Q4 2024 DR Horton Inc Earnings Call
Speaker Change: The
Speaker Change: Good morning and welcome to the fourth quarter, 2024 earnings conference call for DR for in America's Builder, the largest builder in the United States.
Speaker Change: At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
Speaker Change: If you wish to enter the Q&AQ, please press star 1 on your phone at any time. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for DR Warren.
Jessica Hansen: Thank you Tom and good morning. Welcome to our call to discuss our fourth quarter in fiscal 2024 financial results.
Jessica Hansen: Before we get started, today's call includes forward-looking statements as defined by the private security's litigation reform act of 1995.
Jessica Hansen: Although, do you ever hurt and believes any such statements are based on reasonable assumptions? There is no assurance that actual outcomes will not be materially different.
Jessica Hansen: All Forward-looking statements are based upon information available to Dear Horton on the Data of this conference call, and Dear Horton does not undertake any obligation to publicly update or revise any forward-looking statements.
Jessica Hansen: Additional information about factors that could lead to material changes in performance is contained in deer hortons in the report on form 10K and are most recently reportedly report on form 10K, both of which are filed with the Securities and Exchange Commission.
Speaker Change: The Smartings earnings release can be found on our website at investor.dearhorten.com and we plan to file our 10K in about three weeks. After this call, we will post updated investor and supplementary data presentations to our investor relations site on the presentation section under news and events for your reference.
Speaker Change: Now I will turn the call over to Paul Romanowski, our president and CEO. Thank you, Jessica, and good morning. Please 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.
Paul Romanowski: The DR Horton team produced solid results to finish the year, highlighted by consolidated pre-tax income of $1.7 billion on revenues of $10 billion with a pre-tax profit margin of 17.1%.
Paul Romanowski: Ernings per diluted share for the fourth quarter worth $3.92.
Paul Romanowski: for the year earnings per diluted share increased 4% to $14.34. And our consolidated pre-tax income was $6.3 billion on revenues of $36.8 billion, with a pre-tax profit margin of 17.1%.
Paul Romanowski: Our home building pre-tax returned on inventory for the year was 27.8%. Return on equity was 19.9%. And return on assets was 13.9%.
Paul Romanowski: A return on assets ranks in the top 25% of all S&P 500 companies for the past 3, 5, and 10-year periods.
Paul Romanowski: Our consolidated cash flow from operations for 2024 was $2.2 billion. And we returned all of the cash we generated this year to shareholders through purchases and dividends.
Paul Romanowski: Our fiscal 2024 shared distributions increased by approximately $700 million, or 44% from the prior year. Over the past five years, we have generated $9 billion of cash flow from operations, and we have reduced our outstanding share count by 12%.
Paul Romanowski: For the quarter, despite continued affordability challenges and competitive market conditions, our net sales orders increased slightly from the prior year. Our sales pace was in line with normal seasonality from the third to fourth quarter, but below our expectations.
Paul Romanowski: While mortgage rates have decreased from their highs earlier this year, many potential home buyers expect rates to be lower in 2025. We believe that the volatility of rates combined with general uncertainty during the election season is causing some buyers to stay on the sidelines in the near-term.
Paul Romanowski: To help spur demand and address affordability, we are continuing to use incentives such as mortgage rate by downs and we have continued to start and sell more of our smaller floor points.
Paul Romanowski: With 46% of fourth quarter closings also sold in the same quarter, our sales, incentive levels and gross margin are generally representative of current market conditions.
Paul Romanowski: We typically experience seasonally slower demand during the fall and our tenured local operators seek to find the right balance of sales pace, pricing, and incentives in each community that will best position our returns and inventory levels before we enter the spring.
Paul Romanowski: For the full year of fiscal 2025, our home building volume and profit margins will largely be dependent on the strength of the upcoming spring selling season.
Paul Romanowski: Overall, the demographic supporting housing demand are favorable and we continue to see a generally limited supply of new and existing homes at affordable price points in addition to a limited supply of finished lots available for new home construction.
Paul Romanowski: with our focus on affordable product offerings.
Paul Romanowski: 37,400 homes in inventory continued improvement in our construction cycle times and adequate finished lots available in our pipeline. We are well positioned for fiscal 2025.
Paul Romanowski: We remain focused on enhancing the capital efficiency of all of our operations to produce consistent, sustainable returns and cash flows so that we can return more capital shareholders through both share-reportances and dividends.
Speaker Change: Mike, earnings for the fourth quarter of fiscal 2024 decreased 12% to $3.92 per the lower-level leadership compared to $4.45 per share in the prior year quarter.
Speaker Change: Ourings for the full year increased to 4% to $14.34 for the Lydichare compared to $15.82 in fiscal 2023.
Speaker Change: Net income for the quarter decreased 15% to $1.3 billion on consolidated revenues of $10 billion. And for the year, Net income increased slightly to $4.8 billion on revenues of $36.8 billion.
Speaker Change: Our fourth quarter home sales revenue is $8.9 billion on $23,647 homes closed. Compared to $8.8 billion on $22,928 homes closed in the past year.
Speaker Change: Our average closing price for the quarter was $377,600, down 1% both the coincially and from the prior year quarter. Bill.
Speaker Change: Our net sales orders in the fourth quarter increased slightly from the prior year quarter to 19,000, 35 homes and order value decreased 2% to 7.1 billion dollars.
Speaker Change: The sequential decline in our net sales orders was consistent with the prior year and in line with normal seasonality from the third to the fourth quarter. But both our home sales and closing this quarter were below our expectations.
Speaker Change: Our cancellation rate for the quarter was 21% from 18% sequentially and unchanged from the prior year quarter.
Speaker Change: Our average number of active selling communities was flat sequentially and up 10% from the prior year.
Speaker Change: The average price of net sales orders in the fourth quarter was $375,400.
Speaker Change: Down 1% sequentially and 2% from the prior year quarter, Jessica.
Speaker Change: Our gross profit margin on home sales revenues in the fourth quarter was 23.6%. Down 40 basis points sequentially from the June quarter. The decrease in our gross margin from June to September was primarily due to higher incentive costs on homes closed during the quarter.
Speaker Change: On a per square foot basis, homestills revenues were down roughly 1.5 of a percent sequentially, while sticking brick cost per square foot decreased 1% and lock cost increased 1.5%.
Speaker Change: We anticipate our incentive levels to increase further on homes close over the next few months, so we expect our homesilless gross margin to be lower in the first quarter compared to the fourth quarter.
Speaker Change: Our incentive levels and home sales gross margins for the full year of fiscal 2025 will be dependent on the strength of demand during spring selling season in addition to changes and mortgage interest rates and other market conditions. Bill.
Bill Wheat: In the fourth quarter, our home building SGNA expenses increased by 17% from last year. And home building SGNA expense as a percentage of revenues was 7.6% up 100 basis points from the same quarter in the prior year.
Bill Wheat: for the year-hombooting SGNA was 7.5% of revenues of 40 basis points from fiscal 2023.
Bill Wheat: Our increased SUNA costs in both periods are primarily due to the expansion of our operating platform. Our employee and average community count are both up 10% from a year ago. While our market count increased to 125 markets and 36 states from 118 markets and 33 states. Paul.
Paul Romanowski: We started 18,400 homes in the September quarter and ended the year with 37,400 homes in inventory.
Paul Romanowski: Down 11% from a year ago and approximately 5000 homes lower than at the end of June.
Paul Romanowski: 25,700 of our total homes at September 30 were unsolved. 10,300 of our unsolved homes, a year-end, were completed, of which 1,100 had been completed for greater than six months.
Paul Romanowski: The increase in unsolved completed homes this quarter resulted from a combination of a seasonally slowing sales pace and further improvement in our construction cycle times.
Paul Romanowski: For Holmes Weeklows in the fourth quarter, our cycle time decreased by almost a week from the third quarter and a month from a year ago.
Paul Romanowski: Our improved cycle times positioned us to turn our housing inventory faster in 2025.
Paul Romanowski: and we will continue to manage our homes in inventory and start space based on market conditions. Mike, our home building law position at September 30th consisted of approximately 633,000 of ways 24% were owned in 76% were controlled through purchase contracts.
Paul Romanowski: We remain focused on our relationships with land developers across the country to maximize returns.
Paul Romanowski: These relationships allow us to build more homes on lots developed by others. At the homes we closed during the fourth quarter, 64% were a lot developed by either four st. or third party, up from 62% in the fryer year quarter.
Paul Romanowski: are capital efficient and flexible a lot portfolio because it keeps our strong competitive position.
Paul Romanowski: Our force quarter home building investments in lots, land and development totaled $2.2 billion of which $1.5 billion was for finished lots, $560 million was for land development, and $170 million was for land acquisition.
Paul Romanowski: For the year, our home building investments in lots land and development totaled $9.5 billion. Up, 19% for fiscal 2023.
Paul Romanowski: In the fourth quarter, our rental operations generated $100 million of pre-tax income, on $705 million of revenues from the sale of 1,692 single-family rental homes, and 868 multifamily rental units.
Paul Romanowski: for the full year, our rental operations generated $229 million of pre-tax income.
Paul Romanowski: on $1.7 billion of revenues from the sale of 3,970 single-family rental homes.
Paul Romanowski: and 222 multifamily rental units.
Paul Romanowski: We continue to operate a merchant-build model in which we construct and sell purpose-built rental communities. Our rental operations provide synergies to our homes-selling operations by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and land
Paul Romanowski: Our rental property inventory at September 30 was $2.9 billion, which consisted of $800 million of single-family rental properties and $2.1 billion of multi-family rental properties.
Paul Romanowski: We expect our total rental inventory to remain around the current level for the next step.
Paul Romanowski: Jessica.
Paul Romanowski: Forrestar, a majority owned residential lot development company reported revenues of $551 million for the fourth quarter on 5374 lots sold with pre-taxing come of $109 million.
Paul Romanowski: for the full year for a start delivered 15,068 lots, generating $1.5 billion of revenues and $270 million of pretext income with a pretext for profit margin of 17.9%.
Paul Romanowski: For sure, his own and controlled law position at September 30, was 95,100 lots.
Paul Romanowski: 65% of four stars own lots are under contract with or subject to a write-in for software to deal horde.
Paul Romanowski: 430 million dollars of our finished lots purchased in the fourth quarter were from 4 star.
Paul Romanowski: 4 star had approximately $860 million of liquidity at your end with a net debt to capital ratio of 12.4%. Our strategic relationship with 4 star is a vital component of our return-focused business model.
Speaker Change: For a star strong, separately capitalized balance sheet, growing operating platform, and lots supply positioned them well to capitalize on the shortage of finished lots in the humble industry and to aggregate significant market share of in the next several years. Mike?
Mike Murray: Financial Services earned $76 million of pre-tax income in the fourth quarter of $222 million of revenues with the pre-tax profit margin of 34.2%.
Mike Murray: for the year. My nasal services earned $311 million of pretexting count on $883 million of revenues, with the pretext profit margin of 35.3%.
Mike Murray: During the fourth quarter, essentially all of our mortgage companies alone at Regenations related to Hans closed by our home building operations.
Mike Murray: and our mortgage company handle the financing for 77% of our buyers.
Mike Murray: At Baj, and B.A. loans accounted for 60% of the mortgage company's body. Barrowers, originating with D.A. Simon Mortius' quarter, had an average five-coast score of 724, and an average loan-to-value ratio of 88%.
Mike Murray: First time home buyers represented 59% of the closing handled by our mortgage company, this quarter, Bill.
Mike Murray: Our Captain of the Law Education Strategy is disciplined and balanced to sustain an operating platform that produces consistent returns, growth and cash flow.
Mike Murray: We have a strong balance sheet with low leverage and substantial equitity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities.
Mike Murray: During fiscal 2024, our consolidated cash provided by operations was $2.2 billion. And we distributed all of the cash we generated through share repurchases and dividends to enhance shareholder returns.
Mike Murray: During the quarter, we repurchased 3.4 million shares of common stock for $561 million. And for the year, we repurchased 12.5 million shares for $1.8 billion, which reduced our outstanding share cap by 3% from the prior year end.
Mike Murray: I'm remaining Sherry purchase authorization at September 30th was $3.6 billion.
Mike Murray: During the quarter, we also paid cash dividends of $98 million, for a total of $395 million of dividends paid during the year.
Mike Murray: Number 30 is we had $7.6 billion of consolidated liquidity, consisting at $4.5 billion of cash and $3.1 billion of available capacity on our credit facilities.
Mike Murray: and August, we issued $700 million of senior notes due 2034. Our debt at September 30, total $5.9 billion.
Mike Murray: Subsequent to your end, we repaid $500 million of senior notes at maturity and we have no additional maturity in fiscal 2025.
Mike Murray: Our consolidated leverage in September 30 was 18.9%. And leverage, net of cash was 5.2%. We plan to maintain our leverage around 20% over the long term.
Mike Murray: and September 30th, our stockholder's equity was $25.3 billion and book value per share was $78.12 up 15% from a year ago. For the year, our return on equity was 19.9% and our return on assets was 13.9%.
Mike Murray: Based on our strong financial position in cash flow, our board recently increased our quarterly cash dividend by 33% to 40 cents per share.
Speaker Change: Jessica. Looking forward, our fiscal 2025 business plan was built from the community level up beginning with our law position. With a return to more normal seasonality, we expect our results for the full year where largely be dependent on the strength of this spring.
Speaker Change: As outlined in our press release this morning for the full year of fiscal 2025, we expect to generate consolidated revenues of approximately 36 to 37.5 billion dollars and homes closed by our public and operations to be in the range of 90,000 to 92,000 homes.
Speaker Change: We forecast an income tax rate for fiscal 2025 of approximately 24.5%.
Speaker Change: We expect to generate more cash flow from operations in fiscal 2025, then fiscal 2024, and to utilize this substantial portion of our cash flows to enhance shareholder returns.
Speaker Change: We currently plan to repurchase approximately $2.4 billion of our common stock this year, in addition to making annual dividend payments of around $500 million.
Speaker Change: For our first fiscal quarter ended December 31st, we currently expected to generate consolidated revenues of 6.8 to 7.3 billion dollars, and homes closed by our humble operations to be in the range of 17,500 to 18,000 homes.
Speaker Change: We expect our homesteads gross margin in the first quarter to be around 22.5% and humbly next to NA as a percentage of revenues to be approximately 8.9%.
Speaker Change: We anticipate the financial services pre-tax profit margin of around 20% in the first quarter, and we expect our income tax rate for the quarter to be approximately 24.5%. Paul.
Paul Romanowski: In closing, a results in position reflect our experienced teams in the street leading market share, broad geographic footprint and focus on affordable product offerings.
Paul Romanowski: All of these are key components of operating platform that sustain our ability to produce consistent returns, growth and cash flow while continuing to aggregate market share.
Paul Romanowski: We have significant financial flexibility, and we plan to maintain our disciplined approach to capital allocation and provide consistently high returns to our shareholders to enhance the long-term value of our company.
Paul Romanowski: Thank you to the entire DR Horton family. As employees, land developers, trade partners, vendors, and real estate agents for your continued efforts and hardware.
Paul Romanowski: We look forward to working together to improve our operations and provide home ownership opportunities to more individuals and families during 2000 and 2000.
Speaker Change: The Blue's Apparel remarks. We will now host questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, the floor is now open for questions.
Speaker Change: If you wish to ask the question at this time, please press star 1 on your keypad. Should you wish to remove yourself from Q, you may press star 2.
Speaker Change: We do ask if listening on speaker from this morning that you pick up your handset while asking your question to provide optimal sound quality. Finally, we do ask that you limit yourself to one question and one follow-up. Please hold a moment while we pull for questions.
Speaker Change: And your first question this morning is coming from Stephen Kim from Evercore ISI. Stephen, your line is live, please go ahead.
Stephen Kim: Yeah, thanks very much, guys. Appreciate the color. I wanted to ask a couple of questions regarding your guide. First of all, I think in particular, you're revenue guide.
Stephen Kim: can be influenced a lot by rental revenue and the other fact that you didn't give was also the ASP for closing. So just wanted to see if you could help us disaggregate a little bit. What are you assuming in terms of rental revenue? Maybe, you know, sequentially or European, however, you think it's best. I'm thinking about it and you know, revenue dollars.
Stephen Kim: and both for the first quarter and for the full year guide.
Speaker Change: Yes, Steve, you know, implied in our consolidated revenue guide would be relatively flat rental revenues a year over year. We would expect those revenues to be weighted a little heavier in the back half of the year than in the first half of the year and so a little bit lighter in the first quarter as well. In terms of ASP, we're assuming relatively flat ASP with recent trends.
Speaker Change: and of course that's going to be subject to market conditions going forward into the spring as well as incentive levels.
Stephen Kim: Gotcha, okay, yeah, that's that's that's helpful. All right, and then second question I wanted to sort of delve a little bit into the your comment about market conditions, which I think we all realize, you know, it's it's tough out there, but but in particular you talked about
Speaker Change: How do you think then buyers are sort of on the sidelines kind of waiting maybe the election maybe just affordability and so I wanted to see if we could disaggregate that. Can you talk about what you're seeing with respect to your interest lists or traffic? And help us...
Speaker Change: It may be drawn to things between what you're seeing today, versus what you saw in other previous times when buyers kind of went on strike like maybe the back half of calendar 2022 for example. Just to help us get a better sense of how much of this is actual true unaffordability.
Speaker Change: versus psychological effects causing people to wait on the sidelines.
Speaker Change: Yes, David certainly is a combination of both, but we are seeing our buyers.
Speaker Change: Sit on the sidelines, sit on the fence, little less motivated today than they were previously in prior quarters. In affordability has been challenged. We still see consistent traffic. It was below our expectations in the quarter.
Speaker Change: Hansen, you know, the results in terms of total sales, but still, you know, we were up year over year. I would say that, you know, for the quarter and our,
Speaker Change: Sales were in line with normal seasonality.
Speaker Change: I don't think this is a structural issue with demand. There's just a lot of noise in the market today.
Speaker Change: The rate volatility we've seen combined with the election.
Speaker Change: News that's out there. I just think we're seeing people take a pause, but it certainly is a stretch today and we got a continue to focus on affordability. You know, to make sure we get product and monthly payment in position for our people to move forward.
Speaker Change: and the other. Just a clarification there. Are you looking for mortgage rates to come down next year? Is that what's embedded in your guide?
Speaker Change: Now we wouldn't expect and we aren't going to manage our business around that expectation one where another we're going to continue to respond to the market as we go week to week and month a month.
Speaker Change: Gotcha, okay, thank you so much.
Speaker Change: Thank you. Your next question is coming from Matthew Boole from Barclays. Matthew, your line is live. Please go ahead.
Matthew Boole: Morning everyone, thank you for taking the questions. So looking at the delivery guide of 90 to 92,000 in 2025.
Matthew Boole: and comparing that versus the 37,000 homes in inventory you have. At the moment, I guess that ratio is maybe a little bit higher than it typically is entering a year. So is there kind of an expectation for maybe a bigger ramp in starts as you get into the spring or are you saying that kind of cycle times have come down to such a degree where you can have that kind of ratio where it is. Thank you.
Speaker Change: Now, I think we're looking at both actually to come into play in 2020. We have seen tremendous improvement in our cycle times over the past year and continuing through the fourth quarter. With our lot position that we have our ability to lean in the starts with the market, as we see the market unfold, we'll be able to press into the starts.
Speaker Change: and we feel really good about our ability to turn that opening, housing and inventory, you know, what it implies, you know, almost one and a half times.
Speaker Change: and this was only about. So for the first quarter, our starts probably only step up slightly. For more, they were on Q4 and they're lower than the average for the full year. So we would expect to pick up as we move into the spring.
Speaker Change: Okay, I got it. Thank you for that. And then on the topic of building smaller floor plans.
Speaker Change: Paul Jesus, I missed the number, but I guess what was your home size down in Q4? And kind of what is the expectation for home sizes that you're embedding in 2025?
Speaker Change: and beyond just the numbers I'm curious if you could just speak about that kind of balance of affordability, versus how you think about the efficiency of building smaller homes, what goes into that decision.
Speaker Change: and thank you.
Speaker Change: I'll start with the specifics and then Paul can give you his commentary on where he thinks we're going. In terms of square footage for the quarter we were down, again, both 1% sequentially and year over year. And part of that driver is we continue to see a tax product predominantly town homes, making up a bigger percentage of our closings mix.
Speaker Change: and so we were roughly 15% of our closing this quarter were attached product versus detached single-family-hounds.
Paul: and I, you know, we do see efficiency in the smaller plans and that helps us to position as we enter into the spring market for our ability to deliver. You know, we have purposefully reduced the number of homes we have in the market because of that ability.
Paul: and a significant shift overall other than we just need to continue to drive.
Paul: to affordable price points in affordable monthly payments. And that comes from a lean towards smaller product. That being said, we still do have our move up and freedom buyers that will continue to provide what it is that they're looking for in the marketplace.
Speaker Change: Alright, thanks guys, good luck.
Speaker Change: and the other.
Speaker Change: Thank you. Your next question is coming from John Lovalo from UBS. John, your line is live. Please go ahead.
John Lovalo: Good morning guys, thanks for taking my questions as well. The first one is that I think you described.
John Lovalo: and the inventory in the market is generally limited supply of new and existing homes. Just curious if you saw some worsening in that trend as the quarter progressed. And if so, you know, the particular markets where you're seeing more inventory come online and how are you feeling about, you know, overall conditions and that regard.
Speaker Change: You know, the overall numbers haven't grown significantly. I think with the low number of sales you're seeing the months of supply continues to expand, but still at the price points that we compete at, we see limited supply across most of our mark.
Speaker Change: and with people still that lock and effect still impacting people from the low mortgage rate that they have. We're just not seeing that supply grow.
Speaker Change: and a significant way. We still feel very good about our competitive abilities with a new home, you know, ability to offer a more attractive rate and you know, in markets where there's pressure on insurance, we see consistent.
Speaker Change: and relatively stable insurance premiums which are a competitive advantage against the recent market.
Speaker Change: Understood, and then on the first quarter gross margin outlook of 225, that 110 basis point stepped down, I think you guys attributed the majority of that to just step up and in incentives, just want to make sure that that is the case. And if so, can you just help us with what are current incentive levels as a percentage of revenue and worry or expecting those to trend over the next few months?
Speaker Change: Yeah, that's right John, the step down in our guide for margin Q1 is due to higher incentives and really we started seeing this higher level of incentives later in Q4. Our margin in the month of September was lower than it was in July and August.
Speaker Change: respect that trend to continue into Q1 and...
Speaker Change: and Space on Volatility and Rates were rates have recently gone the costs of our interest rate by-downs is increasing and so that's why we expect our incentive levels to increase further into Q1. On a year-over-year basis do you have some steps to get it? Yeah, I'll give you just the buyers that had a rate by-down associated with it. So as the buyers utilizing our mortgage company during the quarter over 80% had some form of a rate by-down, which was flat sequentially, but it was up from 74% a year ago. And so that equates to 63% of our overall closings in the fourth quarter, which was also relatively flat sequentially. So it's not necessarily an increase in the percentage of buyers utilizing it. It really is just the cost associated.
Speaker Change: And I think with the substantial majority of our closings already being, you know, bought down through our mortgage company, that would be the continued expectation is it's just going to be the cost level, not necessarily a significant higher percentage of buyers that would utilize it.
Speaker Change: Got it. Thank you guys.
Speaker Change: Thank you. Your next question is coming from Carl Reichart from BTIG. Carl, your line is live. Please go ahead.
Carl Reichart: Thanks, everybody. Just one two-parter. Can you talk at all about any impact from hurricanes on ops, traffic, the communities themselves, and then has there been any positive or negative impact given your reliance on buyers, brokers? It's a big focus for you, has been for a long time. Any impact from the settlement to driving traffic sales rates at all or cost?
Speaker Change: Carl, I'll take the first part of that question. You know, first of all, the hurricanes just horrified as everyone else was with the impact that had on so many families.
Speaker Change: across the across those regions.
Carl Reichart: You know, fortunately, the Horton family, our employees, and our homeowners fared very well in those storms.
Carl Reichart: We did not have a significant impact on our communities. Thankfully, with the current building codes we built, too, we see those communities perform very well in adverse weather events.
Carl Reichart: excuse me at the same time.
Carl Reichart: You see the crews responding, utility crews, municipalities, focus is diverted to...
Carl Reichart: restoring services to residents and rightly so and so that can slow down you know power electrification for us it can slow down inspections and some of that processing but it becomes a timing issue rather than any kind of a permanent effect on the business so so we feel very
Carl Reichart: Fortunate, as Veer Horton and the Veer Horton family got through these storms pretty well.
Carl Reichart: are.
Carl Reichart: As far as the NAR settlement and Realtor Community Response,
Carl Reichart: They seem to have been handling it well. You know, they're largely adjusting to what they need to do to satisfy the requirements of the NAR settlements.
Carl Reichart: I haven't seen much of a significant shift one way or the other in terms of traffic and or much change in broker commissions.
Carl Reichart: You know, I think that will play out over time, but again, with the limited number of homes generally available across the market, we still have our realtors that have been consistent in their performance with us, still showing up in our sales offices, and able to navigate the requirements of the settlement.
Speaker Change: Thanks for that. You talked about employee and average store count up quite a bit in fiscal 24. As you're looking at 25, what are your expectations for what we might see in terms of a flattening of that store count growth or a slowdown in the number of new markets you'd add so that we might get better SG&A leverage next year, or do you expect to continue to grow those pretty aggressively? Thanks.
Speaker Change: Yeah, clearly we have been making an investment in these new markets to prepare for some growth. And as we grow into that, I would expect those growth rates to moderate a bit. The community count growth has been, you know, near double-digit, high single-digit to low-double for the last year or so. And so naturally, we'd expect that to start to moderate back towards the mid-single-digit level as well. So, yes, we always want to make sure to control our SG&A, but we have been making some investments here recently that we do expect will support a higher growth level going forward.
Speaker Change: Thanks, Bill. Thanks, everyone.
Speaker Change: Thank you. Your next question is coming from Sam Reid from Wells Fargo. Sam, your line is live. Please go ahead.
Speaker Change: and many more. Thank you. You're welcome.
Sam Reid: Awesome, thanks so much. So it sounds like gross margin moved lower intra-quarter, September versus July-August. And as you look to your guidance for the fourth quarter, that 22.5%, you know, kind of, is that 22.5% in line with the exit rate from the from the last quarter? Or does it imply that November-December will be below October levels?
Speaker Change: Yeah, great question, Sam. It is incorporated in our guide that our September month of closings was our lowest gross margin of the quarter, not quite to where we expect to be for the full year of Q1, because as we said, we do expect to have further increases in incentive costs, but not far off from where we were in the September month.
Speaker Change: Gotcha, and then I wanted to touch on your completed unsold inventories around 10,300. I just wanted to see if there was any detail specifically on geographic dispersion, whether you're seeing a concentration of completed unsold inventories in some of the focus markets that investors are interested in like Florida and Texas. Thanks.
Speaker Change: sensitivity or a place where we've seen that those units stack up you know across the board and across our footprint we've seen improvement in our cycle times you know and and sales being you know slightly below our expectations in the quarter is is why we've seen that increase in completed inventory
Speaker Change: We still are not seeing it sit around at age, and that's when we start to get concerned. We do expect that our completed inventory...
Speaker Change: Over the next few quarters we'll start to trend back down as we've you know hit the sales pace we need community by community and have adjusted starts where we've needed to so that we have the homes we're comfortable with today.
Speaker Change: and we need to adjust that completed number down over the next few quarters.
Speaker Change: Great. Thanks so much. I'll pass it on.
Speaker Change: Thank you. Your next question is coming from Michael Rehout from J.P. Morgan. Michael, your line is live. Please go ahead.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: Great. Thanks. Good morning, everyone.
Michael Rehout: Just trying to get a sense when you think about, you know, particularly the guide, you know, kind of flat to up-low single digits for closings.
Michael Rehout: Does that reflect any regional challenges or you know maybe just more broadly if you can kind of give us a sense of where you feel demand is stronger versus weaker across your footprint?
Speaker Change: I don't think the guide is reflecting any concern with a given region. The biggest markets that we've been in, Florida and Texas, are also very competitive markets.
Speaker Change: And so, as the buyers have taken a pause, that's been reflective, I think, across the footprint of those markets. And looking forward into the guide and expectations for next year, that was built largely on the basis of available lots that we have, that we have a comfort level around the start space.
Speaker Change: that will lean into, as we see, spring and fold. And we have the capacity to adjust that start to pace.
Speaker Change: reflective of the spring selling conditions.
Speaker Change: Thank you.
Speaker Change: Okay, I appreciate that. I guess secondly, you know, you mentioned that, you know, throughout the quarter of September was your lower margin month with higher incentives.
Speaker Change: I was curious, and again, apologies if I missed this earlier, but
Speaker Change: Wanted to get a sense just from a demand and order growth standpoint, sales pay standpoint. We've heard some of your competitors talk to September being the strongest month of the quarter.
Speaker Change: August, September, a little bit of a lower point from a rate standpoint. So just kind of curious on what you saw, how things trended during the quarter and where September was relative to the rest.
Speaker Change: I think we saw pretty choppy sales environments through the quarter. You know, if we looked at the charter, the mortgage rates, we started the quarter just under 7%, we ended the quarter just above 6%, and it's a pretty smooth trajectory down. I think that affected a lot of buyers' psyche and thinking about, wow, the rates are on a good trend, I'm going to keep riding that trend before I jump in.
Speaker Change: And then, lo and behold, we saw October turn around after the Fed cuts and rates are up 50 basis points in the month of October. So it's kind of crazy predicting interest rates.
Speaker Change: Hard to see any discernible trend other than we saw some choppy sales and a buyer that was on pause. And still have through the month of October to date and just with continued rate volatility.
Speaker Change: Okay, very good. Thanks so much.
Speaker Change: Thank you. Your next question is coming from Alan Ratner from Zellman & Associates. Alan, your line is live. Please go ahead.
Alan Ratner: I guess what I'm thinking about is, you know, you've heard from several other of your larger peers a goal or a target to grow in 25 by a 5 to 10% rate on closings, orders, whatever the metric they're looking at.
Alan Ratner: and your guide is obviously a bit below that.
Alan Ratner: And I know it's preliminary, and I know it can obviously move around based on how the spring unfolds. But, you know, on the surface right now, it would look like, at least in the near term, you don't expect to be taking a significant amount of market share. So I'm curious when you think about that outlook.
Alan Ratner: Is that a function of you see maybe some more aggressive incentives out in the market from some of your competitors that you don't feel the need or the desire to match right now to, you know, do what you need to do to actually take share?
Alan Ratner: Do you think that some of the guys out there might prove to be too aggressive? Is it a function of a price point differential, maybe stronger activity at higher price points? Just curious if you can kind of talk about the competitive dynamics that would seemingly set you guys up for a year of, you know, no meaningful share growth.
Speaker Change: You know, Alan, we do feel very good about our position. You know, we are still well ahead of the spring selling season. We do have the lot position.
Speaker Change: We have the inventory and cycle time improvement that we need to lean into the market if we see a stronger market in the spring. Our operators are always going to have a higher goal than the numbers that we're reaching to, and it's not a significant shift.
Speaker Change: other than a guide as best we see it today. And, you know, we are, you know, going to stay positioned to respond to the market.
Speaker Change: feel great about our position and great about our operators in the field and their ability to gauge the market and lean in should it show up stronger in the spring.
Speaker Change: Got it. That's helpful. I appreciate that.
Speaker Change: and then second question is kind of around the spec strategy you know I know obviously you and others have pivoted to kind of hundred percent spec models over the course of the last several years
Speaker Change: somewhat out of necessity given the supply chain, somewhat out of, you know, that's where the demand was given the tight resale market, but...
Speaker Change: We've talked about this in the past where, you know, even though you never were a huge bill-to-order builder by any stretch of the imagination, you know, that was always...
Speaker Change: at least some portion of your business. And I'm curious now with kind of where you're...
Speaker Change: your spec position is, where your backlog is.
Speaker Change: Is there any thought of maybe, you know, kind of...
Speaker Change: returning to some extent to the build-to-order market, especially if the demand in the spring turns out to be showing signs of acceleration.
Speaker Change: I wouldn't see a sea change shift in our strategy. You know, it's a kind of a community by community. You know, since we are past the supply chain challenges, we've driven a lot of efficiency into the building process and cycle times.
Speaker Change: You know, we will.
Speaker Change: allow our local operators to make those decisions community by community about going to more of a pre-sale focus.
Speaker Change: You know, depending upon the customer segment that they're seeking to serve with that particular community and what the market conditions are like. I mean, we still see tremendous demand, especially for the first-time homebuyer with a house that can close in 60 days, gets them qualified for the mortgage and in line with when a lease or something may be expiring.
Speaker Change: All right. Thanks a lot. Appreciate it.
Speaker Change: Thank you. Your next question is coming from Eric Bossard from Cleveland Research Company. Eric, your line is live. Please go ahead.
Eric Bossard: Thank you.
Eric Bossard: Thanks, two things if I if I could, the
Eric Bossard: Spender costs just up a little more clarity is this
Eric Bossard: You are investing more, lowering the cost for your customers. And is that the strategy, or is this just the cost of it's gotten more expensive as rates tick back higher? Where we are and what the strategy or vision for that is.
Speaker Change: It's our expectation. We need to increase our incentives and stay, you know, where they are and maybe lean in a little more based on rates and achieving affordability for our buyers.
Speaker Change: Then if we want to maintain a bigger spread off of market rates, that's going to cost a little more. But as we look forward into the next quarter, we expect that our incentives will have to remain elevated in order to maintain affordability and monthly payment that our buyers are looking for.
Speaker Change: And then, Eric, when rates are volatile or more uncertain, the cost of those incentives do increase. And so, you know, regardless, you know, of where the level is or how much we're choosing to buy, you know, during those periods where it's more uncertain, the cost is just higher.
Eric Bossard: Okay and then second question which is...
Speaker Change: Blately potentially redundant, I'll ask it nonetheless, that you talk about this this phenomenon of affordability challenges. Your solution for affordability challenges
Speaker Change: incentives a bit more smaller homes is there anything beyond that or incremental to that as you look at one of the key limiting factors is this phenomenon of affordability any any other solutions that you see that you can help address that to unlock more demand
Speaker Change: We're continually evaluating the product, you know.
Speaker Change: Selections that are going into the homes and looking to see where where it makes sense to hit the affordability numbers You know neighborhood location can have a lot to do with with ultimate affordability as to
Speaker Change: You know, cost of the underlying dirt, cost of the development requirements, and what municipalities are asking for, whether it's in horizontal improvements or the homes themselves.
Speaker Change: and so continually looking for ways to bring houses people can afford to market.
Speaker Change: And it's a combination of everything. It's not one thing that we do. It's something we try to get to do every day
Speaker Change: and be as efficient as possible with our STARTS program.
Speaker Change: to work with our trade partners and labor to make sure that they're able to plan a business and share those savings of a planful business with us that we can pass along to our customers.
Speaker Change: Thank you.
Speaker Change: Thank you. Your next question is coming from Paul Przybylski from Wolf Research.
Speaker Change: Paul, your line is live, please go ahead.
Speaker Change: Thank you. Your can rate increased a little bit, quarter over quarter.
Paul Przybylski: I was wondering, you know, are accelerating incidents creating any issues with backlog right now? And, you know, historically down payments have been the greatest impediment for the entry-level buyer. Is that still the case, or has that shifted more to DTI or monthly payment constraint?
Speaker Change: No, I think we haven't seen a big change in the buyer profile. Obviously, we've harped on affordability being an issue that hasn't changed, so it does take a little bit more household income to qualify for a home today than it did several years ago. But our CAN rate was in line with a year ago, and typically we do see a slight tick up.
Speaker Change: in the fourth quarter, you know, for various reasons. And if you look at our cadence intra-quarter in Q4 on our CAN rate, it was very consistent with last year's Q4. And low, you know, high double digit to low 20s is a very comfortable rate for us to manage.
Speaker Change: Okay, I was wondering, what was your average 4Q rate promotion? How did that compare to 3Q and what is it so far in October?
Speaker Change: and many more. Thank you. Thank you. Thank you. Thank you.
Speaker Change: We're really in the four and a half to five and a half percent in terms of our offerings that are out there. You know, rates have moved up in the last few weeks. We'll see where they settle in over the next couple. You know, that may drift up, but still staying in that one to one and a half percent kind of below market rates is where we have maintained this past quarter and in the prior couple of quarters. Yeah, our backlog is right in the middle of that. It's at 5.2 percent.
Speaker Change: Great, great. Thank you. I appreciate it.
Speaker Change: and the rest of us. Thank you. Thank you.
Speaker Change: Thank you. Your next question is coming from Anthony Pettinari from Citi. Anthony, your line is live. Please go ahead.
Anthony Pettinari: Good morning.
Anthony Pettinari: You had pretty favorable stick-and-brick costs in the quarter, and I was just wondering how you saw those trending in fiscal 1Q. And then, I think referencing maybe John's question, is it fair to say stick-and-brick is not really driving a big move in margins quarter over quarter in terms of that step-down?
Speaker Change: We're down roughly 1% sequentially and about 2.5% year-over-year. And I think our base case as we move throughout 2025 is we'd be relatively flat, give or take a percent on the thick and brick side.
Speaker Change: Got it. Got it. And I'm just curious, I mean, with the election coming up, are there one or two issues that you could see, you know, impacting the industry from a builder perspective or buyers that you'll be really watching as we see kind of how it plays out?
Speaker Change: I think everybody would be happy the election is over. I think that would help fire sentiment and the ability to move forward with their life decision. Sounds good. Sounds good. Thanks, guys.
Speaker Change: Thank you. Your next question is coming from Ken Zener from Seaport Research Partners. Ken, your line is live. Please go ahead.
Speaker Change: Good morning, everybody.
Speaker Change: Thank you.
Ken Zener: Morning, Kim. Can you hear me? Yes. I just want to check. Thank you. All right. Obviously not what the street or probably what you all were expecting, but I just want to go through a few basic thoughts here.
Speaker Change: Do you think part of the, I mean look, price is high.
Speaker Change: In most markets, because the builders are so dominant, the new homebuyers already have been in a rate.
Speaker Change: neutral environment because most new builders are offering incentives.
Speaker Change: That seems to me like you might have pulled forward demand given that we're you know You still have these incentives or do you think it's strictly an issue of affordability? Therefore that affects your long-term view on gross margins
Speaker Change: I do think that the lock-in, the fact that we don't have a lot of resale homes on the market also means that we don't have those buyers coming in when they sell their house.
Speaker Change: coming into our offices.
Speaker Change: You know, 45% of our buyers.
Speaker Change: are not first-time homebuyers. Although we sell more than 50% too, you know, those means they need to move on from their existing home. I don't think there's a lack of want, it's, you know, or need accruing out there, so we could be building some pent-up demand.
Speaker Change: and you know so we aren't that concerned if we see resale inventory start to rise a little bit because that means people are moving around more and that's going to provide more buyers into our offices.
Speaker Change: We are certainly competitive with the resale market today. We do hear that from our realtors, that because of our rate buy downs and availability that we have of homes at more affordable price points, that it's a challenge to the resale market.
Speaker Change: Do you still have confidence that the gross margins can be structurally higher for you guys? Or do you perhaps...
Speaker Change: It can we've always said that we're going to do what we need to do to maximize returns And so for periods of time we could see gross margin compression
Speaker Change: but over the long term I do think on average we believe there's reasons that the long-term average gross margin could be structurally higher because of the scale advantages in the business and our lower cost of capital from the deleveraging we've done but we're going to meet the market quarter to quarter to quarter and if that means compressing margins in the short term to maximize returns that's the approach we're going to take.
Speaker Change: And to the longer term view, we are talking about a step down in margins to 22.5%, which is above the high end of our historic range of margins. So we have been at a higher level, but we are going to meet the market and there will be periods of time where we need to.
Speaker Change #100: Thank you for watching!
Speaker Change #100: Thank you.
Speaker Change #101: Thank you. Your next question is coming from Rafe Jedrosich from Bank of America. Rafe, your line is live. Please go ahead.
Rafe Jedrosich: Hi, good morning. Thanks for taking my questions. You spoke about the stick-and-brick inflation that you're expecting. Can you talk about what you're anticipating for land inflation in the first quarter and then through 2025?
Rafe Jedrosich: Thank you.
Speaker Change #103: So we've seen a little bit of a moderation from low double-digit percentage increase in our lot cost.
Speaker Change #103: to high single-digit this quarter.
Speaker Change #104: On a full-year basis, we were up a double-digit percentage, but on a quarter-over-quarter basis, it was a high single. So, I think, you know, we expect to continue to have cost inflation as we move throughout 25.
Speaker Change #104: But maybe it can moderate to a mid-single-digit as we get a couple of quarters past and have cycled through some of those comparisons already. But our base case is that lot costs will continue to increase at least a mid-single-digit percentage.
Speaker Change #105: Okay that's really helpful and then just putting that all kind of together how do we think of what level of net price you would need in fiscal 25 to hold margins?
Speaker Change #106: Thank you. Bye.
Speaker Change #107: We would need a small amount with a lot cost you know in the mid to high you know impact on overall price you need you need a small amount but but not a significant amount as we do expect our our stick and brick cost to remain relatively flat.
Speaker Change #108: Okay, that's really helpful.
Speaker Change #109: Thank you. Bye.
Speaker Change #110: Thank you. Your next question is coming from Susan McCleary from Goldman Sachs.
Speaker Change #111: Susan, your line is live, please go ahead.
Susan McCleary: Thank you. Good morning everyone. I just want to focus in a bit more on the cost side of the business. We have seen lumber and wood product prices generally inflating over the last several weeks. It feels like they're on a general upward trajectory as you think about the next several quarters in there. Can you talk about what you're seeing and how you're thinking about that element of the cost structure in fiscal 25?
Speaker Change #113: We have seen, Sue, we have seen, you know, lumber come up some recently and, you know, as we look at the next year, we're looking for relatively flat stick and brick.
Speaker Change #113: You know, we have seen a good response from the labor markets, and we see trades looking for business, which
Speaker Change #113: you know, tends to mean we can hold our costs as relatively flat. So as we kind of look at it all...
Speaker Change #113: You know, we aren't sure exactly where lumber goes as we move over the next several months, but feel like we don't expect much movement up or down in Stick and Brick in 2025.
Speaker Change #114: Okay, that's helpful. And then maybe turning to the rental side of the business, you mentioned in your comments that you expect your inventories to hold flat for the next several years. But as you do think about the potential that rates stay relatively higher versus lower in there, can you just talk about the demand that you are seeing on that rental side and how you're thinking about managing that and meeting that need as well?
Speaker Change #115: A quick clarification on the first part, the comment on our rental investment was over the next several quarters. Haven't spoken out to future years. That's gonna depend on market conditions and where we get the return profile on that business in terms of what we're willing to invest in it.
Speaker Change #115: Yeah, and I think overall, you know, as we look at the market, we still see, you know, relatively solid demand in terms of the number of buyers in the market. We've certainly seen a reduction in apartment starts.
Speaker Change #115: consistently over the past 12 months and, you know, feel good about our positioning and the inventory we have in production, the timing that it's going to come to market.
Speaker Change #115: So, still feel good about that segment, and we will monitor it quarter to quarter in terms of what we do with our starts and positioning on a go-forward basis.
Speaker Change #116: Okay, thank you for the color. Good luck with everything.
Speaker Change #117: Thank you. Your next question is coming from Jade Romani from KBW. Jade, your line is live. Please go ahead.
Speaker Change #117: and many more. Thank you. Thank you.
Jade Romani: Thank you very much. What level of rates would you need to see to spur demand and get buyers off the sidelines as you've categorized? Would it be around 100 basis point reduction and would you need to see that through the 10-year treasury?
Speaker Change #119: But more than any one given rate, I think stability in rates is most helpful for us in seeing buyers demand and come off the sidelines, so that they're not waiting for rates to come down or fearful they're going up and they're going to escape their ability to afford right now. Stability is good. We saw a tighter trading ban on the mortgages in the third quarter, and we have a stronger sales environment.
Speaker Change #120: Yeah, and there's that's some seasonality to that as well But we have more volatility and rates in the fourth quarter and that was that was a negative to demand
Speaker Change #121: In terms of the APR you're currently offering, is it in the mid 5% range or low 5% range? I've seen at least one competitor in the fours, but most do seem to be in that 5-ish percent range.
Speaker Change #122: Our offering across the market can kind of range in the mid-4 to mid-5. The average in our backlog, I think Jessica alluded to earlier, was just over 5%.
Speaker Change #123: Thank you for watching!
Speaker Change #123: Thank you.
Speaker Change #124: Thank you. This does conclude today's Q&A session. I would now like to hand the floor back to Paul Romanowski for closing remarks.
Paul Romanowski: Thank you, Tom. We appreciate everyone's time on the call today and look forward to speaking with you in January to share our first quarter results.
Speaker Change #125: Congratulations to the entire D.R. Horton family on a successful fiscal 2024.
Speaker Change #125: Due to your efforts, we just completed our 23rd consecutive year as the largest builder in the United States. We are honored to represent you on this call, and we look forward to everything we will accomplish together in fiscal 2025.
Speaker Change #125: and many others. Thank you. Thank you.