Q3 2025 D. R. Horton Inc Earnings Call
Good morning and welcome to the third quarter 2025 earnings conference call for Dr. Horton, America's Builder.
We'll open the floor for your questions and comments after the presentation.
Speaker Change: I'll now like to turn the call over to Jessica Hansen senior vice president of communications for Dr. Horton
Jessica Hansen: Thank you, Matthew and good morning. Welcome to our call to discuss our financial results for the third 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, although deal, Horton believes any. Such statements are based on reasonable assumptions. There's no assurance that actual outcomes will not be materially different.
Jessica Hansen: All forward-looking statements are based upon information available to deal Horton on the date of this conference call and dear. Horton, does not undertake any obligation to publicly update or revise any forward-looking statements,
Jessica Hansen: This recent quarterly report on form 10 Q, both of which are filed with the Securities and Exchange Commission.
Jessica Hansen: This morning's earnings release can be found on our website at investor.org horton.com and we plan to file our 10q later this week.
Jessica Hansen: 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 through your reference.
Paul Romanowski: Now, I will turn the call over to Paul Romanowski our president and CEO.
Paul Romanowski: 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 and Bill wheat, our Executive Vice, President and Chief Financial Officer. The DR. Horton, team exceeded, our expectations and delivered solid results for the third quarter highlighted by earnings of 3.36 cents per diluted. Share our Consolidated pre-tax income was 1.4 billion on 9.2 billion dollars of revenues with a pre-tax profit. Margin of 14.7% our net sales orders in the third quarter were flat with the prior year quarter and increased. 3% sequentially, our 10-year operators, continue to respond to market conditions with discipline balancing Pace versus price to maximize returns in each of our communities achieving 23,160 homes. Closed this quarter with a home sales gross margin of 21.8% both of which were above
Paul Romanowski: Of our guidance range. We remain focused on maximizing Capital efficiency to generate substantial operating cash. Flows and deliver compelling returns to our shareholders.
Over the past 12 months, we have generated 2.9 billion dollars of cash from operations and we have returned 4.6 billion dollars to shareholders through repurchases and dividends
Paul Romanowski: For the trailing 12 months ended, June 30th, our home building pre-tax return, on inventory was 22.1%. While our Consolidated Returns on equity and assets, were 16.1% and 11.1%, our return on assets ranks. In the top, 15% of all S&P 500 companies for the past 3, 5 and 10 year periods, demonstrating that our disciplined returns focused operating model, produces sustainable results and Physicians as well for continued value creation.
Paul Romanowski: New home, demand continues to be impacted by ongoing affordability, constraints, and cautious consumer sentiment where necessary, we have increased incentives to drive traffic and incremental sales. Our cancellation rate remains at the low end of our historical range. Indicating the buyers in today's market are able to qualify financially and are committed to their home purchase despite the volatility and uncertainty of the current economic environment.
Paul Romanowski: We expect our sales incentives to remain elevated and increase further during the fourth quarter, the extent to, which will depend on the strength of demand changes in mortgage interest, rates, and other market conditions, with 54% of our third quarter. Closings, also sold in the same quarter, our sales incentive levels and gross margin are generally representative of current market conditions,
We will continue to tailor our product offerings, utilize sales and incentives, and adjust the number of homes and inventory. Based on demand. In each of our markets, we are well, positioned, offering our customers and attractive value proposition with Quality Homes at afordable price points. And we have a positive outlook for the housing market over the medium to long term. Mike earnings for the third quarter of fiscal 2025 or $3.36 per diluted share compared to $4.10 per share in the prior year quarter. Net income for the quarter was 1 billion dollars on Consolidated revenues of 9.2 billion. Our third quarter home sales revenues were 8.6 billion dollars on 23160 160 homes closed compared to 9.2 billion dollars on 24155 homes. Closed in the prior year quarter our average closing price for the quarter was 369,600 down
Paul Romanowski: 1% sequentially and down, 3% year-over-year.
Paul Romanowski: For the third quarter, our net sales, orders of 23,071, homes were flat with the prior year quarter while order value decreased. 3% to 8.4 billion.
Paul Romanowski: Our cancellation rate for the quarter was 17% up from 16% sequentially and down from 18% in the prior year quarter.
Paul Romanowski: Our average number of active selling communities was up, 4%, sequentially, and up, 12% year-over-year.
Was 365,100, which was down, 2% sequentially and down 4% from the prior year quarter, Jessica, our gross profit margin on home sales revenues in the third quarter was 21.8% which was flat sequentially and above our expectations.
Although our home sales gross margin was stable from the second to third quarter. Our incentive costs have increased on recent sales. So we expect our home sales, gross margin to be lower. In the fourth quarter, compared to the third quarter, our actual incentive levels and home sales, gross margin for the fourth quarter will be dependent on the strength of demand changes in mortgage interest, rates and other market conditions. Bill
Paul Romanowski: In the third quarter, our home building sgna expenses, increased 2% from last year and Home Building sg&a expense, as a percentage of revenues was 7.8% up, 70 basis points from the same quarter in the prior year.
Paul Romanowski: Our community count is up 12% and our Market count has increased 4% to 126 markets in 36 States.
Paul Romanowski: The Investments we have made in our team and platform position is to continue producing, strong returns, cash flow and market, share gains while remaining focused on managing our sgna costs, sufficiently across our operations, Paul.
Paul Romanowski: We started 24,700 homes in the June quarter up 24% sequentially from the second quarter and we expect our starts in the fourth quarter to be lower than the third quarter. We ended the quarter with 38,400 homes, in inventory of which 25,000 were unsold 7,300 of our unsold Homes. At quarter end were completed down, 1100 homes, from March, 800 of our unsold homes have been completed for greater than 6 months.
Paul Romanowski: For homes, we closed in the third quarter, our construction cycle times improved several days from the second quarter and approximately 2 weeks from a year ago. Our improved cycle times position us to turn our housing inventory faster, and we will continue to manage our homes and inventory and starts Pace based on market conditions, Mike our home building luck position at June 30th consisted of approximately 600,000, lots of which 24% were owned and 76% were controlled through purchase contracts. We are actively managing our investments in lot land. And development, based on current market conditions during the quarter, our home building segments, incurred, 16 million dollars of inventory impairments and rode off 36 million of option deposits and due diligence costs related to land and lot purchase contracts.
We remain focused on our relationships with land developers across the country, to allow us to build more homes on Lots developed by others, which enhances our Capital efficiency returns and operational flexibility.
Paul Romanowski: Of the homes, we close this quarter 66% or on a lot developed by either 4 star or a third party up from 64% in the prior year quarter.
Our third quarter Home, Building investments in Lots land and development totaled. 2.2 billion dollars of which 1.4 billion dollars was for finish Lots.
Paul Romanowski: 610 million was for Land Development and 140 million was for land acquisition. Paul.
Jessica Hansen: In the third quarter, our rental operations generated. 55 million of pre-tax income on, 381, million of revenues from the sale of 1,065 single family, rental, homes and 328, multi-family rental units. Our rental property inventory at June 30th was 3.1 billion which consisted of 2.5 billion of multi family rental properties, and 668 million of single family. Rental properties. We remain focused on improving the capital efficiency and returns of our rental operations, Jessica 4-star. Our majority-owned residential lot development company reported revenues for the third quarter of 391 million on 365. Lots sold.
Jessica Hansen: With pre-tax income of 44, million 4, stars owned and controlled lot position at June 30th was 102,000. Lots
Jessica Hansen: 63% of 4 stars owned. Lots are under contract with or subject to a right of first offer to deal Horton.
Jessica Hansen: 320 million of our finished. Lots purchased in the third quarter were from 4-star.
Jessica Hansen: 4-star had 790 million of liquidity at quarter, end with a net debt to Capital ratio of 28.9%.
Jessica Hansen: Our strategic relationship with 4, star is a vital component of our returns focused business model.
Jessica Hansen: Tax income for the third quarter was 81 million on 228 million of revenues, resulting in a pre-tax profit margin of 35.7% during the third quarter, our mortgage company handled the financing for 81% of our home. Buyers borrowers originating loans, with the hi mortgages quarter had an average fight coat, score of 720 and an average loan to value ratio of 90% first-time home buyers represented. 64% of the closing, handled by a mortgage company. This quarter bill,
Jessica Hansen: Our Capital allocation strategy is disciplined, and balanced to support an operating platform, that produces compelling returns and substantial operating cash flows. We have a strong balance sheet with low, leverage and healthy liquidity. Which provides us with significant financial. Flexibility to adapt to changing market, conditions and opportunities.
Jessica Hansen: During the first 9 months of the year homebuilding cash, provided by operations was 1.7 billion in Consolidated. Cash provided by operations was 950 million.
Jessica Hansen: At June 30th, we had 5.5 billion dollars of Consolidated. Liquidity consisting of 2.6 billion dollars of cash and 2.9 billion dollars of available capacity on our credit facilities.
Jessica Hansen: In may we issued million dollars of homebuilding senior notes, due 2030. And in June, we increase the capacity of our homebuilding revolving credit facility to 2.3 billion.
Jessica Hansen: Debt. At the end of the quarter totaled, 7.2 billion with $500 million of homebuilding senior notes maturing in the next 12 months.
Jessica Hansen: Our Consolidated leverage at June 30th was 23.2% and we plan to maintain our leverage around 20% over the long term.
Jessica Hansen: At June 30th, our stockholders Equity was 24.1 billion. And book value per share was $80.46 up 7% from a year ago.
Jessica Hansen: For the trailing 12 months ended June 30th. Our return on Equity was 16.1% and our return on assets was 11.1%.
Jessica Hansen: During the quarter, we paid cash dividends of 40 cents, per share totaling, 122 million. And our board has declared a quarterly dividend at the same level to be paid in August.
Jessica Hansen: We repurchased 9.7 million shares of common stock during the quarter for 1.2 billion dollars. And our fiscal year to date stock, repurchases were 3.6 billion which reduced our outstanding share count by 9% from a year ago.
Jessica Hansen: Our remaining share repurchase, authorization is June 30th with 4 billion. Jessica looking forward to the fourth quarter, we currently expect to generate Consolidated revenues in the range of 9.1 to 9.6 billion and homes closed by our humbling operations, to be in the range of 23,500 to 24,000 homes.
Jessica Hansen: We expect our home sales, gross margin for the fourth quarter to be in the range of 21 to 21.5%. And our Consolidated pre-tax profit margin to be in the range of 13.6% to 14.1%.
Jessica Hansen: For the full year of fiscal 2025. We now expect to generate Consolidated revenues over approximately 33.7, to 34.2 billion, and homes closed by our humbling operations, to be in the range of 85,000 to 85,500 homes.
We still forecast, an income tax rate for fiscal 2025 of approximately 24%.
Jessica Hansen: Based on our fiscal year to date share repurchases, strong financial position and expected operating cash flows of greater than 3 billion. We now plan to repurchase 4.2 to 4.4 billion of our common stock in fiscal 2025 subject to the amount of cash flow generated and share price changes during the fourth quarter. Paul, in closing our results and position reflect, our experienced teams industry-leading market share broad, Geographic footprint and focus on delivering Quality Homes at affordable price points.
Jessica Hansen: all of these are key components of our operating platform that support our ability to generate substantial operating cash, flows and return Capital to shareholders while continuing to aggregate market share
We recognize the current volatility and uncertainty in the economy and will continue to adjust Mark to market conditions in a disciplined manner to enhance the long-term value of our company.
Looking ahead. We expect a solid finish to our fiscal year and we have a positive outlook for the housing market over the medium to long term.
Jessica Hansen: Thank you to the entire DR. 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,
Jessica Hansen: On your phone at this time.
We do ask that while posing your question, please, pick up your handset if you're listening on speaker phones to provide Optimum sound quality
Jessica Hansen: Once again, if you have any questions or comments, please press star 1 on your phone.
Speaker Change: Your first question is coming from Alan Ratner. From zelman and Associates. Your line is live.
Alan Ratner: Hey, guys. Good morning. Uh, congrats on the really, uh, strong results in a
Challenging Market, uh, really impressive. Um, first question, you know, on I guess on the incentives first, um, you know, you got it for an uptick here in the fourth quarter, just curious, if you can kind of talk through how incentives have trended through the quarter and and into July, and you know, how much of that increase is is based on competitive pressures, you're seeing from other builders in terms of trying to match them to maintain a certain sales, Pace versus you going out and, you know, trying to accelerate the the level of activity a little bit. And and what I'm looking at specifically, is your start pace, which which did increase, you know, pretty, pretty meaningfully sequentially in in the fiscal third quarter.
Yeah, Alan. Uh, you know, I think the incentives throughout the quarter were a bit choppy. Uh, and, uh, you know, we've responded to the market. Uh, and, you know, in terms of competition, that that kind of flows Market to Market, uh, you know, we uh, look to maintain and and, uh, we're able to exceed, uh, our, uh, our guidance on closings. And that really comes from our operators at a community level managing their incentives to drive, uh, that
Alan Ratner: Result. Uh that being said, uh, you know, as we work through uh the end of spring and deep into this. Uh summer selling season or incentives, have increased some to maintain our Pace uh which is going to allow us to maintain our guidance uh at 85 to to 855,000 for the year. So uh, feel good about our position so far in the quarter and while it starts increased in the second in the quarter, they were basically aligned trailing 6 months starts, and trailing 61 sales were almost the same number.
Alan Ratner: Kind of bringing those back in alignment.
See, it pulled back quite a bit in the first half.
Alan Ratner: Um, second.
Speaker Change: Sorry, big changes, but if I look at some of the disclosures you gave on the mortgage side, looks like the average FICO score of your buyers down about 5 Points here over a year. It's it's the lowest it's been in in quite a while, you know, LTV combined ltvs, ticking higher as well. So, um, just any commentary you can give on this the strength of the consumer today. And, and if you are seeing any impact at all from student loan repayments, uh, resuming and and being reported to the Credit Agencies, thank you.
Speaker Change: We're seeing more of our buyers selecting FHA product and we're, we've probably been very heavily incentivizing that FHA product offering at 399, probably our most attractive interest rate on the FHA. So that's LED more buyers to select that program. Not seeing a lot of impact at this point on the student loan, um, area,
Speaker Change: Great, thank you very much.
Thank you. Your next question is coming from John lavallo from UBS. Your line is live.
John Lavallo: Good morning, guys, thanks for taking my questions. Um, so the fourth quarter, gross, margin Outlook of 21 to 21 and a half is, is, you know, similar to what you put out there for the third quarter, which you obviously beat by 30 basis points. Um, curious on that beat, was that just a little bit more volume than you expected. Um, you know, what sort of drove the beat. Um, and then, in terms of the fourth quarter guy, is it really just the incentive load that or or the potential incentive load? That could drive that lower? Or are you seeing anything changed in terms of, you know, stick and break or land cost? Things of that nature?
John Lavallo: Yeah, John in the third quarter as, as Paul mentioned, our incentives were a bit choppy during the quarter. So as you know, a quarter ago as we looked into, uh, Q3 we were, we were seeing, you know, the potential for needing to increase incentives through the quarter as it turned out. Um, it was it was a little more balanced and and we'd it it didn't impact the, uh, the closings in the margins quite as quickly in the quarter as we anticipated the quarter ago. So some margins were flat but we still as we sit here today CA trend of higher incentives, our recent sales uh and are currently our sales and and backlog do reflect the higher cost of incentives and so the closings that we see into July August September. We do expect margins to, to take that step down that we had previously anticipated would occur in Q3
John Lavallo: Understood and then, you know, it was good to see the the share repurchase authorization um or or the the Assumption raised from about 4 billion to 42 to 44. I mean, what sort of drove the decision to uh, you know, to move that higher.
John Lavallo: And so we've had the room to be able to devote a bit more Capital to the share repurchase this year, obviously, with where our share price has been, we feel like the valuation is attractive and so we're taking advantage of that uh, during uh, during this time. And so the, the the step up, uh, in the annual level is really just still within, uh, our our target range for our balance sheet.
Speaker Change: Okay, makes sense. Thank you, guys.
Speaker Change: Thank you. Your next question is coming from Stephen Kim from evercore isi, your line is live.
Stephen Kim: Yeah, thanks a lot, guys. Um, I just want to say, I mean I think that grows margin guide is a lot better than uh, many had feared. So, uh, uh, we're we're pretty excited about that. Um, I want to talk about your sgna, uh, to start off with you had pretty good, uh, or strong overhead control. I kind of beat you up about that last quarter, a little bit because it was high was wondering, was there anything unusual in the quarter? Um, this time. Uh, and then from a long term perspective is kind of the mid 7s, uh, still a kind of a good long-term Target for sgna. Uh, and then finally on sgna, I think you would said previously, that sgna is kind of sensitive to ASP. And so with your ASP, uh, your average selling price coming down, should we expect this to put some near-term pressure on your sgna? Thanks.
Stephen Kim: Sure. Steve um the bead on sgna is is really a function of closing higher closings volume. Even though our ASP was down, our, our closing did exceed our expectations, in terms of where we expect our sgna to be over the long term. I do think 7 to 8%, somewhere in that range. Um, you know, we're a ways away from that on an annual basis right now, to your point when we have significant price appreciation, say back in 2022, that does really good things for sgna leverage.
Stephen Kim: Um, so our sgna improvement from here on an annual basis, is probably going to be pretty gradual, um, but we would expect to continue to, to make improvements in that in the future years.
Speaker Change: Yeah, I appreciate that. Jessica, I do, I do. Uh, I do. Um, I do note though that your, um, actually, hold on. Sorry, I'm having some tech issues. Um, I do notice that your closings while they were a little better than maybe, uh, what you thought. They, um, you, you actually performed quite well, um, given that, uh, you know, things on a year-over-year basis, uh, were still, um, uh, down, uh, you know, in terms of closing so. So, um, it seems to, you've got a good control on your sgna. Um,
Speaker Change: The second question, I had regards your Roe. Um, and your cash conversion. I think you had said, uh, when we last met that you were targeting cash, flow conversion, and maybe a 100% uh, which I think some folks have had a little bit of difficulty getting to and and, and uh, you I think, uh, we're kind of in, we're kind of looking to see what could get your row.
Speaker Change: We hire then, you know, or up to near 20% longer term, both of those seem to speak to maybe some changes on the balance sheet, um, and I wanted to talk to you, or have you talked a little bit about what your longer-term goals are with respect to your balance sheet, should we be expecting, uh, inventory or maybe rental or maybe 4-star or something, you know, in, in, in, in that realm that would, uh, that you would make changes to that would enable your Roe to sort of get a boost. Um, and then maybe also, uh, if you bring some inventory levels down that that might also lead to Stronger, cash flow conversion, maybe if you could just sort of opine, a little bit on on those 2 uh points, Roe, going higher potentially and also your cash flow conversion. Thanks
Speaker Change: Uh sure thanks Dave uh we are in position to uh generate much more consistent, uh cash flow, yield and cash flow conversion. Uh, going forward. Uh, today we believe with we're we're our platform is set up where our balance sheet is. Uh, as I mentioned earlier, we're in our target range for for leverage and liquidity. So we don't see major changes on that side of the balance sheet. Uh, going forward. Uh, we are very focused on inventory efficiency and, uh, improving inventory, efficiency. Uh, throughout all aspects of our operations. In terms of our land Holdings, our, our ownership of of, of finish Lots, uh, and then our, uh, homes and inventory and our inventory turns there we are very focused on continuing to improve those turns. And and so with that that we we do expect we are setting.
Speaker Change: in the past and the key to maintaining a an Roe up close to that 20% is to to have a cash flow, yield of north, north of 10%, uh, with with strong inventory, efficiency,
Great. That's really helpful, guys. Thanks very much.
Speaker Change: Thank you. Your next question is coming from Matthew Bully. From Barclays. Your line is live.
Matthew Bully: Uh good morning everyone, thank you for taking the questions. Um I wanted to ask on the community count thing, you said it was up uh 4% sequentially and and up 12 year over year. So uh curious if at this point if you can give any kind of directional color or quantification on on how 2026 May shape out, just kind of giving where you'll be, uh, entering the year. Um, and are you? I don't know, are you extending out or phasing out communities? Anything along those lines to to kind of manage some of that Supply growth? So yeah, just kind of early 26 expectations and any changes on kind of how you're managing uh that that pace of new community openings, thank you.
Uh, Matt you would do expect our community count to, uh, to moderate some, you know, it's been, uh, double digit uh, for, for a bit now. And we do expect it to drift back down into uh uh the mid to high single digit and then and then to kind of mid. Uh you know, we have opened a fair amount of markets. We've got another 4 markets uh out there and you know, that Community count tends to tends to accelerate when we get out into those communities.
Before they start to produce, uh, at a higher level of absorption per Community, uh, we feel really good about our footprint about the, you know, the progress we've made in the new markets that we've opened. So not concerned about the level of community of count we have and, and our operators have done a great job of managing their inventory, uh, throughout our communities. And we certainly watch that closely, uh, responding to the absorption. They're getting Community by Community. Uh, our uh, total specs and completed book are completed. Specs have come down, uh, as we expected to, and we expect that to continue into the fourth quarter. So, uh, feel good about that. But we do expect to see moderation in community count as we move into 26.
Speaker Change: Okay, got it. Thank you for that. And then, um, secondly, your your peer this morning spoke about, um, maybe towards the end of June. When rates came down a little bit seemed like there might have been a bit of a positive response from from buyers, um, and I'm obviously paraphrasing what they said but it sounded like then July was a little bit choppy. Um, so just curious kind of what what you guys were seeing around, you know, sort of the rate volatility and into the holiday and and now into the, you know, early part of Summer just to how are you guys been seeing traffic Trends? These past few weeks. Thank you.
Speaker Change: You know, it's it's really, it has been choppy and that choppiness can be based on rate or the noise that you see in the new cycle these days. And uh, you know what, we have been pretty consistent with the rates. We've been offering in the market and, uh, because we, uh, have great relationships with our Realtor Community. They understand what we're offering in the market. I think that we have been able to maintain uh you know, across our footprint in the communities uh that have been performing. Well uh, have continued to and so far we've been uh on track and pleased with what we've seen into July.
Speaker Change: You know the incentives are up as we've spoken to you. That's why we guided to a uh to a a little lower gross margin into the fourth quarter. Uh but so far seems to be doing okay. As far as driving traffic in the incremental sales, we need
Got it. All right. Thanks Paul. Good luck guys.
Speaker Change: Thank you. Your next question is coming from Sam Reed. From Wells Fargo. Your line is live.
Third-party broker relationships really quickly. Um I believe you're somewhat unique in that. You embed third-party broker Commissions in gross margin so just curious if you had any color on broker attach rate and
Speaker Change: The uh, the rate you're paying those Brokers, this quarter and whether there was any step change in that number, I believe 1 of your large competitors, you know, has been moving deeper into third-party broker relationships. So curious, if you've had to respond to that.
We've seen, you know, always had a long-term, very good relationship with the brokerage community and I think we are still north of 80% with our broker attachment rate to our transactions. And, you know, we love it that they bring us a qualified buyer and they're only paid, you know, when the home closes
Speaker Change: and so we we continue to maintain strong relationships that have been part of our operating model for a long time. And, and I envisioned, it will be for for a long time.
Speaker Change: Builders that that recorded differently.
Speaker Change: No, that's very helpful. And then you you've alluded a few times so far on the call to hire sequential incentives in the fourth quarter. And it's definitely a very topical today. Um, could you just talk to the composition though of those incentives that you're embedding in that fourth quarter, gross, margin guide? Um earlier in the call I think you mentioned you're leaning more into FHA into that end you know kind of would it be reasonable to assume that perhaps some of that lower sequential on gross margin could be a function of more buyers utilizing that 3.99% buy down and then on that 3.99% rate, you know we've seen it in several markets across our checks but just curious the uptake on it. Or do you think it's more of a traffic driver versus something to buy or actually ends up going with? Thanks
Speaker Change: Yeah, the the 399 rate where we have it is, is largely a traffic, uh, driver and its Community specific. I mean, I was in a division last week where they were offering everything from 3.99 to know BFC, no rate incentive just Market, because they had solid strong consistent demand at the pace. They expected in that Community. Uh, you know, I think our average rate in backlog Andor on closings was just over 5%. So, uh, you know, we really do have a range of incentives out there, uh, including multiple programs whether that's for, uh, a buyer that needs no money down or a special, uh, arm, which has taken a little bit better. Hold, uh,
Paul Romanowski: You know, so our our operators have done a great job of managing that rate incentive but by and large that is the key incentive that has been driving uh, sales for us. Um, and that's the biggest component of the incentives, uh, that we're seeing in our mix. I think we've talked to the 1 to 1 and a half points below Market. Pretty consistently last quarter, we were pretty transparent about. We were probably closer to the 1 and a half on average, which is what the just over 5% Paul mentioned. Um, would incorporate
Very helpful. Thanks so much. I'll pass it on.
Thank you. Your next question is coming from Eric bossert from Cleveland research, your line is live.
Good morning, uh, 2 things. Uh, first of all, I'm just curious from a, a stick brick and land
Eric Bossert: where that is in terms of inflation and where you expect that to go from here.
Eric Bossert: If so, on a year-over-year basis, we saw, um, a nice decline in our sick and brick costs on a per square foot basis down about 2% sequentially, that was down about 1%. Um, and then on the lot cost side, we did see the moderation. Um, you know, it's only been 1 quarter so we'll see what happens next quarter. Um, but we've talked about that moderating for some time. And so our lot cost was up a mid single digit percentage year-over-year, and it was slightly just ever so slightly down to sequentially.
uh, from a a lot cost perspective is
Eric Bossert: Is there anything that you're doing to influence this? Is there anything different in the market that you're seeing, uh, that suggests the path for that forward can be a bit of a flatter curve than we've seen.
Eric Bossert: I, I think some of that is mixed, uh, you know, uh, down 1% quarter. I wouldn't expect that with consistency. Uh, you know, we really haven't seen a significant shift in the land market. Uh, you know, people have pulled back, uh, on purchases, and delayed purchases and more, uh, from the land market negotiating terms and timing of those terms, you know, there certainly are some opportunities out there, but not to the extent that we would expect given uh, the mix of lots that we have across our whole portfolio. Anything that's going to change. Uh, those live valuations significantly in the coming quarter.
Speaker Change: And then the second question from a a product or Price Point. Uh, anything that you're seeing change, it was a quarter where you spoke to things were better than expected. I'm just curious from a, a product mix perspective if there are areas of incremental outperformance or underperformance,
Speaker Change: I think we continue to see strong adoption of some of the smaller plans. We've introduced across our markets. Probably not having a a meaningful material impact on the overall Consolidated results yet. But we're encouraged by how some of that smaller products been well received in the market and the utility is providing for the buyers.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Your next question is coming from Trevor, alanson from Wolfe research. Your line is live.
Just can you talk about how you feel about your completed inventory levels, currently? And is there a Target level? For each of those numbers. You'd like to be at as you exit your fiscal year.
Speaker Change: Uh, we we feel very good about, uh, where we are in the progress that, uh, We've made in reducing our specially. Our completed spec count. We do expect that to continue uh, to lower uh, given our cycle times and continued Improvement in cycle times. We just don't need to carry as many, uh, spec homes, uh, to generate, uh, the closings that we're looking for in the quarter and as we look into, uh, 26. So we would expect that to continue to Trend down, uh, don't have a specific Target. Uh, we're going to respond to the market and make sure that we are starting homes. Uh, largely in sync with our sales Pace, uh, into the fourth quarter as we prepped for, uh, fiscal 26.
Speaker Change: Okay, makes a lot of sense. And then uh second question is just your views on resale inventory, in the markets you operate in, we've heard a lot of Builders talk about retail inventory, not being very competitive with new homes. At the same time we've seen a pretty notable rise in recent inventory, since really the middle of last year coincided with some overall, demand weakness. So are you seeing more competition there from resale inventory? And if so, could you rank where that stands in terms of headwinds, uh, and context of affordability and sentiment issues? Thanks.
Speaker Change: In the conversations, I have with our sales, folks. And our models, I'm not hearing resale as being a big push back from us or that we're losing comp customers to resale inventory. That housing stock is generally quite a bit older than it otherwise would have been because it sat dormant for a while and was not brought to Market plus some of the interest rate incentives are not nearly as compelling um that are being offered by the resale owners and um you know, it's still
Speaker Change: A very attractive position for buyers, especially new home buyers to come. Look at new home comp new home construction.
First time home buyers, look at new home construction.
Speaker Change: Thank you for all the color and good luck moving forward.
Speaker Change: Thank you. Your next question is coming from raphe Jed rosich, from Bank of America. Your line is live.
Rafe: Hi, hi. Hi. Good morning. It's, it's Rafe. Thanks for taking my my questions.
Rafe: I wanted to ask just when you compare the performance in the larger markets that you operate versus some of the smaller markets, maybe where you have more private competition, is there a big difference and what are you seeing from the the the the private smaller home? Builders
Rafe: I, I would say that, uh, you know, throughout this fiscal year, we've seen more consistent, uh, performance, uh, to budget or to planned, uh, absorptions from the markets that are smaller, uh, where we operate mostly against the, the private Builders with maybe, uh, a public or 2 in those markets. Uh, and, you know, those are the markets that uh, largely, we have entered as well over the last several years and our teams are just starting to build out their teams and uh, catch their stride, and their communities and performing at a good level. Uh, you know, I think as you look at the larger markets, uh, there certainly is, uh, competition though. It has been, uh, which we're happy to, to play in that space, uh, and operators doing well in those as well. But I think if you look at comparison to plan, uh, we're seeing a little better performance this year, in the markets, the secondary markets and markets, where we have less public Builder competition.
Speaker Change: That's interesting, then thank you. And then uh in terms of um the the land cost impact, I think the last couple of quarters some, uh, there was some, uh, lot cost pressure from from mix and this quarter. It was a, it was a Tailwind if we were to sort of normalize for that, what are you seeing for sort of, underlying lot cost and inflation? And just giving some of the softness in the market more recently? Like when would that sort of underlying Trend, when is there an opportunity for that to sit on Lower?
Speaker Change: I think in the in the near term we would expect to continue to see you know mid single digit inflation in our lot cost. I mean it it's kind of a flow of inventory that's going through there. So the homes we closed over the next 12 months are pretty much on lots that are identified costed and largely owned by us today. You know, going forward, if we continue to see a little bit of softness or changes in the marketplace and that results in changes in land and development costs, we expect to see relief from that inflation going forward. But that would be, you know, several quarters out in 40 that inventory came into production and closings.
Speaker Change: Thank you, that's helpful.
Speaker Change: Thank you. Your next question is coming from, Michael rehat from JP Morgan. Your line is live.
Michael Rehat: Great. Uh, thanks for taking my questions, appreciate it. Um, first, I I just wanted to Circle back and make sure fully appreciated or understood the trends around incentives during the quarter and, um, how they've progressed year to date and, and how you're thinking about them in the back in the next quarter or 2.
Michael Rehat: um, you know, you know you're you're
Michael Rehat: 1 of your competitors. This morning talked about incentives. Now up each of the last 2 quarters, 70 to 80 bips on average, uh sequentially. Each of the last 2 quarters. I was wondering if you were seeing any type of similar Trend at least on average. I know obviously Market by market of varies a lot
um, and if you would expect incentives to continue to rise over the next quarter or 2,
Michael Rehat: Like, I don't think we've Quantified our incentives other than talking about them in a high single digit percentage range. I mean, obviously, if it's netting against revenue or it's in cost of sales, it all falls out, and gross margin, which is why you hear us continue to focus on on that forward-looking data point. Um, and we did, as we said, um, start to incentivize more heavily here over the last couple of weeks, um, to drive what we're trying to achieve for the full fiscal year. And so, we do expect, you know, at the midpoint of 50 basis point decline in our gross margin from Q3 to to Q4.
Michael Rehat: Okay. No I appreciate that and I guess you know secondly um anything that you know maybe is offsetting
Michael Rehat: Um, that rise in incentives that that you saw this past quarter going into next quarter. Obviously this quarter, um still came in above a little bit above your guidance next quarter down. 50 bits is not not anything too, too material relative to perhaps some more bearish uh concerns out there. So anything on the Tailwind side that that you can kind of put your finger on that that's offset. Some of those headwinds um be it you know costs or even tariffs or other areas of the uh uh uh uh of of of the construction cost basket.
Michael Rehat: I mean, we have seen slight um improvement in our, in our stick and brick costs. And so that is a, a partial offset, uh, you know, but our commentary really over the last year, has been that incentives have been increasing. That's been the main driver for the gross margin decline over the last year. Um, our our operators are, are striving every day to to strike the best balance between hitting pace and, and and maintaining margin um, in each uh, Community to maximize returns. And so they're, they're using all the levers, they have, um, with incentives to, to try to balance that. And so we have seen the pace of incentive costs increases. And the
Michael Rehat: Pace of margin decline, moderate a bit over the last couple of quarters and then this quarter had held still flat sequentially. But the trend is still pointing towards uh a bit higher incentives and and we don't see significant offsets to that though. We will continue to work on uh, work on costs. Uh, on the construction side,
Great. Thanks so much.
Speaker Change: Thank you. Your next question is coming from Mike doll from RBC your line is live.
Mike Doll: All right, thanks for taking my questions. Um, so if we think stick with the cost side of the equation, I mean, we may or may not be in a position to kind of refine views on tariff duties, all that fun stuff.
Speaker Change: Mike, did we lose you?
Sorry, can you hear me?
Speaker Change: Yeah. Um we cut out after fun stuff.
Speaker Change: All the fun stuff around tariffs and uh, and potential labor Dynamics. You guys, you guys giving your position in the market and and your breath have a good holistic view of things like that. Can you just give us your your sense of um, as we've kind of refined as
Speaker Change: As all the headlines come out, you know, obviously this would impact your your fiscal 25. But when you think about costs,
Speaker Change: Uh, for construction next year on Sticks and Bricks and then availability of Labor. Um, how are you thinking about things?
Speaker Change: Have the support, we need to get our homes built and, uh, you know, given those efficiencies, we do expect to continue to see, uh, reductions in stick and brick over time, some of that is from design and efficiency of the product, uh, that we're putting in the field. Um, and uh, some of that is just from the efficiency of our operations and from the competitiveness from the labor basis in out there today
Speaker Change: Okay. Um, and then shifting gears. Um, you know, you had a healthy result in terms of kind of Step Up in in rentals, uh, both revenue and profitability. I it's still pretty Dynamic Market out there. Uh, so can you just, um, help us understand some of those moving pieces working together in 3Q? How you're thinking about the next couple of quarters given the, um, you know, the backlog that you've got on the rental side?
Speaker Change: Yeah. You know, we have the backlog of identified properties that are that are in line to sell. Um, we we did see a bit of a step up there in the in the revenue there. This quarter a little bit better margin on those uh, that that market is still um, uh experiencing, you know, a lot of transition, you know, in the higher rate, environment and cap rates that have changed over the last few years. And so uh, so we're we're working on each 1 of those projects. So working them closer to to sale and uh uh that that is 1 element of our margin guide as we look to Q4, uh, we would expect. Um, while revenues, may still be, you know, in the same ballpark,
Speaker Change: Are better than where it was this quarter. Um, we do expect margins um on the sales in Q4 to be lower in the rental segment than they were in Q3
Got it. Okay, thank you.
Speaker Change: Thank you. Your next question is coming from Alex ryal from Texas Capitol Securities. Your line is live.
Speaker Change: Thank you. Uh, geographically. Can you comment on a demand Trends and and highlight the outliers?
Speaker Change: We typically don't go into a whole lot of geographic discussion. It's kind of a roll up of everything we're doing and and we see, you know, some of the same National Trends. I would say, you know, you see with others and in the resale markets, there's been a lot of of a change in the dynamic of the Florida markets and perhaps most. So there um other markets continue to be consistent performers where there's been limited inventory and limited development of lots and housing production continues to see strong demand in those markets. Our supplemental
Speaker Change: data presentation will include our sales and active selling Community detail, again, that gets posted after the call. So you'll see on the sequential basis. There's there's really no outliers outside of the Northwest sales. Um, we're a little bit lagging, um, and I think we attribute some of that just to, to the tech buyer and and what's going on with, you know, potentially uncertainty of of the job market and whatnot and the Pacific Northwest. But otherwise, you know, we saw a, a decent increase. Um, at least on a sequential unusual, seasonal basis.
In our sales, um, which was a positive?
Speaker Change: and real quick could you talk a bit about your lower your low cancellation rate, what it's telling you about the economy, consumer confidence and and by our credit quality,
You know, at at the rate that we're seeing, which is kind of below our historical average, is that the buyers that are out there and our FICO score at what a 720? Uh, even even with a transition to FHA rate, I think some of that transition is people taking advantage of the lower rates that we can offer, uh, with a rate buy down. But, uh, uh, you know, people are having to work to get there. And, uh, as we introduce smaller products, and continue to try and reduce our ASP to expand into that buyer base. We certainly have to go through the process of of working through credit, but our teams do a very good job of that. And our mortgage company, doesn't exceptional job of working with those buyers to get them uh, to get them in a position to uh, close on their home.
Speaker Change: During the quarter, over 12,000 of our customers, were first-time home buyers. And so they people that have worked very hard to get on the home ownership ladder. And, you know, we're very proud of this company that we're able to make that happen for so many families, quarter, after quarter after quarter.
Speaker Change: Thank you. Your next question is coming from Alex Barron from housing Research Center, your line is live.
Yes, good morning. Um I'm sorry if I missed uh, if you mentioned the the build time but can can you repeat that? Um and is there any particular initiatives to try to lower that you know such as um you know, more more in-house.
Labor or or manufacturing, you know trusses or any of that kind of stuff.
Speaker Change: And a very strong trade-based is very supportive of us, so we don't feel the need to internalize any of that and take on that additional uh, Challenge and risk at this time. Uh, we've seen, uh, sequential reduction in that cycle time, you know, over a couple days. And then, 2 weeks over last year, we're sitting, right? Uh, uh, where we want to be 3 months, which is below our historical Norms. Uh, I would not expect to see a significant decline over the next 12 months, uh, but teams are very focused on on, uh, maintaining that and gaining Advantage where they can on cycle time.
You got it. What, what about um efforts to drive? You know, greater affordability, such as
Speaker Change: Smaller lot sizes or smaller floor, plans any initiatives on that front?
Speaker Change: I think, I think both of those, uh, Alex, you can look at our, uh, average square footage and it's declined, consistently, uh, over really the last 24 months, I would expect that to continue some, uh, and, you know, the key to affordability in this country is to provide, uh, a smaller home site, uh, with a, a smaller home that meets the, uh, uh, the ability of our buyers to, uh, close on their home and meet some monthly payment that fits what they're looking for. Uh, we just need a little extra help from local governments to allow us to achieve that, uh, really across across the us, but that's an opportunity that we we continue to explore every day. All right.
Speaker Change: Average square footage on homes. Close was 1,956, which was down 1% from a year ago, which has been just a very gradual decline. Um, but we're down in The Last 5 Years, a high single digit percentage on our average square footage. So we expect that just gradual trend of the average shrinking to continue.
Speaker Change: Okay, great, good luck for the rest of the year. Thank you.
Thank you. Your next question is coming from Jade ramani from KBW. Your line is live.
Jade Ramani: Very much, can you discuss what you're seeing in the market in terms of home prices, uh, across the board? Uh, if you could quantify any, you know, range of price decline, you're seeing and also, you know what, you might expect going forward.
Speaker Change: We focused predominantly on.
Speaker Change: That doesn't mean you won't find places where on select houses and select communities, we are making actual base, price, reductions. Um, that's generally much more targeted, though. Um, in terms of on completed aged inventory,
Speaker Change: And are you seeing competitors? Um, with your product uh, primarily new home, builders but also in the existing Home Market, uh, cut price
Speaker Change: I think competitive pressures across the board. You know in any given submarket we're seeing some competitors cut price or resale cutting price and our local operators respond to every 1 of those Dynamics on a weekly basis. And we're still seeing, you know, sales spaces in line with the targeted goals for those communities, you know, at the right margins to drive the returns we're looking for. So it's going to be a competitive thing. We deal with neighborhood by neighborhood and and trusting our local operators to meet their Market week to week to week. And we do generally see though by and large Builders are much more rational today. You can look at, you know, another competitor's results, this morning and I think most Builders today are taking
Speaker Change: Balanced approach, um, as it relates to, to pace and price and not just slashing prices across the board. Um so we're we're happy to see the rational approach that that the industry is is taking today.
Speaker Change: Thanks very much.
J. McCandless: Thank you. Your next question is coming from J. McCandless from wedbush, your line is live.
J. McCandless: Hey, good morning 1, thanks for taking my questions. Um an apologies, I missed this, but did you all have any comment on the the Canadian softwood? Lumber agreement? What gross margin impact that might have on Horton.
Speaker Change: No, we haven't commented on it and it will have some potential impact, but we've not quantify that. I know it is a significant step up in the Tariff rates, I think going to affect next month. But uh you know, we're buying some percentage of that would. And if some substitutionary product that would be available as well, based on where that price pricing ultimately, Settles
Okay. Um, and then the second question and and I'm sure you guys addressed this earlier but um,
Speaker Change: Just to give people a sense of how you might be able to hold that gross margin into the fourth quarter.
Speaker Change: Uh, is is a credit to our our teams out in the field managing week to week, uh, their flow on on buyers and sales and traffic that they need to achieve, uh, their goals for the quarter. And uh, you know, we, we were able to outperform which honestly was a surprise to us relative to our guidance. Uh, but you know, we we do expect to see, uh, a step down in, in margins as to our guide of of 50 basis points. As you look into this quarter, we'll be happy to be pleasantly surprised. If that occurs again, this quarter, but uh, it's very early in the quarter, to be able to tell where that's going to land, uh, 54% of the homes that we close this quarter were sold in the quarter so we still got a long way to go in this quarter to see uh uh how the margin plays out by by quarter end.
Speaker Change: Okay, great. And then the last 1 I had, did y'all give any color about fiscal 26 Community growth, or, or how you expect that to trend?
Paul Romanowski: Yes. Um, Paul mentioned that it it should ultimately moderate. Um, it's been a low double digit percentage on an annual basis, or excuse me, on a year-over-year basis for a while. Um, and we would expect that to moderate to the high single digit and ultimately, probably more like a mid single digit Community, count growth going forward.
Speaker Change: Okay, great. That's all I had. Thank you.
Speaker Change: Thank you, that concludes our Q&A session. I'll now hand the conference back to, Paul Romanowski for a closing remarks, please go ahead.
Paul Romanowski: Thank you, Matthew. We appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter results, on Tuesday, October 28th. Congratulations to the entire DR. Horton, family of producing a solid third quarter. We are honored to represent you on this call and greatly, appreciate all that you do.
Paul Romanowski: Thank you, everyone, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.