of your private guys who are more dependent upon regional and local banks. So, I wanted to ask you whether you think that a lot of...
You know, people were wrestling with over the last few months. Stay in markets where we have our largest market share control, the largest market share.
We see much more stability in both cost and demand and deliveries and March.
So it's our expectation as we continue to sell consolidate markets. There's going to be a kind of a new norm and stability of margin and cost structure to be honest with you.
As we get more efficient and more efficient in delivering houses, we can hit the affordability to use more soldering can be found in the
controlling the percentage of the market that gives us more access to trades, materials, and a stronger relationship with developers and third party builders, which all drive our business.
Great, that's encouraging. Appreciate that.
Second question relates to what degree you're able to ratchet back incentives.
looking ahead. I know you sort of talked about a stable environment and I get that. But I also know that you are probably going to be adjusting what sort of product you put out to market. I would guess that probably has a little bit more of a value orientation. And I'm curious as to whether you anticipate over the medium term that you will be able to ratchet back your incentives as you roll out some more inherently affordable.
makes sense, we're taking advantage of that. So we do see an opportunity to continue to peel back on incentives and take advantage of pricing power on a go forward basis.
And as with everything, we're not directing anything globally, nationwide, community by community, market by market. Our local operators are making those decisions to maximize returns at the local level. Great, thanks a lot guys.
Your next question for today is coming from Carl Reichart at BTIG. Hi everybody, good morning. Thanks for the time. In the last couple of quarters, there's been sort of a mixed bag in terms of geographic performance for builders with the southeast. Texas feels pretty good in the last week. I'm curious in one quarter, and I know we're going to see some of this information when you guys put the stuff up on the screen.
Flagdale hey Look
I'm not sure that we saw significant improvement.
sure that we saw significant improvement. But.
Again, it's a part of the overall and the contributor. Most of our pickup really was absorption versus community count. Our overall community count was only up 3% sequentially. We saw three of our regions up, you know,
better than normal seasonality, but call it, you know, still less than 60 percent. And then we have the Southeast East and North that were much higher. The North is a lot of new communities, new markets, but the Southeast and the East are just showing the continued strength, particularly of Florida and the Carolina.
Okay, thanks, Jeff. And then on supply chain, you mentioned, or sorry, on the cycle times, you mentioned down 12 days. And I'm curious if that was just really all supply chain improvement or to some extent sort of mix, moving down to quicker homes to turn.
And then are you expecting additional improvement in the back half of the year in that metric?
Yeah, Carl, that was primarily supply chain improvements. Finally getting houses through various stages of construction, being better organized and prepared with the labor. And we saw improvement sequentially throughout the quarter, and we're continuing to see improvement in early construction stage movements of homes more recently started. So yes, we expect to see.
better cycle times as we progress through the year. I appreciate it all. Thanks so much. Your next question is coming from Mike Rehot at J.P. Morgan.
Thanks, good morning, everyone. First question, I wanted to get a sense. You mentioned that incentives have stabilized or recently stabilized. And based on our conversations for certain privates.
You know, there has been somewhat of an improvement in net pricing throughout the March quarter. I'm curious if you saw that as well in other words that net pricing by March end was better than the beginning of the year
And if so, all else equal, with that point, your 3Q gross margin towards the higher end of the range or even a little bit above, if you're expecting stabilization from here on in, particularly in this metric.
I think the key word we keep using here is stabilization. We've started to see pricing and incentive levels stabilize during the quarter. Naturally, as that stabilization remains in place a bit longer, if you are stable to tighten things up a bit. And as we've been able to move through this spring selling season, community by community, we see. We see.
some great places where we're able to start pushing it up a little bit. So on a net basis, as we look forward, we expect our margins to stabilize around current level. So that's why our guidance range anticipates perhaps slightly below this quarter, perhaps a little above this quarter, and it's too early to know for sure how that will play out over the remainder of the coming quarter.
Okay, now I appreciate that Bill. I guess secondly, maybe building on another question around ASP. How should we think about, you know, directionally, you know, ASPs, you know, not just for the back after this year, but...
into fiscal 24, is it something where you feel like at current levels, you know, there's been, most of the adjustment has been made, or you know, you know, I guess more specifically I'm even thinking about, you know, potential product mix changes.
to continue to address affordability if you want to try and drive ASP maybe a little bit lower in fiscal 24 just to, you know, more fully address perhaps the market or affordability challenges, etc. Yeah, Mike, I think that's just all part of the mix.
We're able to take advantage of some price and power. We will do that also, community by community. So stabilization is the word for the day. And obviously we don't guide sales prices very far out. And it's largely going to be dependent ultimately on market conditions over the remainder of the year. And what happens in the rate environment?
Great. Thank you. Your next question for today is coming from Matthew Blay at Barclays.
Hey, good morning, everyone. Thanks for taking the questions. What are the follow-up on Steve's questions from earlier around sort of what's happening with credit tightening from regional banks? And of course, the smaller private builders generally leveraging the regional banking system. Are you actually seeing any changes competitively yet?
from those smaller builders in terms of land acquisition starts. How are you guys reacting to any changing conditions from those builders? Thank you. We haven't really seen any significant shift in how they're operating in the market. A lot of builders certainly have come out of the end of
of this calendar year and had inventory that they may have gotten through cancellations, that they've been working through that product. Not seeing significant starts on a go-forward basis for most of the smaller privates or regional and we certainly have picked up a few land positions, lot positions here and there, but no significant shift in how they're addressing the market.
Got it. Okay. Thank you for that. And then secondly, it looks like you started less homes than you sold during the quarter. I think you guys had previously spoken about sort of aligning starts and sales pace. How are you guys thinking about that going forward? Is there any room to kind of push a little harder on starts here?
going forward, giving some of these improving demand trends? Yeah, as we were in a transition the last couple of quarters that was more closely to sales, but really our focus is tied to clothing and our search space. And if you look at that, we were kind of neck and neck this quarter. And so with our guide for next quarter and what we're trying to do, market by market, community by community to build back our production.
is coming from Truman Patterson at Wolf Research.
Hey, good morning, everyone. Thanks for taking my questions. First, hoping to get an update on your mortgage business and overall environment, are you seeing any distress in the market from mid-tier banks, tightening of mortgage warehouse financing or...
tightening in consumer credit or lending standards for agency, non-agency loans. We've heard that it's been kind of business as usual, but wanted to get your thoughts. Yeah, obviously, with all the headlines that we've had this quarter, we have been watching that market very closely, having a lot of conversation with our banking relationships. But I would echo what you heard.
you know, obviously if we see further distress on that market, that's something we'll need to be prepared to adjust to. Bill, that relates to both the R-Horton and kind of the broader market, those comments.
Yes, absolutely. We all see the same headlines there and depending on what happens in the rate environment and across the spectrum of banks, there could be further headlines obviously, but today, no, we have not seen a significant impact. Okay, perfect. And then, um,
Just an update on construction costs outside of lumber. You know, it seems like they've been relatively sticky and Bill, I think he even mentioned some costs might be increasing a little bit. But could you just give us an update on how you're viewing the magnitude of potential cost savings moving through the year really into 2024?
Should we really see an improvement outside of lumber or are things just pretty stable at this point? I think we're seeing a lot of stability. A lot of the increases that we were taking over the past year have stopped. But we're seeing the effects of those increases coming through.
More recent starts would be at the more stable cost, benefiting from the lumber commodity price and declines. But we're getting to the point we're starting to anniversary.
well into some normalized lumber market pricing. So I'm not expecting to see huge changes in our cost inputs, but they certainly have been, increases have been a little bit sticky.
All right, thank you all and good luck on the upcoming quarter. Thank you, Chairman. Our next question is coming from Anthony Petinari at Citi.
Good morning. Your net order ASP was up I think a percent quarter over quarter which is a little bit better than we were expecting. Just wondering if there's any kind of mix effects that you'd call out there whether regionally or product type you know kind of given the commentary around incentive stabilizing. I think it's pretty much like for like.
We saw a stabilizing market that cropped through the quarter. And in fact, about half of the homes we delivered this quarter were sold in the quarter. And so we feel pretty good about market conditions right now. We've seen good stabilization and pricing and incentive levels. And when we see that, we're hitting absorptions in the communities. Have a community-by-community level.
maybe some room to flex up production or should we think about that 80,000 to sort of an upper limit of where you could go for the year.
I think the range we've provided for the years are realistic range given current conditions and our homes that we currently have an inventory and end production as we've already stated we do expect to incrementally increase our starts in the coming quarters. We saw a nice step up at our start for this quarter and would expect that to incrementally improve from here. But in terms of significant upside to the delivery this year, I think we would say that our current range is a realistic one.
under all circumstances. Okay, and the mortgage rate assumptions around the full year guidance are just kind of around where we are or anything you'd call it there? Current conditions. We guide based on current conditions if things change that obviously could affect our outlook. Okay, that's helpful. I'll turn it over.
Your next question for today is coming from Susan McLeary at Goldman Sachs.
Thank you. Good morning. My first question is, can you talk a little bit about what you're seeing on the rental side of the business? You know, as we've seen the four sales side get a little better in the quarter. Are you seeing any shifts there and how you're thinking about the outlook on the rentals? We have seen good pace on our ability to rent up both our apartments and
and single-family for rent. We have seen stability in rent rates. They've been increasing quite a bit over the prior 12 months, and we've seen stability there. On the purchase side, we still see activity in the market. We have certainly some units that we pushed out and sold consistent this quarter really would last in terms of number of units.
And then, you know, give in the outlook and, you know, the trajectory of demand, the way it seems to be coming together. Can you talk a bit about your appetite for land acquisitions? The land spend, I believe you said, was about flat sequentially. How are you thinking about that as we go through the next couple quarters? We're really just continuing to look at replenishing the supply market.
Okay, thank you and good luck.
Your next question for today is coming from Eric Bolashardt at Cleveland Research. Good morning.
Two things, first of all, I think the gross margin in the quarter was a bit better than you had targeted. What was different that drove the relative better gross margin performance?
I think the main difference was our pricing stabilized at a slightly higher level than we were projecting. We were not seeing signs of stabilization at the end of Q1, but once we got into the spring we've been able to see that really start to stabilize.
I think we've seen a stable stabilization a little sooner or a little earlier than we would have projected a quarter ago. We definitely saw a strong start to the spring selling season in the March quarter.
And as I mentioned before, half the homes we closed were sold in the quarter, so they benefited from some of those stabilizing and improving price environment. So we carried a fair number of completed specs into the quarter. And then secondly, in regards to
incentives or pricing. I'm curious if you can help with the what the average rate on closings is. I'm just trying to get a sense of where
rate buy downs are part of the effort, the magnitude of what that looks like, what the I guess in other words, what the magic number of rates are the bullseye that you need to get rates to to get consumers comfortable closing on homes.
Our average or general buy down is typically a point on the loan value. I would say there's been a lot of headlines out there, I think, talking about 5.5%. It fluctuates probably a little bit, but 5.5 is relatively reasonable in terms of what a consumer is.
is okay with at this point. Yeah, and that is roughly 60, 65% of our buyers are utilizing that buy down through our mortgage company. And so they're getting that benefit of that point by then. And then regarding the trend within that, is there been any...
change within that or is that kind of the bulls-eye that works and obviously the mortgage market moves around but is that five and a half the 60 to 65 is there been any variability in the trend around either of those? It's been pretty consistent certainly throughout the quarter and rates have stayed relatively consistent and we will fluctuate our rate to the market based on what we see in the...
Thanks, yet. Hey guys, good morning. Thanks for taking my question. Nice quarter. First question, obviously you guys are an entry-level builder, but you do have exposure at different price points and segments as well. So I'm curious if you're seeing any notable differences in terms of demand trends across your price points. And similar to that effect.
We have heard in recent quarters that, and I think you guys mentioned this as well, that there was a reluctance of buyers to kind of sit in backlog for a long period of time, given the volatility and rates, and you guys were holding specs off until they were further along in the construction process. Has that changed at all? Are you seeing, you know, with this stability now, are you seeing more willingness to maybe sit in backlog for...
time in backlog than they would have had six months or certainly a year ago. And so there's a confidence level that we're able to sell from that helps that buyer quite a bit.
Got it. And on the price point, a question, any notable differences and move up and active adults recognizing it is a smaller part of your business.
No, Alan, we really haven't seen market to market a significant difference in terms of levels of demand as we go up and down the price curve. Even where we are at the higher end of the price market, in any given market we're still at the value price point for that price.
We're still seeing that demand and for us if they've come off of a $700,000 price that means they may be looking for six or five and so we are catching those people I think as they move down the curve. And what still hasn't changed is the amount of existing home inventory out there and available. That remains very limited and so if somebody does want a home at a higher price point or a lower price point, new construction is where they can find it right now.
You also have the trend of migration from high-cost states to lower-cost states. It seems like a high-price point in Florida to our Florida operators.
is a relatively low price for somebody coming from New York or California. Understood. If I can squeeze in a follow-up on the rental segment. If I look at the average order price of your FFR homes, it's come down quite significantly, and I'm sure there might be some mix involved there since we're talking about a relatively small number of homes.
He's got 25, 30% decline in per unit price. I think this quarter's average is in the low 300s. Is that representative of what's going on in the market today, or have the trends mirrored the fore-style market? I think we've seen certainly through the fall with the disruption in the capital markets.
increases in cap rates for disposition of those properties, but largely what we saw this quarter was a change in mix of geographies of where those homes were being delivered and related rental rates and NOIs on those projects. So still feel good about the overall platform for sure, very excited about the opportunities that are in front of us with that, and excited that the capital markets have been stabilizing a little bit, which is going to help execution for sure. Thank you very much.
on the disposition of those properties. And also expect, on a go forward basis, to see a little more variability in our rental platform, just because we're selling whole communities in a time, and they could be townhomes or smaller homes or geographic location. Can cause that to move around a little more than our for sale business.
Until the volume and the number of projects closing in a quarter gets up to a larger level in a steady state, you're going to see a little bit more loppiness in the quarter-to-quarter stats there. And I will say...
It's very difficult to put a lot on the ground and to get a house built. Very little inventory out there and a lot of money chasing investment properties. So.
We think we have high hopes for this product segment. Appreciate the call, thanks guys. Your next question for today is coming from Raffi Judrosik at Bank of America.
Hi, good morning. Thanks for taking my question. I wanted to ask, how do you think about how your ability to offer rate buy downs impacts demand and sort of a volatile mortgage rate environment? Do you see volatility in weekly traffic and demand as mortgage rates move around or is your ability to offer a rate buy down to prevent that?
I think you can certainly see as rates shift in traffic, you're going to see that change, either up or down. But the sales cycle time isn't immediate, and so our agents and our realtor partners do a good job of maintaining those buyer relationships and our ability to offer some stability and multicl GET. This is...
and that rate helps us really at the close. And just certainty of payment gives confidence to the buyer. And at a 5.5% rate, we have more qualified buyers than we do at a 6.5% rate.
at the close. And just certainty of payment gives confidence to the buyer and you know at a five and a half percent rate we have more qualified buyers than we do at a six and a half percent rate. So it opens up.
ownership to more people if you're able to present that. Much easier to manage to the interest rate environment when now you're talking about 20 to 50 basis point moves in rates versus what we were experiencing in the back half of last year. I mean it's just not as impactful as what we had to manage through last year.
Thank you. And then just following up on an earlier question on how the gross margin came in versus your initial guidance for the quarter, it sounded like the pricing stability was higher than projected. Did you start to raise prices at all during the quarter and then the gross margin improved?
throughout the quarter or was there better elasticity where you didn't have to lower prices as much as you anticipated to to sell homes at the current rate.
versus the guidance we gave it was the latter we did not have to lower as much as we had been projecting necessarily but in terms of how we're actually managing community by community that's a mixed bag as we got into the spring and we did as Mike said we sold about half our homes that we closed this quarter in the quarter
So as we started hitting our pace, seeing a solid demand into the spring, definitely in certain communities we are starting to push pricing up. But carefully, but are pushing it up. Thank you very helpful. Your next question is coming from Buck Horn at Raymond James. Hey, thanks. Good morning. Before we leave the rental segments altogether, we wanted to just...
maybe drill down a little bit further in terms of breaking apart your expectations for single family rental versus multi-family for the remainder of the year. You mentioned that there's been some backing up of cap rate expectations, I guess, with higher cost of capital and disruptions in the capital markets. Is that more pronounced on multi-family versus SFR or vice versa or kind of what are you seeing in terms of buyer expectations for stabilized cap rates in either segment?
Other than saying higher than they were a year ago, on a go-forward basis, it does seem to have stabilized. I don't think it has been.
changing between the multifamily and the single-family rental. The relative gap that's there has not changed. Generally, the multifamily projects underwrite at a slightly lower cap rate, like for like. It's a more established market, it's a more known market.
But still very pleased with the performance we're getting from that segment and the disposition opportunities ahead of us over the next several quarters. Okay, that's helpful. Appreciate that. And maybe just kind of hypothetically just thinking ahead of here with challenges in the regional banking environment and maybe more capital constraints for...
particularly for smaller and your regional private competition, home building competition, that is, would you think that it's possible that more M&A opportunities might open up either later this year or in the next year if there's just more capital constraints on some of your small private competition out there? Well, we do believe that the capital constraints for the privates and smaller builders is going to be impactful in the future.
We see opportunities, we evaluate the opportunities, and based upon positioning people and market that they have, we'll pursue them or not. But irregardless, it's going to help us aggregate markets, whether it's via acquisition or picking up lots.
or just providing more inventory of availability than can be done by a private or small region. So it's an opportunity for us. Your next question for today is coming from Alex.
supply chain issues the following year. As you know, demand is pretty good here at 6, 6.5% rate.
If rates were to go down, say below six or towards five, you know, in the next year or something, you know, you're going to be able to get
What do you guys think you could do differently this time around to be able to capture and deliver on those homes, meaning
Have you guys thought of doing warehousing of materials or hiring crews to some level of the deliveries or some type of vertical integration? Any thoughts around anything you do different to be able to grow and not just kind of keep your deliveries limited?
I think there is just a built-in capacity issue in the industry. Even when you think you've got everything solved, then something else happens. I mean, the transformers that
I think there is just a built-in capacity issue in the industry. Even when you think you've got everything solved, then something else happens. The transformers that bring subdivisions to life.
could be a huge issue in getting lots delivered within the next 12 to 15 months. And so you're constantly looking at how are you positioned, where can we pick up incremental capacity, both in trade and in lots.
From a division level push, that is really kind of what we've been focused on, simplifying our operations, consolidating markets, consolidating trade capacity, and...
How do we improve our logistics of getting materials to communities?
But it's just within the entire industry if we had 100% of the trade material capacity.
But it's just within the entire industry if we had 100% of the trade material capacity, it would still be this price.
It's very difficult to put lots on the ground. Very difficult to get houses built. I do think that's why we're gaining market share because we are 100% focused on controlling capacity.
what percentage of your lots you own versus how many you option. And you obviously acquired four-star to kind of help in that process. But.
Is there anything else that you could do to, I guess, grow 4-star or do something to shift your ability to increase that ratio of own-to option even more?
Let's just continue to work. I mean it's day in day out developing trade or development partners and then building a trust relationship with them where they know when we bring up a deal or they bring us a deal that there's going to be the highest level execution.
from a housing standpoint of anybody in the industry. And it is hard work. It's to build relationships over time and maintain trust through any kind of market.
But we're just going to continue to work on it, try to get a little better next year.
There's no magic wand to make all that happen. It's hard work, it's trust, it's transparency, it's building relationships.
All right, well best of luck on your road back at $100,000. Your next question for today is coming from Mike Dahl at RBC Capital Markets. Morning, thanks for taking my question.
Just follow up on the lot side, you know, a couple of comments already on the call, but, you know, you know, the flexibility in your current portfolio, not necessarily getting too aggressive on offense. Yeah, I'm still expecting somewhat elevated option right off. I guess I'm wondering, you know, clearly as the market's improved to probably some deals that you.
have in your existing book. Maybe you didn't think they would pencil a quarter or two ago and now they might be. And any way that you could kind of ballpark, quantify what deals you think have kind of come back into the underwriting box on what makes sense today versus things you might have thought you would walk from prior. We have so many deals under contract and evaluation that.
the deals work and to find ways to bring those lots to market. So it's a constant evaluation process and you know the transparency and the relationships we've built over 45 years of doing this you know really help us achieve that. Got it. Okay and then second question just off of Dr.
I guess, you know, what's...
Do you think you'll keep targeting more of that dollar figure or should we expect as the year goes on that you move back to more targeting a certain level of either dilution offset or net share count reduction? Yeah, you know, it's always, obviously we're looking at both, the dollars invested as well.
projections going forward to the extent that our projections are improving and our cash flow prospects are improving versus what we've previously thought then that increases the chance of increasing share repurchase levels. But as of right now and as we're looking at the rest of the year and our positioning there and our
our needs for our capital to invest in the business, guiding to around the same level of dollar investment as last year is still where we expect to be, but that's something we'll be constantly reevaluating. Okay, thank you.
Your next question is coming from Jay McAnlis at Wedbush. Hey, good morning. Thanks for taking my questions. So if my math is right, I think this is the fifth quarter in a row where your average selling communities have been up year over year. I guess, and I think you talked a little bit about this earlier, David, what are the headMMMMMMMMMM Scientology centers pre functioning
we have an opportunity to pick up finish lots on some kind of roll or take.
We're going to pursue that aggressively. It's like controlling the lumberyard. If you control the lots...
you control the ability to meet capacity. I would anticipate the community can continue to decline.
When it was declining, it was because every time we opened a community it sold out immediately, which is a good thing too. The market is normalizing. There's much more stability, much better ability to look at the market, understand the absorption, set a start pace, and then we're going to
and kind of drive an efficient production operation. So, I guess that's a long way of saying yes. I do think you're going to see our community count continue to move on.
Okay, great. Yeah, it is a high class problem to have. And I guess the other question I have.
Pre-COVID, could you remind us for the fiscal second and fiscal third quarter, historically, what was the percentage of homes that you would sell and close interquarter?
That really bounces around quite a bit and it doesn't really have a whole lot of seasonality it's just kind of dependent on our inventory position at the time which is why we were able to sell and close 50% of our homes this quarter, inter-quarter sold and closed at the same quarter.
which is very high. A more normalized range would be somewhere between 30 and 40 percent. So when we think about Q3, it could still be elevated, but we don't necessarily expect to replicate the 50 percent.
Well, our backlog going into this quarter is much better than it was. Much better position, so. Yes. Okay, great. Appreciate it. Thank you. Again, things just feel to be normalizing. We have reached the end of the question and answer session and I will now turn the call over to David.
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