Q1 2025 D R Horton Inc Earnings Call
Thank you for watching
Speaker Change: Good morning and welcome to the first quarter 2025 earnings conference call for Dero Horton, 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 form of a presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for Dior Horton.
Jessica Hansen: Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the first quarter of fiscal 2025.
Jessica Hansen: Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
Jessica Hansen: Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements.
Jessica Hansen: Additional information about factors that could lead to material changes in performance is contained in D.O. Horton's Annual Report on Form 10-K, which is filed with the Securities and Exchange Commission.
Jessica Hansen: This morning's earnings release can be found on our website at investor.deerhorton.com and we plan to file our 10-Q in the next few days. 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.
Jessica Hansen: Now I will turn the call over to Paul Romanowski, our President and CEO. Thank you, Jessica, and good morning. I'm pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer.
Jessica Hansen: and Bill Wheat, our Executive Vice President and Chief Financial Officer.
Jessica Hansen: For the first quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $2.61 per diluted share. Our consolidated pre-tax income was $1.1 billion on $7.6 billion of revenues.
Jessica Hansen: with a pre-tax profit margin of 14.6%. We remain focused on enhancing capital efficiency to produce sustainable returns and cash flow.
Jessica Hansen: Our home building pre-tax return on inventory for the trailing 12 months and to December 31st was 26.7 percent. Our return on equity was 19.1 percent and return on assets was 13.4 percent.
Jessica Hansen: Our return on assets ranks in the top 15% of all S&P 500 companies for the past 3, 5, and 10 year periods.
Jessica Hansen: During the three months ended December 31st, we generated consolidated operating cash flow of $647 million and returned $1.2 billion to shareholders through share repurchases and dividends.
Jessica Hansen: Over the past 12 months, we returned essentially all of the cash we generated to shareholders through repurchases and dividends.
Jessica Hansen: Overall, the demographics supporting housing demand remain favorable, and although both new and existing home inventories have increased from historically low levels, the supply of homes at affordable price points is generally still limited.
Jessica Hansen: To help spur demand and address affordability, we are continuing to use incentives such as mortgage rate buy-downs, and we have continued to start and sell more of our smaller floor plans.
Jessica Hansen: Our local teams have been successful meeting the market, with net sales orders this quarter decreasing only slightly from the prior year.
Jessica Hansen: With 53% of our first quarter closings also sold in the same quarter, our sales, incentive levels, and gross margin are generally representative of current market conditions.
with our focus on affordable product offerings.
Homes and Inventory, Continued Improvement in our Construction Cycle Times
and Finish Lots, available in our pipeline.
Jessica Hansen: Earnings for the first quarter of fiscal 2025 decreased 7% to $2.61 per diluted share compared to $2.82 per share in the prior year quarter. The income for the quarter was $845 million, on consolidated revenues of $7.6 million.
Jessica Hansen: Our first quarter home sales revenues were $7.1 billion on 19,059 homes closed, compared to $7.3 billion on 19,340 homes closed in the prior year quarter. Our average closing price for the quarter was $374,000.
Thank you.
Bill: $374,900 down 1% sequentially and roughly flat with the prior year quarter. Bill?
Bill: Our net sales orders for the first quarter decreased 1% from the prior year to 17,837 homes, and order value decreased 2% to $6.7 billion.
Bill: Our average number of active selling communities was up 2% sequentially and up 10% year-over-year.
Bill: The average price of net sales orders in the first quarter was $373,000, which was down 1% both sequentially and from the prior year quarter. Jessica? Our gross profit margin on home sales revenues in the first quarter was 22.7%.
Bill: down 90 basis points sequentially from the September quarter, as expected, due to higher incentive costs.
Bill: On a per-square-foot basis, home sales revenues and stick-and-brick costs were both relatively flat sequentially, while lot costs increased approximately 3%.
Bill: Our incentive costs are expected to increase further on homes closed over the next few months so we expect our home sales gross margin to be lower in the second quarter compared to the first quarter.
Bill: Our incentive levels and home sales gross margin for the full year of fiscal 2025 will be dependent on the strength of demand during the spring selling season in addition to changes in mortgage interest rates and other market conditions.
Bill: In the first quarter, our home building SG&A expenses increased by 6% from last year. And home building SG&A expense as a percentage of revenues was 8.9%, up 60 basis points from the same quarter in the prior year and in line with our expectations.
Bill: Our increased SG&A costs are primarily due to the expansion of our operating platform. Our employee count is up 8% from a year ago. Our community count is up 10% and our market count has increased 7% to 126 markets in 36 states.
Bill: The investments we have made in our team and platform position us to execute and sustain our strategic plans to produce strong returns, cash flow, and market share gains. Paul?
Bill: We started 17,900 homes in the December quarter and ended the quarter with 36,200 homes in inventory, down 15% from a year ago and approximately 1,200 homes lower than at the end of September.
Bill: 25,700 of our homes at December 31st were unsold, relatively flat with year-end. 10,400 of our unsold homes at quarter-end were completed, of which 1,300 had been completed for greater than six months.
Bill: For homes we closed in the first quarter, our construction cycle times improved a few days from the fourth quarter and approximately three weeks from a year ago.
Bill: Our improved cycle times position us to turn our housing inventory faster in 2025.
Bill: and we will continue to manage our homes and inventory and start space based on market conditions and to achieve targeted closings by community.
Bill: Mike, our home building lot position at December 31st consisted of approximately 640,000 lots, of which 24% were owned and 76% were controlled through purchase contracts.
Bill: We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others.
Bill: which enhances our capital efficiency, returns, and operational flexibility. Of the homes we closed this quarter, 65% were on a lot developed by either 4-star or a third party, up from 62% in the prior year quarter.
Bill: Our first quarter home building investments in lots, land, and development totaled $2.4 billion.
of which $1.5 billion was for finished lots.
Bill: $710 million was for land development and $140 million was for land acquisition.
Bill: Paul, in the first quarter, our rental operations generated $12 million of pre-tax income on $218 million of revenues from the sale of 311 single-family rental homes and 504 multifamily rental units.
Bill: This quarter's rental pre-tax profit margin was impacted by recent uncertainty in the capital markets and higher interest rates for purchasers of rental communities.
Bill: We continue to operate a merchant-built model in which we construct and sell purpose-built rental communities.
Bill: Our rental operations provide synergies to our home building operations by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and absorption of our land and lot pipeline. We are focused on improving our operational execution and efficiencies in both our rental businesses.
Bill: During the last several quarters, we have been successful monetizing some of our single-family rental communities prior to leasing stabilization. We plan to continue this strategy to improve the capital efficiency and returns of our rental operations.
Bill: Our rental property inventory at December 31st was $3 billion, which consisted of $728 million of single family rental properties and $2.3 billion of multifamily rental properties.
Bill: We expect our total rental inventory to remain around the current level for the next several quarters.
Bill: Four Star, our majority owned residential lot development company, reported revenues of $250 million for the first quarter on 2,333 lots sold with pre-tax income of $22 million.
Bill: Four Star's owned and controlled lot position at December 31st was 106,000 lots. 64% of Four Star's owned lots are under contract with or subject to a right of first offer to D.O. Horton. $220 million of our finished lots purchased in the first quarter were from Four Star.
Bill: Four Star had approximately $640 million of liquidity at quarter end with a net debt to capital ratio of 29.5%.
Bill: Our strategic relationship with 4STAR is a vital component of our returns-focused business model.
Bill: Four Star Strong, Separately Capitalized Balance Sheet, Growing Operating Platform, and Lot Supply positioned them well to capitalize on the shortage of finished lots in the home building industry and to aggregate significant market share over the next several years. Mike? Financial Services.
Bill: earned $49 million of pre-tax income in the first quarter on $182 million of revenues, resulting in a pre-tax profit margin of 26.7%. During the first quarter, our mortgage company handled the financing for 79% of our homebuyers.
Bill: Borrowers originating loans with the H.I. Mortgage Discorder had an average FICO score of 724 and an average loan-to-value ratio of 89 percent.
Bill: We have a strong balance sheet with low leverage and strong liquidity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities.
Bill: During the first three months of the year, consolidated cash provided by operations was $647 million.
Bill: We repurchased 6.8 million shares of common stock during the quarter for $1.1 billion, which reduced our outstanding share count by 4% from the prior year.
Bill: As our stock price declined during the quarter, we accelerated some of our planned share repurchases for the year. Our remaining share repurchase authorization at December 31st was $2.5 billion.
Bill: During the quarter, we also paid cash dividends of $0.40 per share, totaling $129 million, and our board has declared a quarterly dividend at the same level to be paid in February.
Bill: At December 31st, we had $6.5 billion of consolidated liquidity, consisting of $3 billion of cash and $3.5 billion of available capacity on our credit facilities.
Bill: Debt at the end of the quarter totaled $5.1 billion, with $500 million of senior notes maturing in the next 12 months. Our consolidated leverage at December 31 was 17%, and we plan to maintain our leverage around 20% over the long term.
Bill: At December 31st, our stockholders' equity was $24.9 billion, and book value per share was $78.53, up 13% from a year ago.
for the trailing 12 months into December 31st.
Bill: Our return on equity was 19.1% and our consolidated return on assets was 13.4%.
Jessica.
Bill: Looking forward to the second quarter, we currently expect to generate consolidated revenues of $7.7 to $8.2 billion and homes closed by our home building operations to be in the range of 20,000 to 20,500 homes.
Bill: We expect our home sales gross margin for the second quarter to be approximately 21.5% to 22% and our consolidated pre-tax profit margin to be in the range of 13.7% to 14.2%.
Bill: We have added guidance for Consolidated Pre-Tax Profit Margin to provide more meaningful insight to our overall profit expectations. As a result, we no longer plan to provide specific guidance for Quarterly Homebuilding SG&A Percentage or our Financial Services Pre-Tax Profit Margin.
Bill: Our results for the full year of fiscal 2025 will still largely be dependent on the strength of the spring.
Bill: For the year, we continue to expect to generate consolidated revenues of approximately $36 to $37.5 billion, and homes closed by our home building operations to be in the range of 90,000 to 92,000 homes.
Bill: We now forecast an income tax rate for fiscal 2025 of approximately 24%.
Bill: Based on our strong financial position, first quarter share repurchase activity, and our expectation for increased cash flows from operations in fiscal 2025, we now plan to repurchase between $2.6 billion and $2.8 billion of our common stock for the full year.
Bill: We also continue to expect annual dividend payments of around 500 million dollars. Paul? In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and focus on affordable product offerings.
Bill: All of these are key components of our operating platform that sustain our ability to produce strong returns, grow the business, and generate substantial cash flows while continuing to aggregate market share.
Bill: We have significant financial and operational flexibility, and we plan to maintain our disciplined approach to capital allocation by providing compelling returns to our shareholders to enhance the long-term value of our company.
Bill: 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.
Bill: Thank you. At this time, we will be conducting a question and answer session. In the interest of time, today we ask that participants limit themselves to one question and one follow-up.
Bill: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please while we poll for questions.
Thanks for watching!
Speaker Change: And the first question today is coming from John LaValle from UBS. John, your line is live.
John LaValle: Good morning, guys. Thanks for taking my question. Maybe starting off with just the gross margin outlook in the second quarter, so looks like sequentially going from 22.7 to 21.5 to 22. Can you just help us with some of the moving pieces there? I mean, is that really the expectation of just higher incentive levels? Or, you know, is there something that changes sequentially in terms of land, labor, and materials?
Speaker Change: Hey John, really it's just a matter of incentive levels and what we're seeing in the market today.
Speaker Change: You know, we closed 53% of the homes, we closed this quarter, we're sold in the quarter, so we think representative of kind of where we are.
Speaker Change: and looking throughout the quarter, our margin on closings in December was a little lower than the prior two months. So based on the visibility we have today, what we're seeing in the market, we do expect a slight step down in margin on closings in our second quarter.
Speaker Change: Understood. And then in terms of deliveries, it looks like you guys beat by about a thousand units versus the top end, still kind of maintain that 90 to 92,000 guide for the full year. How would you kind of characterize that? Was there anything pulled forward into the first quarter that you didn't expect or is this more just a little bit of conservatism, just not knowing what lies ahead as we move into the spring?
Speaker Change: I think we're always a little concerned in the fourth calendar quarter, our first fiscal with the sales demand environment. We had the inventory and the teams did a great job of delivering that inventory to closings.
Speaker Change: and putting people in homes. So they're really good about the execution across the board and we're positioned to continue to deliver homes and we need to sell a fair number of homes this quarter that we're going to close this quarter, but we've got the inventory position to do so.
Speaker Change: I think the beat really just reflects our continued improvement in build times and also the fact that we did sell and close 53% of our homes intra quarter that's a little bit higher than it typically would be for a December quarter
Makes sense. Thanks, guys.
Speaker Change: Thank you. The next question is coming from Alan Ratner from Zellman & Associates. Alan, your line is live.
Hey guys, good morning. Thanks for the detail so far
Speaker Change: First question on the start pace, you know, that's been trending lower here which, you know, I think makes sense given the environment, but...
three quarters in a row down year over year.
Speaker Change: Just curious how you're thinking about the start pace going forward, you know, are you thinking about just given the improving cycle times, bringing back, you know, some components of BTO back in the business, or do you feel like just given that improving cycle time, you can more appropriately match the starts and sales going forward and still hit that full year guide?
Speaker Change: Yeah, Alan, I believe that just the improved cycle times that we have seen have allowed us to carry a lower number of inventory and that's why you've seen that sequential decline.
in our star space.
Speaker Change: It does allow us to sell earlier in the process because of our ability to turn these homes faster. So it does allow us to pick up a little broader scale on the buyer demographic or demand that's out there. I would expect on a go-forward basis that you're going to see our starts be more in line with our sales paces. We just replenish the inventory that we have and start to build as we grow throughout the year.
Speaker Change: Okay, great. Second question, you know, we're day one here on the new administration, a lot of uncertainty about which direction some of the housing related policies might go in, whether we're talking about tariffs or integration or the future of the GSEs. I'm just curious how you guys are thinking about the next, you know, several years in the backdrop, and whether you're, you know, changing any strategies or doing anything in anticipation of that.
Speaker Change: You know, alongside everyone else, we're keeping an eye on what will occur. But, you know, we've been through a number of changes in administrations before, and ultimately, we are just focused on what buyers can afford. We're going to continue to open communities and try to price our product as affordably as possible to meet the needs of homebuyers. There is a core need for shelter and for homes in our country, and we're going to continue to do the best we can to supply it at an affordably price as we can.
Thank you. Thank you.
Speaker Change: Thanks a lot. Thank you. The next question is coming from Stephen Kim from Evercore ISI. Stephen, your line is live.
Yeah, thanks very much guys, appreciate the color.
Speaker Change: I was really encouraged to see the share repurchases you did this quarter, and it's a tough environment and the cash flow was impressive. I think you had guided, you're guiding now, continuing to guide for cash flow above 2024.
Speaker Change: Can you give us a sense for how you're thinking about cash flow from operations relative to your combined share repurchases and dividends, because that I think might help dial in even a little bit better.
Speaker Change: Thanks for joining us. Thank you. Thank you. Thank you. Thank you.
Speaker Change: Yeah, that's impressive. Appreciate that. And then the second question relates to your leverage longer term. I think you had indicated that your long-term leverage goal is around 20%. Can you give us a sense for what kind of cash balance you guys would typically carry? So in other words, what kind of net debt to cap do you think is a good target longer term for the company?
Speaker Change: Sure, you're correct on the consolidated leverage target at or below 20%. Net, it's probably closer to approximately a 10%. Cash is going to vary, though, quarter to quarter. We typically have our heaviest cash balance or our highest cash balance at the end of the fiscal year, call it roughly $3 billion. And then the other quarter is probably anywhere from $1 to $2 billion.
Speaker Change: Gotcha, that's really encouraging. Okay, thanks a lot guys. Appreciate it.
Speaker Change: Thank you. The next question is coming from Karl Reischart from BTIG. Karl, your line is live. Thanks, everybody. I'm going to talk about SG&A for a second.
Karl Reischart: Mike, I think it was you that talked about the growth rate in store count, the growth rate in...
Karl Reischart: Lots and business at people you've added will start the anniversary those growth rates and you've talked about sort of balancing your your pace
Karl Reischart: with with margins and returns more so in going forward. So especially because you're not going to be guiding on this anymore, where do you sort of think your target SG&A ought to be and when do you expect to see some better leverage on those SG&A dollars? Is it going to be later this year? I know seasonally it'll happen or will we start to see more the next couple of years?
Karl Reischart: You know, as was commented, we have made investments. We've expanded our market count, increased our community counts. As you know as well, Carl, we are always focused on being as efficient as we can. So, we would expect to see leverage overall in our SG&A. I think today as we look at fiscal 25, we would expect our home building SG&A percentage to probably be a little higher than it was in 24. But we certainly expect to leverage those investments as we move beyond 25 into 26 in future years. We will be very focused.
Thank you for joining us.
Speaker Change: Michael O'Neill, The Illuminatiatic Group, Johns Hopkins University and Create California Open University. I want to talk a little bit about California Open University and Craig Barbara's book läh el renovador, so we want to go into tonight's session, there's a few things in the third part of the resolution that we want to get started on but initially I want to talk about three things that are important here.
Karl Reischart: on land bank transactions versus doing self-development on your own books?
Karl Reischart: I think, Carl, the 65% we talked about at the closings in the quarter were on lots that were developed by a third party or four-star. So that would be a lot development professional entity that is developing finished lots for us. And that comes from deals they source, projects we source and assign to them, enter into buyback contracts. It kind of runs the gamut there.
Karl Reischart: on the homes we closed on lots we self-developed. Those were all done on our balance sheet.
Karl Reischart: and you know and we continue to explore you know other accretive ways for capital efficiency and whether that's you know sort of that call it land banking development services land banking process we continue to evaluate and are looking to drive the most efficient
capital usage in our lot pipeline.
Karl Reischart: We'll use lot bankers if we have an excess supply of finished lots that we're not ready for but in terms of true traditional land development where you don't technically have a lot of risk transfer, we have little to no of that. We're 100% focused on risk transfer in the structures of our contracts.
Thanks, Jess. Thanks, everyone.
Speaker Change: Thank you. The next question is coming from Michael Reholt from J.P. Morgan. Michael, your line is live.
Michael Reholt: Thanks. Good morning everyone. Congrats on the results. First question, I'd love to circle back to you had a comment in your prepared remarks around inventory levels.
Michael Reholt: and the comment was supply is still generally limited at affordable price points. I'd love to dial into that a little bit and see if there's any regional differentiation that you've seen across inventory levels and as a result, perhaps, which markets or regions that you operate in might be a little stronger versus a little weaker than the corporate average.
Michael Reholt: You know, we have seen, like has been reported, some buildup in the Florida market and certainly in certain of the Florida markets a little more than others.
Michael Reholt: The same in some of the Texas markets, but generally across the footprint, we feel like inventory is in pretty good shape. We think that we and the other builders.
Michael Reholt: Being pretty responsible in terms of watching the market and based on what the market brings, sizing their inventory in kind. And, you know, the resale market is just going to continue to play out as people loosen up and eventually move and put their homes on the market.
Thank you. Thank you. Thank you.
Speaker Change: and David Auld. And I'm going to be talking about the the the the the the the the the the the the the the
Thank you for having me.
Speaker Change: I think in the past you've talked about most likely not going below a year's worth of own supply.
Speaker Change: kind of thing in that year-year and a half range. So as you look forward, I know you're talking about improving.
Speaker Change: inventory turns or build cycle times. I'm just wondering how you guys think about, you know, further improvement on capital efficiency. What are those levers that you look to move and, you know, if...
Speaker Change: If there's any rethinking of where that option lot percentage or years owned supply might be able to go over the next three to five years.
Speaker Change: Well, Mike, our average is 76% across our operations. We do have markets that it's higher than that, and we obviously have markets that it's lower than that as well. So we are still focused on continuing to ensure that we have a good network of third-party developers and we're utilizing 4STAR as much as we can. So there still is opportunity for some of those markets that are at a lower option percentage to increase that.
Speaker Change: So if we're going to pay for it to use a third party, whether it's banking or developing lots, we're balancing what we're paying versus what the risk transfer and the capital efficiency benefits are. And so that's something we do continue to evaluate, as Mike said earlier, and we expect there will be opportunities for us to find ways to get more efficient with our lot pipeline going forward.
Thank you.
Thank you.
Thanks guys, good luck.
Thank you.
Speaker Change: Thank you. The next question will be from Matthew Booley from Barclays. Matthew, your line is live.
Matthew Booley: Morning everyone, thank you for taking the questions. So the the closings guidance I think for the second half that implies...
Matthew Booley: Something like 52,000 homes closed or maybe 30% or so higher than the first half.
Speaker Change: I think it's a little bit greater than normal, or at least history. So I just want to get some color around your confidence in that step up in closings. It sounds like better cycle times, as you keep alluding to, for sure, is part of that. But any other assumptions we should consider that you're making in that kind of step up there? Thank you.
Thank you.
Speaker Change: No, I think we feel good about our efficiency today, we feel very good about our position of housing inventory, as well as the lot inventory that we need to achieve those numbers.
but you know, of course.
Speaker Change: We're very early in the spring selling season, and we need the spring to show up for us and to see the sales. But we believe that our operators are positioned to take advantage of the spring selling season and be in position to deliver on our guide of 90,000 to 92,000 homes for the year.
Thank you.
Speaker Change: okay got it thank you for that and then secondly back on the gross margin
Speaker Change: It sounded like the margin exited December a little lower than the prior two months, if I heard you correctly. So is that second quarter margin guide assuming that the margin on homes, I guess, sold and closed during Q2 would be similar to December or lower than December?
Speaker Change: I guess conceptually at what point would you look to kind of more hold the line on the gross margin. Thank you
Speaker Change: So we would continue to look at traffic and demand we see in the neighborhoods to affect the pricing and the margin to you know It's about maximizing the returns for us at a community level
but we entered the quarter in a roughly 6%.
Speaker Change: Mortgage environment and we exited the quarter in a 7% mortgage environment, which is what we kind of rolled into
Speaker Change: to Q2 with. And so that's coloring our margin outlook as well, looking at perhaps being a bit lower than December as we work our way through second quarter. But it is the spring and it is historically a better selling season, and we're optimistic about the trends we'll see.
All right. Thanks guys. Good luck.
Thank you.
Speaker Change: Thank you. The next question will be from Sam Reid from Wells Fargo. Sam, your line is live.
Sam Reid: I'm curious about the number of people who plan to close in the second quarter. I'm just curious for a rough number there. And then maybe one other number on that point would be any sense as to what the bought down rate is in your backlog? I believe you've provided that in past quarters, so just curious if we've got an updated number there.
Sam Reid: Sure. With regard to the margin and backlog, that is one of the key items that we do have visibility to when we're preparing our guide. So our margin and backlog is relatively consistent with the range that we're providing here for Q2. And then in terms of prevailing rate that we're offering in the market today, generally between $4.99 to $5.99 range, depending on the product, is what's prevailing out there, really for the last little while across our system.
Sam Reid: And there's really no meaningful change in that average rate this quarter versus last quarter.
Speaker Change: No, that helps. And then maybe more of a higher level question on labor costs and stick-and-brick costs.
Speaker Change: It sounds like those are looking to hold in Q2, although correct me if I'm wrong, but maybe could you just talk a little bit more broadly about your ability to manage higher costs on these two buckets from some of these exogenous factors we're seeing, whether it's the new administration's tone on remigration or higher material costs on the back of natural disaster rebuild. Just trying to get your rough sense as to sort of how you'd manage through those should we see inflation and labor and stick and brick.
Thanks.
Speaker Change: I think today we are seeing, you know, good access to, we have the labor we need and we have the materials we need.
Speaker Change: And that's what's allowed us to continue to see improvements in our cycle time. And given that, we've been able to hold pretty tight on pricing for both materials and labor. It has yet to play out to see what happens with this administration and what that impact is, either through tariffs.
and or labor if it becomes a little more scarce.
Speaker Change: But we feel good about our positioning in the markets with our market share and our ability to maintain the labor
Speaker Change: and the parts and pieces we need and still don't expect to see much inflation in either of those over the next 12 months.
That's helpful. Thanks so much. I'll pass it on.
Speaker Change: Thank you. The next question will be from Eric Bossard from Cleveland Research. Eric, your line is live.
Eric Bossard: Good morning, thanks. A few things if I could. First of all, in terms of affordability, I'm curious as you think looking forward, I think your ASP indicated is down 1%.
Eric Bossard: Is there something more meaningful that you're considering or taking steps towards to address affordability? I know you talked about smaller homes, but is there a need to unlock, or an opportunity to unlock demand by doing something more meaningful and changing the product and changing your ASP?
Eric Bossard: Hard to say that we could make a massive swing in the near term from from what we're doing. I mean it's kind of an incremental change neighborhood by neighborhood. You're kind of, I don't say locked in, but for the lots that are on the ground and that are approved by the municipalities, oftentimes they're also approving some product parameters and guidelines that kind of limit our ability to flex significantly, you know, within a short
Call it a six to nine month time frame
Eric Bossard: Longer term, we continue to evaluate ways to be more efficient in usage of land and development dollars.
Eric Bossard: at relative to the stick and brick cost it takes to deliver it. You know, a certain number of bedrooms, bathrooms, and square footage.
for Homeowner.
Eric Bossard: For data points this quarter on homes we closed our average square footage was down 1% from a year ago Which it's been down a low single-digit percentage here for the last couple of years Sequentially it was relatively flat and we did see another tick up in the number of attached homes So call it townhomes and duplexes that we closed that was roughly 17% of our business which was up from 15% sequentially
Eric Bossard: Okay and then secondly I know is is you look forward to the spring selling season.
Speaker Change: Rates were 7, rates were 6, rates were 7. Is your customer behaving differently with rates back at 7? I'm curious, especially in an environment where it feels like we're a little bit higher for longer. Is the consumer responding to incentives the same way? Is traffic the same or is it different this time back at 7?
Speaker Change: We still, you know, our best incentive and most impactful to the consumer is utilizing some form of rate mining. And, you know, that increased for us throughout the quarter to try and maintain rates that seem to be in at least a comfortable enough place for them to move forward.
Speaker Change: As far as their monthly payment, you know, still we're successful in achieving what we needed to in the quarter with 53% of the homes closed in the quarter sold in the quarter. So we're able to navigate it through this past quarter. It's still early.
Speaker Change: We're only a couple weeks into this quarter but so far been pleased with the traffic levels and with the sales pace that we're seeing in our models. We'll see how that continues. Got a long way to go in the spring selling season.
Thank you.
Speaker Change: Thank you. The next question will be from Anthony Pettinari from Citi. Anthony, your line is live.
Good morning.
Speaker Change: I wonder if you can give an update on what you're seeing with consumer debt levels and if you're seeing any real change in sort of availability or ability to qualify and then when you look at kind of the first you know true first-time buyer versus more of a move
is one group maybe holding up better than the other?
Speaker Change: Really the debt level or the credit makeup of our buyers, you know, because we do sell.
Speaker Change: 59% of our buyers through our mortgage company this past quarter were first-time homebuyers. We live in a world where if we could go down on the credit score significantly, it would significantly open up the buyer available to us, but we spend a lot of time.
Speaker Change: in our sales offices working through those credit challenges and our buyers to get them in position to buy their first home.
Speaker Change: Okay, that's helpful. And then just following up on smaller format homes or, you know, products, you know, like townhomes or duplexes, you know, understanding it varies by community, is it possible to talk about sort of how the returns or the gross margin profile of smaller format homes compares with a more traditional offering, if at all?
Speaker Change: It's very similar actually. If we look at our product and project performances, you know, the margin is going to be very similar. If you're well positioned, you know, with the right product, the right price, the right house, whether it's attached or detached, you're going to get similar outcomes in your margin and your returns.
Thank you.
Thank you.
When we do it, we like it when it's ready.
Pssh!
Speaker Change: Thank you. The next question will be from Mike Dahl from RBC Capital Markets. Mike, your line is live.
Mike Dahl: Thanks for taking my questions. I wanted to ask about the pre-tax margin guidance. I appreciate that going forward you want to frame your business this way. But if I look at it, you're guiding pre-tax margins at the midpoint down at 280 basis points year-on-year and gross margins
Mike Dahl: You're really only guiding down 150 basis points So can you it seems like there is something else underneath the surface whether it's on rentals or SG&A or Or star this quarter specifically and in terms of 2Q. So can you help us? understand that
Mike Dahl: The buyers of rental properties really over the last year have, it's been more challenging for them. Some margins in that business have been lower. It's a business that we're continuing to move forward with and would expect that in 2025 we're dealing with some supply out there that is a challenge, but that should alleviate as we move to the latter part of 25 and into 26.
Mike Dahl: But I'd say primarily the change in the year-over-year gross margin beyond the home building change would be in the rental segment.
Thank you.
Mike Dahl: Okay, got it. So year-on-year rental revenue and margin down significantly biggest driver.
Yes.
Thank you. Thank you.
Speaker Change: got it and and then I guess I'm going back to kind of the the price versus pace discussion
Speaker Change: You know, I guess as you think about it, and again, you've added some, you've made a point of, you know, that you added some additional
Speaker Change: slides around the return focus and change the way that you're guiding certain things. So, I know you've been return focused for a while, but in the current environment,
Speaker Change: Is that focus actually shifting you to be a little bit more biased towards let's keep things a little bit more price and margin focused versus volume in the near term?
Speaker Change: you know how would you say that that's that your views are evolving there?
Speaker Change: We continue to evaluate the business at a community level, community by community. Our local operators are making decisions based upon the lot supply they have in a given project or a given sub market relative to demand that they're currently seeing in that market and looking to price.
Speaker Change: and start homes, price those homes, and sell those homes at a pace that's going to maximize the margin available at that pace and for what that sub-market can absorb. And it is very much, again, I know it's repetitive us saying this, but it's very much a community by community build-up of what's happening.
Speaker Change: and we see the best outcomes there and we don't, at the corporate level, dictate a pace or a margin to the field, we ask them to maximize the returns.
Speaker Change: and there are times when you lean more heavily into pace to get pace up and then once pace is up you can oftentimes bring margin up behind the sales amount to help drive the returns up but it's it's a balance that you know it's it's probably a lot more art for us than it is science.
Okay, thank you
Speaker Change: Thank you. The next question will be from Ken Venner from Seaport Research Partners. Ken, your line is live.
Hello, everybody.
Ken Venner: Could you, and happy new year, could you give color around the margin spread between the 47% backlog closings and the 53% spec as well as comment on because you're at 126 markets most of the builders are you know
Ken Venner: So your first part of your question was between backlog and our spec closings? Is that between the sold and closed in the same quarter? Yeah, it's margin spread. Yeah. I don't think we have that breakdown. I would say that 47% that were sold prior to the quarter, and it's slightly different, a lower interest rate environment, we're going to be at a higher margin than what we exited the quarter at in December.
Ken Venner: But I can't give you any magnitude, Ken, I'm sorry. I don't have that in front of me.
Ken Venner: Okay, I think in the past you guys talked about a couple hundred basis points being multi years ago so I didn't know if that might be a... That would have been billed to order versus SPAC.
Yeah, I can.
Okay.
Speaker Change: Regional margins. You guys stand out versus many of the peers and having very similar regional margins across your business.
Speaker Change: Is there any reason we didn't necessarily see more dispersion of margins in your business? You know, Florida, Texas, the West, they're all pretty similar in that 60% range LTM. Just curious as to why perhaps we didn't see more of a spike in some markets versus others.
Thank you very much.
Speaker Change: I think, not exactly sure Ken, I think there's just an aggregation of enough markets in each one of our regional groupings that it kind of blends out any specific market differences where the market's performing differently or our execution is different.
Speaker Change: and more. Please see the complete disclaimer at https://sites.google.com If you have any questions or other problems, please post them in the comments. Thank you for watching and I hope to see you again soon.
Speaker Change: All of our markets are focused on maximizing returns community by community. And so it's a balance between margin and pace and inventory returns. And so yeah, the better the margin, the better returns generally as well. And so that is focused across the board.
Thank you.
Thank you.
Speaker Change: Thank you. The next question will be from Rafe Jadrasich from Bank of America. Rafe, your line is live.
Rafe Jadrasich: Great, good morning. Thanks for taking my questions. First I want to, just on the land inflation that you're seeing today, I think you said up 3% quarter over quarter. Can you just run us through what that implies for the year over year trend and then how do we think about that for a remainder of the year? Maybe how does that compare to what you're contracting today? Like are you seeing any relief there that we'll see flow through later on?
Speaker Change: and Bill Wheat. Thanks for joining us. Thanks for having me. I'm Bill Wheat. I'm Jessica Hansen.
Speaker Change: On a year-over-year basis, we were up 10%, which we've been up a high single to low double-digit year-over-year for the last
Speaker Change: at least four to six quarters and on a sequential it has continued to be just a low to mid single-digit increase. I think our base case is going forward it will remain a low to mid single for the foreseeable future. We're not necessarily seeing land prices come down certainly not development costs when you look at an all-in lot cost but we do think on a year-over-year basis here at some point over the next couple of quarters that should moderate to a mid to you know maybe just high single-digit.
Thank you.
Speaker Change: Okay, that's helpful. And then just on the the change in the share repurchase, I'll look at especially like the the pace
Speaker Change: you stepped it up in the guidance. Can you talk about, have you continued that pace of buyback quarter to date? And then how do we think about sort of the pace as we go through the year? Was the step up in buyback in the quarter related to just where the stock price was? Or is there any change in sort of a philosophy
Speaker Change: or strategy in terms of like the pace of capital return relative to pre-cash flow.
Speaker Change: Yeah, no change overall in strategy. We will manage our repurchases within our liquidity availability and our balance sheet targets, but we do have the flexibility within that liquidity to be able to accelerate repurchases when the share price is under some pressure.
Speaker Change: Obviously we saw that this quarter and that continued really through the end of the quarter so we continued to be a bit more aggressive in our repurchases and judging based on where the stock price has been early this quarter, obviously we're still out in the market.
Speaker Change: We are still being active. I would characterize some of the increase in the first quarter as an acceleration implied by our guide of the $2.6 to $2.8 billion. We did increase that guide, but not by the full amount that the acceleration would have occurred in Q1.
Speaker Change: So, we continue to, we manage based on our overall plan, what we feel like our liquidity and balance sheet and our cash flow will allow, but we will see it ebb and flow a bit depending on where the valuation of the stock is and when we see some opportunities to take advantage of dips in the stock.
Thank you, appreciate it.
Speaker Change: Thank you. The next question will be from Trevor Allenson from Wolfe Research.
Trevor Allenson: Trevor, your line is live. Hi, good morning. Thank you for taking my questions. First, can you just talk about any differing demand trends geographically South, East and South Central were two weaker regions for you guys on a year basis. So perhaps any demand commentary on Texas and Florida would be helpful.
Trevor Allenson: Yeah, I think that, you know, as we talked to a little earlier, some of the buildup we've seen in inventory has had some impact on sales when you look at portions of the Florida market and as well, you know, isolated to some of the Texas markets.
Trevor Allenson: where they saw significant run-up in valuations. We've seen some moderation there.
Trevor Allenson: but you know generally as we enter into the spring we've been placed with what we've seen in these first few weeks in our sales offices across our footprint.
Speaker Change: Okay, thank you. That's helpful. And then, second question, understanding it's early and a lot of unknowns with the new administration, can you just give us some color on some potential impacts that you think could be possible if we were to see a major change on immigration or then also tariffs on China and Mexico, just, you know, what kind of impacts you guys think that could potentially have on you all? Thanks.
Speaker Change: It's hard to foresee what the impact would be when we're not sure what the change is going to be yet. So, you know, we continue to, as Bill said before, you know, prepare to provide an affordable product for our buyers that we can get a homeowner into and qualify for the mortgage. And so, you know, we do everything we can.
Speaker Change: to bring that affordability into play. And if there is cost increases, that is not going to be helpful for housing affordability. And I do think housing affordability is a stated goal of the administration. So we're hopeful that they're able to do some things that will help drive affordability.
Speaker Change: And we have had to deal with both immigration changes and tariffs in the past, so it's something that we're familiar with and likely, you know, although it is way too early to say the ultimate outcome, likely it's more regional in nature than something, you know, sweeping across our entire footprint, but it remains to be seen.
Thank you.
Speaker Change: Thank you. The next question will be from Buck Horn from Raymond James. Buck, your line is live.
Buck Horn: Hey, thanks. Good morning. Just one quick one for me. I was wondering if you've seen any inbound or uptick in inbound interest from single-family rental investors in some of the longer-dated finished unsold inventory, or would you consider maybe negotiating or doing a bulk deal if an SFR investor wanted to come in and take some of that inventory off your hands?
Buck Horn: You know, we have really maintained our single-family, four-rent business as more of a merchant build. We have plenty of opportunity for those buyers to sell into those, and that can, as we stated in our prepared remarks, you know, have started to do some of those more on a...
Buck Horn: We've largely maintained the number of completed inventory units, and that's exactly where we want to be as we enter into the spring selling season. So, we feel good about our inventory on both sides of that on a for sale and on a built-for-rent basis.
Okay, thanks. That's all for me. Thanks. Appreciate it.
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Buck Horn: The next question is coming from Susan McClary from Goldman Sachs. Susan, your line is live.
Thank you. Good morning, everyone.
Buck Horn: My first question is on the consumer and the rate environment. If the Fed does cut less than expected or fewer times than expected this year versus say last year, what rates
Buck Horn: realize some level of stability as a result of that. Do you think that that could be enough to ease some of the uncertainty or some of the fears that are leaving people on the sidelines? Or do you think that we actually need to see rates come down to see more of a lift in confidence and activity?
Buck Horn: I think we'd take great stability all day long if we could pick something today. It's much easier to manage our business.
Buck Horn: and drive affordability if we know what the rate is going to be. And I think if rates remain stable for an extended period of time, that's going to get consumers off the fence that need to buy a house. They will ultimately reset their expectations on what they can afford if they thought rates were going to go lower, and they ultimately don't. So we don't have a base case scenario. Nothing in our guidance assumes rate declines as we move throughout the year. Certainly that would be helpful,
are pretty positive as we moved throughout the year.
Speaker Change: Okay, that's helpful. And then just one last question on the rental side of things. You did mention efforts to realize greater efficiencies and some operational execution there. As you think about eventually improving that margin, how much of that can come from your own efforts versus a shift in the overall market?
Speaker Change: I think what we're looking at there, Susan, is the ability to sell some of the projects prior to stabilization from a greater capital efficiency perspective from us.
Speaker Change: So, in terms of, we're always looking to control our stick and brick cost and operate efficiently. That's just part of the DNA in the home building for sale platform as well as across the rental platform.
Speaker Change: but you know to see materially different changes in the financial performance and selling those assets it takes a fundamental increase in rents, net operating incomes, and decrease in cap rates to really change the valuation on those. We do everything we can to control the cost side but the efficiency side we're focusing on now is working with some of the buyers of the Build-to-Rent communities to sell them earlier in the process, prior stabilization.
Speaker Change: Okay, that's helpful. Thank you. Good luck with everything. Thank you.
Thank you.
Speaker Change: Thank you. The next question will be from Alex Byron from Housing Research Center. Alex, your line is live.
Alex Byron: Thanks everybody and good start to the year. I wanted to ask, you know, some of your competitors seem to have a philosophy of
Alex Byron: trying to sell a certain number of homes and do whatever it takes to get there, even if it means offering super low interest rates.
Alex Byron: Wondering if you guys have maintained the same approach to the business that you have historically or whether you guys have...
Alex Byron: Maybe approached it a little differently in terms of your willingness to balance margin versus pace, if you can comment on that.
Alex Byron: I think as we have alluded to earlier it's it's always a community by community build up you know and we're looking for a consistent pace in those communities that allows us to drive a margin and a return community by community.
Alex Byron: So, you know, we aren't making that decision from here. We do rely on our local operators to balance what they need to. They need to be competitive in the market.
You know so sometimes we may offer a rate
Alex Byron: Or an incentive beyond where we would hope to but at the end of the day We're going to be competitive in the market to achieve the absorptions We need and that when we get on pace allows us to drive margin and therefore returns at a higher level
But it's a community-by-community, market-by-market, daily activity for our operators.
Speaker Change: Got it. And then I'm wondering if you can comment on
Speaker Change: It seems like their number of locks sold, I suppose mostly to you, was lower than expected generally but they seem to maintain the same number for the year. So was that just a timing issue or is there anything you can comment on that?
Speaker Change: Yeah, it was purely timing, Alex. They do expect their lot deliveries to increase throughout the remainder of the year. They had a pretty heavy percentage that they sold to us in Q4, and it was a little bit lighter in Q1, but we would just say that's timing related.
Got it. Thank you so much.
Speaker Change: Thank you. The next question will be from Jade Rahmani from KBW. Jade, your line is live.
Jade Rahmani: Thank you. Can you comment on the pricing environment that's out there and whether the guidance assumes any price cuts? Because to get to the consolidated revenue guidance it seems like we need to assume somewhat lower average sale prices.
Jade Rahmani: You know, our average sales price does reflect the level of incentives from our rate buydowns largely. And so that does have some impact on the average selling price. And yes, we've seen slight declines in our net average selling price over the last year. And we do still expect probably a little bit further, you know, downward movement in our net average selling price, largely because of the cost of the incentives that we're having to pay in terms of rate buydowns with the mortgage rates.
Jade Rahmani: We expect the cost of surveilling to be higher at the end of the quarter, we expect those costs to be higher in Q2 which will have an impact on the NED ASP.
Jade Rahmani: So what's a reasonable range for ASP to assume? Would it be around 370,000?
Jade Rahmani: You know we're not getting to that specifically but I you know we've seen modest you know generally sequentially one or two percent change really not expecting much more than that.
Thanks a lot
Speaker Change: Thank you. There were no other questions in queue at this time. I will now turn the call back to Paul Romanowski for closing remarks.
Speaker Change: Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our second quarter results in April. Congratulations to the entire D.R. Horton family on producing a solid first quarter. We are honored to represent you on this call and greatly appreciate all that you do.