Q4 2023 D. R. Horton Inc Earnings Call
Good morning, and welcome to the fourth 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.
If you wish to enter the queue you May press star one on your phone at any time I will now turn the call over to Jessica Hansen Senior Vice President of Communications for D. R. Horton.
Thank you Tom and good morning, welcome to our call to discuss our fourth quarter and fiscal 2023 financial results before we get started today's call includes forward looking statements as defined by the private Securities Litigation Reform Act of 1995, although D over and believes any such statements are based on reasonable assumptions. There is no issue.
Orange 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 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 its annual report on Form 10-K, and subsequent reports on Form 10-Q, all of which are filed with the Securities and Exchange Commission.
This morning's earnings release can be found on our website at Investor <unk> D. R. Horton Dot com and we plan to file our 10-K late 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 executive Vice chair.
Thank you Jessica and good morning.
I am pleased to also be joined on this call Paul Rowland ASCII, President and Chief Executive Officer.
Mike Murray, our executive Vice President and Chief operating Officer.
When we talk about our results I'd like to congratulate Paul on his well deserved promotion to CEO.
The first of October.
We have built a very finish transition and catalyst for quite some time.
<unk> our leadership throughout the company for the future.
We'll still be actively involved as executive Vice chair.
Board of directors Alright.
Paul has the support of our executive region and Division leadership.
Although our results linear Horton team finished the year with a solid fourth quarter results highlighted by earnings of $4.45 per diluted share a consolidated pre tax income was $2 2 billion.
On a 9% increase in revenues to $10 $5 billion with a pre tax profit margin of 19, 2%.
For the year earnings per diluted share was $13 82.
And our consolidated pretax income was $6 $3 billion with a 6% decrease in revenues to $35 5 billion.
With a pre tax profit margin of 17, 8%.
We closed a record 91002.
204 homes and apartments this year in our homebuilding and rental operations.
Cash flow from operations for 2023.
Four 3 billion.
Despite continued higher mortgage rates and inflationary pressures, our net sales orders increased 39% from the prior year quarter.
As a result of both new and existing homes at affordable price points is limited.
The graphic supported housing demand remain favorable.
With improvements in both labor capacity and availability of materials, our cycle times are decreasing.
Turning us to improve our housing inventory turns.
We are well positioned with our experienced operators affordable product offerings flexible lot supply and strong capital and liquidity positions to generate strong cash flows and produce consistent returns.
We will maintain our disciplined approach to investing capital to enhance the long term value of the company, including returning capital to our shareholders through both dividends and share repurchases on a consistent basis of earnings for the fourth quarter of fiscal 2023 decreased 5% to $4 45 per.
<unk> share compared to $4 67 per share in the prior year quarter earnings for the year decreased 16% to $13 82 per diluted share compared to $16 51 in fiscal 2022.
Net income for the quarter decreased 7% to one $5 billion Arkansas.
Consolidated revenues of $10 5 billion and for the year net income decreased 19% to $4 7 billion on revenues of $35 5 billion.
Our fourth quarter home sales revenues were $8 $8 billion on 22928 homes closed compared to $9 $4 billion on 23212 homes closed in the prior year, our average closing price for the quarter was $382900 up one <unk>.
Sequentially and down 5% from the prior year quarter, Mike Our net sales orders in the fourth quarter increased 39% to 18939 homes and order value increased 34% from the prior year to $7 3 billion or.
Our cancellation rate for the quarter was 21% from 18% sequentially and down from 32% in the prior year quarter.
Our average number of active selling communities was up 2% sequentially and up 10% from the prior year the average price of net sales.
Orders in the fourth quarter was $383100 up 1% sequentially and down 4% from the prior year quarter to adjust to changing market conditions and higher mortgage rates. We have increased our use of incentives and are reducing the size of our homes, where possible to provide better affordability for homebuyers we.
<unk> to continue utilizing a higher level of incentives in fiscal 2024, particularly rate buy downs and the current interest rate environment or.
Our 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 in aggregate market share.
Our gross profit margin on home sales revenues in the fourth quarter was 25, 1% up 180 basis points sequentially from the June quarter the.
The increase in our gross margin from June to September reflects the slight increase in our average sales price and lower stick and brick costs on homes closed during the quarter.
On a per square foot basis home sales revenues were up two 5% sequentially, while stick and brick cost per square foot decreased two 5% and what cost increased 6% as.
As Mike mentioned, we expect to continue offering a higher level of incentives in fiscal 2024 to help address affordability due.
Due to recent increases in volatility in mortgage rates are incentive costs have increased on recent sales and we expect our homebuilding gross margins to be lower in the first quarter compared to the fourth quarter Jessica in the fourth quarter, our homebuilding SG&A expenses increased by 2% from last year and homebuilding SG&A expense as a percentage of revenue.
As was six 6% down 10 basis points from the same quarter in the prior year for the year homebuilding SG&A was seven 1% of revenues up 30 basis points from fiscal 2022, we will continue to control our SG&A, while ensuring that our platform adequately supports our business. Paul we started 20 <unk>.
1100 homes in the September quarter down 8% from the June quarter. We ended the year with 42000 homes in inventory down 9% from a year ago and down 4% sequentially 27000 of our total homes at September 30th were unsold of which 7000 were completed for <unk>.
Homes will be closed in the fourth quarter, our construction cycle time decreased by a month from the third quarter, reflecting improvements in our supply chain, we will continue to manage our homes and inventory and starch pace based on market conditions, and we expect further improvements in our cycle times and housing inventory turns in fiscal 2020 for Mike.
Our homebuilding lot position at September 30th consisted of approximately 568000 lots of which 25% were owned and 75% were controlled through purchase contracts, 35% of our total owned lots are finished and 54% 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 fourth quarter homebuilding investments in lots land and development totaled $2 3 billion up.
Up 7% sequentially. Our current quarter investments consisted of $1 5 billion for finished lots $580 million for land development and $290 million for land acquisition for the year, our homebuilding investments in lots land and development totaled $8 billion up.
Up 6% from fiscal 2022 call.
In the fourth quarter, our rental operations generated $217 million of pre tax income of $1 $4 billion of revenues from the sale of 3006 single family rental homes and 1582 multifamily rental units for the full year, our rental operations generated 524.
Our rental property inventory at September 30 was $2 7 billion, which consisted of $1 $3 billion of single family rental properties and $1 4 billion of multifamily rental properties, our rental operations generated significant increases in both revenues and profits this year as our platform is maturing.
And expanding across more markets due to the rise in interest rates and volatility and uncertainty in the capital markets. We are not providing separate guidance for the rent for our rental closings in fiscal 2024 based on the current pipeline of rental projects. We do expect to have more multifamily unit closings in fiscal 2000.
24, then in fiscal 2023 Bill.
<unk> our majority owned residential lot development company reported revenues of $550 million for the fourth quarter on 4986 lots sold with pretax income of $95 million for the full year <unk> developed delivered 14040 lives generating $1 $4 billion of revs.
<unk> and $222 million of pre tax income with a pre tax profit margin of 15, 4%.
<unk> owned and controlled lot position at September 30 was 79200 lots or 60% of <unk> lots are under contract with a subject to a right of first offer to D. R. Horton.
<unk> had approximately $1 billion of liquidity at year end with a net debt to capital ratio of five 5%.
<unk> is uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry and to consolidate significant market share over the next few years, which is with its strong balance sheet lot supply and relationship with D. R. Horton, Mike financial services earned $85 million of pre tax income in the fourth quarter on 220 million.
Revenues, resulting in a pretax profit margin of 38, 9% for the year financial services earned $283 million of pre tax income on $802 million of revenues, resulting in a pretax profit margin of 35, 3%.
During the fourth quarter virtually all of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 76% of our buyers.
And VA loans accounted for 51% or the mortgage company's volume.
Borrowers originating with D. H M mortgage this quarter had an average FICO score of 725, and an average loan to value ratio of 87% first time homebuyers represented 55% of the closings handled by our mortgage company this quarter Bill.
Our balanced capital approach is disciplined flexible and opportunistic to support our operating platform and produce 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 market conditions during fiscal 2000.
And our cash provided by homebuilding operations was $3 1 billion.
Over the past five years, our homebuilding operations have generated $9 $6 billion of cash flow.
At September 30, we had $7 5 billion of consolidated liquidity, consisting of $3 9 billion of cash and $3 6 billion of available capacity on our credit facilities, we repaid $400 million of senior notes this quarter and our debt at September 30 totaled $5 1 billion.
No senior note maturities in fiscal 2024.
Our consolidated leverage at September 30 was 18, 3% and consolidated leverage net of cash was five 1%.
At September 30, our stockholders' equity was $22 7 billion.
And book value per share was $67 78.
20% from a year ago.
For the year, our return on equity was 22, 7%.
During the quarter, we paid cash dividends of $84 million for a total of $341 million of dividends paid during the year.
We repurchased three 5 million shares of common stock for $423 million during the quarter and for the year, we repurchased $11 1 million shares for $1 2 billion.
Which reduced our outstanding share count by 3% from the prior year end.
In October our board of directors authorized the repurchase of up to $1 5 billion of our common stock, replacing our previous authorization.
Based on our strong financial position and cash flow. Our board also increased our quarterly cash dividend by 20% to 30 per share Jessica.
We look forward to the first quarter of fiscal 2024, we expect challenging market conditions to pursue with continued uncertainty regarding mortgage rate the capital markets and general economic conditions that may significantly impact our business.
Our December quarter, we currently expect to generate consolidated revenues of seven four to seven $6 billion and homes closed by our homebuilding operations to be in the range of 18500 to 19000 homes, we expect our home sales gross margin in the first quarter to be approximately 23 seven.
<unk> to 'twenty, four 2% and homebuilding SG&A as a percentage of revenues in the first quarter to be around seven seven to seven 9%.
We anticipated financial services pre tax profit margin between 20 and 25%.
Our income tax rate to be in the range of 24 to 24, 5% in the first quarter.
We are well positioned to continue consolidating market share in both our homebuilding and rental operations, our fiscal 2020 for home closings volume pricing and margins in our homebuilding rental financial services enforced our businesses will be determined by market conditions and our efforts to meet the market by balancing pace and price to Maxim.
Nice returns.
For the full year at fiscal 2024, we expect to generate consolidated revenues of approximately 36% to $37 billion and homes closed by our homebuilding operations to be in the range of 86000 to 89000 homes.
We forecast an income tax rate for fiscal 2024 in the range of 24 to 24, 5%.
We expect to generate approximately $3 billion of cash flow from our homebuilding operations.
We also plan to repurchase approximately $1 $5 billion of our common stock to continue reducing our outstanding share count in addition to dividend payments of around $400 million.
We will continue to balance our cash flow utilization priorities, among our core homebuilding operations, 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 and broad geographic footprint across 118 markets are.
Our strong balance sheet and liquidity and low leverage.
US was significant significant financial flexibility to meet changing market conditions and continue aggregating marketshare.
We plan to maintain our disciplined approach to investing capital to enhance the long term value of the company, while consistently returning capital to our shareholders.
With dividends and share repurchases.
Thank you to the entire D. R. Horton team for your focus and hard work.
Goodyear efforts, we just completed our 20 <unk>.
Consecutive year, as the largest and strongest builder in the United States.
And we look forward to working together to improve our operations and provide whole ownership opportunities to more American families. During 2024.
With my transition to executive Vice chair.
This will be my last public earnings call.
It has been at honor and a privilege to represent and report on the D. R. Horton team.
Efforts for the past 10 years.
You all again.
This concludes our prepared remarks, we will now host questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you wish to ask a question at this time. Please press star one on your keypad should you wish to remove yourself from queue. You May Press star two we do ask if listing on speaker phone. This morning that you pick up your handset while asking your question to provide optimal.
Quality finally, we do ask that you. Please limit yourself to one question and one follow up please hold a moment, while we poll for questions.
And the first question. This morning is coming from John Lovallo from UBS. John Your line is live. Please go ahead.
Good morning, guys. Thanks for taking my question.
The first question is just on the gross margin in the quarter of $25. One of them that was well above your expectations above I believe 23, 5% to 24, despite what seems like a greater use of incentives and perhaps even a higher cost of incentives can you just help us kind of work through some of the puts and takes on gross margin in the quarter versus your expectations.
Sure John.
The second half of the fiscal year, we had a little more relative stability in the rate environment, and so we were able to level off or incentives.
In Q3 and Q4, we also then had a little bit of price traction that allowed our average sales prices tick up just a tad in the fourth quarter and then really the one of the biggest benefits was we did see continued improvement in lumber costs as our overall stick and brick costs on our homes came down in the quarter. We do think we basically really.
While the majority of that lumber cost benefit in the near term and within the more recent rise in interest rates and the use of incentives. That's why we're guiding down for Q1, but but we had some benefits.
Supported the increase in gross margin in Q4.
Okay. That's that's helpful. Bill and then maybe sticking with the gross margin as we look forward into the first quarter was at $23 seven to 24.2, if we think about the sequential decline that's implied in there I mean, it sounds like there's going to be higher incentives and again, maybe a little bit of higher cost you mentioned that the lumber benefit might be through what are the other sort of puts and takes that we should.
All right.
Sequential margin. Thank you.
I think you summed it up pretty well John I think we see higher incentives coming forward with the rapid rise in interest rates through the through the last six weeks or so a little bit of moderation last week, which was helpful. But one week doesn't make a trend I don't think and we do sell a significant number of the homes, we closed in a quarter during that quarter I think for the fourth.
39% of our closings were sold in the quarter, so wherever pretty real time indication of margins in the business as it comes through.
Thank you guys.
Thank you. Your next question is coming from Stephen Kim from Evercore. Steven Your line is live. Please go ahead.
Thanks, very much guys. Congratulations on the good results you gave an interesting well you gave a guide for a $3 billion in our homebuilding cash flow for next year I wanted to get a sense from you how much of that do you think is gonna be benefited by a reduction in work in process inventory.
We are able with our improved cycle times, we are seeing improved inventory turns and our assumption next year is that we will see some further improvement in cycle times and inventory turns. So we are able to operate with a relatively lower level of homebuilding inventory. However, we're also guiding to a to a volume in.
Nice Okay, and then second question is related to rate buy downs.
Could you give us a sense for what the average rate actually used.
In the quarter in your in your September quarter was for your customers and if we were to look at sort of what your average is you know for let's say orders being taken today.
Where would that average rate be.
You know the average rate.
Can move quite a bit through the quarter Bud.
Tend to stay about a point to a point at quarter below market at any given time.
And today, we're offering on a on an FHA government loans.
And the $5 99, right and on a conventional and six in a quarter.
Which is right in that range of a point in a quarter point and a half below today.
And is that what most people are actually using.
About 60% of our total closings are used with some form of a rate buy down.
And so a big percentage of and the most successful incentive we have seen has been to impact that monthly cost of homeownership through through some form of rate buy down.
And sorry, just to clarify you're saying that 60% of your closings using some form of buy down do you know what the average rate cutting across all of the kinds of buy downs that people are using what that actual rate was underpinning the mortgages.
I'm going to say probably in the six ish range.
Perfect. Thank you.
Thank you. Your next question is coming from Joe <unk> from Deutsche Bank. Joe. Your line is live. Please go ahead.
Hey, everybody. Thanks for taking the questions and congrats on executing so well this year I. Appreciate also the effort to give the visibility for the full year here I just wanted to talk maybe about those inventory turns a little bit further your guidance for clothing suggests something above two times on your current homes in inventory level I know that's a.
An important threshold for you guys just wondering maybe than what the starts look like over the next couple of quarters to make sure that you deliver on that that closings guidance in the back half, but also sort of gear up for growth again in 2025, we're maintaining that two X targets just housing starts could look.
Alright, Thanks, Joe and our starts did tick down a little bit sequentially, and but our base case and subject to market conditions as everything in the strength of the spring is that we would expect to increase our starts gradually quarter to quarter as we move throughout the year and to position ourselves to deliver on the guidance that we've talked about and then obviously the off of exit <unk>.
Four positioned to grow into 25, so we're working market by market community by community.
To improve our production capabilities and what we wanted to do is make sure that as we're increasing our starts it is sustainable. So that's why you're just going to see it gradually happen throughout the year.
Understood. Okay, and then thinking about your return on inventory on a trailing basis that has been normalizing of course, but where do you think that can settle out if you've got headwinds maybe on the profitability side from land and incentives, but tailwind from that production efficiency, because we actually sort of sees.
Settle out here in the high Twenty's is that realistic.
Well the way, we're running our business the way we underwrite our land deals that's our focus with our focus on purchasing finished lots in as many deals as we can our goal would be to keep that return on inventory in the homebuilding business as high as we can and so so definitely you know mid to high <unk> is a good level for us.
It does fluctuate with where gross margins are so we've been coming down off of some of the peak gross margins, we saw last year, but but definitely mid to high <unk> is the level that we are striving to achieve.
Thanks, a lot good luck.
Thank you. Your next question is coming from Carl Reichardt from <unk>. Carl Your line is live. Please go ahead. Thanks, good morning, everybody Congratulations Paul Congratulations David.
Joe are still one of my questions, but looking at the guide for next year are you anticipating much alteration in mix in terms of geography or price points and I'm, particularly interested in some of the smaller markets, where you all are really the only large builder a couple of the acquisitions you've done what percentage of deliveries next year do you think.
It might come from markets like that however, you want to define it.
Don't probably have a good breakdown of deliveries by market stratified by market size or recent entrants, but we do expect to see probably a rotation to smaller home footprints and introduction of smaller plans, where we can get municipality approvals again just to maintain the affordability I think we will see that.
We're going to continue to roll with starts but the compressed cycle times that we've gotten out of our construction process is going to allow us to deliver a lot more homes on fewer homes carried in inventory at any given quarter and eight and then Carl not just doesn't perfectly answered your question, but I do want to let people know that in our investor presentation, we're going to pay and have them.
Usually do post the call and we've updated our market share a dominant slide pretty dramatically to to make sure. It aligns with all of the markets. We operate in we did a lot of work like Zinedine, our internal data and so now instead of just reporting on the top 50 U S housing markets and where we rank <unk> and we're talking about all 118, and so it'll give me.
You need some more insight into where we are in terms of whether we're number one top five top 10 out of the 118 markets. We're in today and only doesn't mean, we're not talking in and we went through last night and they are all markets that we essentially had just entered within the last year or two and so we would expect to be top can you know very quickly and then.
Move up into the top five and certainly continue to work on becoming number one it doesn't answer geographic mix, but I did want to kind of plug. The fact that we gave you incremental data on market share that we hadn't historically put out there.
That's great. Thank you and then just as a follow up I know you're not guiding on the rental business in 2024 is becoming a bigger portion of that.
The PTA in and obviously taken up some balance sheet, but from an institutional investor perspective on both multifamily and single family how has that appetite fared for the projects youre selling at stabilized occupancy obviously spreads have come in there, but there's also a lot of capital I would guess chasing both asset classes. So I'm just sort of curious what you're seeing from those customers. Thanks al.
But yeah, we are still seeing strong interest Carl from the institutional investors that are out there as you mentioned you know the spreads have come in.
And so we're going to see some volatility in gross margin as we move through this process and move through the markets of higher rates, but still seeing consistent activity is still feel we are in great position to be the dominant supplier of single family rental and continuing to grow our multifamily platform.
Alright, thanks, everybody.
Thank you. Your next question is coming from Mike Rehaut from J P. Morgan Mike. Your line is live. Please go ahead.
Great. Thanks, good morning, everyone.
I wanted to focus for a moment on the fiscal 'twenty four closings growth guidance of up 4% to 7%. It seems like that's a little bit below.
Maybe what you typically shoot for and kind of like a high single digit range, if I'm not mistaken.
And I'm just curious if that's a function of maybe the current backdrop.
With the recent move in rates.
Also obviously your backlog is still down.
Over 20% year over year.
You know just kind of wondering if there's a little bit of a timing gap here.
Given the backlog maybe given the current environment that high single digit rate is something we should think about you guys. Maybe returning to win in 2025 all else equal.
Yeah, No great question, Mike and we expected it and we didn't talk about always positioning ourselves for growth and you typically hear us talk about plus or minus 10% is how we're going to position the company and if you look at how we're exiting 'twenty three though and our guide for fiscal 'twenty for clothing. It does already assume our typical two times have been trying to actually a little.
Better than that at the high end say 2.04 times to one one times would be our guide so it's already incorporating our improvement in cycle times.
If we continue to be able to have success with that throughout the year.
And we'll consider that in what we've talked about publicly in terms of what we're able to deliver for fiscal 'twenty four but as we sit here in November that's a realistic expectation for closings and with the visibility that we have today, it's not necessarily that we have seen a.
A big falloff in demand obviously, our sales were up a very strong and so it's more a function of the houses we have in inventory and our cycle times.
Right.
With that.
Makes sense.
Bob.
I'm, sorry were you going to add something.
This is Mike just just following on with that is that our lot position is very strong right. Now we have 50 150000 lots that are finished and there's obviously more that are in the controlled.
A portion of our portfolio that as we see the market unfold for the year, we will be able to accelerate starts to meet any increased demand.
Coming into 'twenty four we saw coming into 'twenty three we saw rates spike at the end of 'twenty, two and we're a little concerned about the year and the outlook. We gave last year at this time.
And we the team stepped up and delivered a great year in fiscal 'twenty through fiscal 'twenty, three and against that backdrop. So.
Positioning for conservatism in the in the year, but always are.
Have a desire to grow and to grow in that double digit level.
Yeah.
Right no no thanks for that Mike.
I guess also just wanted to circle back you know you had mentioned with.
With regard to sticks and bricks.
6% lot inflation.
You know if that's something that you know.
Has been accelerating.
I guess, not just sticks and bricks, but maybe just more broadly.
Where is you know lot and as well as construction cost inflation.
For the fourth quarter on a year over year basis and.
How do you expect that to play out.
In 24 based on current trends and.
Would that require.
Some amount of.
A price appreciation to offset.
Let's say to maintain your your fiscal your first first quarter gross margins.
And it sticks and bricks, we've been the last couple of quarters have been seeing the benefit of lower lumber costs. However across most other cost categories within the vertical construction costs. We are still seeing modest inflation. So on a year over year basis in the quarter, our stick and brick costs were down three 5% on a per square foot basis.
But our log costs were up 11%. So we're seeing more inflation in our log costs and so as we look forward into fiscal 'twenty. Four we would expect to continue to see inflation interlock cost us land moves through and development cost inflation that continues and I think we would still expect to see you'll still see some modest inflation in some of the other stick and brick categories.
There has been some recent moderation in lumber costs.
As we move through 'twenty four we may see some we'd expect to see some benefit from but overall I think we still expect cost too.
To show moderate inflation.
Far as price appreciation with the current rate environment and the volatility in the recent rise in rates, we're not expecting any price appreciation our base case would probably expect a little bit of downward pressure on prices and as we've already talked about we are using higher incentives going into the first part of the year now rate environment can change the strength of the market can change as we go into the spring and so will it.
Just depending on what we see in the market as we as we get further into the year and Karl asked about geographic mix, but that's a good point here in terms of just our reported average sales price. We are continuing to shift as we said in our prepared remarks to more and more of our smaller floor plans to address the affordability issues in the market. So we could have some downward pressure on pricing.
Just a function of product mix.
Great. Thanks very much.
Okay.
Thank you. Your next question is coming from Matthew Bouley from Barclays. Matthew Your line is live. Please go ahead.
Morning, everyone. Thank you for taking the questions.
So just given all the of course interest rate volatility. These past several weeks I'm curious.
Number one given what youre doing with rate buy downs or are you finding that that sales pace is reacting quickly to these sort of numbing moves in interest rates. That's number one and number two I mean, I guess just any color on your own sales pace into October and November.
You're kind of thinking about seasonality of orders here in the first quarter. Thank you.
Yes, as you know we don't report on you know on sales.
Forecast on sales, but we are pleased with our sales thus far into October and you certainly see fluctuations in traffic when we see the kind of moves that we've seen over the last couple of weeks, both up and down and rates, but with our ability to hold our stable rates through our interest rate incentives, we've been able to convert pretty consistently with a buyer.
Or is that we've had out there, but you know any time you have fluctuations in rates, we're going to see people pause for a period of time until they settle into the reality of what they're what they can afford and we're also going into the seasonally slowest time of the year. So in November and December typically are the slowest sales months as you get into the holidays and so we're going to continue to focus ourselves on.
And meeting the market, but not make any drastic and judgment to our business plan and we're going to wait and see how the spring unfolds and make sure that we're continuing to start houses and going into the spring.
Got it Okay. That's really helpful color and then secondly.
Secondly on the rental side I know you're not guiding the topline in 'twenty. Four you did mentioned that multifamily units would be I think you said would be rising in 24 year over year clearly there. There is a lot of supply coming online I think in the multifamily.
World broadly.
What can you say around the margin side and what you know what you might be expecting on the margins of those multifamily unit sales next year. Thank you.
I think we will see probably margins compress a bit on those multifamily sales just as interest rates have come up in cap rates tend to come up.
The question of how much supply is is out there is really specific to a given project in a given submarket that that project serves.
And our team has done a great job of looking at those Submarkets. When we made the decision to move forward with the projects cognizant of what was available in the marketplace. Both ahead of us and behind us from a supply perspective, so I feel pretty good about being able to deliver into a healthy demand environment, we're still seeing good lease ups and our rental properties.
In line with expectations. So so we're very encouraged by that.
Thanks, Matt.
Thank you. Your next question is coming from Alan Ratner from Zelman and Associates. Alan Your line is live. Please go ahead.
Hey, guys. Good morning, first off congrats to Paul and David and good luck with the transition.
Second I think the the topic that we get the most questions on or the sustainability of the rate buy downs that you guys are offering in the industry is offering right now and.
I guess my question to you and I hear through you know when I listen to some of your comments on the puts and takes on margin than you know a lot cost inflation, starting to accelerate and maybe stick and brick costs also inflicting higher again after being a good guy this year.
Is there a point, where you look at your margin, which obviously its very healthy today, but at a point, where it becomes harder to continue buying down that rate of 100 150 basis points and what is that threshold for you.
We're going to operate the neighborhoods, but focused on return as usual element and it is going to be a pace and a price conversation continually and the rates by downs. The incentives that we offer it's just part of the mix of the cost environment that we deal with and while we've seen some nice relief in the stick and brick cost.
I've had some price pressure on either sides of it but you know fuel prices have come down and that should give us a little bit of relief across a pretty broad spectrum of commodities as well as delivery costs. So it's a it's a constant give and take on the cost and the margins and our primary focus in guiding stars returns.
And we're going into the year with a very strong start.
So their gross margins are expected to decline in Q1 that we're coming off a 25, 1% in Q4, which is below the peaks that we achieved last year, but it's still a very healthy gross margin that gives us some room.
The market.
Some nice returns and still posted very healthy returns.
It makes sense absolutely the starting point is certainly very healthy Jessica so I appreciate that.
Second question would love to hear your thoughts on just credit availability in general beyond.
On one hand, I think there's certainly a nice tailwind to the public builders, given your balance sheets and access to liquidity and capital and the ability to use that to take market share.
On the other hand, your suppliers and your trades are certainly dependent on on credit availability to fund their businesses and you know the headlines out of.
The Fed report yesterday, obviously point to continued tightening there and your land developers probably are dependent on bank credit as well so in your conversations with trades and suppliers and developers are you starting to see any indications of stress throughout the channel as a result of credit tightening and on the flip side are you seeing any opportunities.
Come from that.
I think anytime you see rates like they have been in the capital markets.
Flux, then we're going to see some headwinds.
From from our developers from less capitalized builders and it will create some opportunities but.
But we feel like we've got a good plan and open communications with our vendors our trades and are a lot of suppliers to continue to work through those processes.
Got it I appreciate it guys. Thanks a lot.
Thank you. Your next question is coming from Anthony Pettinari from Citi. Anthony Your line is live. Please go ahead.
Good morning, and.
And congratulations on the transitions to David and Paul.
Hum I'm wondering you know understanding the your entire offering is fairly affordable.
Wondering if there's a specific buyer types youre seeing is kind of best positioned to weather higher for longer rates.
Are your move up buyers meaningfully outperforming first time buyers or are you seeing more buyers moved down market, it's more affordable offerings and I'm, just wondering what youre seeing there and if you're making any sort of strategic shifts to target a different mix of buyers.
I think our buyers are focused primarily on affordability and for us the way we deliver that affordability is through the monthly payment process and that's obviously been a big driver for the rate buy downs, but also introducing smaller product footprints.
The monetizing some of the homes a bit and letting people do things to improve their homes. After the closing when their financial position, perhaps has changed and they can afford a little more but it's continuing to hit a price point relative to median income. So that we can find a place to work and that families budget.
We still really like over half of our business being first time homebuyers, because despite what's happening with interest rates, there's buyers need a place to live they don't already own a home so they're not in discretionary buyer there in the market looking at buy versus rent opportunities and so if we can stay competitive and with it with the rental market on that front, we're going to continue to capture first.
And home by our market share.
Okay, that's very helpful.
And then just following up on something Mike said, you know I think this time last year you elected not to give very detailed full year outlook for 'twenty three with the volatile rate environment I guess Big picture can you talk about what is giving you confidence to provide more detailed guidance now with mortgage rates near 8% is it.
The experience of kind of managing through higher rates and the success of the buy down are you seeing something different with the consumer just wondering you know how you could contrast, where we are now versus 12 months ago.
12 months ago, we were facing two big issues, we were still trying to solve the production supply chain challenges at our cycle time for very elongated. So we had a hard time determining exactly what homes, we're going to finish and deliver and that was also a big interaction with the rate buy down process, because we can only buy rates down for certain foreign amount of time in a cost effective.
Manner, and so being able to pinpoint when those homes would deliver into the buy down environment.
And then you touched on the second point with the rates, yes, we still are facing some rate uncertainty and increases, but we have been able to manage through that over the past 12 months and the teams delivered a really strong year.
Okay. That's helpful I'll turn it over.
Thank you. Your next question is coming from Kensington from Seaport Research partners can your line is live. Please go ahead.
Thank you very much and good morning, everybody.
Good morning, Ken.
John talked about at the time.
2010 times, so 20% gross margin two turns David because we all recall when you came on shortly thereafter express.
Obviously, a great product.
And you guys pull gross margins down to guidance in the 1921 focusing on out that turns.
Vincent with Don's comments and it's been great.
Now Paul I, certainly wanted to give you a chance to.
Give your fingerprints on this could you comment on.
Those.
Prior well CEO.
Those comments.
Why it's different today than perhaps tie that into your top.
Right and comments on your exposure to non top 50 markets.
My first question simple.
Well I think you know we are the team that's at the table as a team that was at the table last quarter last year and the prior several.
We have a great position in.
We are aligned as a company not just from this group, but with our regional leadership and our division leadership.
And we have continued to focus on returns.
Anybody community and we have the benefit now of a wider footprint across the geographic area that we've expanded on which is going to kind of continue to provide strength for us and supply.
As we continue to expand in those markets. So the short version is we feel really good about where we are I don't feel the need to put a stamp footprint or our fingerprint on something unique and different because we have we have a strong team and a great operation in play and a good playbook that we are executing on every day.
And Kian I was going to try to stay off this Q&A.
Joe.
I can't do that.
Yeah.
Uh huh.
Go ahead, Eric everything you'd go back 45 year history.
The goal of the company is to be the low cost provider.
Oh, the affordable housing and create opportunities for first time homebuyers to get at home.
And everything we've done through those years has been to position the company, a little bit better and a little bit stronger.
And then the.
The awakening of all eight nine and 10.
I think created a discipline.
And in operations that that made the transition from margin to return.
Pretty much an industry standard today.
Yeah.
You listened to other builders calls.
And that's.
<unk>.
I don't see that changing.
The industry has matured.
The difficulty of putting lots on the ground the difficulty of building houses restrictions on capital all of those things.
Forcing a discipline on the industry.
Allowing the.
The national builders to gain market share quarter after quarter after quarter after quarter.
So our internal focus is going to continue to be project by project.
Uh huh.
Driving improvements to efficiency.
Simplifying product, making it.
Even as overall individual component price increases the availability of housing to the first time homebuyer.
<unk> continues to be there. So that's our goal that's our first all.
All we think about every day and I think earlier someone said something about sustainable.
Everything we do if it's not sustainable.
Consistent.
And transparent I mean, that's that's this team.
<unk> built alignment throughout our company and I don't see that changing.
Paul will do things differently than I do.
That's a good thing.
I feel very good about it just never been as well positioned as a company.
You can see Paul Paul with taller I was watching Youtube videos.
Yes.
Everybody is focused on returns.
Thank you.
And I would say that your positioning.
Boy again I'm sorry.
I'm sorry so.
Focused on returns I'd like you to expand on your comment that you know if you're taking down 54% of your options are finished is that a fair.
<unk> for your mix of closings coming from finished lots and are those geared more towards these non.
Top 50 markets, which is about a third of your closings. Thank you.
The first part of your question, where we're over 60% of the houses that were closing today.
Or developed for this past fiscal year on a lot developed by a third party. So.
And at 54% is kind of a minimum that we would expect to take down finished because in a lot of cases as you likely recall industry practices for we had hundreds of land professionals across the country that are very good at what they do so they'll go out sourced the land negotiate it with the land seller put it under contract and then we'll go find that third party developers.
A lot of cases, some of that stuff in another 45% that we maybe today have not identified he's going to give all of it by the time, we bringing on our balance sheet it'll be from a third party and then in terms of the markets, where we're buying more finished lots versus not you expect that to.
No I don't expect that to SKU can we continue to build our developer partnerships in all markets and I would expect that over time, you'll continue to see.
Or is not a reduction in the number of lots, we buy fully developed as we derisk, our balance sheet and our lot pipeline.
Thank you very much thank you David.
Thank you Ken.
<unk> done this for 30 years.
Thank you. Your next question is coming from Susan Mcclary from Goldman Sachs. Susan Your line is live. Please go ahead.
Thank you good morning, everyone and thanks for taking the questions.
Good morning. My first question is around the community count growth any thoughts there on how we should be thinking about that for 2024 is something in that mid to high single digit range that you've talked about in the past still a reasonable goal.
On a year over year basis see yes, I think we would expect as we look at fiscal 'twenty four.
We've driven a lot of increased absorption out of our communities for quite some time now and so we're shifting to some of that growth now coming from just incremental community count and continuing to expand our footprint. So I think mid to high single is is a good base case, and we don't specifically guide to community count for a reason.
It's pretty hard to predict just because there's so many moving pieces to communities coming on and offline, but I do think that's a reasonable base case assumption that we'll obviously update isn't this throughout the year if necessary.
Okay. That's helpful and then you.
You got to keep buying back $1 $5 billion of stock over the over the next year, which is up versus the $1 billion that you get and in this past year can you just talk about what's driving that confidence how youre thinking about the cash generation of the business. As you go forward from here and what that could mean in terms of Cabot.
Our allocation priorities.
Sure. So it's been a goal of ours to consistently repurchase shares over time and grow that over time and so this is just another step in that progression and in the business as we see I'd say increased visibility and confidence in our ability to generate cash flow into fiscal 'twenty four.
Given us a little more certainty around being able to guide a little more specifically to that growth and we have in the past you know as Mike said earlier a year ago. We were we were concerned about our production capacity and how quickly we could actually deliver homes, we have more certainty around that today and so with that that gives us more visibility around our cash flow and so.
Our repurchases dividends distributions to shareholders are an important part of our of our capital allocation and so as we are guiding to $3 billion of homebuilding cash flow with a 1 billion and a half of that go into share repurchase another $400 million going to dividends. That's obviously, a very important part of our capital allocation.
Okay. Thanks for the color and good luck with everything.
Thank you. Your next question is coming from Ralph two dosage from Bank of America. Chris. Your line is live. Please go ahead.
Hi, good morning, Thanks for taking my questions.
I wanted to just follow up on the comments on the log cost outlook up 11% year over year in the fourth quarter is there something that's driving that higher near term or is that sort of the run rate, we should be expecting as we go into fiscal 2024.
That is our current run rate it has been inflicting a bit higher reflects several things obviously land prices over time over a number of years have increased incrementally, but we've also seen significant inflation in development costs and all of that included in that whether it's the infrastructure cost themselves along with <unk>.
Costs from government permits in regulations and requirements there as well as lengthening the time of development. The development timelines have lengthened dramatically, which then adds to obviously the cost associated with it. So so there has been pretty strong inflation across across really all of our markets on what's getting.
And there is still a shortage of lots out there in the market for builders as well and so so that is a that is our current run rate, whether that's going to accelerate further or whether we might see some moderation overtime I don't think we have visibility to that but but we do still expect to see probably stronger loss cost inflation than our other inflation.
Stick and brick costs as we go into 'twenty four.
Great. Thank you that's helpful and then on.
Just on the rental outlook.
I mean, there there are some signs that rents are coming down and as you mentioned earlier your cost of capital is higher how do you think about incremental investments in rental at this in this current rate environment is there a level of rates, where you pull back.
And this demand is weak or how do you handle boat.
What you've invested there, but would you sell that at retail or just continue to learn about how could you handle added different rate environments.
Okay.
Yeah.
We are watching it closely and we continue to be in the market with.
Lived assets and we just like as we sell homes, we watch the market closely look at what the demand is and what that pricing is.
We don't intend to continue to hang on to stuff and significantly increase our balance sheet. So why we're indicating that we may see some choppiness in margins as we flow through this market.
But we still feel good about the demand that's out there we feel good about our position in the platform and intend to continue.
To grow the platform, we are positioned to do so, but we'll watch it closely in the coming quarters and adjust accordingly, the strategic value of the platform for us to be a very good multifamily developer is significant as a land user.
Being a residential developer we've done that for a long time and now going into the multifamily development side, we become a better buyer of land parcels and a better partner for land sellers and so strategically it's a business we're going to stay isn't going to continue to scale that business, but we will be opportunistic and.
And responsive to market conditions with what we do.
Thank you.
Okay.
Thank you. Your next question is coming from Jade Rahmani from K B W. G. Your line is live. Please go ahead.
Thank you very much not sure. If this was stated earlier, but could you get the percentage of <unk>.
Your buyers that are taking some kind of mortgage buy down or interest rate.
Incentive and secondly, what percentage are taking the full full term by now.
Yes, it's about 60% of our buyers are utilizing some type of a rate buy down and a fair chunk of those I don't have specific numbers almost all.
Our permanent 30 year by them.
Thank you for that on the rental business could you talk to a rough ballpark of exit cap rates that or acquisition cap rates that the purchases of your.
Development assets are looking to achieve.
Sort of across the board.
Very significantly by market and what the interest rate environment wasn't the time, we made the acquisition.
So it's hard to pin it down to any one cap rate or even a relevant range.
I guess like with many expectations over the life of the project from from cost and rental side Theres a lot of.
Actual proved different than the assumptions, we made in the on the come.
And so Fortunately, we've been able to see some really strong execution by the teams.
And picking good projects and executing well on those projects and that's shown up in our results and you know, we're just going to try to keep working that direction, but it's hard for me to give you a number of what a ballpark cap rate was at the time, we did a pro forma on a deal and when we decided to go forward with it.
And we have been very conservative in our underwriting and expectations for our single family rental.
Business and making sure that we feel good about it as a for sale position as well as a four round and in underwriting it to the lowest of those guidelines for operators.
We arent stretching.
Environment.
Okay. Thanks.
Thank you and our final question. This morning is coming from Mike Dahl from RBC capital markets. Mike. Your line is live. Please go ahead.
Hey, Thanks for fitting me in congrats.
Paul and congrats David.
I wanted to ask a follow up about margin and I appreciate you're not giving full guidance.
Thinking about returns not margins, but some of the <unk>.
Your expectations for maybe a little bit of downward pressure on price, obviously, some potential just outright price pressure than the added incentives Slovak costs. It sounds like Youre a great theme for further margin declines beyond <unk>.
<unk> is that fair or is there any order of magnitude that you can.
You can help us with on some of the other moving pieces that you're you're contemplating around margins beyond <unk>.
Sure, Mike I, probably wouldn't use the word bracing for I mean, we feel like we're in a very strong financial position to weather whatever we find in front of us whether it's upside or downside and we're going to do what we always do which is continue to adjust to market conditions. We're not in a position to give a full year guide and we likely may never do that.
Again, because margin really is a function of market conditions, and we're going to meet the market weekend and week out and we haven't seen the spring yet which is the biggest driver of our full year margin and where we land for the year in terms of gross margins obviously.
And as you alluded to there are a lot of moving pieces and a lot of that can be dependent on what happens in the spring, but if we do find ourselves in a market, where we have more downward our house price pressure. Then we'll also be looking to adjust our cost structure at the same time and in a typical <unk>.
Alan warehouse price market, we do have the ability to adjust our cost structure not perfectly real time, and but we're not going to sit there in a vacuum and just reduced home prices and not adjust the other components that go into our business. So we feel very good like I said earlier, where we're starting from 25, 1% exit rate in Q4.
To weather whatever the year looks like and to continue to maximize returns.
And Mike I'm, generally pretty optimistic I'm pretty optimistic.
We've never been positioned.
To execute from.
Product.
Location lot supply.
And have gained efficiency through the last two or three years I think will continue.
So.
<unk>.
I think I think 24 is going to be a good year given.
<unk>.
A lack of some catastrophic event.
It's just.
Ultimately in this business, it's about who can who can produce houses the most efficient at a lower cost and drive the best returns and we are we are no. We have never been positioned as a company.
To do that better than we are right now.
Yeah, Yeah, no. It's certainly a strong starting point.
And then Relatedly you just.
Yes, the cash flow strength is also.
Continuing to be.
Unique in this.
The cycle of the $3 billion in cash from homebuilding ops over the last couple of years.
Had some offsets from.
Accelerated multifamily rental operations and some other assets.
In the current environment, given what you've already articulated on multifamily I know you still have a big backlog of under construction, but when we're trying to bridge that cash flow from homebuilding ops down to kind of true free cash number.
Anything that we should be thinking about in terms of potential offsets from rentals or other parts of your business or do you think the majority of that will actually flow through to free cash.
As we did comment earlier, our pipeline of multifamily deals is growing and we expect higher deliveries on multifamily. So I do expect our investments on the multifamily side of rental too to show an increase in fiscal 'twenty four.
The single family side, I think is uncertain as to whether that will grow or not it's going to we're evaluating that and market conditions.
Where the rate environment is as Mike and Paul commented earlier, but do you expect some offset on the on the multifamily side.
Yes.
Okay.
<unk> construction and then decide at the point, we are ready with homes do we go to rent or go to lease go to rent or go to sale on those so we can respond almost in real time towards the market is and not take a long duration risk on that asset.
Alright, great. Thank you.
Thank you. This does conclude today's Q&A session I would now like to hand, the floor back to Paul roaming housekeeper for closing remarks.
Thank you Tom we appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first quarter results I would like to thank David for his leadership guidance and support throughout my career. Our company has produced remarkable results. During his tenure as CEO and he has positioned us for continued.
Success to litigate D. R. Horton team. Thank you for your incredible efforts in fiscal 2023, we are well positioned heading into the new year and I look forward to everything we will accomplish together in fiscal 2024.
Thank you. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.