Q3 2023 D. R. Horton Inc Earnings Call
Yeah.
Good morning, and welcome to the third quarter 2023 earnings conference call for D. R. Horton America's builder, the largest builder in the United States at.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you wish to enter the Q&A queue. Please press star one on your phone at any time.
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 third 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 1995, 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 in its most recent quarterly report on Form 10-Q, both of them.
What's your filed with the Securities and Exchange Commission.
The earnings release can be found on our website at investors got yogurt in Dot Com and we plan to file our 10-Q early next week. 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 <unk>, Our executive Vice President and co Chief operating officers.
And Bill wheat, our executive Vice President and Chief Financial Officer.
For the third quarter. The D. R. Horton team delivered solid results highlighted by earnings of $3 90 per diluted share.
Our consolidated pre tax income was $1 $8 billion on an 11% increase in revenues to $9 7 million.
With a pre tax profit margin of 18, 3%.
Our homebuilding return on inventory for the trailing 12 months ended June 30 was 31, 8% and our return on equity for the same period was 24, 3%.
Despite continued higher mortgage rates and inflationary pressures pressures.
Our net sales orders increased 37% from the prior year quarter.
As a supplier of both new and existing homes at affordable price points is limited and demographics supporting housing demand remain favorable.
We are focused on consolidating market share specify more homes to meet home buyer demand.
Maximizing the returns and capital efficiency of each of you.
In each of our communities.
With improvements in both labor capacity and availability of materials, our cycle times are decreasing positioning us to release homes for sale earlier in the construction cycle.
We're pleased that we were able to increase our homebuilding starts to 22900 homes. This quarter, which was supported by a 6% sequential increase in our <unk>.
Active selling communities.
Our homebuilding operating margins are lower.
And the record high margins, we reported last year due to cost inflation and pricing adjustments and incentives we implemented two draft to address homebuyer affordability challenges caused by higher mortgage rates. However, our margin our margin to improve sequentially from the March to June quarter.
As home prices and incentives have stabilized and some reductions in construction costs are now being realized.
Homes closed.
We are well positioned with our experienced operators to first product offerings.
The lot supply and strong capital and liquidity positions.
We produce and sustain consistent returns growth and cash flow.
We will maintain our disciplined approach to investing capital to enhance our long term value of our company, including returning capital to our shareholders through both dividends and share repurchases on a consistent basis Paul.
Earnings for the third quarter of fiscal 2023 decreased 16% to $3 90 per diluted share compared to $4 67 per share in the prior year quarter net income for the quarter decreased 19% to $1 $3 billion on consolidated revenues of $9 7 billion.
Our third quarter home sales revenues were $8 7 billion on 22985 homes closed compared to $8 3 billion on 21308 homes closed in the prior year, our average closing price for the quarter was $378600 flat.
Actually and down 3% from the prior year quarter, Mike Our net sales orders in the third quarter increased 37% to 22879 homes and order value increased 26% from the prior year to $8 $7 billion, our cancellation rate for the quarter was 18% flat sequentially.
And down from 24% in the prior year quarter.
Our average number of acting active selling communities was up 6% sequentially and up 8% year over year. The average price of net sales orders in the third quarter was $381100 up 2% sequentially and down 8% from the prior year quarter.
To adjust to changing market conditions and higher mortgage rates over the past year, we increased our use of incentives and reduced the size of our homes to provide better affordability to homebuyers, although home prices and incentives have begun to stabilize we expect to continue utilizing a higher level of incentives as compared to last year our <unk>.
Sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share bill.
Our gross profit margin on home sales revenues in the third quarter was 23, 3%.
Up 170 basis points sequentially from March quarter.
The decrease in our gross margin from March to June reflects a decrease in incentive costs and lower stick and brick costs on homes closed during the quarter on a per square foot basis home sales revenues and lot cost for both flat sequentially, while stick and brick cost per square foot decreased 4% as.
As Mike mentioned, we continue to continue we expect to continue offering a higher level of incentives as compared to 2022.
But due to the recent stabilization in home prices and some reductions in both incentives and construction costs, we expect our homebuilding gross margins to be slightly higher in the fourth quarter compared to the third quarter Jessica in the third quarter homebuilding SG&A expenses increased by 6% from last year and homebuilding SG&A expense as a percentage of revenues was.
Six 7% up 10 basis points from the same quarter in the prior year.
Fiscal year to date homebuilding SG&A was seven 2% of revenues up 30 basis points from the same period last year as we've maintained the capacity of our platform to grow market share Paul we.
We started 22900 homes in the June quarter up 15% from the March quarter, we ended the quarter with 43800 homes in inventory down 22% from a year ago and flat sequentially 25000 of our homes at June 30th were unsold of which 5700 were completed.
For homes, we closed in the third quarter, our construction cycle time decreased by over a month from the second quarter, reflecting improvements in our supply chain, we expect to see a further decrease in our cycle time for homes closed in the fourth quarter, we will continue to adjust our homes and inventory and starts pace based on market conditions Mike.
Our homebuilding lot position at June 30 consisted of approximately 555000 lots of which 25% were owned and 75% were controlled through purchase contracts of 34% 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.
Our third quarter homebuilding investments in lots land and development totaled $2 $2 billion.
Up 25% from the prior year quarter, and 27% sequentially. Our current quarter investments consisted of $1 $2 billion for finished lots $700 million for land development and $290 million for land acquisition Paul.
During the quarter, our rental operations generated $162 million of pre tax income on $667 million of revenue from the sale of 1754 single family rental homes and 230 multifamily rental units.
Our rental property inventory at June 30 was $3 3 billion, which consisted of $1 $9 billion of single family rental properties and $1 $4 billion of multifamily rental properties. Our rental operations are generating significant increases in both revenues and profits this year as our platform expands across.
More markets for the fourth quarter, we expect our rental revenues to be greater than our third quarter and our rental profit margin to be lower than our third quarter Phil.
<unk> our majority owned residential lot development company reported total revenues of $369 million for the third quarter on 3812 lots sold with pretax income of $62 million.
<unk> owned and controlled lot position at June 30 was 73000 lots, 57% of <unk> owned lots are under contract with or subject to a right of first offer to D. R. Horton.
$270 million of our finished lots purchased in the third quarter were from <unk>.
<unk> is separately capitalized from D. R Horton and had more than $780 million of liquidity at quarter end with a net debt to capital ratio of 19, 1%.
<unk> is uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry.
And to aggregate significant market share over the next few years with a strong balance sheet lots supply and relationship with D. R. Horton, Mike financial services earned $94 million of pre tax income in the third quarter on $229 million of revenues, resulting in a pretax profit margin of 41, 2%.
During the quarter, 99% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 74% of our buyers FHA and VA loans accounted for 51% of the mortgage company's volume.
<unk> originated loans with DHA mortgage this quarter had an average FICO score of 723, and an average loan to value ratio of 88% first time homebuyers represented 56% of the closings handled by our mortgage company this quarter Phil.
Our balanced capital approach focuses on being disciplined flexible and opportunistic to support and to sustain an operating platform that produces consistent returns growth and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing mark.
<unk> conditions.
During the first nine months of the year, our cash provided by homebuilding operations was $2 1 billion.
And our consolidated cash provided by operations was $2 3 billion.
At June 30, we had $4 $6 billion of homebuilding liquidity, consisting of $2 6 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility homebuilding.
Homebuilding debt at June 30 totaled $2 7 billion.
Which includes $400 million of senior notes that we redeemed early in July .
Our homebuilding leverage was 11, 1% at the end of June and homebuilding leverage net of cash was 0.7%.
Our consolidated leverage at June 30 was 22% and consolidated leverage net of cash was 11, 2%.
At June 30, our stockholders' equity was $21 7 billion.
And book value per share was $64 three up 20.
23% from a year ago for.
For the trailing 12 months ended June our return on equity was 24, 3%.
During the quarter, we paid cash dividends of $85 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in August .
We repurchased three 1 million shares of common stock for $343 million during the quarter for a total of seven 7 million shares repurchased fiscal year to date four $764 million Jessica as we look forward. We expect current market conditions to continue with uncertainty regarding mortgage eight.
The capital markets and general economic conditions that may significantly impact our business.
For the full year, we currently expect to close between 82880 3300 homes in our homebuilding operations and between 6000 507000 homes in units and a rental operation.
We expect our consolidated revenues for fiscal 2023 to be in a range of $34 seven to $35 $1 billion, we expect to generate greater than $3 billion of cash flow from operations in fiscal 2023, primarily from our homebuilding operations.
We also expect our fiscal 2023 share repurchases to be approximately $1 1 billion similar to last year.
For the fourth quarter, we currently expect to generate consolidated revenues of $9 seven to $10 $1 billion and homes closed by our homebuilding operations to be in the range of 22000 823300 homes.
We expect our home sales gross margin in the fourth quarter to be approximately 23.5% to 24% and homebuilding SG&A as a percentage of revenues in the fourth quarter to be in the range of $6 seven to six 8%.
We anticipate our financial services pre tax profit margin of around 30% to 35% and we expect our income tax rate to be approximately 24, 5% in the fourth quarter.
We will continue to balance our casualty utilization priorities among our core homebuilding operation our rental operations, maintaining conservative leverage and strong liquidity paying an increased dividend and consistently repurchasing shares David.
In closing our results and position reflect our experienced teams industry, leading market share broad geographic footprint and diverse product offerings.
All of these are key components of our operating platform to sustain our ability to produce consistent returns growth and cash flow, while continuing to aggregate market share.
We will maintain our disciplined approach to investing capital to enhance hence 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 continued focus and hard work.
This concludes our prepared remarks, we will now host questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Also we ask that each participant limit yourself to one question and one follow up on today's call. One moment. Please while we poll for questions.
On the first question today is coming from Stephen Kim from Evercore ISI Stephen Your line is live.
Thanks, very much guys impressive quarter once again, so congratulations on that I wanted to talk about your construction your pace of construction.
And your goals going forward are you talked about growing your starts this quarter versus last quarter, but when we just look back you know maybe a year year and a half ago. There were a couple of quarters, where you started even more you started about 25000 units a quarter I wanted to get a sense from you as to.
Whether or not you feel like that's a level that you could achieve in the near term and if not why not and then also if you could talk about whether seasonality is going to be a factor we should be thinking about with respect to your starts cadence.
Yes, Stephen we have seen as we talked about a about a 30 day reduction in our cycle time and can see consistency and improvement as we as we travel throughout.
Throughout our divisions and seemed pretty pretty good balance with our trades and all the supplies that we need to continue with with improvement in cycle time.
Look at our starts pace it did tick up some and stayed pretty consistent with our closings, which has a cadence that we expect to see as we look towards the fourth quarter based on our sales pace and the strength of the market and where we have the lots and the ability to push that up a little bit we will but not looking to outpace the market.
Continue to to keep in that cadence and position ourselves for continued growth.
Yes.
Okay. So it sounds like.
I didn't really get a sense for whether 25000 is a significant figure in your mind and.
Why is that a level that we couldn't achieve a revisit simply because it wasn't that long ago, where you actually did that for you know like I said two quarters in a row and then also if I could tack on a second question about your rental platform you did give some guidance regarding routes being higher but margins being lower relative to the <unk> realm.
<unk> to <unk>, but.
Could you talk about your plans for rental inventory and dollars are carried on the balance sheet, where should we be thinking oh, you're going to take that level of investment, which I think is $3 3 billion. If I'm not mistaken right now is that going to grow meaningfully as we look into 2024.
And beyond or is that a level that you feel comfortable with maybe even begin to harvest some of that thanks.
Hey, David.
As to the 25000 stores per quarter.
We are very focused on increasing incrementally increasing starts quarter to quarter to quarter.
And.
We believe that.
And as we continue this process.
We will consolidate.
The labor.
Mobility capacity and with labor and materials consolidation.
Our ability to program out our starts and then continue to build the houses and gain efficiency in that process.
It's just a it's an ongoing effort.
So do we have a target out there of.
Got to get to this number no our target market.
Market by market flag by flag, how do we consolidate these markets and increase our market share.
And just by the nature of doing that we're going to get bigger and bigger and bigger.
And I'll, let Mike replied to the rental question.
That statement. So we expect that the margin on the fourth quarter closings in the rental segment will probably have a lower profit margin largely on the basis of mix of projects that are delivering between Q3, and then into Q4 a lot of it is on a cost basis difference between those phones that were built that are at different times and when their delivery.
And then in terms of our forward investment levels were at a total of about $3 $3 billion of inventory today.
Significant growth ramp in that over the last two years, we do expect to continue to grow that platform and we will see our inventory levels continued to grow over the next couple of years, but we do expect that growth pace to moderate from what it's been in the last two years.
Okay, great. Thanks, very much guys.
Thank you. The next question is coming from Joe how Theres Mare from Deutsche Bank, Joe Your line is live.
Thanks, and good quarter guys.
Thank you Dan one of the follow up on the community Count that's up about 9% year to date calendar year to date that is and I'm. Just wondering is there anything in there that we should consider that's more temporary in nature I am not going to straight straight line that released or anything or that and got sequential number but.
So we expect that to go down into the back half or are we going to sustain those levels are and then I have a follow up.
Sure. So we've been really focused on on our flag count mainly clearly had the lot position to open our new communities and to grow our community count, whereas the last couple of years, it's not and it is more of a low single digit percentage.
We feel like we're positioned to be closer to the mid single digits going forward not necessarily 9% going forward.
But around the mid single digits quarter to quarter, there can be some choppy.
Shopping is just determining when we closed out of communities and ultimately bringing them online.
But our lot position is there and our operators are focused on growing their fleet count.
It makes sense and just thinking about the homes and inventory number that was actually sequentially flat flattish. The last couple of quarters, even as you did grow those communities. So is it right to think that maybe this is part of returning to higher levels of inventory unit turnover or should we expect that the total homes in inventory will sort of.
It's up on a lag as you continue to grow starts.
We are very focused on improving our inventory turn is our construction cycle times have improved that that's facilitating that you know you look historically, we've typically when we go into a year with our number of homes in inventory, we've been able to turn that two times in the following year in the last couple of years has been slower than that and so we're looking to get.
Back to that more historic inventory turn level as we look to fiscal 'twenty four.
As I go back going back to the store question that is a factor in our stock base is making sure that we have the capacity to continue to deliver these houses and a more and a faster and more efficient way.
It's up.
All flows together.
So that we can actually deliver more houses with fewer homes in inventory quarter to quarter quarter to quarter.
That's great to hear thanks, very much and good luck.
Thank you. The next question is coming from John Lovallo from UBS, John Your line is nice.
Good morning, guys. Thank you for taking my questions.
The first one is it looks like the sequential improvement or the sequential cadence of orders for the second quarter to third quarter was better than normal seasonality by a bit I mean, I think normal seasonality would suggest down about 5%. It looks like they were down about 1% as we move into the fourth quarter, how should we sort of think about seasonality.
Which it looks like it's typically down call. It 15 to 20 per cent.
On a quarter over quarter basis is that a is that a reasonable way to think about the fourth quarter. What are the dynamics getting a little bit better out there, where you might be able to do a bit better than that.
Yeah.
Thanks, John I think we are seeing more normal seasonality. This year in terms of just demand traffic patterns and so I think our base expectations would be that that orders would show a bit closer to normal seasonality going forward you know.
But to our our approach and trying to be as consistent as we can and providing.
<unk> pace and a consistent level of inventory.
We're still a short supply of inventory out there in the existing home market and in the new home market.
We're going to make sure we've got enough homes out there to capture whatever demand there may be and so so our hope would be over the longer term, we could see a bit more consistency there, but there still is a natural seasonality in an ebb and flow to consumer demand that I think is getting back to a more normal level.
And I do I do believe.
We're going to have a lot more houses to sell this year, given the shortened cycle time, and our ability to to give people a date certain to close. So we were limited in the number of homes last year. So the comparison this quarter to last quarter a year ago quarter.
He is probably going to.
It is going to look better than <unk>.
Typical seasonality.
That makes sense, Okay, and then maybe just a bigger picture question. If we look at 2019.
D. R. Horton delivered 57000 homes in that ballpark versus the you know close to 83000 homes expected this year.
Industry wide single family starts were pretty similar in 2019 to what's expected today now you know, obviously horton and in the publics have been gaining share for years, but this is you know close to $45 50 per cent jumps since 2019. So I guess the question is how sustainable are these gains how important is your build strat.
D G to this performance and you know maybe how important is the lack of existing home inventory just to overall homebuilder success today.
I think yes, yes, and yes.
We've been focused for four years now one <unk>.
Simplifying this business can and creating a level of consistency that didn't exist in.
The Eighty's Ninety's early two thousands.
And.
Jokingly call it building a real business.
I believe we have and are doing that.
Coming out of the downturn.
There was tremendous opportunity consolidate market.
But we didn't have the liquidity and balance sheet to do it so.
As we have.
Through this.
Last 15 20 years.
15 years I guess.
Our goal has been to create a company.
With our balance sheet and the liquidity to take advantage of any disruptions in the market.
And since 2019, it just seems like a lease.
Quarterly you either coming out of it or going into another.
Option so.
It's the power of the platform and we talk a lot about it and I think youre seeing that play out.
People.
Uh huh location product.
Just trying to simplify the business and create affordability.
Two high level nobody else can achieve.
And that's going to consolidate these markets.
Thank you very much.
Yes.
Thank you. The next question is coming from Carl Reichardt from BTG Carr. Your line is less thanks, Good morning, everybody and Bill you mentioned stick and brick down 4% per foot I think year on year could you break that out in terms of what materials are helping most obviously lumber and then labor and the reason I ask is I'm assuming that.
We're starting to see some leverage from the single family and multifamily rental platform part of the reason you're trying to grow that business as did it add scale in your markets. The lower overall construction cost. So I'm wondering if that's starting to help there.
Right now as we look at the components of the home across the materials. It is primarily lumber right. Now there is some minor moves C. Both directions really across the other components of the homes, it's primarily lumber there.
We are on the front edge of starting to realize some improvement in labor as well as the homes that we have been starting over the last quarter or two have been at a lower cost than what we had there for a while but I think we still expect a bit more improvement there with lumber.
And and then really the forward cost structure really depends on what the capacity of the industry is in and what what all builders are doing so.
So a bit a bit more improvement there, but as we continue to add scale.
Which does include our rental platform as well, we definitely have advantages and opportunities to continue to leverage that to drive our cost structure down, especially relative to the rest of the industry.
Okay. Thank you Bill and then David.
The private builders talking too we've seen sort of you mentioned normal seasonality to the slower market maybe than they had expected starting to some Rob I don't know if that's just a particular bakeries are being small and private no can't harder to do buy downs of our capital constraints to be higher and that you purchased a private during the quarter and you've got presence in a law.
The markets, where the smaller privates really make up the bulk of your competitors in some cases all of them has there been much movement in terms of interest willingness or or need to sell among the privates.
Right now just given what they're facing relative to what the public SAB advantage wise. Thanks.
Carl we talk about it.
A lot it seems like in the last couple of years, but it is really hard to put a lot on the ground.
It is really hard to build houses.
These private guys now they've got a struggle with.
Capital from either private or banks increasing in cost.
No.
Yeah, we do we have the opportunity to talk to a lot of these guys. Yes, we did.
But it's going to take unique opportunities for us.
The invite them into the family because.
We do have a special culture here and we're not going to screw it up.
Ryan to force a square Pentagon around at all.
Excited about the metric ton with Centurylink in terms of the Rd, and having been one of our largest developers in our Gulf Coast region, and so we picked up <unk> homebuilding operations that Nathan talks and his team will continue to be a key component in terms of developing lots today and for us in the Gulf Coast, and I will say I've had a personal <unk>.
Relationship with Nathan cuts for 15, plus years and he is an example of somebody that absolutely mirrors our culture.
Super quality built.
Built a good company.
And we're going to be in business with for a long long time.
Okay I appreciate it thanks al.
Thank you Carl.
Thank you. The next question is coming from Mike Rehaut from J P. Morgan Mike Your line is lives.
Great. Thanks, I appreciate it.
Wanted to circle back to an.
Earlier answer that you gave around thoughts around your four Q demand and order trends.
You know last month, you had Lamar talk about their third quarter.
Orders being a little bit above two Q and our K.
Kb.
Talking about normal seasonality be muted in the third in their third quarter.
All based on not only strong demand, but also kind of filling a void.
For the lack of supply that's out there and and and the strong.
Demand for that new homebuilders can provide as a result, so you know just going back to your comments I think bill you kind of said, perhaps normal seasonality, David I think I heard you say, perhaps better than normal seasonality.
I was hoping to kind of get a finer tuned.
Tuned answer there in terms of.
What you think your capacity is to meet demand.
You know again is there an ability to.
Take orders that is similar to the third quarter level. If you see the demand there in the end and I would assume you'd be just as interested in taking as much share as you can or going back to an earlier question as well is there any type of production constraints that might hold you back there a little bit.
Sure Mike So I mean, we're not even necessarily quarterly results were in this for a long term and can build as much shareholder value as we can over the long term so quarter to quarter to quarter as you've heard David say over and over we're focused on being consistent and as we talked about it's all tied to our starts pace.
We're not in the energy into a sales number in Q4, and if the market's there and our cycle times continue to improve we might be able to see a little bit better than normal seasonality. If you know the market where do weekend for some reason or and we don't get as many homes started ultimately you know it can be less than normal seasonality.
Right now we feel like we're positioned to increase our start slightly from where we were in Q3 and also as we've talked about our construction cycle times have continued to improve in our flag count has grown and so we feel like we're very well positioned but frankly, we're more focused on positioning for 24 at this point than we are worried about and Q4.
I mean, we're going to finish out the year very strong and generate strong returns and continue to add to book value and positioning ourselves to go do the same in 2024.
Okay I appreciate that I.
I guess, maybe then turning to 'twenty four.
When you look at your backlog conversion at the beginning of the year relative to what you deliver.
Yeah.
That's you've kind of hit a four times, maybe low four times a turnover in other words your backlog turned over four times in terms of the amount of closings, we were able to achieve that the height was in 2020.
At 4.8.
It looks like you know on a rough basis, you'd probably be closer to five times or above maybe even six times given where.
Potentially you're your backlog could be at the end of this fiscal year. So you know given the fact that you're looking for you know community count growth is it still reasonable to expect a kind of a high single or even low double digit.
The closings growth number for next year or again.
You know just given the the physical constraints of turnover and in other.
You know the fact that cycle times are improving but not back to where they were.
Are there any other items to consider.
Sure. Mike is we're just we're looking to fiscal 'twenty four.
And we've talked about this before we always try to position ourselves with our with our lot position with our homes and inventory. So that we're in a position to deliver close to a double digit growth you know high single, 10% type type growth and so that's what we're doing again is positioning our inventory so that we're in a position there in the market that we see today I think it's there for us if we can get.
Get our lot positions in our in our homes and inventory.
Ready for that and with improved cycle times that and that helps us improve our inventory turnover and I think we focus a lot more on our inventory turn our inventory conversion than we do backlog backlog is just really just a factor of when we choose to sign a sales contract on a home we focus on our starts pace what.
Homes, we have in inventory and then we adjust when when we're going to release those for sale based on when we have confidence that we can deliver that home. So every home we start we will close.
And if we're turning those faster than that will improve the inventory turnover and an improved honestly improves your visibility to see what our closings are going to be as well. So it's really about our starch based <unk> are empty inventory positioning and then how efficiently can we turn that.
As a reminder, we sell and close generally 35% to 40% of our homes intra quarter. So you never see those in our backlog that we're reporting and at quarter end anyway, which is why it build the leading home starts in our homes and inventory being a better driver an indicator of what we're going to close any forward period.
Great. Thanks, so much.
Hi.
Thank you. The next question is coming from Matthew Bouley from Barclays.
Your line is less.
Good morning, Thank you for taking the questions I wanted to ask about lot costs. I think you said lot lots on a per square foot basis, we're actually.
Flat sequentially, which is maybe a little surprising given the shortage of of lots out there as you alluded to could you speak to a little around whats implied near term.
And your margin guidance around a lot costs and then just sort of more broadly how are you thinking about managing inflation and lots going forward. Thank you.
What we're seeing today in the closings are lots that were contracted in acquired quite some time ago and coming through so we're not seeing a lot of cost pressure coming through going forward along with the lot scarcity up we're expecting to see a lot costs coming through in forward got forward margins at a higher level, there's certainly been inflation in land and lot development costs.
And then finished lot prices. So we expect to see that but that's factored into our guidance and in the way we're <unk>.
Planning for the business next year.
Okay got it thank you for that and then secondly.
Secondly, just on the topic of mortgage rate buy downs I'm curious if you can kind of educate us a little around you know how that dynamic may change, depending where prevailing mortgage rates go. So you know if if we were to see a rise in mortgage rates from here for example.
You know, what what level or what ability do you have to you know what.
What's kind of the maximum level of rate buy down I guess, you could do and Conversely, if rates were to come down.
Would you continue to buy down rates by the same amount or would you actually reduce the size of your mortgage rate buy downs just curious around how all that may play out. Thank you.
Yeah, the rate buy down for us has been an effective incentives and to help us provide as we've improved our cycle time as well a certainty of close date.
Certainty of home payment and.
We have stayed roughly a point below the market and we'll have to measure that as we move forward, depending on where rates move whether that'd be up or down, but we have found it to be one of our most effective incentives.
And we have been consistent in that execution, and we will continue to explore that as the as the interest rates move in and on a go forward basis.
Alright, well, thank you and good luck.
Okay.
Thank you. The next question is coming from Eric Bosshardt from Cleveland Research Research company.
Eric Your line is nice.
The gross margin progress in the quarter.
Was notable in and you talked about I guess a bit more progress in <unk> I'm curious if you could help us.
Get a sense of how we should be thinking about the path of gross margins from here you've done a good job historically outlining ranges, but in in the world, which seems like it's stabilizing for you know how.
How should we think about the range of path of gross margin.
Yeah Erika.
What we have visibility to is basically what's in our backlog and what's been in our recent sales and then we certainly have visibility to what our recent cost levels have been so we've been seeing the costs on our more recent starts be lower so we've got some visibility to what that could produce.
Right now as we look at our reason backlog and sales we see a sequential.
Modest improvement in margin up to the high 20, threes 224 range in Q4.
You used the word stabilization last quarter, we use that word quite a bit and so we again, we're still seeing that.
And so I think we are kind of settling into a more stable.
Youll period here in terms of our cost and demand has been pretty steady as well so I think.
We certainly don't see a.
The trajectory and margin forever upward, but but the modest improvement into the coming quarter looks like a pretty sustainable level here in the in the near to medium term, but a lot of tailwind from limited inventory supply at affordable price points are helpful to margins and then interest rates are the biggest risks to margin significant significant increases in interest rates will occur.
Compress our margins.
But within this you've mentioned a moment ago buying rates down a point below market is better.
But silver bullet or something that's been a catalyst for consumers to do it.
Go ahead and sign a contract.
I'm curious if you're seeing.
That's just the way, it's going to be or if youre seeing consumers.
Coming more comfortable with the reality and the days of a 3% mortgage are long gone I guess, what I'm trying to figure out is that can you get away with buying down rates less now.
Now are you seeing consumers a bit less sensitive or is this that medium term reality that we should expect.
The interest rate buy down is an incentive like many that we use and we have a lot of different levers that we may pull market by market our community by community based on the needs of the buyers walking in the door.
It has certainly been a hot button today because of the meteoric rise in rates and People's adjustment to that.
As that adjusts it'll just ebb and flow with different incentives, whether that's closing costs or price or included features.
It's been a good tool for us today, and we will adjust to the market as it comes out it was still on a majority of the homes. We closed in the third quarter, but it was at a lower percentage than it was in Q2.
In terms of the number of buyers utilizing.
Great. Thank you.
Thank you. The next question is coming from Ken Zenner from Seaport Research partners can your line is live.
Good morning, everybody.
One again.
I wanted to take.
Two questions here, one I just wanted to kind of focus on capital and cash flow and the other is going to be about just where we are on kind of the level of business by community versus in the past. So your ability to match EPS and cash flow has been improving I think 3 billion of cash flow to pay about 4 billion net income so that's 75%.
Obviously multifamily plays into that but could you specifically talk to the 53% of option lots that you expect to be finished.
What limits this from going higher perhaps and what kind of factors determined whether youre, taking down finished or raw.
Land in those option structures and just refresh us.
And what that raw first developed Lacoste is so we can understand the inflation inherent in those raw lots.
Sure.
Sure and Ken and then I'm sure. My question was going to China, and the true up piece of it but in terms of the 53% and that we said in our scripted remarks of our option lots that we expect to be purchased finished and that's just at a point in time, So that's where we've already determine who's going to develop those lots for us and we know we're going to.
And down at the finish line that's by no means the ceiling.
We're now closing 60 plus percent of our houses quarter to quarter on a lot purchase from a third party developer and so we are in the normal course of business will contract with the land seller as D. R. Horton.
And on the contract and then we'll go find a land developer said that 53% is more of a floor.
Necessarily.
Thank you said it very well, we're going to take a piece of dirt entitle. It and then in that process look to work with a third party developer in some cases to assign that contract too.
<unk> acquired the land parcels and then they'll complete the lot development and sell US finished lots that will then start constructing homes on overtime. So that 53% expected would go up but we will choose in some cases to develop the neighborhood ourself in every one of our markets. We have great teams in place that are capable of developing their own lots as well as Nick.
Shifting to buy finished lots from third party developers and Ken to circle back to your initial comment about capital and cash flow and percentage of cash flows relative to our to our earnings we are seeing a big improvement in that this year and that's what we were expecting to see this year I would tell you that that big move is being driven primarily by the improvement in our cycle times by our construction cycle times.
We don't have as much capital tied up per home.
Our homes in inventory because we are turning those faster.
Definitely our land shift over many years has been a component of that over time, but this year, specifically, it's more about our homes and inventory turnover improvement.
Great and so.
I guess, just a follow up to that why would you want to develop a land.
As it relates to you know.
Other builders are one specifically that is absent that and then the other question, which I'm still struggling with why not just try to normalize.
Housing.
Is your starts pace or your pace per community is about $4 six.
This year it used to be about $3 six why is that the new normal basically I mean, you got one.
Pushed down.
Sales pace for no reason, but like why are we so far above where we used to be as an industry. It's not just you guys. If you could explain that thank you.
Yes, I think on the lot development question, we have talented teams across our platform and there are instances, where it's important to us and our starch basis, we have to have a lot on the ground and so controlling that process and being good at producing that largest talent and we're going to retain and we have.
To continue to exercise that in order to do so in some deals just make more sense for us to develop from a timing perspective, <unk> structure and our size and so we're going to make that decision community by community across across the platform.
In terms of our absorption per community I, just I think that you've seen.
Some larger communities that may be a portion of that impacting sales and positioning of those communities to drive more efficient activity both on the construction and sale side.
Yeah, I'm not sure I've got an answer for you for sure Ken If you don't know the answer I'm sure. We don't either in terms of why the industry's improved only thing I could come up with as you have seen a shift in this industry to focus more on returns.
And as we focused on returns that really comes down to being more efficient with every asset you have and so if you can improve your absorption improve your turns in each community. Your returns on capital are improving and so perhaps you're seeing a little bit of that come through in your observation of looking at a higher pace higher absorptions over over time across the industry.
Thank you.
Thank you. The next question is coming from Mike Dahl from RBC capital Mike Your line is live.
Good morning, Thanks for taking my questions a.
Couple of follow ups on the rental side.
So yeah, there was a pretty well publicized deal between yourselves and a large FSFR company.
Within the quarter and the guide.
Any color you can provide on how much of that deal already closed in <unk> and whether or not the increase in the guide for the year is requests the full closing of that or if there's going to be some carryover into fiscal 'twenty four.
Sure our guide on rental does and will continue to just incorporate that the homes that we closed in our leasing pace and when those projects are available to be sold and marketed and so we've sold projects on a one off basis, but as we continue to scale that business, it's opening up additional and interested investors, who you know theres any.
So money that doesn't necessarily want to buy just one project at a time, they're interested in buying a portfolio of projects and the deal you were talking about was press speculation. We havent publicly commented on any specifics in that transaction and that when we look at our rental communities, whether we're selling multiple projects to one investor or not they are all.
Real estate transactions and so we would continue to point to our disclosures on a unit basis in terms of the number of completed homes, we had and rental units and in terms of what that forward pace of sales looks like and we will continue to do sales of individual projects and I'm sure. We'll continue to do packages in the sales and going forward.
All right.
Okay got it and I guess, a follow up there so without the specifics.
Given the total units you are now guiding to in the inventory that you've outlined you will close a significant portion of your existing.
Inventory in four Q and so I fully understand that this is a growth part of your business for the next couple of years, but just circling back to a question.
I think earlier on the call around specifics on 24 should we be thinking that you've kind of pulled forward the timing of when some of that inventory you might have expected.
Those in terms of closing 23 versus 24, so maybe it's a little a little lower in 'twenty four or are you really in a position where even with this increased guide you can keep growing in 'twenty four offset.
We've generally been talking about our rental platform cannot combined that in our 10-Q, you can see a breakdown and we do give our unit breakdown separately.
<unk> 24 is going to be a pretty big growth year from a multifamily perspective, and we're going to continue to scale the single family, but as we scale those sides of the business. It can still be choppy quarter to quarter and year to year with ultimate overall growth on an annual basis as expected.
Okay, great. Thank you.
Thank you. The next question is coming from Alan Ratner from Zelman and Associates Alan Your line is live.
Hey, guys good morning.
So you know very impressive progress on the cycle times on the cost front.
Guessing what we're seeing now is probably somewhat of a lagged effect of that.
Big pullback in starts the industry saw late last year and in the negotiating power you had open trading at that time and of course, the pullback in lumber.
Youre not the only ones ramping your start pace now I think we're hearing similar messages from most of your larger competitors, maybe some of that's at the expense of the smaller private but I think it's clear the industry start pace is going to be accelerating here for the next handful of quarters at least so.
What are your thoughts on the sustainability of the progress you've made on cycle times and costs, you know heading into 'twenty four and more specifically what are you seeing from your trades are they ramping their head count in anticipation of an accelerating start pace going forward or are they or you're seeing more capacity out there.
That would that would support this type of growth without cost inflation following.
Yes, it's something we work on every day.
Aggregating market share.
<unk> aggregating trade base and materials within those communities.
And we've been talking about a consistent.
Dark pace when we've been talking about simplifying the process.
And making it easier for our tries to get to and from the job with the right materials. Okay.
Fleet understanding of what they are doing that is allowing us to aggregate. These trades.
Our goal here.
Communication is we want to be the builder they want to work for.
And.
And we do a lot of things to try to make their job easier and more profitable without coming in and trying to renegotiate price every quarter.
So is it sustainable yes.
I think that we're going to continue to focus on that.
And as time goes on we will get better.
And basically build.
Capacity month to month quarter to quarter.
On a continual basis.
Got it I appreciate that I appreciate the thoughts there.
Second you know Jessica you you mentioned earlier that while you're still offering mortgage rate buy downs on the majority of closings. It did tick a little bit lower quarter over quarter in terms of our share of closings that had those buy downs.
I was curious if you and if you had that specific data you could share with us would be are you seeing any sensitivity to demand in the communities may be where you are dialing back those those buy downs you know on one hand.
The buy down to probably putting you guys in such a strong competitive advantage versus the resale market, but on the other hand with inventory as tight as it is in demand seeming seemingly pretty strong it would seem like you should have some ability to pull back on those without impacting demand too much. So I'm just curious the interplay between that.
The use of the rate buy downs is about 10% less than it has been as we look over the last few quarters and that sensitivity is a is a community by community and buyer by buyer process. We have great sales agents in each of our communities that go through that experience.
With every buyer that walks in and finding what's important to them is what they do very well and so we will continue as we mentioned to utilize that and certainly that reduction shows some stability in rates, although they've moved up they've remained in a similar range and I think people are getting comfortable with their purchasing power has.
Allowed some of some of the relief of that use <unk> them not being as concerned about it.
As the thing that is important to them in a purchase.
Great I appreciate the color thanks, guys.
Thank you. The next question is coming from Truman Patterson from Wolfe Research Truman Your line is live.
Hey, good morning, everyone. Thanks for fitting me in.
First just the this has been touched on a little bit earlier in the call, but just trying to get a big picture overview of the banking environment and what it means.
No means for Horton.
Has the banking environment.
Currently negative negatively impacted your developer partners kind of outside of four star.
Their ability to access capital for future projects.
For smaller private builders are you actually seeing them kind of pulled back on spec construction.
Land deals et cetera.
I think with a lot of the third party developers, we work with we have a long relationship with them and in a lot of cases, they are banking where financing sources are kind of looking through their developer tool were keep looking through to the land contracts and working with us and they take great comfort in that and we've been able to continue to sign up new deals.
Over the past quarter that have secured new financing commitments for third party developers through the process is it as easy as it was or as inexpensive as it was certainly not it is more challenging I do think that the.
Banking industry is being more selective and who and what levels, they're choosing to support third party developers.
On the private builder side, we've probably seen a little more opportunity to step into some positions and it helped those builders with some liquidity and.
Opportunities by taking some of their lots are stepping into different positions. So it's it has been if anything a bit accretive to the business and we're just here to help.
Perfect. Thank you and then.
We have discussed previously.
Previously about rotating the smaller square footage offerings to.
Combat affordability.
Any way you can help us think about or are you seeing consumers actually prefer the smaller square footage homes over the past six months or you know based on the offerings that you have out there or are consumers still kind of preferring the larger square footage homes.
Okay. They prefer what they can afford so what we generally see is that buyers continue to want as much square footage as they can get but they are constrained by what they can afford which is why we continue to start more and more of our smaller floor plans. We did see a slight tick down on a year over year basis again by about 2% and the terms and.
Square footage on our homes closed it was flat sequentially. So we would expect just continued very gradual moves down and our average square footage today.
Alright, Thank you and good luck in 'twenty four.
Thanks Shannon.
Thank you and the next question is coming from Rafe <unk> from Bank of America, Ralph Your line of sight.
Hi, good morning, Thanks for taking my questions.
You mentioned that build cycles have come down 30 days from peak levels and we expect them to continue in the fourth quarter can you just talk about where they are now versus historical levels and then beyond the fourth quarter. As you look into next year, how should we think about further potential improvement like what that could do for your for your asset turns.
Yes, we are.
Today down that 30 days puts us at about five and a half months and our current cycle time, which is still slightly above our historical averages and so we see a trend towards more towards our.
Normalized and consistent.
Cycle times.
That's going to depend on labor availability and our ability to continue to to aggregate that labor as you see starts pace increase across the country. We could certainly see some pressure on that but feel feel comfortable in our position and with the trade capacity that we have in labor markets today, our build time of that at five and a half.
<unk> has come down about a month and we probably have another month month and a half to go to get back to where we have been historically when you're operating at a more efficient level and then there's probably another 45 days to 60 days after that what we call construction completion until we hit the home closing date. So on average we're looking to get into a two or a little better than two times turn of inventory units.
Implies a 6% slightly less than six months start to closing cycle time.
Got it. Thank you that's helpful. So there's still more opportunity.
And then just on the rental profit outlook for the fourth quarter that gave you. The guidance is units will be up.
Quite a bit, but youre thinking about rental profits being down.
Or should we think about gross margins there being lower than kind of core homebuilding longer term is there any dynamic that's driving that that margin kind of cadence short term or is it something we should be thinking about it longer term.
Yeah, It's really a short term thing and as Mike mentioned earlier as part of it is the mix of the projects that we see coming through in the time in which those homes, where construction was the time when we were seeing higher construction costs as well. So we really see that as a Q4 event and as we look longer term from a gross margin.
<unk> and really pretax margin perspective, we would expect our rental to still be higher than our than our homebuilding margins.
Margins overall, maybe a little bit of anomaly here in Q4, but not a long term phenomenon.
Okay, great very helpful. Thanks.
Thank you that's all the questions. We have time for today I would now like to hand, the call back to David Auld for 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 fourth quarter results in November .
And finally, congratulations to the entire D. R Horton family.
Producing a solid third quarter.
To compete.
When every day thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.