Q2 2024 DR Horton Inc Earnings Call
Good morning, and welcome to the second quarter 2024 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.
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 should you wish to remove yourself from queue. You May Press Star two 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 financial results for the second quarter of fiscal 2024 before we get started today's call includes forward looking statements as defined by the private Securities Litigation Reform Act of 1990, Fad, although the yogurt and 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 deal 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.
This shall information about factors that could lead to material changes in performance is contained in D. R. Horton annual report on Form 10-K, and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
Mornings earnings release can be found on our website at Investor day over at <unk> 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 <unk>.
Presentations section under news and events for your reference now I will turn the call over to Paul <unk>, our president and CEO. Thank.
Thank you Jessica and good morning.
Pleased to also be joined on this call by Mike Murray, Our executive Vice President and Chief operating Officer, and Bill Wheat, our executive Vice President and Chief Financial Officer for the second quarter. The D. R. Horton team delivered solid results highlighted by earnings of $3 52 per diluted share our consolidated pretax income.
<unk> increased 23% to one 5 billion.
On a 14% increase in revenues to $9 $1 billion with a pre tax profit margin of 16, 8%. Our homebuilding return on inventory for the trailing 12 months ended March 31 was 29, 9% and our return on equity for the same period was 22, 2%.
Homebuyer demand during the spring selling season, thus far has been good. Despite continued affordability challenges with 45000 homes in inventory, we are well positioned to continue consolidating market share. Our average construction cycle times are back to normal and our housing inventory turns are improving.
To focus on capital efficiency to produce consistent strong homebuilding operating cash flows and returns.
Earnings for the second quarter of fiscal 2024 increased 29% to $3 52 per diluted share compared to $2 73 per share in the prior year quarter net income for the quarter was $1 2 billion on consolidated revenues of $9 1 billion.
Our second quarter home sales revenues increased 14% to $8 5 billion.
22548 homes closed compared to $7 4 billion.
19664 homes closed in the prior year, our average closing price for the quarter was $375500 flat sequentially and down 1% from the prior year quarter Bill.
Our net sales orders in the second quarter increased 14% to 26456 homes and order value increased 17% from the prior year to $10 1 billion.
Our cancellation rate for the quarter was 15% down from 19% sequentially and 18% in the prior year quarter. Our average number of active selling communities was up 4% sequentially and up 15% year over year.
The average price on net sales orders in the second quarter was $380400 up 1% sequentially and up 2% from the prior year quarter.
To address affordability for homebuyers were still using incentives such as mortgage rate buy downs, and we have reduced the prices and sizes of our homes, where necessary based on current market conditions and mortgage rates, we expect our incentives to remain at these elevated levels in the near term.
Our sales continued to be primarily from homes under construction and completed homes and we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share Jessica our gross profit margin on home sales revenues in the second quarter was 23, 2% up 30 basis points sequentially from the December quarter.
Per square foot basis home sales revenues and stick and brick costs were both essentially flat in the quarter, while lot cost increased 3%.
Our home sales gross margin for the full year fiscal 2024 will be dependent on the strength of demand during the rest of the spring selling season. In addition to changes in mortgage interest rates and other market conditions.
For the third quarter, we expect our home sales gross margin to be similar to or slightly better than the second quarter.
In the second quarter, our homebuilding SG&A expenses increased by 13% from last year and homebuilding SG&A expense as a percentage of revenues was seven 2% down 10 basis points from the same quarter in the prior year.
Year to date homebuilding SG&A was seven 7% of revenues up 20 basis points from the same period last year due primarily to the expansion of our operations to support growth.
We will continue to control our SG&A, while ensuring that our platform adequately supports our business.
We started 24900 homes in the March quarter and ended the quarter with 45000 homes in inventory up 3% from a year ago and up 6% sequentially.
7600 of our homes at March 31 were unsold 7300 of our total unsold homes were completed.
790 had been completed for greater than six months for homes, we closed in the second quarter. Our construction cycle time improved slightly from the first quarter and we are back to our historical average of four months from start to complete we will maintain a sufficient star space and homes in inventory to meet demand and continue.
Consolidating market share Mike our homebuilding lot position at March 31 consisted of approximately 617000 lots of which 23% were owned and 77% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns.
These relationships allow us to build more homes on lots developed by others of the homes. We closed this quarter, 62% raw lots developed by four star or third party are capital efficient and flexible lot portfolio is a key to our strong competitive position.
Our second quarter homebuilding investments in lots land and development totaled $2 4 billion.
Our investments this quarter consisted of $1 4 billion for finished lots $760 million for land development and $230 million for land acquisition, Paul in the second quarter, our rental operations generated $33 million of pre tax income on $371 million of revenues.
From the sale of 1109 single family rental homes, and 424 multifamily rental units are rental property inventory at March 31 was $3 1 billion, which consisted of $1 $3 billion of single family rental properties and $1 8 billion of multifamily.
Rental properties, we are not providing separate annual guidance for our rental segment due to the uncertainty regarding the timing of closings caused by interest rate volatility and capital market fluctuations based on our current pipeline of projects. We expect our rental revenues in the third quarter to be similar to the second quarter Jessica.
<unk> our majority owned residential lot development company reported revenues of $334 million for the second quarter and 3289 months old with pre tax income of $59 million <unk> owned and controlled lot position at March 31 was 96100 watts.
60% of <unk> lots are under contract with are subject to a right of first offer to deal.
$310 million at the finished slabs, we purchased in the second quarter were from Forrester.
<unk> had approximately $800 $800 million in liquidity at quarter end with a net debt to capital ratio of 16, 4%.
<unk> remains uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry.
Aggregate significant market share over the next few years with its strong balance sheet lot supply in relationship with D. R. Horton like financial services earned $78 million of pre tax income in the second quarter on $226 million of revenues, resulting in a pretax profit margin of 34, 6% during the second.
Quarter, essentially all of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 80% of our buyers.
And VA loans accounted for 59% of the mortgage company's volume.
<unk> originating loans with the ACI mortgage this quarter had an average FICO score of 725, and an average loan to value ratio of 89% first time homebuyers represented 57% of the closings handled by our mortgage company this quarter Bill.
Our balanced capital approach focuses on being disciplined flexible and opportunistic 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 the ability to adjust to changing market conditions.
During the first six months of the year, our consolidated cash used in operations was $470 million and our homebuilding operations provided $408 million of cash at.
At March 31, we had $5 7 billion of consolidated liquidity, consisting of $3 1 billion of cash and $2 6 billion of available capacity on our credit facilities.
Debt at the end of the quarter totaled $5 9 billion with no senior note maturities in fiscal 2024.
Our consolidated leverage at March 31 was 20% and consolidated leverage net of cash was 10, 8%.
At March 31, our stockholders' equity was $23 8 billion.
And book value per share was $72 13.
Up 19% from a year ago.
For the trailing 12 months ended March 31, our return on equity was 22, 2% and our consolidated return on assets was 15, 1%.
During the quarter, we paid cash dividends of <unk> 30 per share totaling $99 million and our board has declared a quarterly dividend at the same level to be paid in may.
We repurchased two 7 million shares of common stock for $402 million during the quarter and our fiscal year to date stock repurchases were $801 million Jessica for the third quarter. We currently expect to generate consolidated revenues of nine five to $9 $7 billion in homes closed by our homebuilding operations to.
In the range of 23000 524000 homes.
We expect our home sales gross margin in the third quarter can be approximately 23 to 23, 5%.
Homebuilding SG&A as a percentage of revenues to be approximately 7%.
We anticipate the financial services pre tax profit margin of around 30% to 35% in the third quarter and we expect our quarterly income tax rate to be approximately 24%.
Our full year fiscal 2024 revenue pricing and margins will be affected by market conditions and changes in mortgage rates. In addition to our efforts to meet demand by balancing sales pace and price to maximize returns.
For the full year fiscal 2024, we now expect to generate consolidated revenues of approximately 36, 7% to $37 $7 billion and expect homes closed by our homebuilding operations to be in the range of 89 to 91000 homes.
We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations.
We now plan to purchase approximately $1 $6 billion of our common stock for the full year. In addition to our annual dividend payments of around $400 million.
Finally, we now expect an income tax rate for fiscal 2008 2024 in the range of 23.5% to 24%.
We are balancing our casually utilization priorities to grow our operations pay an increased dividend and consistently repurchase shares while maintaining strong liquidity and conservative leverage Paul in closing our results and position reflect our experienced teams industry, leading market share broad geographic footprint and diverse.
<unk> 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 the long term value of the company, which includes returning capital to our shareholders.
Through both dividends and share repurchases on a consistent basis.
To the entire D. R. Horton family of employees land developers trade partners vendors and real estate agents for your continued focus and hard work. This concludes our prepared remarks, we will now host questions.
Thank you.
Florida is now open for questions. If you wish to ask a question at this time. Please press star one on your phone to join the queue. If you wish to remove yourself from queue. You May Press star two we do ask if listening on speaker phone. This morning that you pick up your handset while asking your question to provide optimal sound quality and we do also.
Ask that you 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 Carl Reichardt from BT I G. Carl Your line is live. Please go ahead.
Good morning, everybody.
I wanted to talk about Florida.
Pretty important market for you all.
Long experience there.
We've seen an increase in existing home inventory in some parts of that market and we obviously know higher insurance costs are also coming to bear there. So could you talk a little bit in some detail about your performance there may be the various markets within Florida.
How it feels to you right now.
Carl Florida still feels good to US there certainly has been a lot of news tied to.
The rise in insurance rates and for most of where we sell our homes are off the coast.
And building new construction allows for some stability in those insurance rates. So havent seen a significant increase for the homes in the communities, where we sell as you may see reported along the coastal and high wind zones still seeing good in migration.
Good job growth throughout the Florida market. So we feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida Peninsula.
Alright, Thanks, and then a follow up.
Multifamily and single family for sale of that portfolio of business.
With some lumpiness there.
I'm curious about the markets, where you've got fairly good sized operations in multifamily and single family rental.
One of the reasons for you entering in and play more significantly in that space I think as scale benefits for the overall homebuilding operation. So if you think about the markets, where you're big in those two businesses.
Are you seeing lower overall vertical costs for the homebuilding operation to where better margins and maybe sort of expand a little bit on that particular element of the business. Thanks.
I think there's two big factors that drive into our push into the rental business wanted we're a better buyer of land a better user of land and that we're able to convert more of the land to its ultimate final use. So we're a better counterparty to do a lot of sellers as we can deal with the build for rent the multifamily.
Component as well as the residential for sale.
That gives us some economies and the purchase of the land and efficiencies in the entitlement process certainly within the vertical cost structure, we've probably seen more ability to influence cost on the traditional multifamily side coming over from our homebuilding operations, because we're much bigger buyers of parts and pieces that go in.
The structures than a traditional multifamily developers.
Okay I appreciate it thanks al.
Thank you. Your next question is coming from John Lovallo from UBS. John Your line is live. Please go ahead.
Hey, guys and thank you for taking my questions.
First one obviously, there's a lot of concern in the market given you know the stickier than expected CPI and you know although rates you know the long term mortgage rates only moved up by about 35 basis points since pre CPI I mean, I guess the question is have you seen or would you expect to see any impact to demand or would there be any change in your incentive activity given.
This 35 basis point move in rates.
We expect to continue to meet the market.
We continue to stay focused on.
<unk> that drive that activity in interest rate buy downs has been a big portion of what we have done we tend to move with the market. So as you've seen that increase in market rates, we will move up the rate buy downs.
To be about a point to a point and a half below market, but we do expect incentives to remained near their elevated levels today.
Especially with the rate instability and stickiness up in that 7% range today.
Understood and maybe splitting hairs slightly here, but you guys beat deliveries are universities your outlook in the quarter by about 2300 units at the midpoint raised the outlook by about 1500 units at the midpoint I mean was there some pull forward in the second quarter or is there some conservatism in this outlook or maybe the expectation.
Delivery pace could moderate to some extent I mean, how should we think about that.
Great Great question, John We did go into the quarter with a significant number of completed specs. So we actually sold and closed in third quarter, 54% of our houses and so that is a very high percentage for us a typical range would be about 35% to 40% of our homes would be sold and closed within the same quarter.
And so we still have over 7000 completed spec. So I do think youll see that intra quarter and activity stay higher than our historical norms. It may not be at the 54% we saw in this quarter.
That did allow for probably a little bit of pull forward of demand and it gave us the confidence to add and the low end of our range by the fall of 2000 units that we can be and then the high end of our range by 2000, and we are now.
Back to normal if not better than our historical inventory turns in terms of what we're guiding to at the high end it would be roughly two two times turns.
Feel very good about about the ability to take that range I don't think there's necessarily an opportunity for the same scale and beat them next quarter.
Yes, it makes a lot of sense. Thank you guys.
Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Stephen Your line is live. Please go ahead.
Thanks, very much guys a strong quarter.
I appreciate all the guidance thus far.
Was curious if you could shed a little bit more light regarding your cash flow guidance. You had mentioned about 3 billion from homebuilding, specifically, but you do have other segments. You have the rental segment you know four star in particular and I was curious as to you know.
What kind of an offset should we expect from a rental or four star.
This year relative to that 3 billion from homebuilding and then specifically with rental you have about $3 1 billion in inventory value right now where do you where do you think that's going to go over the next let's call it 12 months or so.
Sure Steve on our cash flow guide, we had been guiding to homebuilding cash flow because that hasnt been the primary generator of cash for us over the last couple of years and we have invested portions of that into the rental operations as well, which feeds to the consolidated cash flow from ops. So there is some some offset versus the homebuilding cash.
Slowed this year, we're guiding to around $3 billion of homebuilding cash flow would expect.
In the in the $800 billion to $1 billion range, probably at the offset to that for the full year. This year on consolidated.
We do expect that gap to start narrowing in future years as the growth ramp of our rental platform starts to starts to moderate and so are we would expect going forward, our consolidated cash flow and our homebuilding cash flow to be much near to the same number beyond fiscal 'twenty four.
So with the rental platform asset growth moderating we're at $3. One today, we do still expect to see that grow a bit further this year and will grow slightly next year, primarily from the multifamily platform our multifamily platform.
10 years to grow and we're building out.
A more elevated level of starts over the last couple of years, but that will probably late 'twenty five start to moderate as well and so we do see prospects for the cash flow on a consolidated basis to be increasing consistently from here.
Into 2004 and into 'twenty five.
Speaker Change: Okay. That's helpful. I appreciate that and then with respect to uses of cash I think you. You know is always you you talk about the opportunity for growth and your market share.
Ross the country, it's still leave some room, there and so I wanted to ask about your community Count you were up 4% month to month up 15% year over year, that's an area, where a lot of other builders have struggled.
And I'm curious if you could provide a little bit of granularity into.
With how much you expect there's further opportunity for growth this year in your community count and what you generally our target for the next year or two in terms of community count growth.
Sure, Steve and we've been at the double digit percentage on a year over year basis for community count now for several quarters. So we've probably got at least another quarter or so until we've cycled an anniversary that and would expect the growth to moderate a bit but as we look at our overall lot position and our position.
Positioning for the future to continue to drive growth, we have shipped into a lot of that coming from community count rather than just continuing to have to drive more absorption out of each and every community and so I do think you'll continue to see our community count growth. Its just probably won't continue to be at the double digit percentage year over year increase here in a quarter or two.
Okay Gotcha, so like more like kind of like a high single digit kind of rate is what you're talking about right.
Yeah.
Okay Gotcha appreciate it thanks very much guys.
Thank you Susan.
Thank you. Your next question is coming from Matthew Bouley from Barclays. Matthew Your line is live. Please go ahead.
Good morning, everyone. Thank you for taking the questions I wanted to ask around start pace going forward, perhaps where we are assuming we we live in this kind of mid to high Sevens mortgage rate environment is there a scenario, where you would dial back production at all to the extent that supports price or margin or.
So maybe said another way is there a mortgage rate at which you would consider pulling back a little bit on starts. Thank you.
I think we're going to manage the startup space at a community by community level based upon what we're seeing with buyers in the market and how they are responding to the current interest rate environment and mix of incentives that we're offering.
Speaker Change: Traditionally we've had a limiter for the past several.
Speaker Change: Periods on lot supply in terms of what we could actually start so as we're seeing our lots get developed and get brought online we're able to bring good production starts in the market I think we start to just under 25000 homes in the quarter and we probably expect that to continue into the June quarter.
If we see continued absorptions and sales.
And so with our gross margin currently over 23% and very solid it would take a pretty big disruption in the market for you to see a kind of a broad based across the board pullback in starts as Mike alluded to is going to be distributing on a community by community basis like it always is based on our finished lot position and what makes the most sense to maximize returns with that.
Individual community level as we see right now without another big stacked or any sort of big shock to the system or a more significant move in rate I think we would expect our starts to be pretty consistent through the remainder of the year.
Got it very helpful. Secondly, I wanted to ask around.
Credit and DTI metrics, particularly for your first time buyers are you seeing any sort of incremental signs of stress in your mortgage applications. Just given this affordability backdrop. Thank you.
No we've seen pretty pretty solid level of qualified buyer and our average FICO store. This last quarter was still at $7 25.
With the low level of inventory and available homes to purchase out there.
We still see strong buyer demographic and demand and we've remained pretty consistent.
We have seen fluctuation in rates, but they have really not been significant enough to have any meaningful impact on our backlog and people's ability to qualify.
Great. Thanks, everyone.
Thanks, Matt.
Thank you. Your next question is coming from Michael Rehaut from J P. Morgan Michael Your line is live. Please go ahead.
Thanks, Good morning, everyone.
Just wanted to drill down if possible a little bit on you know the demand trends over the last.
A couple of months.
And I know you don't typically go too far down the rabbit hole in terms of month to month, but obviously with the change in rates with with some of the concerns in the market.
Any.
Kind of.
Yeah January February March April type of progression, we've heard that.
For example March I'm, sorry March and April maybe are a little bit more moderate than what we saw on February I'd Love Your take on just.
You know how the demand trends, how the sales pace has come in through the door.
You know maybe versus your expectations.
And you know its been standards in the marketplace have changed at all around that.
Sure Mike We did see the end of our first fiscal quarter in December we saw I'd say better than normal seasonality in terms of our sales demand and that continued on into January when we had our call in January we were still seeing I'd say, probably a little bit better than normal seasonality into January and then as we've talked many times anytime you see a lot of volatility.
<unk> and rates are there is always an adjustment period for buyers and so we saw more volatility in rates in February and March and so we saw some intermittent periods, where buyers were having to adjust which does affect weekly sales pace. But then you know as we look out look over the last six weeks or so we've seen that stabilized and are seeing a very good sales pace in line with our own.
For all plans and very pleased that that has positioned us to increase our guide for the year going forward as Jessica has said a couple of times already going forward is going to be subject to the.
The rates you know what happens in the market with rates and we're in the last week. We've seen another period of volatility. So I think we'll continue to see that the market adjust and will adjust to it as the rate environment changes.
Great. Thanks, Bill appreciate that and I guess, maybe along those lines in terms of the impact.
The impact of higher rates at points.
You know it seems like if you go back to your guidance last quarter, there was a little bit of a surprise that you know maybe the.
The out quarter for gross margins with a little less and people were looking for and it kind of went back to the higher level of rates and incentives seen in in in three in the calendar third quarter.
Wondering you know obviously, you haven't given guidance for the fourth quarter, but all else equal.
If perhaps you are having some of the.
Are you a delayed impact of perhaps higher incentives, perhaps more costly incentives.
And I know, there's some warehouse buying and delay of an impact on the incentive front from the mortgage rate buy downs.
If we were to stay at these levels just from the standpoint basically of.
The buy downs being maybe a little more expensive.
All else equal would that.
Impact be more on your fiscal fourth quarter than your third quarter.
And I think right now Mike with the number of homes that we're selling and closing intra quarter youre seeing a pretty good real time average gross margin and so unlike a lot of other builders I think you'll see more real time market conditions show up in our results faster and hard to say you know its splitting hairs between Q3 and Q4.
But we you know, we're really pleased with where our gross margin came in this quarter.
And we actually did see an increase in the number of buyers sequentially that that we're able to utilize the mortgage rate buy down and in spite of that we had.
It ticked up in our gross margin and so without giving specific guidance for the remainder of the year because it is going to be dependent on the interest rate environment and it feels pretty good to US right now our cost outside of incentives is generally flatten out and on the stick and brick side and we're still having some categories go up where we have pressure, but we've had some success getting categories.
Go down.
Do you still have some launch costs and inflation, we would expect to continue to need to be able to offset that.
When we think about really predominantly the next two quarters. It is gonna be incentives.
Wildcard and it's going to be dependent solely on market conditions.
Speaker Change: Well it just to make sure we understand then to the extent that right.
Wrote rates have risen and the cost of those mortgage rate buy downs become more expensive you feel like a lot of that is already reflected in <unk> and <unk>.
I think again based on the fact that we are selling are more than 50% of our homes intra quarter.
See how that plays out as we look at the next.
In the third quarter and the fourth but we.
We move our rates along with the market and so really it becomes a question of absorption in pace, we're going to continue to manage.
Pace and margin to the returns that we want and if we need to suppress a little more on the incentives to keep that pace consistent we will do so but we move our rates along with the market. So it doesn't necessarily mean, we're seeing significant cost and the level of those buy downs. It really just starts to stress the buyer when they climb up into the <unk>.
And if they go to the 8% range and then we will and we will see a little more challenge in getting buyers qualified and if it goes out I would expect to see our our incentives increase to keep our eyes.
Great. Thanks, so much appreciate it.
Thanks.
Thank you. Your next question is coming from Erik bass from CRC. Eric Your line is live. Please go ahead.
Good morning, Susan.
So if I could first of all that the gross margin in the quarter was a little bit better what was what was different that created that.
And I'm, assuming you're talking on a sequential basis.
Correct.
Yeah, so a little bit of it was just core and inclusive of just a very modest to pick up on.
On the incentive front in terms of the forward commitments and the interest rate buy down because you will see when we put out our supplemental guidance.
That kind of core margins at about 20 basis points.
And then we also had a little bit less of an impact on warranty and litigation this quarter and those are the two biggest pieces is and why there was a sequential increase.
Okay, and then and then secondly, you talked about it a little bit but I'm just curious the.
The effectiveness of the incentives as you've moved through the quarter and in the March and April I, suppose, but just trying to figure out the effectiveness and the last comment that was made up as rates move higher what do you have to do different with buy downs I'm. Just curious how you are seeing.
Conversion or closing customers behave relative to incentives relative to buy downs and if youre you indeed are having to do anything different.
Currently we're not doing anything significantly different we're responding to the rates and the customers that are in front of us at the time and they are reacting very positively to the incentive offerings that our teams have crafted for the various neighborhoods we have out there.
So no we're not seeing anything with the current range range of rates, we've been dealing with right now we feel like it's almost like business as usual in this crazy volatile world. We're in but right now we feel pretty steady pretty good about where things are.
Thank you.
Thank you. Your next question is coming from Sam Reed from Wells Fargo. Sam Your line is live. Please go ahead.
Awesome. Thanks, so much guys for taking my question you made a lot of progress here and getting back to your historic levels on cycle times that said I mean, one thing that I'm thinking here is you're also building a more value engineered house today than perhaps what might have been the case pre pandemic. So the question really yet they are in.
Opportunity to bring cycle times lower versus that historical trend or do you really think kind of four months at steady state, we should be thinking about longer term.
Yeah, Sam we are pleased to be back at what we deem our historical norm and you bring up a good point, we are building a more efficient house and it's been our extreme focus of us to to try and pull labor and man hours out of their home to reach afforded and maintain affordability.
We're always going to believe there is upside for improvement in our business and so we continue to stay focused on our inventory turns.
And the opportunity to reduce cycle times and be more efficient in the construction process, where we can we're going to continue to strive for that.
We got back.
To this place and we will continue to <unk>.
To focus on doing everything we can to drive it down further.
Gotcha, and then maybe to touch on order ASP a little bit it.
It looks like there was a little bit of a sequential lift between Q1 and Q2 I just would like to hear maybe a bit more context on that number was was there a function of perhaps.
A little bit of a dialed back in incentives in early spring or were there any kind of geographic or other mix dynamics that might have also driven that sequential improvement.
Yeah. It continues to be primarily geographic when you look at our price points and the south central and the southeast which is some of our lower price point markets in terms of average sales price and then a slightly lower percentage of our mix for a couple of quarters now and that continued this quarter.
Awesome. Thanks, so much I'll pass it on.
Thank you. Your next question is coming from Alan Ratner from Zelman and Associates Allen. Your line is live. Please go ahead.
Hey, guys good morning, nice quarter and thanks for taking my questions.
First.
On the resale market I'm curious some of your thoughts there, but we're starting to see inventories ticking up a little bit and some of your markets more meaningfully than others and when I think about the spec entry level model. I think you guys have really benefited from the tight resale market over the last few years and just curious are there any markets, where you're starting to see it.
Increased competition from resale you know maybe more contingent.
<unk> on your move up product and just more broadly how you're viewing.
Kind of the uptick in resale inventory right now.
I still think.
It's a very limited amount of inventory that's available in the marketplace, especially at our price point affordable price point.
That coupled with some of the interest rate incentives that we're able to offer that for the most part existing home offerings don't provide we're able to solve the affordability problem a little better than some of the existing home sales would be open to do but we haven't seen a significant impact on our sales pace to date.
Great I appreciate that.
And then second on the DNA our settlement with brokers.
I know, it's still very early but you guys had been.
One of the heavier users that were friends to the brokerage community. If you will over the years I think do you view them as a as an important tool to bring buyers to your communities and I'm just curious if you've given any thought to how this settlement might change the economics there the relationships you have with brokers.
Commentary you can give would be helpful.
Yeah.
Think this is going to take some time to play out.
We work very closely with the brokerage community and will continue to do so regardless of what direction that takes.
I think you are going to see some restructuring certainly in terms of commissions in and it will have some impact I believe on the number of realtors that stay active through the market.
But we're going to continue to stay close to the realtor community communicate with them. This is still an emotional buy for people.
We're also going to stay focused on our digital presence and ability to make sure that we are ahead of the curve in terms of reaching customers.
Through whatever form it takes over the next couple of years.
I appreciate the thoughts thank you.
Thank you. Your next question is coming from Collyn thereon from Jefferies. Colin Your line is live. Please go ahead.
Good morning. Thank you for taking my questions I guess just wanted to start on a lot of input cost inflation youre seeing any thoughts on the magnitude of that through the remainder of the year. I know you said it was tracking in the low single digits in the most recent quarter.
Yes, I think our expectation is we'll continue to see moderate increases I think that low single digit percentage continuing as is in our current what we can see in our current pipeline.
That's helpful. And then just on the lots controlled its moved up again as you concentrate on that land light model I guess, how much more runway do you think that there is any update on the timeline of getting there and your thoughts on the right number of the years of land or lots owned.
So I think we continue to look for ways to be more efficient and more capital efficient in our lot portfolio.
77% very controlled number position right now and we're looking at 62% of our deliveries were on lots that were actually developed by third parties or four star. So we're continuing to expand those relationships and seek opportunities to buy more lots from third parties you have I'm not going to put a ceiling on how how far we can take that.
Great. Thank you for taking my questions. Thank you.
Thank you. Your next question is coming from Jade Rahmani from K B W. Jade. Your line is live. Please go ahead.
Thank you are you seeing any changes in terms of investor appetite for single family rentals and multifamily, leaving aside the issue of interest rates. We've seen Blackstone for example, make a couple of quite large acquisitions wondering what the tone is from the.
The investors you sell to.
Yeah, I would I would say, we've seen a little bit of a tick up in terms of interest and the number of investors out there in the market. They are still being cautious and rates are where they are and cap rates are.
Acting in time, but I would say that just across the board we've seen a bit of a tick up and have more interested parties and those assets that we have out for sale today.
And a follow up would be a lot of these investors are looking for scale and their capital deployment you've already done.
Some large deals are you seeing on average the size of deals you're looking at increase.
Besides for community that necessarily but there are large appetite to place dollars at scale into this space.
Thank you multiple communities yes.
Thank you. Your next question is coming from Mike Dahl from RBC capital markets. Mike. Your line is live. Please go ahead.
Good morning, Thanks for taking my questions.
Michael Glaser Dahl: Just to follow up on <unk> question on the.
On the rental side.
Michael Glaser Dahl: You know revenues flat sequentially as expected in <unk> you do have more units completed on I think both.
Single family and multi families.
Is that a function of.
Okay.
Michael Glaser Dahl: Characterized by its not better.
Is it more the investor hesitancy at this point or is it the conversations you're having around price.
Meet your objectives for margin and return on those projects.
It's really a matter of communities community size and timing of those closings.
And we're going to be selective through the process, but we have projects that are done and we're going to go ahead and monetize those and put them into the market.
I'm not saying the margins.
Where we would like to see them, but thats relative that's just tied to cap rates.
And interest rates, but.
No real.
Got it.
And then shifting gears back to the the homebuilding margins last fall when there was a period of significant volatility and ultimately rates came came down you had a negative mark to market.
Jessica I think you mentioned that lower lower forward contracts played a role in.
Were lowered costs or mark to market. There I played a role in sequential gross margin improvement in fiscal quarter can you be more specific around what impact quantification.
Your forward hedges are having on both the <unk> the gross margin and is that actually a continued sequential benefit in your <unk> guide.
No I mean, we really think about it Mike is last quarter was somewhat of an anomaly, we're not going to say one time and it could happen again, but it was highly unusual in terms of the rate is going up and down so quickly and the timing in which that happened and then move close to quarter end and so this quarter. When we say minimal impact I mean, we've talked about outside of Q1.
One it's been no more than a plus or minus 10 basis point move.
From a gross margin perspective, and so hopefully that'll be the case going forward as well and you won't see a repeat of what happened in Q1.
Okay, great. Thanks.
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.
My first question is on the material cost I think Jessica you had mentioned that you're seeing some success on seeing some of those.
Moves lower can you give more detail on what is coming down and how you're thinking about that relative to some of the other areas, where there may be some inflation, that's coming through and any thoughts on lumber as well within that.
I'll start with lumber and then I'll leave that up and down on other categories, followed by probably better versus than I am lumber is still less than half what it was at its peak back in March 'twenty, two but it has started to increase since December and which would be kind of a typical seasonal trend.
So hopefully we're not going to be talking about lumber in terms of big swings in our clothing.
Most of our year over year stick and brick decline is still from lumber, but in terms of sequential moves going forward, we expect it to ease eligible modest.
Very fair.
Think in terms of the other categories, it's a market by market category by category.
I don't want to say struggle or battle, but it's an ongoing effort to be as efficient as we can do that and we make some progress on some categories and then we might have to give back some on others.
So it's a constant battle Susan and.
We've seen right now I think some moderation and seeing increases which has been very helpful. In margin right now.
Okay, Alright, that's helpful. And then you got your SG&A to be about 7% for the third quarter, which is still really low and there had been as youre, making those investments can you just talk about the puts and takes into the SG&A as we think about not just in the third quarter, but even looking out any thoughts there.
Yeah sure so were continually trying to position ourselves to across our footprint to be in position to grow and as we've gotten larger and have more scale in individual markets that has involved realigning certain divisions.
You're breaking up certain markets into multiple divisions to put ourselves in a position to more deeply penetrate market share in those markets and the same is applied across our our infrastructure across the country as well and so so we're making some of those investments right now and we do see pretty quick payback on that and so that's why our SG&A percentage has remained as low as it has but we are making those investments.
What's that.
Times do you have to come a little bit ahead of the growth, but it's primarily in primarily in people and in making sure. We've got the depth on our teams and we've got the land personnel in various markets in order to be able to tie up the land positions and develop those relationships with third party third party developers.
Trades to continue to position our platform to support growth.
Okay. That's great. Thank you good luck.
Thank you.
Thank you. Your next question is coming from Kenneth Zenner from Seaport Research partners. Kenneth Your line is live. Please go ahead.
Good morning, everybody.
Good morning, Ken.
Alright.
Origin stability up 52% of closings.
Intra quarter orders.
Why was it higher specifically.
It looks to be yet.
My own narrative, but I wouldnt hear it specifically and then what was the margin spread between those 52% into your Q versus the ones that were naturally coming out of backlog.
I frankly don't think any of that's looked at that before the call, but we can take a look and get back to you and it was 54% versus the 52 just to clarify and the driver on that was a function of we went into the quarter with over 9000 completed specs and our cycle times are back to normal.
Okay.
Okay, So youre getting.
We'll follow up on the margin backlog versus <unk> is that correct.
Yes.
Okay.
<unk>.
And then Paul I think you had talked about your markets in Florida.
Not being affected by the rise in inventory, we are seeing in coastal markets and bore.
Higher cost of ownership related to insurance.
Maybe isolate that comment to a place like Central Texas, Austin, I know Youre building in Buda.
Austin per se, but.
But we are seeing inventory go up in Central Texas, you don't have right to coastal issues is it still that you have homes that are affordable.
And in demand.
So youre seeing the same dynamics, you've talked about there, where we're kind of excluding coastal conditions. Thank you well well the question and the comment back on Florida was mostly as it relates to insurance and increased costs around that.
Inventories.
We had certainly see more inventory in the market today on the resale side than we have in the past months of supply has crept up slowly and across most of our markets, but majority of what we see coming to the market.
It's still maybe either overpriced or has significant need and work and very minimal in the affordable price points, where we tend to compete so we.
We expect it's going to take significantly more homes to come on.
Before we see.
To be a lot of impact on our ability to yourself, but we've competed in that market forever.
We have been a spec builder, we do that to compete in the new home market as much as we do against the resale market and feel very good about our product and positioning against the homes that come to market.
Resale available when they do and we think we have a great package of incentives warranty and closing cost basis.
To compete against that inventory when it does come on and it will at some point in the future.
Right I appreciate it and I guess, Jessica you said, 3% on land could you split that between land you developed in land Youre buying finished.
I don't think we've quantified that and I definitely don't have that in front of me [laughter] talking you guys. Later thank you.
Sure.
Thank you. Your next question is coming from reef drove Sage from Bank of America.
Your line is live please go ahead.
Hi, how are you good morning, Kurt Thanks for taking my questions.
Just first on the the fiscal third quarter gross margin outlook for flat to slightly up just how do we think about the assumptions.
Assumptions for the stick and brick per square foot net pricing and land inflation, that's baked into that guidance and then specifically on land inflation just the lacoste is flat quarter over quarter. What are you seeing in terms of land inflation.
For Atlanta is contracted today.
Yes, and our forward forward guide.
Relative stability right now in materials and labor. So we are still seeing some components go up slightly so I think a very low.
Single digit percentage increase is generally the expectation there and our lot cost a little bit higher than that still low single digits, but probably more in that 3% to 4% range.
And in terms of just new land.
Deal by deal specific market by market specific I think in general we've seen land prices kind of settle out here over the last little while not as much inflation, but but the long term trend is still up over time. This industry still has a shortage of lot availability and so I think that's going to continue to be a constraint.
Situation and so in that situation, we would not expect to see land prices come down.
Thank you that's very helpful and then on the for the rate buy downs.
Forward commitments.
You all have how long do those go how are.
Are those months are those weeks, who does the recent move in rates. It hasnt impacted the rates that you are offering yet when will that start to be kind of offered to the homebuyer like how how long of a forward commitment that you have.
We generally.
Don't go out too terribly far in terms of the volume of forward commitments that would go with we have.
Various levels based upon anticipated demand of of how much we will buy for a given exploration date, which can vary from 60 to 90 days out, but we're not going to look to fulfill all of our existing.
Sale of expectations with anyone given.
Hedge or anyone given builder forward and we'll continually sort of repriced to market. So that we're offering incentives that are within as Paul said before they can point to a point and a half of market. When that is the incentives that we feel is the most effective at driving appropriate pace and margin for the returns at a given community.
Thank you that's helpful.
Thank you. Your next question is coming from Alex Barron from housing Research Center.
Alex Your line is live please go ahead.
Yes, thanks, guys and great job on the quarter.
Yes, I was just curious around land development costs I mean, you guys are.
Developing I mean, using more a lot more land options and stuff but.
Our land development costs are expected to.
Impact margins for you guys in the near term or do you feel that's going to be more.
Absorbed by whoever is developing the land for Ya.
Hey, Alex we haven't seen much reduction in land development costs, either from materials or labor.
We still have significant demand out there for the labor.
Those that are putting lots on the ground and not just in what we're doing in other builders are doing but you have infrastructure improvements throughout the country.
That are keeping demand up for materials and labor so.
That's kind of baked into what we look at in terms of our increase in lot price overtime. So we don't we'd love to see some reduction, but we don't expect to see it in the near term.
Got it and.
I guess you already touched a bit on the on the rental business, but I was just curious if the margins. We saw this quarter do you expect that's going to be sort of more what they're going to look like in the future.
Not necessarily.
It's going to be largely rate dependent and the capital markets as to the execution of all of those.
I think at this point, our expectation is that it's going to be somewhat consistent with where we are today, but there is opportunity for some volatility around that too, especially within quarters.
Within one quarter to the next because these are some chunky transactions there are large individual transactions.
And our multifamily platform has not yet to the scale, where they're producing a significant number of multifamily communities delivering every quarter to the marketplace. So there is a relatively small number they can be chunky.
And there is opportunity for volatility, but our expectation is.
Somewhere in the range we're in today.
Got it okay well good luck thanks. Thank.
Thank you. Thank you.
Thank you. The final question. This morning is coming from Jay Mccanless from Wedbush.
Jay Your line is live please go ahead.
Thanks, Good morning, everyone.
On the rental guidance, you've talked about for <unk> does that guidance based upon projects that already have financing in place or is that just the schedule of what you think might closed during the quarter.
Jay McCanless: It's a mix of both.
Jay McCanless: Okay.
And then the other question I had is.
I don't want to make too much of this if it's not a big deal, but it does seem like.
You're going from maybe an aggressive selling pace during the COVID-19 years now to try to gain market share leadership through more communities I guess, how far along do you think you are in that in that transition.
I think kind of the <unk> question also what does that ultimately going to mean for SG&A going forward. If you are starting to staff up and bring more people on to support a larger organization.
Yes.
Wouldn't say today that it has anything to do with us trying to push more pace. During COVID-19, it's all tied to our lot position and so we've been building our lot position at that not all of those lots were ready to go and so we knew that communities are coming.
And obviously the market was extremely hot for a period of time. So we were able to drive additional absorption where we handle lots available. We don't have that same kind of strong demand less affordability challenged environment today and at the same time. Our lots are getting finished in the communities are ready to go so we're bringing them.
Online and it happens to be good timing that we have the community is ready to go when we're not able to drive incremental absorptions further in our existing communities.
Okay.
How far along do you think you are maybe in the process of trying to get bigger from a community count standpoint.
That's going to be an ongoing and.
As planned in Angola and positioning.
And I'd say just watch our lot position and ultimately in other communities are going to come online over time now from year to year, what exactly is that community count growth is going to look like it's impossible for us to predict.
Okay, great. Thanks for fitting me in.
Sure.
Thank you I would now like to turn the floor back to Paul Romano ski for closing remarks.
Thank you Tom we appreciate everyone's time on the call today and look forward to speaking with you again to share our third quarter results in July congratulations to the entire D. R. Horton family I'm, producing a solid second quarter. We're proud to represent you on this call and appreciate all that you do.
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.
Yeah.