Q3 2024 DR Horton Inc Earnings Call
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[music].
Good morning, and welcome to the third 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.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the call over to Jessica Hansen Senior Vice President of Communications for D. R. Horton.
Thank you Paul and good morning, welcome to our call to discuss our financial results for the third 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 1995, Although D. R. Horton believes any such statements are based on reasonable assumptions. There is no assurance that actual outcomes will not.
Being materially different all forward looking statements are based upon information available to D. R. Horton on the date of this conference call and Youll run 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 in our report on Form 10-K.
In its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
This morning's earnings release can be found on our website at Investor day over in Dot Com and we plan to file our 10-Q early next week. After this call we will post updated investor and supplementary data presentations to our Investor Relations site on the presentations section under news and events for your reference now I will turn the call over to David Auld our.
<unk> chairman.
Thank you Jessica and good morning.
When we discuss our results I wanted to take a moment to pay tribute to our founder Don Horton Paas.
Okay.
Tom was an incredible win with an unstoppable drive and work ethic.
The foundation of culture of our company.
D R. Horton the company would not exist as it does today without those tires.
Tireless pursuit to help as many Americans as possible achieve the dream of home ownership.
The simple mission has driven us from the first one the dawn Bill Sullivan closed himself what was.
45 years ago through the more than 1 million homes for a couple of you guys provided for families across the country.
We are thankful for dawn and we and all employees are beneficiaries of his life's work.
Okay.
Along with our homeowners customers contractors suppliers land sellers real estate brokers.
Everyone else.
And his family.
Yeah.
It is bittersweet to be talking about the company's results.
For the first time since his passing.
Now onto a great ride and the Companys growth profitability and shareholder returns, which have been at the top of all public companies in America.
Okay.
We will work everyday to preserve this legacy and continue to build upon.
To improve our operations and the value of our company.
We would also like to take the countless people, who contacted us to share their condolences and memories.
Received hundreds of messages from employees across the country.
And we heard from many industry leaders.
All the other homebuilding companies.
Our suppliers lot developers bankers and sell them anymore.
On behalf of Dawn family and our company.
Thank you for that.
<unk> contributes to a remarkable man.
He will be missed.
Now I'll turn the call over with Husky, our president and CEO.
Thank you David for sharing those words and sentiments about dawn on behalf of all of US at D. R. Horton.
In addition to David and Jessica I Am pleased to also be joined on this call by Mike Murray Executive Vice President and Chief operating Officer, and Bill Wheat, Executive Vice President and Chief Financial Officer for the third quarter. The D. R. Horton team delivered solid results highlighted by earnings of $4.10 per diluted share.
Which was an increase of 5% from the prior year quarter, our consolidated pre tax income increased 1% to $1 $8 billion on a 2% increase in revenues to $10 billion with a pre tax profit margin of 18, 1%. During the nine months ended June 30th we generated 900.
Third and $72 million of cash flow from our homebuilding operations and consolidated cash flow of $228 million. Our homebuilding return on inventory for the trailing 12 months ended June 30 was 29, 5% and our return on equity for the same period was 21, 5%.
Although inflation in mortgage interest rates remain elevated the supply of both new and existing homes at affordable price points is still limited and the demographic supporting housing demand remain favorable homebuyer demand during the spring selling season was good despite continued affordability challenges with 42.
600 homes in inventory at an average selling price of approximately $380000. We are well positioned to continue consolidating market share. Our average construction cycle times are back to normal and improved from the second quarter driving additional improvement in our housing inventory turns we remain.
And focused on enhancing capital efficiency to produce consistent sustainable returns and to increase our consolidated operating cash flows. So that we can return more capital to shareholders through both share repurchases and dividends like earnings for the third quarter of fiscal 2024 increased 5% to $4.
10 cents per diluted share compared to $3 90 per share in the prior year quarter net income for the quarter was $1 $4 billion by consolidated revenues of $10 billion, our third quarter home sales revenues increased 6% to $9 $2 billion on 24155 homes closed.
Compared to $8 $7 billion on 22985 homes closed in the prior year.
Our average closing price for the quarter was $382200 up 2% sequentially and up 1% from the prior year quarter still.
Our net sales orders for the third quarter increased 1% from the prior year to just over 23000 homes and order value was flat at $8 7 billion.
Our cancellation rate for the quarter was 18% up from 15% sequentially and flat with the prior year quarter.
Our average number of active selling communities was up 3% sequentially and up 12% year over year.
Average price of net sales orders in the third quarter was $378900, which is flat sequentially and down 1% from the prior year quarter.
To address affordability, we are still using incentives such as more mortgage rate buy downs, and we have reduced the prices and sizes of our homes where necessary.
Although our home sales gross margin improved sequentially. This quarter incentives are elevated and we expect them to remain near these levels, assuming similar market conditions and no significant changes in mortgage rates Jessica our gross profit margin on home sales revenues in the third quarter was 24% up 80 basis points sequentially from the March quarter.
Our gross margin was better than expected, primarily due to lower incentive costs than in the second quarter on a per square foot basis home sales revenues were up 2% and stick and brick costs were down 1% in the quarter, while lot costs increased approximately two 5%.
For the fourth quarter, we expect our home sales gross margin to be similar to the third quarter.
Further out our home sales gross margin will continue to be dependent on the strength of new home demand changes in mortgage rates and other market conditions.
Yes.
In the third quarter, our homebuilding SG&A expenses increased by 12% from last year and homebuilding SG&A expense as a percentage of revenues was seven 1% up 40 basis points from the same quarter in the prior year.
Fiscal year to date homebuilding SG&A was seven 5% of revenues.
Up 30 basis points from the same period last year due primarily to the expansion of our operations, including new markets and an increased community count.
We will continue to control our SG&A, while ensuring that our platform adequately supports our business. Paul We started 21400 homes in the June quarter and ended the quarter with 42600 homes in inventory down 3% from a year ago 26200 of our homes at June 30th were.
Unsold 8800 of our total unsold homes were completed of which 990 had been completed for more than six months for homes. We closed in the third quarter. Our construction cycle times improved slightly from the second quarter, bringing us below our historical average cycle times are faster construction.
And housing terms allow us to manage our homes and inventory more efficiently we plan to maintain a sufficient starts pace and homes in inventory to meet demand while remaining focused on improving capital efficiency, Mike our homebuilding lot position at June 30 consisted of approximately 630000 lots of which.
24% were owned and 76% 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, all lots developed by others, but the homes. We closed this quarter, 64% run a lot developed by either forced.
Or a third party.
Our capital efficient and flexible lot portfolio is a key to our strong competitive position, our third quarter homebuilding investments in lots land and development totaled $2 $5 billion. Our investments. This quarter consisted of $1 $4 billion per finished lot $750 million for land development and 300.
$40 million for land acquisition Paul.
In the third quarter, our rental operations generated $64 million of pre tax income on $414 million of revenues from the sale of 790 single family rental homes and 610 multifamily rental units. We continue to operate a merchant built model in which we construct.
Purpose built rental communities and sell them to investors our rental operations provides synergies to our homebuilding business by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and land parcels.
Our rental property inventory at June 30 was $3 1 billion.
Which consisted of $1 $1 billion of single family rental properties and $2 billion of multifamily rental properties. We expect our total rental inventory to remain around the current level for the next several quarters Jessica four-star a majority owned residential lot development company reported revenues of 318.
For the third quarter on 3255 lots sold with pretax income of $52 million for Starz owned and controlled lot position at June 30th was 102100 lots.
63% of Foresters owned lots are under contract with or subject to a right of first offer to D. R. Horton.
$270 million of the finished lots we purchased in the third quarter were from Forrester.
First start had approximately $745 million of liquidity at quarter end with a net debt to capital ratio of 18, 7%.
Our strategic relationship with <unk> is a vital component of our returns focused business model for homebuilding and rental operations.
First our strong separately capitalized balance sheet growing operating platform and lot supply position them well to capitalize on the shortage of finished lots in the homebuilding industry and to aggregate significant market share over the next several years Mike.
Angel services earned $91 million in pre tax income in the third quarter on $242 million of revenues, resulting in a pre tax profit margin of 37, 7%.
During the third quarter, essentially all of our mortgage companies loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 78% of our buyers.
P J and VA loans accounted for 56% of the mortgage company's volume <unk>.
Borrowers originating loans with the ACI mortgage this quarter had an average FICO score of 725, and an average loan to value ratio of 88% 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.
We have 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 nine months of the year, our consolidated cash provided by operations were $228 million and our homebuilding operations provided $972 million of cash.
June 30, we had $5 8 billion of consolidated liquidity, consisting of $3 billion of cash and $2 8 billion of available capacity on our credit facilities.
It ended the quarter totaled $5 7 billion with.
With $500 million of senior notes maturing in October, which we expect to refinance our.
Our consolidated leverage at June 30 was 18, 8% and we plan to maintain our leverage around or slightly below 20% over the long term.
At June 30, our stockholders' equity was $24 7 billion and book value per share was $75 32 up.
Up 18% from a year ago for.
For the trailing 12 months ended June 30th a return on equity was 21, 5% and our consolidated return on assets was 14, 8%.
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 August.
We repurchased 3 million shares of common stock for $441 million during the quarter.
Our fiscal year to date stock repurchases through June increased by over 60% from the same period last year to $1 2 billion.
<unk> reduced our outstanding share count by 3% from a year ago.
Just on our strong financial position and expectations for increased cash flows our board recently approved a new share repurchase authorization totaling $4 billion Jessica to the fourth quarter. We currently expect to generate consolidated revenues of 10 to $10 $4 billion and homes closed by our homebuilding operations.
To be in the range of 24000 to 24500 homes, we expect our home sales gross margin in the fourth quarter can be around 24% and homebuilding SG&A as a percentage of revenues to be approximately 7% we.
We anticipate our financial services pre tax profit margin of around 35% in the fourth quarter and we expect our quarterly income tax rate to be approximately 24 to 24, 3%.
The full year of fiscal 2024, we now expect to generate consolidated revenues of $36 eight to $37 $2 billion and expect homes closed by our homebuilding operations to be in the range of 90000 to 90500 homes.
We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations in fiscal 2024.
Finally, we now plan to repurchase approximately $1 $8 billion of our common stock for the full year. In addition to annual dividend payments of around $400 million.
We plan to provide guidance for fiscal 2025 in October when we report our fourth quarter earnings and after we've completed our annual budgeting process with our operators we.
We expect to be positioned to increase our market share. Further next year. We also expect to generate increased cash flow from operations in fiscal 2025, which we plan to utilize to increase our returns to shareholders through proportionately higher share repurchases and dividends Paul in closing our results and position reflect.
Our experienced teams industry, leading market share broad geographic footprint and focus on affordable product offerings. All of these are key components of our operating platform to sustain our ability to produce consistent returns growth and cash flow, while continuing to aggregate market share we have significant financial flexibility.
<unk> ability and we plan to maintain our disciplined approach to capital allocation by providing consistently high returns to our shareholders to enhance the long term value of our company.
Thank you to the entire D. R. Horton family of employees land developers trade partners vendors and real estate agents for your continued efforts and hard work.
This concludes our prepared remarks, we will now host questions.
Thank you at this time, we'll be conducting a question and answer session. We ask that on today's call participants. Please limit themselves to one question and one follow up if you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
And once again, we do remind you to please limit yourself to one question and one follow up today.
Please hold while we poll for questions.
And the first question today is coming from John Lovallo from UBS, John Your line is live.
Good morning, guys. Thanks for taking my questions. The first one is you know absorptions were somewhat worse than normal seasonality would suggest I know theres been some noise of normal seasonality over the past few years.
But margin was 50 basis points above the high end of your outlook at 24%. So I guess the question is did you guys focus more on profitability per home versus maintaining the sales pace, maybe as rates rose in April and along those lines absorptions tend to decline you know call. It 15, maybe a little bit more percent quarter over quarter in the fourth quarter.
Speaker Change: How are you thinking about kind of the seasonality in the fourth quarter.
Yeah, John we continue to balance price and pace to drive the returns that we're looking for a community by community.
We saw choppiness through the quarter and demand as you saw fluctuation and in interest rates and we responded accordingly.
We did bid maintain incentives, but didn't lane in too hard and I think that's where you saw the result in the overall sales pace, but still feel good about our position about the backlog, we have and the opportunity to perform on our guidance for the full year.
Got it yeah no. It was it was a good outcome and then maybe the next question is in the southeast, which you know, obviously encompasses Florida and South Central which is Texas and it you know orders were a little bit lighter than what we were looking for and I think when we spoke in in the quarter Paul It seemed that the pickup in existing home inventory in those markets. You know it was characterized as more of a norm.
Speaker Change: Amortization than a glut and you know I think the thought was that the age of the existing housing stock and the price points. You know just weren't that competitive with DHS product. How are you thinking about existing home inventory in those two markets specifically today and you know did higher inventory negatively impact the orders in the quarter. Thank you.
I think similar to what we've seen last quarter and through today, yes inventory.
Inventory continues to increase not just in Florida, but across the markets.
But we still feel good about our competitive advantage, especially in the price points that we operate in and with the incentive package and opportunity with being able to be flexible in rates.
And so I don't think that you know.
Some of the flatness in sales that you saw across those regions was significantly impacted by increase in inventory.
And we still feel good about the demand just not as vibrant as it was in prior quarters.
Great. Thank you guys.
Yeah.
Thank you. The next question is coming from Carl Reichardt from BTG Carl Your line is live.
Good morning, everybody.
Once again for me as I expressed to you all privately my condolences on your staffing I'm really very sorry for your loss and the industry to so about that said John took one of my questions, but I wanted to ask about intra.
Intra quarter sales and closings I think it was over 50% last quarter I'm curious what it is this quarter and given that you are back to really normalized cycle times and you've got it.
Good amount of inventory heading into Q4 and into next year. What's your guess sort of long term is to sort of that the sales closings inter quarter level is going to be on a go forward basis.
I think we've seen with the volatile interest rate environment is choppy choppy traffic pattern when rates move.
Traffic patterns are impacted and we saw that through the quarter. I think we ended the quarter with better traffic patterns better demand and felt that coming into July.
Good.
We would also see is that people are trying to have interest rate certainty when they're buying a home and so homes that are closer to completion.
Our more attractive because they can get into a better interest rate debt.
We can help them with our builder forward progress.
And at the same time, you know that means we're buying a little bit later and so we're seeing a high level of homes sold and closed in the same quarter and we're focused on historic space to drive our closings number in that sales are going to occur between those two things.
Yeah.
Speaker Change: Okay and then.
One of the elements you guys have talked about in the past I think it's still in your deck is this idea of getting your cash in and out of land deals in in 24 months and I'm kind of curious as you're looking at deals going forward here.
Obviously, we've seen entitlements.
Development times take longer and longer is that still realistic to expect that as you underwrite youre going to see that and maybe what percentage of your current communities right now I've hit that that goal of getting your cash in and out within 24 months of those transactions. Thanks al.
Yeah, Karl Yes that has been a standard of us on underwriting for several years and we intend to hold to that.
We really aren't looking to own that land until its shovel ready so although the entitlement may take longer we are positioning ourselves in expectation of that time. So that we can have properties under contract.
<unk> third party development partners involved to help and so you know the more lots that we have more homes that we're building on lots that were developed by a third party developer.
It makes it easier for us to maintain that 24 month cash back so.
We don't always hit it we'd love to say, we do but reality sets in sometimes but it's absolutely an underwriting standard that we intend to hold onto it.
Great appreciate it guys. Thanks.
Thank you. The next question is coming from Stephen Kim from Evercore ISI Steve.
Steven Your line is live.
Yeah. Thanks, very much guys. Let me also echo what Karl was Carl sentiments, you know about D. R. You know really a great man and it was a it was a real pleasure to work with them all those years.
I do want to ask about your cash flow commentary, which I found very encouraging both in terms of the remaining quarter. You'll have this year and then also your information about next year I think.
You said you were looking to increase your expected or hoped to increase free cash flow next year.
And you know, obviously deploy that maybe more towards repurchases and dividends. So just leaning into that a little bit more your guidance has typically been around homebuilding operating cash flow, where rental and four star you know it's kind of been.
Offsets to that and so your consolidated free cash flow you know, obviously being a little lower than your were meaningfully lower than your homebuilding cash flow.
But you said I think I heard you right that the rental inventory is going to remain consistent going forward. So does that mean that going forward. Your homebuilding operating cash flow is going to be a much much closer to your consolidated.
And when you talk about hoping to increase your free cash flow are you talking homebuilding or you're talking or can we say you know now that's pretty much consolidated free cash flow increasing next year.
Thanks, Steve Thanks for asking this question. This helps US clarify this yes, we are talking about consolidated cash flow and going forward into fiscal 'twenty five we would anticipate any future guidance that we provide on cash flow will be based on on a consolidated basis with our rental inventory now flattening out stabilizing with.
Ah you're range around the current level, we would anticipate that our consolidated cash flow will be much nearer to the homebuilding cash flow level, there won't be as much of an offset from homebuilding cash flow from from rental four-star is consolidated in our financials. We would expect them to continue to use cash flow, but just as a reminder, there totally separately.
Capitalized so it really doesn't impact the cash flow, we have available to utilize for shareholder returns.
But with the sharp improvement in our cycle times. This past year, our inventory turns have improved we expect that improvement to continue into next year. So the efficiency in our homebuilding operation is improving and therefore, the cash flow generation from our income should continue to improve with stabilization in rental we do.
<unk> an increased level of consolidated cash flow next year and then that's reflected in the increased share repurchase authorization that our board authorized a that will be utilizing going forward as we expect to see proportionately higher share repurchases and dividends being paid out of that cash flow.
Well that all sounds pretty great. So thanks for that there that does also segue very nicely to my next question, which relates to your levels.
Levels of spec inventory and backlog turns that we can expect out of your in your guidance for the fourth quarter closings.
You know implies.
Fairly high level of backlog turnover and I'm wondering if you can give us a sense for what is a comfortable level of backlog turn that we can expect going forward is it is what we're seeing this year kind of similar can we expect kind of a similar level on a going forward basis and tied to that.
Your spec inventory I think you're running at like 26 total specs per community, but we're actually you don't report the community let me put it this way whatever [laughter] whatever.
Whatever your whatever your spec levels our per community, where they are today is that about what we can expect on a go forward basis, both on a total basis and on a finished basis or if you can give us some color. There in terms of what is the target range for finished specs and normal specs and backlog turnover ratio.
Sure that was a lot to unpack for you, but I'll do my best to answer all of your questions. So on the latter part there really is no global expectation for number of specs, we run the business as you know community by community and so our operators are ingesting and based on their sales and environment and each individual community in terms of what theyre starting in.
How many specs theyre going to carry based on their sales run rate that they're experiencing and so they can adjust very quickly to current market conditions and in terms of either slowing down or speeding up assuming we have the finished lot position to do so and so that kind of just roll of that from a bottoms up perspective, we're very comfortable with where we are today is I think on pause.
Remarks on the call said, yeah, where we're selling homes still later and in construction and to one of Mike's earlier points that we buyers want a certainty of close and so the 60 to 90 days of being able to lock their rate, we're very comfortable with our completed spec position today and it is allowing us to run at much higher.
Backlog conversion rates than we have historically, we don't really focus on backlog conversion, we focus on turning our houses and not running with an excess supply of completed specs that had been sitting for an extended period of time unsold and so that's really our focus is on continuing to turn our houses faster and as long as that is completed specs.
Arent age for an extended period of time, we're very comfortable and running with the the levels. We're at today.
Okay. That's helpful. Thanks, very much guys.
Thank you. The next question is coming from Mike Rehaut from Jpmorgan My Carolinas lives.
Great. Thanks, Good morning, everyone and I also wanted to express.
My condolences on the loss of a D. R is obviously, a great leader and visionary for the industry and it'll be sorely missed.
Speaker Change: It wanted to.
Start off my first question just on some of the comments you made around I think earlier you said there was some choppiness during the quarter, obviously with rates earlier in the quarter being a little higher.
At the same time, you know you talked about incentives, maybe being a little less.
Than you.
You expected and that drove the gross margin upside I was just kind of curious as rates, maybe subsided, a little bit or came down.
Perhaps to the lower end of their range that we've seen in the last 345 months.
If any of that Choppiness systems has subsided.
And you know.
It appears that maybe incentives are similar.
As you see them going in.
For Q versus <unk>, but if it had any impact on either incentives or.
Or just more broadly demand trends as those rates have come in a little bit in the last month or so.
And obviously any pullback in rates, we would call a beneficial and we would expect them to have some relief on the incentive front and as incentives are able to be reduced or at least the cost of incentives that we're offering and that we are still balancing that with just overall affordability issues in the market today.
And we do continue to experience higher lot costs, which is why our guide for Q4 would be a relatively flat gross margin and because even if we do have the ability to pull back on incentive cost to some extent and we do have cost pressures, particularly on the lot side.
Speaker Change: Okay. No. That's that's that's helpful makes sense also maybe just along this line of questioning.
Yeah.
Repaired remarks, you highlighted that you reduce prices and incent and sizes of homes.
Speaker Change: You know to a degree over and I don't know if that was specific to the quarter or just more broadly over the last several quarters.
But would love to get a little more clarity around that.
Ill comment and you know.
Maybe just more broadly.
Obviously, we can see the clothing, ESP and and you know backlog.
Backlog a S P. But you just kind of curious obviously theres mix, then that that's that impacts those numbers, maybe just give us a sense of.
[noise] excuse me percent of homes that huge.
Either lowered our reduced prices and.
And by how much by contrast, if theres been.
Our percent of homes or communities that where you've raised prices.
Or sizes and how to think about you know the E. S P through.
For the business going forward into 'twenty five.
Oh, yes, there's a lot a lot there in that question, Mike Let me try them. So in total our average house the house size is down about 2%.
From a year ago, and about flat sequentially and Youre right that is a mix reflection of what our operators are choosing to start in a given community and the community that they are planning to come online and we might be moving to a few more townhome communities to try to meet affordability targets first given the sub market.
With regard to price increases or price decreases.
That's occurring very much week to week at a community level.
By our operators as they're engaging their market demand their inventory conditions in their future log supply. So we feel really good about those teams, making the right decision and we really don't aggregate up and say, we had 14th out of the communities like a price increase 20% a decrease of <unk> was flat and just don't.
Look at those numbers out of them at a at a high level here.
We tend to look at are we turning our housing inventory and are we driving returns community by community. The best we can.
Speaker Change: Yeah.
Great. Thanks, a lot.
Right.
Thank you. The next question is coming from Matthew Bouley from Barclays. Matthew Your line is nice.
Good morning, everyone. Thanks for taking the questions I wanted to go back to the comment around our finished spec.
You were clear that that you're intentionally selling homes later in the construction cycle for.
A lot of obvious reasons.
But obviously the number of finished spec did rise sequentially. Your starts did come down sequentially.
I'm trying to understand if there is any kind of signal, we should take from that around sort of the state of demand.
And you know with finished spec being higher.
Is there an implication.
How we should think about margins going forward.
The extent you have to clear some of that with either incentives or price. Thank you.
Yes, Matthew I think that some of that what you've seen is increase in completed specs as we have seen a consistent improvement in our cycle times. So those homes are moving through the construction at.
At a faster pace, which means they are reaching completion sooner. So even though we may still be selling those homes later in the construction process. It now allows us to sell them.
You know with a with a closer certainty. So we'll cycle through that we don't worry a lot about you know how many of them exactly as a percentage are completed as Jessica pointed out earlier, it's more focused on are they sitting once they reach completion so as they age.
That tends to be an indicator that we have seen slower absorption or demand community by community. So we're focused on maintaining our housing inventory levels that we need in each community and we're going to moderate that and always starts either increase or pullback based.
Based on demand, assuming we have lots in front of us that we need to continue the pace that they were looking for.
Speaker Change: We're very comfortable with the housing inventory that we have a we don't have a buildup of aged inventory and feel good about that going into the fourth quarter.
Got it okay, that's very clear Paul Thanks for that.
Secondly are you.
I noticed you mentioned earlier in the quarter that that stick and brick were down our costs were down sequentially on a per square foot basis, I'm curious as we think about that fourth quarter margin guide of of <unk>.
Flat sequentially I mean is the expectation that stick and brick is continuing to come down further into the next quarter and I guess, what what specifically in terms of construction costs are you actually able to press down on thank you.
I think we're looking for effectively Glastonbury cost, we've gotten a lot of the tailwind out of the lumber price decreases coming through and I think we're coming to a more consistent level there.
The violence of our of our stick and brick costs were probably seeing some pressing for increases some that are were able to make some progress with them.
In various markets as starts have pulled back people will come looking for work and maybe a little bit sharper pencil.
Coming in and trying to get the next neighborhood in the next phase of the starts.
So we expect some plastic and break we'll probably see an escalation in the lot cost going forward into the fourth quarter and then you know the ultimate margin is going to determine based upon what the concession levels are like in the fourth quarter and since a significant portion of our closings in the fourth quarter will be sold in that quarter north of 40%.
You know that will heavily drive the ultimate margin. That's why we felt very comfortable looking at a flat market environment.
Q3, Q4, alright, thanks, everyone. Good luck. Thank you.
Thank you. The next question is coming from Alan Ratner from Zelman Allen Your line is live.
Hey, guys. Good morning, and I also I shared my condolences to you and your family are on this passing in the quarter.
So thank you for all the great info, so far we've heard from some other builders and also just other consumer facing companies about.
Some deterioration I guess in the credit quality of the consumer recently over the last handful of months, we've seen savings rates on the decline.
You guys are have done a fantastic job keeping your price point low when you walked through all the drivers of that but I'm. Just curious if you can provide some insight into what you are seeing from the consumer today in terms of their ability to qualify funds for down payment.
Credit card debt et cetera, any color there would be great.
Well, if I can write still being around 18%, we feel very comfortable about the buyers that are making their way into our sales offices and their ability to qualify our historical cancellation rate for us would be high teens to low twenties and so we're at the low end actually is at a comfortable cancellation rate on what we closed this quarter.
Very strong FICO of 725, I think for the second quarter consistently and the only noticeable difference in terms of the buyers that were ultimately selling and clothing killers that theyre, averaging 10 has.
Course, Unfortunately had to continue to rise because of the interest rate environment. Today. So on a household income basis, where you were at roughly and I think it was the first quarter. It rounded up to $100000 $99 nine and is the average household income on that the buyers who utilize our mortgage company enclosed in a home in the third quarter and so that's.
The only noticeable differences is the buyers coming into our sales offices. Today do you have to have higher income to be able to qualify and but in terms of what we're selling and closing and no noticeable deterioration in those credit metrics everything has been very stable.
That's great to hear I appreciate that Jessica and secondly, really positive commentary on the cash flow and capital allocation I think that that's going to certainly excited investors. If I look at your last several years, you've been buying back around 3% of your shares each year or at least reducing your share count by that amount.
Other builders have been a bit higher than that it certainly sounds like you're you're looking to take that a bit higher here is there a target you could give us just to think about where that can go on an annualized basis could need to be in the kind of mid to high single digit range. I know you have the authorization in place, but it doesn't really give us a lot of insight into kind of what timing you expect to utilize that.
Yes, it does not happen.
Speaker Change: And exploration date of our last authorization was a it was issued in our first quarter. So that one lasted about nine months typically they've been in the 12 month range, but but we're not providing specific cash flow or repurchase guidance for 'twenty five as of yet as we just commented we want to go through our budgeting process before we can provide that specific guidance, but we do expect that as.
As cash flow does provide a significant increase next year, we will increase our repurchases and dividends proportionately to that so we do expect it to be a meaningful step up in the level of repurchases.
The reduction in share count will be a function of really where our share prices as well in combination with that because we're allocating dollars and ultimately we will we will be in the market. We will repurchase shares that were able to get with those dollars, but would expect the reduction in share count to be greater.
Next year than it has been in the last few years.
Understood I appreciate it thanks a lot.
Okay.
Thank you. The next question is coming from Eric Bosshardt from Cleveland Research, Eric Your line is live.
Thanks.
Two things first of all the to circle back to the Choppiness on dinner.
Demand relative to the movement in rates I'm just curious.
How much of the orders now are using a rate buy down and I guess I would've thought with the rate buy down prevalence there'd be less visibility and influence on consumers' as a result of that can you just help me understand that a little bit better.
Yeah, and we actually saw a slight tick up in the number of buyers getting the permanent rate buy down which is the vast majority of what we're offering in the market today of the buyers that utilize our mortgage company. It was roughly 77% I think that translates to about 60% of the overall business give or take and that was up slightly from the second quarter.
And it was that more significantly from a year ago I think there's a lot of noise in the marketplace. When rates are moving and rates are moving up and that affects I think our perspective buyer behavior as to whether or not that you can go to come into the sales office and talk to us once they come into the sales office and they understand whats available to them. They might have had an expectation that I gotta make a seven.
Speaker Change: Mortgage rate work in my budget and they come in and we're able to put them in something different at a different monthly payment. It opens our eyes up quite a bit to what's possible and so the struggle becomes the traffic patterns. If we get we get the traffic we're pretty good at conversion, but sometimes all the headline noise around interest rates can depress the traffic.
Okay, and then secondly, Florida has been an important and successful market. It sounds like it continues to be both a curious if you could just dig a little bit more into for us what's going on there in terms of traffic.
Price sensitivity and what Youre doing or what your communities. There are doing in response to that to position the business to continue to grow.
Yeah, Florida has been an important market to us and we certainly continue to see migration people that people love to live in Florida, I want to be there.
But affordability is challenged like it is across the country and so we've seen seeing significant rise in prices in Florida and across the country and with interest rates.
Sticking where they have it certainly taxing and that's Jessica spoke to you know the real change in and buyers as they just need to make a little more to afford homes at a static sales price and a higher interest rate environment and I think that that's really what we're saying on the impact of sales in Florida and not so much signet.
It can change in traffic and or basic demand or what it's a matter of continuing to provide the right house at the right affordable price point that reaches as many people as possible and that's what we continue to strive to do as we position our new communities.
Speaker Change: Okay. Thank you.
Thank you. The next question is coming from Sam Reed from Wells Fargo Savi. Your line is live.
Awesome. Thanks, so much so wanted to touch on your rental business. One of your bigger competitors is looking to do more in this space, but there are also approaching it from perhaps a less capital intensive standpoint, so first maybe talk through the implications as more builders entered the rental space.
Or the build to rent space I guess I should say, but second you know are there opportunities to recapitalize the segment longer term, perhaps run it with more third party capital. It sounds like your rental inventories are right sized for now, but just curious if there's room down the road to rethink the approach to capital structure here.
Yeah as we continue to grow in this business, we're continually looking at ways to not only capitalize but how we want to execute in this space and I think from a.
Single family for rent.
<unk>, we've become more efficient with the capital and how we produce and.
Sell these communities and I think that's some of what you're saying in a moderation of growth in the inventory levels that we expect to see consistency of the investment level that we have out there.
Speaker Change: So we still see a strong demand, we still see an under supply and ability to meet the demand of what's out there. So it's going to maintain we're going to continue to be focused on it ourselves and be as efficient as we can with that capital.
That's helpful and then.
Switching gears to community count.
It was up double digits still in Q3, if I'm not mistaken and it's really been strong throughout 2024.
I believe in the past you've indicated you expect that growth to slow and I know you're not providing guidance obviously for 2025, but curious if there's a level of community account growth that you'll need to sustain next year in order to hit those market share gain aspiration.
Sure a Saturday and the great thing is that the position of strength, we are coming from in terms as you know even if we grow sub 10% were generally growing the size of a top 10 builder and consolidating share and regardless, but I think we have and tried to get across the point. The last couple of quarters that we do believe going.
Forward more of our growth is going to come from community count and whereas really for most of the cycle outside of the early years, it's been coming from increased absorptions. So we do recognize that to continue to grow we're going to continue to need.
Kris community some of that come through our increased market count, which has expanded dramatically over the last several years and we still got a hit list and quite a few additional markets to enter into and we're continuing to work on our finished lot position and to where we can get that isn't even flags open opened sooner I think what we said last quarter does still hold though within the next quarter or two.
<unk> I think our community count is going to moderate it it won't be up double digit.
But I think we're hopeful we can continue to maintain it and you know at least in mid to maybe high single digit increase and for some period of time and then at some point it may not have to grow at a mid to high. It may just be a low to mid <unk> and it is you already kind of indicated that was one of the hardest things for us to talk about and get right because there's so many move.
The pieces to either bringing on a new community or clothing outline in terms of sales pace and so we don't ever give specific guidance and that that's our best estimate as we sit here today.
Oh, thanks, so much I'll pass it on.
Thank you. The next question is coming from Anthony Pettinari from Citi. Anthony Your line is life.
Hi, good morning.
Can you talk of Hey can you talk about what lot costs were in the quarter, maybe mix adjusted and then based on the prices for Wan that you've been buying and expectations for stronger cash and twenty-five should should we expect a lot cost inflation to maybe kind of normalize a bit in fiscal 'twenty five could kind of go back down to.
Low single digit or mid single digit or just any.
Thoughts on those.
The loss cost trends.
Yeah, we have continued to see increase in our lot cost and slight increases as a percentage of overall revenue.
Speaker Change: We don't expect to see that moderate significantly.
I don't know whether that settles in it.
High singles low double digits, but we do expect that to be a headwind for us.
As the reality of the cost to put a lot on the ground. We just haven't seen much relief in that.
And so we expect to see a continued decline in terms of the specifics since since you asked for that on a per square foot basis, and as I said on the call are sequentially. We were up about two 5% on a lot cost basis year over year, we were still at a low double digit percentage, which would still have some mixed impact that we've continued to talk to you in terms of the south central.
In South east, making up a slightly lower percentage of our closings and those are generally lower a lot cost markets and to kind of give you. Another data point, we typically talk about in terms of the just the percentage of home sales revenue that are our lot cost averages and it generally is in that 20% to 25% range pretty consistently and we're right and.
The heart of that range today, even with the increased lot costs, we've been experiencing.
Got it got it that's very helpful.
Just for starters, obviously, a major source of developed lots for you, but putting aside for Istar could you just touch on the kind of the health of your land banking pipeline and partners.
Yes, I wouldn't necessarily referred to the land banking pipeline I'd referred to it a lot developers pipeline.
It's a large collection of very seasoned experience.
And development companies.
Across the country that have had to frankly, they've had to look for some different capital sources and we've been able to help them find some other capital sources as a lot of the regional and community banks have pulled back from that sort of lending, but there has been other capital sources willing to step up when a when the developers working for somebody like D. R. Horton that we've been able to keep those folks.
In business producing lots for us.
And 64% of our closings this quarter came on lots developed by someone else. Besides D R Horton and and that's a great great part of our business strategy.
Okay. That's very helpful I'll turn it over.
Okay.
Thank you. The next question is coming from Buck Horne from Raymond James.
Mark Your line is live.
Thank you good morning, Mike.
My question is just a quick one on <unk> and just if theres an update on the longer term plan for what to do with four star or is there a thought to eventually recapitalize that stood at four star could eventually be D. Consolidated.
Speaker Change: Yeah, you know four star is a very important part of our strategy with them being separately capitalized they are able to support their growth with their own capital sources and so it does not have any offset on the cash available for the parent company and our shareholders.
They are growing their platform and so we are working alongside them as they grow their platforms are now in about 60 markets I believe so roughly half of the markets that are the D. R. Horton does and so they've still got a lot of opportunities to grow that platform and so our focus right. Now is to continue to work with them as they grow improve their operations get to get as efficient as <unk>.
They can add.
Delivering lots to us and to the industry.
And then as they mature.
They are raising capital I would expect them to continue to raise capital over time.
So as that capital structure. Ultimately matures, then that will give us the visibility to be able to make the determinations on on what we do in terms of our investment.
And so obviously, we you know we made an additional investment to buy a majority stake and we have not contributed or needed to contribute any additional capital to four star and don't expect that we will need to going forward, but there will be an opportunity at some point down the line to look at their capitalization when they're out of mature more mature level.
Got it got it that's helpful. I appreciate that.
And quickly on the rental operations in terms of the current inventory balance it kind of looks like its about one third single family rental about two thirds multifamily is that the right mix for how you think the inventory is going to track going forward or do you think at some point given.
The amount of multifamily inventory Thats out there right now do you think it shifts more towards the SF are waiting.
I think near term our expectation based on the pipeline that we have of deals is the weighting towards multifamily is probably a little bit higher in the near term. The next few quarters over the long term I would expect that to balance out a little bit more than where it is today is MSR picks back up.
The near term, probably a little bit heavier multifamily.
Okay.
Like 50, 50, the right optimal balance kind of where you'd like to get you to do.
We don't have a set level unnecessarily, it's whatever the market demand is and whatever the we believe best Youll mixes for returns community by community across our markets.
Got it thank you.
Yeah.
Thank you. The next question is coming from Susan Mcclary from Goldman Sachs. Susan Your line is live.
Thank you good morning, everyone.
My first question is you mentioned that the cycle times have actually moved below normalized.
Normalized levels. Historically can you talk about where you saw that improvement come from and how sustainable do you think that is especially if we do see a world, where perhaps rates come down and activity picks up on a relative basis.
Yeah, we've seen that mostly from we don't really have supply chain challenges that has largely healed and we have the parts and pieces we need to build.
And Labour has strengthened we've seen with our consistent production and market scale, we have the labor that we need.
And a job site.
Maintenance and controls and efficiency, just all of that kind of coming together and that's where you've seen our cycle.
Our cycle times dropped a little bit below our historical norms, we continue to focus on being more efficient.
The construction process and something we're focused on every day.
Okay. That's helpful and then.
Turning to the M&A environment can you talk a bit about what youre seeing there has anything changed in how that pipeline is looking today.
We still prefer small tuck in acquisitions, we like things that either expand our footprint in a new and emerging geography.
Where we can acquire some people along with be awful lot position in other places it becomes oftentimes a homes and construction finished law firm.
We were able to work with the spelling principal to stay in the business as a lot of entitled and developer and that's been a very successful strategy for us and creating lot development partners around the country as well still see good flow of deals to look at but I would say, we're pretty selective on what we're willing to do right now.
Yes.
Okay, Alright, thank you for the color and good luck with everything.
Thank you.
Thank you. The next question is coming from Ralph Chad Research from Bank of America, Ralph Your line is live.
Hi, Good morning, Thanks for taking my questions and I'll add my condolences on D. R.
Just going back to your earlier comments on pricing piece, and then targeted market share gains for 2025, if I look at your starts in the quarter Theyre down.
They're they're tracking down year over year. The sensus single family starts are up 7% quarter on quarter in the second quarter.
Your margin what was was higher though.
There've been a strategy shift at all.
Why not incentivize or push orders more at this at this gross margin level.
And then my second question would be how do we think about the starts pace going forward relative to your plan for market share gains.
Yes, no no change in strategy right.
Are seeing efficiencies in our operation, which is why you've seen you know a little lower starts pace than maybe might have been expected, but as we continue to move through this market, we're going to have to see some improvement in the overall or inquiries I guess, if you will in the overall star space to keep pace with our with our growth goals.
It's really just us managing our inventory and making sure we have that we need community by community to hit the the.
Speaker Change: Price and base goals that were looking for and we will manage that inventory based on our ability to to get those homes moved through the construction process and based on availability of lot community by community in front of us.
Okay.
Speaker Change: Okay. Thank you and then just on the <unk>.
The fourth quarter gross margin guidance of flat quarter over quarter. It sounds like you're expecting that net price to be flattish with incentives you talked about stick and brick being flattish and in land is up what is your.
Speaker Change: Is there another piece in there that that's going to be giving you relief on the on the cost side like what's happening with broker commission or mix to get to that flat quarter over quarter.
As we look as we're going into the quarter here.
Obviously, we've had some rate volatility we did we did see sequential ASP growth and so there's probably a little bit of price, we saw a little bit of our cost of our incentives go down sequentially. This quarter. So it's probably a little bit of an assumption a little bit apprised of little bit of incentive cost reduction in the quarter to offset the lot cost increase.
Great. Thank you.
Thank you. The next question will be from Mike Dahl from RBC capital markets. Mike Your line is live.
Alright extra squeeze squeezing and just to follow up on <unk> question about kind of the price versus pace I'm, sorry to hit it again, but I guess from a more near term standpoint.
The decision to not lean in more heavily on incentives because at the time there was rate volatility you Didnt. Your perception was that there just wouldn't be a sufficient demand response or anything else you can give as far as just during the quarter did see.
Sounds like you kind of made a decision not to not to push more aggressively.
But you know we arent, we arent, making that decision here on a broad scale I wish we were good enough to know which way rates, we're going to go.
Speaker Change: But we rely on our operators at a community level to make those decisions based on the traffic volume that they have in the sales demand and the people that and buyers that they have in front of them on a daily basis, and I think you know overall.
That resulted in is a solid margin for us and our sales that are that seasonally didn't increase maybe like what they would but we're in a good place with the sales pace that we achieved in the quarter on the inventory we have to hit.
Guidance for the year.
Got it got it Okay and then on the rental business just specifically on the fourth quarter. Obviously, the last three quarters, it's been a volatile environment to sell either S. F. Our multifamily can you talk more specifically about what your expectations are for fourth quarter for the rental platform.
Yes, the rental is baked into our consolidated revenue guide and then there is uncertainty around timing of closings of rental deal. So theres a little bit of Lumpiness in those numbers, but that is built into the range that we're providing in our revenue guide, but no other specific guidance on the Q4 revenues from from rental.
Okay.
Okay Alright.
Thank you. This does conclude our Q&A session today, I would like to hand, the call back to Paul room, and ask you for closing remarks.
Thank you Paul we appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter results in October congratulations to the entire D. R. Horton family on producing a solid third quarter. We were honored to represent you on this call and greatly appreciate all that you do.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.