Operator:

Good morning, and welcome to the Third Quarter 2024 Earnings Conference Call for D.R. Horton, America's builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the former presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

David Auld:

Thank you, Jessica, and good morning. Before we discuss our results, I wanted to take a moment to pay tribute to our Founder, Don Horton, who passed away in May. Don was an incredible man with an unstoppable drive and work ethic that established the foundation and culture of our company. D.R. Horton, the Company would not exist as it does today without Don's tireless pursuit to help as many Americans as possible achieve the dream of home ownership. This simple mission has driven us from the first home that Don built, sold and closed himself more than 45 years ago through the more than 1 million homes our company has provided for families across the country. We are thankful for Don and we and all D.R. Horton employees are beneficiaries of his life's work. Along with our homeowners, customers, contractors, suppliers, land sellers, real estate brokers, and everyone else, Don included, in his family. It is bittersweet to be talking about the company's results publicly for the first time since his passing. Don took great pride in the company's growth, profitability, and shareholder returns, which have been at the top of all public companies in America for the past decade. We will work every day to preserve this legacy and continue to build upon it to improve our operations and the value of our company. We would also like to thank the countless people who contacted us to share their condolences and memories. We received hundreds of messages from employees across the country, and we heard from many industry leaders of other home building companies. Our suppliers, lot developers, bankers, and so many more. On behalf of Don's family and our company, we thank you for the kind words and tributes to a remarkable man. He will be missed. Now I'll turn the call over to Paul Romanowski, our president and CEO.

Michael Murray:

Earnings for the third quarter of fiscal 2024 increased 5% to $4.10 per diluted share compared to $3.90 per share in the prior year quarter. Net income for the quarter is $1.4 billion on consolidated revenues of $10 billion. Our third quarter home sales revenues increased 6% to $9.2 billion on 24,155 homes closed compared to $8.7 billion on 22,985 homes closed in the prior year. Our average closing price for the quarter was $382,200, up 2% sequentially and up 1% from the prior year quarter. Bill?

Jessica Hansen:

Our gross profit margin on home sales revenues in the third quarter was 24%, up 80 basis points sequentially from the March quarter. Our gross margin was better than expected, primarily due to lower incentive costs than in the second quarter. On a per square foot basis, home sales revenues were up 2% and stick and brick costs were down 1% in the quarter, while lot costs increased approximately 2.5%. For the fourth quarter, we expect our home sales gross margin to be similar to the third quarter. Further out, our home sales gross margin will continue to be dependent on the strength of new home demand, changes in mortgage rates, and other market conditions. Bill?

Paul Romanowski:

We started 21,400 homes in the June quarter and ended the quarter with 42,600 homes in inventory, down 3% from a year ago. 26,200 of our homes at June 30th were unsold. 8,800 of our total unsold homes were completed, of which 990 had been completed for more than six months. For homes we closed in the third quarter, our construction cycle times improved slightly from the second quarter, bringing us below our historical average cycle times. Our faster construction and housing terms allow us to manage our homes and inventory more efficiently. We plan to maintain a sufficient start pace and homes in inventory to meet demand, while remaining focused on improving capital efficiency. Mike?

Paul Romanowski:

In the third quarter, our rental operations generated $64 million of pre-tax income on $414 million of revenues from the sale of 790 single-family rental homes and 610 multifamily rental units. We continue to operate a merchant-built model, in which we construct purpose-built rental communities and sell them to investors. Our rental operations provide synergies to our home building business by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and land parcels. Our rental property inventory at June 30th was $3.1 billion, which consisted of $1.1 billion of single-family rental properties and $2 billion of multifamily rental properties. We expect our total rental inventory to remain around the current level for the next several quarters. Jessica?

Michael Murray:

Financial services earned $91 million in pre-tax income in the third quarter on $242 million of revenues, resulting in a pre-tax profit margin of 37.7%. During the third quarter, essentially all of our mortgage company's loan originations related to homes closed by our home building operations. And our mortgage company handled the financing for 78% of our buyers. FHA and VA loans accounted for 56% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 725 and an average loan to value ratio of 88%. First-time home buyers represented 57% of the closings handled by a mortgage company this quarter. Bill? Bill Wheat Our balanced capital approach focuses on being disciplined, flexible and opportunistic to sustain an operating platform that produces consistent returns, growth and cash flow. We have a strong balance sheet with low leverage and significant liquidity which provides us with the ability to adjust to changing market conditions. During the first nine months of the year, our consolidated cash provided by operations were $228 million, and our home building operations provided $972 million of cash. At June 30th, we had $5.8 billion of consolidated liquidity, consisting of $3 billion of cash and $2.8 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.7 billion with $500 million of senior notes maturing in October, which we expect to refinance. Our consolidated leverage at June 30th was 18.8%, and we plan to maintain our leverage around or slightly below 20% over the long term. At June 30th, our stockholders' equity was $24.7 billion, and book value per share was $75.32, up 18% from a year ago. For the trailing 12 months ended June 30th, our return on equity was 21.5% and our consolidated return on assets was 14.8%. During the quarter, we paid cash dividends of $0.30 per share, totaling $99 million. And our board has declared a quarterly dividend at the same level to be paid in August. We repurchased 3 million shares of common stock for $441 million during the quarter. Our fiscal year-to-date stock repurchases through June increased by over 60% from the same period last year to $1.2 billion, which reduced our outstanding share count by 3% from a year ago. Based on our strong financial position and expectation for increased cash flows, our board recently approved a new share repurchase authorization totaling $4 billion. Jessica?

Paul Romanowski:

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and focus on affordable product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth, and cash flow, while continuing to aggregate market share. We have significant financial flexibility and we plan to maintain our disciplined approach to capital allocation by providing consistently high returns to our shareholders to enhance the long-term value of our company. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued efforts and hard work. This concludes our prepared remarks. We will now host questions.

John Lovallo:

Good morning, guys. Thanks for taking my questions. The first one is, absorptions were somewhat worse than normal seasonality I would suggest. I know there's been some noise in normal seasonality over the past few years. But margin was 50 basis points above the high end of your outlook at 24%. So I guess the question is, did you guys focus more on profitability per home versus maintaining the sales pace, maybe as rates rose in April? And along those lines, absorptions tend to decline, call it, 15%, maybe a little bit more percent quarter-over-quarter in the fourth quarter. How are you thinking about this kind of the seasonality in the fourth quarter?

John Lovallo:

Got it. Yes, it was a good outcome. And then maybe the next question is in the Southeast, which obviously encompasses Florida and South Central, which has Texas in it. Orders were a little bit lighter than what we were looking for. And I think when we spoke in the quarter, Paul, it seemed that the pickup in existing home inventory in those markets was characterized as more of a normalization than a glut. I think the thought was that the age of the existing housing stock and the price points just weren't that competitive with DHS product. How are you thinking about existing home inventory in those two markets specifically today? And did higher inventory negatively impact the orders in the quarter? Thank you.

John Lovallo:

Great. Thank you guys.

Carl Reichardt:

Thanks. Good morning, everybody. Once again, for me, as I expressed to you all privately, my condolences on [DRS] (ph) passing. I'm really very sorry for your loss, and the industry's too. So that said, John took one of my questions, but I wanted to ask about inter-quarter sales and closings. I think it was over 50% last quarter. I'm curious what it is this quarter. And given that you're back to really normalized cycle times and you've got a good amount of inventory heading into Q4 and into next year. What's your guess sort of long term as to sort of the sales closings inter-quarter level is going to be on a go forward basis?

Carl Reichardt:

Okay. And then one of the elements you guys have talked about in the past, I think it's still in your deck, is this idea of getting your cash in and out of land deals in 24 months. And I'm kind of curious as you're looking at deals going forward here, obviously, we've seen entitlements, lot development times take longer and longer. Is that still realistic to expect that as you underwrite you're going to see that? And maybe what percentage of your current communities right now have hit that goal of getting your cash in and out within 24 months of those transactions. Thanks, all.

Carl Reichardt:

Great. Appreciate it, guys. Thanks.

Stephen Kim:

Yes, thanks very much, guys. Let me also echo what Carl was -- Carl's sentiments about DR. Really a great man, and it was a real pleasure to work with him all those years. I do want to ask about your cash flow commentary, which I found very encouraging, both in terms of the remaining quarter you have this year and then also your intimations about next year. I think you said you were looking to increase -- you expected or hoped to increase free cash flow next year and, obviously, deploy that maybe more towards repurchases and dividends. So just leaning into that a little bit more, your guidance has typically been around home building, operating cash flow where rental and 4 Star have kind of been offsets to that. So your consolidated free cash flow is obviously being a little lower than your -- or meaningfully lower than your home building cash flow. But you said, I think I heard you right, that the rental inventory is going to remain consistent going forward. So does that mean that going forward your home building operating cash flow is going to be much closer to your consolidated? And when you talk about hoping to increase your free cash flow, are you talking home building or you talking -- or can we say, now that's pretty much consolidated free cash flow increasing next year?

Stephen Kim:

Well, that all sounds pretty great. So thanks for that. That does also segue very nicely to my next question, which relates to your levels of spec inventory and backlog turns that we can expect. Your guidance for the fourth quarter closings implies a fairly high level of backlog turnover. And I'm wondering if you can give us a sense for what is a comfortable level of backlog turn that we can expect going forward? Is what we're seeing this year kind of -- can we expect kind of a similar level on a going forward basis? And tied to that, your spec inventory, I think you're running at like 26 total specs per community. Oh, actually, you don't report to the community. Let me put it this way. Whatever your spec levels are per community, where they are today? Is that about what we can expect on a go-forward basis, both on a total basis and on a finished basis? Or if you can give us some color there on terms of what is a target range for finished specs and normal specs and backlog turnover ratio?

Stephen Kim:

Okay. That's helpful. Thanks very much, guys.

Michael Rehaut:

Great. Thanks. Good morning, everyone. And I also wanted to express my condolences on the loss of D.R. Obviously, a great leader and visionary for the industry, and he'll be sorely missed. I wanted to start off my first question just on some of the comments you made around, I think earlier you said there was some choppiness during the quarter, obviously, with rates earlier in the quarter being a little higher. At the same time, you talked about incentives maybe being a little less than you expected and that drove the gross margin upside. I was just kind of curious as rates maybe subsided a little bit or came down perhaps to the lower end of their range that we've seen in the last 345 months, if any of that choppiness has subsided? And it appears that maybe incentives are similar as you see them going in 4Q versus 3Q, but if it's had any impact on either incentives or just more broadly demand trends as those rates have come in a little bit in the last month or so.

Michael Rehaut:

Okay. No, that's helpful and makes sense. Also maybe just along this line of questioning, in the prepared remarks you highlighted that you reduced prices and sizes of homes to a degree over, and I don't know if that was specific to the quarter, or just more broadly over the last several quarters. But we'd love to get a little more clarity around that comment, and maybe just more broadly, obviously, we can see the closing ASP and backlog ASP, but just kind of curious, obviously, there's a mix that impacts those numbers. Maybe just give us a sense of percent of homes that you've either lowered or reduced prices, and by how much? By contrast, if there's been a percent of homes or communities that where you've raised prices or sizes and how to think about the ASP for the business going forward into 2025?

Michael Rehaut:

Great, thanks a lot.

Matthew Bouley:

Good morning, everyone. Thanks for taking the questions. I wanted to go back to the comment around finished spec. I think you were clear that you were intentionally selling homes later in the construction cycle for a lot of obvious reasons. But obviously the number of finished spec did rise sequentially. Your starts did come down sequentially. I'm trying to understand if there is any kind of signal we should take from that around sort of the state of demand and with finished spec being higher, is there an implication to how we should think about margins going forward to the extent you have to clear some of that with either incentives or price? Thank you.

Matthew Bouley:

Got it. Okay, that's very clear, Paul. Thanks for that. Secondly, I noticed, you mentioned earlier in the quarter that stick and brick were down -- costs were down sequentially on a per square foot basis. I'm curious as we think about that fourth quarter margin guide of flat sequentially, I mean is the expectation that stick and brick is continuing to come down further into the next quarter? And I guess what specifically in terms of construction costs are you actually able to press down on? Thank you.

Matthew Bouley:

All right. Thanks, everyone. Good luck.

Alan Ratner:

Hey guys. Good morning. And I also share my condolences to you and to D.R.’s family on his passing of the quarter. So thank you for all the great info so far. We've heard from some other builders and also just other consumer facing companies about some deterioration, I guess, in the credit quality of the consumer recently over the last handful of months, we've seen savings rates on the decline. You guys have done a fantastic job keeping your price point low when you walk through all the drivers of that, but I'm just curious if you can provide some insight into what you are seeing from the consumer today in terms of their ability to qualify, funds for down payment, credit card debt, etc. Any color there would be great.

Alan Ratner:

That's great to hear. Appreciate that, Jessica. And second, a really positive commentary on the cash flow and capital allocation. I think that that's going to certainly excite investors. If I look at your last several years, you've been buying back around 3% of your shares each year, or at least reducing your share count by that amount. Some other builders have been a bit higher than that. It certainly sounds like you're looking to take that a bit higher here. Is there a target you could give us just to think about where that can go on an annualized basis, could you be in the kind of mid to high single digit range? I know you have the authorization in place, but it doesn't really give us a lot of insight into kind of what timing you expect to utilize that.

Alan Ratner:

Understood. Appreciate it. Thanks a lot.

Eric Bosshard:

Thanks. Two things. First of all, to circle back to the choppiness on demand relative to the movement in rates. I'm just curious how much of the orders now are using a rate buy-down? And I guess I would have thought with the rate buy-down prevalence, there'd be less visibility and influence on consumers as a result of that. Can you just help me understand that a little bit better?

Paul Romanowski:

I think there's a lot of noise in the marketplace when rates were moving and rates were moving up and that affects I think our perspective buyer behavior as to whether or not they're even going to come into the sales office and talk to us. Once they come into the sales office and they understand what's available to them, they might have had an expectation that I got to make a 7% mortgage rate work in my budget and they come in and we're able to put them in something different at a different monthly payment, it opens our eyes up quite a bit to what's possible. And so, the struggle becomes the traffic patterns. If we get the traffic, we're pretty good at conversion, but sometimes all the headline noise on uninterest rates can depress the traffic.

Paul Romanowski:

Yes, Florida has been an important market to us and we certainly continue to see in migration. People love to live in Florida, want to be there, but affordability is challenged like it is across the country. And so we've seen significant rise in prices in Florida and across the country and with interest rates sticking where they have, it's certainly taxing. And that Jessica spoke to, the real change in buyers is they just need to make a little more to afford homes at a static sales price in a higher interest rate environment. And I think that that's really what we're seeing on the impact of sales in Florida, not so much significant change in traffic and/or basic demand or want. It's a matter of continuing to provide the right house at the right affordable price point that reaches as many people as possible and that's what we continue to strive to do as we position our new communities.

Operator:

Thank you. The next question is coming from Sam Reid from Wells Fargo. Sam, your line is live.

Paul Romanowski:

Yes, as we continue to grow in this business, we're continually looking at ways to not only capitalize, but how we want to execute in this space. And I think from a single family for rent basis, we've become more efficient with the capital and how we produce and sell these communities. And I think that's some of what you're seeing in our moderation of growth in the inventory levels that we expect to see consistency of the investment level that we have out there. And so we still see strong demand. We still see an under supply and an ability to meet the demand of what's out there. So it's going to maintain, we're going to continue to be focused on it ourselves and be as efficient as we can with that capital.

Jessica Hansen:

Sure, Sam. And the great thing is, the position of strength we're coming from in terms of --even if we grow sub 10%, we're generally growing the size of a top 10 builder and consolidating share regardless. But I think we have tried to get across the point the last couple of quarters that we do believe going forward more of our growth is going to come from community count. Whereas really for most of this cycle outside of the early years it's been coming from increased absorption. So we do recognize that to continue to grow, we're going to continue to need those increased communities. Some of that's come through our increased market count, which has expanded dramatically over the last several years. And we've still got a hit list of quite a few additional markets to enter into. And we're continuing to work on our finished lot position to where we can get those new flags open sooner. I think what we said last quarter does still hold though. Within the next quarter or two, I think our community count is going to moderate. It won't be up double digit, but I think we're hopeful we can continue to maintain it in at least a mid to maybe high single digit increase for some period of time. And then at some point it may not have to grow to mid to high. It may just be a low to mid. As you already kind of indicated though, it's one of the hardest things for us to talk about and get right, because there's so many moving pieces to either bringing on a new community or closing out one in terms of sales pace. So we don't ever give specific guidance, but that's our best estimate as we sit here today.

Operator:

Thank you. The next question is coming from Anthony Pettinari from Citi. Anthony, your line is live.

Paul Romanowski:

Yes, we have continued to see increase in our lot cost and slight increases as a percentage of overall revenue. We don't expect to see that moderate significantly. I don't know whether that settles in at high singles, low double digits, but we do expect that to be a headwind for us. As the reality of the cost to put a lot on the ground, we just haven't seen much relief in that. And so, we expect to see a continued decline.

Anthony Pettinari:

Got it. That's very helpful. And then just -- 4 Star is obviously a major source of developed lots for you, but putting aside 4 Star, could you just touch on the kind of the health of your land banking pipeline and partners?

Anthony Pettinari:

Okay, that's very helpful. I'll turn it over.

Buck Horne:

Thank you. Good morning. My question is just a quick one on 4 Star and just if there's an update on the longer-term plan for what to do with 4 Star or is there a thought to eventually recapitalize that so that 4 Star could eventually be deconsolidated?

Buck Horne:

Got it. Got it. That's helpful. I appreciate that. And quickly on the rental operations, in terms of the current inventory balance, it kind of looks like it's about one-third single-family rental, about two-thirds multifamily. Is that the right mix for how you think the inventory is going to track going forward, or do you think at some point, given the amount of multifamily inventory that's out there right now, do you think it shifts more towards the SFR weighting?

Buck Horne:

Okay. Is like 50-50 the right optimal balance kind of where you'd like to get it to?

Buck Horne:

Got it. Thank you.

Susan Maklari:

Thank you. Good morning, everyone. My first question is, you mentioned that the cycle times have actually moved below your normalized levels historically. Can you talk about where you saw that improvement come from? And how sustainable do you think that is, especially if we do see a world where perhaps rates come down and activity picks up on a relative basis?

Susan Maklari:

Okay. That's helpful. And then perhaps turning to the M&A environment. Can you talk a bit about what you're seeing there? Has anything changed in how that pipeline is looking today?

Susan Maklari:

Okay. All right. Thank you for the color, and good luck with everything.

Operator:

Thank you. The next question is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live.

Paul Romanowski:

Yes, no change in strategy, Rafe. We are seeing efficiencies in our operation, which is why you've seen a little lower start pace than maybe might have been expected. But as we continue to move through this market, we're going to have to see some improvement in the overall, or increase, I guess, if you will, in the overall starts pace to keep pace with our growth goals. But it's really just us managing our inventory, making sure we have that we need community by community to hit the price and pace goals that we're looking for. And we'll manage that inventory based on our ability to get those homes moved through the construction process and based on availability of lot, community by community in front of us.

Paul Romanowski:

As we look -- as we're going into the quarter here, obviously, we've had some rate volatility. We did see sequential ASP growth, and so there's probably a little bit of price. We saw a little bit of our cost of our incentives go down sequentially this quarter, so there's probably a little bit of an assumption, a little bit of price, a little bit of incentive cost reduction in the quarter to offset the lot cost increase.

Operator:

Thank you. The next question will be from Mike Dahl from RBC Capital Markets. Mike, your line is live.

Paul Romanowski:

We aren't making that decision here on a broad scale. I wish we were good enough to know which way rates were going to go. But we rely on our operators at a community level to make those decisions based on the traffic volume that they have and the sales demand and the people and buyers that they have in front of them on a daily basis. And I think, overall, what that resulted in is a solid margin for us and sales that seasonally didn't increase maybe like they would, but we're in a good place with the sales pace that we achieved in the quarter and the inventory we have to hit our guidance for the year.

Paul Romanowski:

Yes, the rental is baked into our consolidated revenue guide and there is uncertainty around timing of closings of rental deals. So there's a little bit of lumpiness in those numbers, but that's built into the range that we're providing in a revenue guide, but no other specific guidance on the Q4 revenues from rental.

Operator:

Thank you. This does conclude our Q&A session today. I would like to hand the call back to Paul Romanowski for closing remarks.

Operator:

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning and welcome to the Second Quarter 2024 Earnings Conference Call for D.R. Horton, America's builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

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. For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $3.52 per diluted share. Our consolidated pre-tax income increased 23% to $1.5 billion on a 14% increase in revenues to $9.1 billion with a pre-tax profit margin of 16.8%. Our homebuilding return on inventory for the trailing 12 months ended March 31st was 29.9%, and our return on equity for the same period was 22.2%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges. With 45,000 homes in inventory, we are well-positioned to continue consolidating market share. Our average construction cycle times are back to normal and our housing inventory turns are improving. We continue to focus on capital efficiency to produce consistent, strong homebuilding operating cash flows and returns. Mike?

Bill Wheat:

Our net sales orders in the second quarter increased 14% to 26,456 homes and order value increased 17% from the prior year to $10.1 billion. Our cancellation rate for the quarter was 15%, down from 19% sequentially and 18% in the prior year quarter. Our average number of active selling communities was up 4% sequentially and up 15% year-over-year. The average price of net sales orders in the second quarter was $380,400, up 1% sequentially and up 2% from the prior year quarter. To address affordability for homebuyers, we are still using incentives such as mortgage rate buydowns and we have reduced the prices and sizes of our homes where necessary. Based on current market conditions and mortgage rates, we expect our incentives to remain at these elevated levels in the near term. Our sales continue to be primarily from homes under construction and completed homes and we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Jessica?

Bill Wheat:

In the second quarter, our homebuilding SG&A expenses increased by 13% from last year and homebuilding SG&A expense as a percentage of revenues was 7.2%, down 10 basis points from the same quarter in the prior year. Fiscal year-to-date homebuilding SG&A was 7.7% of revenues, up 20 basis points from the same period last year due primarily to the expansion of our operations to support growth. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul?

Michael Murray:

Our homebuilding lot position at March 31st consisted of approximately 617,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others. Of the homes we closed this quarter, 62% were on a lot developed by Forestar or a third party. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our second quarter homebuilding investments in lots, land and development totaled $2.4 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $760 million for land development and $230 million for land acquisition. Paul?

Jessica Hansen:

Forestar, our majority-owned residential lot development company reported revenues of $334 million for the second quarter on 3,289 lots sold with pre-tax income of $59 million. Forestar's owned and controlled lot position at March 31st was 96,100 lots. 60% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $310 million of the finished lots we purchased in the second quarter were from Forestar. Forestar had approximately $800 million of liquidity at quarter end with a net debt to capital ratio of 16.4%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply and relationship with D.R. Horton. Mike?

Bill Wheat:

Our balanced capital approach focuses on being disciplined, flexible and opportunistic to sustain an operating platform that produces consistent returns, growth and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with the ability to adjust to changing market conditions. During the first six months of the year, our consolidated cash used in operations was $470 million and our homebuilding operations provided $408 million of cash. At March 31st, we had $5.7 billion of consolidated liquidity consisting of $3.1 billion of cash and $2.6 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.9 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at March 31st was 20% and consolidated leverage net of cash was 10.8%. At March 31st, our stockholders' equity was $23.8 billion and book value per share was $72.13, up 19% from a year ago. For the trailing 12 months ended March 31st, our return on equity was 22.2% and our consolidated return on assets was 15.1%. During the quarter, we paid cash dividends of $0.30 per share, totaling $99 million and our Board has declared a quarterly dividend at the same level to be paid in May. We repurchased 2.7 million shares of common stock for $402 million during the quarter and our fiscal year-to-date stock repurchases were $801 million. Jessica?

Paul Romanowski:

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth and cash flow, while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors and real estate agents for your continued focus and hard work. This concludes our prepared remarks. We will now host questions.

Carl Reichardt:

Thanks. Good morning, everybody. I wanted to talk about Florida. It's a pretty important market for you all. The long experience there. We've seen an increase in existing home inventory in some parts of that market and we obviously know higher insurance costs are also coming to bear there. So could you talk a little bit in some detail about your performance there, maybe the various markets within Florida and how it feels to you right now?

Carl Reichardt:

Right. Thanks. And then a follow-up on multi-family and single-family for sale, that portfolio business. With some lumpiness there, I'm curious about the markets where you've got fairly good-sized operations in multi-family and single-family rental, one of the reasons for you entering and playing more significantly in that space, I think is scale benefits for the overall homebuilding operations. So if you think about the markets where you're big in those two businesses, are you seeing lower overall vertical costs for the homebuilding operation too or better margins? And maybe sort of expand a little bit on that particular element of the business? Thanks.

Carl Reichardt:

Okay. I appreciate it. Thanks all.

Operator:

Thank you. Your next question is coming from John Lovallo from UBS. John, your line is live. Please go ahead.

Paul Romanowski:

We expect to continue to meet the market and we continue to stay focused on incentives that drive that activity and interest rate buydowns has been a big portion of what we have done. We tend to move with the market. So as you've seen that increase in market rates, we will move up the rate buy downs to be about a point to a point and a half below market. But we do expect incentives to remain near their elevated levels today, especially with the rate instability and stickiness up in that 7% range today.

Jessica Hansen:

Yeah, great question, John. We did go into the quarter with a significant number of completed specs. So we actually sold and closed intra-quarter 54% of our houses. And so that is a very high percentage for us. A typical range would be about 35% to 40% of our homes would be sold and closed within the same quarter. So we still have over 7,000 completed specs. So I do think you'll see that intra-quarter activity stay higher than our historical norms. It may not be at the 54% we saw this quarter. But that did allow for probably a little bit of pull forward of demand, and it gave us the confidence to up the low end of our range by the full 2,000 units that we beat, and then the high end of our range by just 1,000. And we're now back to normal, if not better than our historical inventory turns in terms of what we're guiding to at the high end, it'd be a roughly 2.2 times turn. So feel very good about the ability to take that range up, but don't think there is necessarily an opportunity for the same scale of beat next quarter.

Operator:

Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Stephen your line is live. Please go ahead.

Bill Wheat:

Sure, Steve. On our cash flow guide, we have been guiding to homebuilding cash flow because that has been the primary generator of cash for us over the last couple of years. And we have invested portions of that into the rental operation as well, which feeds to the consolidated cash flow from ops. So there is some offset versus the homebuilding cash flow this year. We're guiding to around $3 billion of homebuilding cash flow. I would expect in the $800 million to $1 billion range, probably offsets that for the full year this year on consolidated. But we do expect that gap to start narrowing in future years as the growth ramp of our rental platform starts to moderate. And so we would expect going forward, our consolidated cash flow and our homebuilding cash flow to be much nearer to the same number beyond fiscal '24. So with the rental platform asset growth moderating, we're at 3.1 today. We do still expect to see that grow a bit further this year and will grow slightly next year, primarily from the multi-family platform. Our multi-family platform continues to grow and we're building out a more elevated level of starts over the last couple of years. But that will probably late '25 start to moderate as well. And so we do see prospects for the cash flow on a consolidated basis to be increasing consistently from here into '24 and into '25.

Jessica Hansen:

Sure, Steve. We've been up a double-digit percentage on a year-over-year basis for community count now for several quarters. So we've probably got at least another quarter or so until we've cycled and anniversaried that and would expect the growth to moderate a bit. But as we look at our overall lot position and our positioning for the future to continue to drive growth, we have shifted to a lot of that coming from community count rather than just continuing to have to drive more absorption out of each and every community. So I do think you'll continue to see our community count grow. It just probably won't continue to be at the double-digit percentage year-over-year increase here in a quarter or two.

Jessica Hansen:

Yes, mid to high.

Paul Romanowski:

Thank you. Stephen.

Matthew Bouley:

Good morning, everyone. Thank you for taking the questions. I wanted to ask around start pace going forward. Perhaps we -- assuming we live in this kind of mid to high sevens mortgage rate environment. Is there a scenario where you would dial back production at all to the extent it supports price or margin or maybe said another way, is there a mortgage rate at which you would consider pulling back a little bit on starts? Thank you.

Jessica Hansen:

And so with our gross margin currently over 23% and very solid, it would take a pretty big disruption in the market for you to see us have a broad-based across the board pullback in starts. As Mike alluded to, it's going to be just driven on a community-by-community basis like it always is based on our finished lot position and what makes the most sense to maximize returns at that individual community level. So as we see right now, without another big shock or any sort of big shock to the system or a more significant move in rates, I think we would expect our starts to be pretty consistent through the remainder of the year.

Paul Romanowski:

No, we've seen a pretty, pretty solid level of qualified buyer. Our average FICO store this last quarter was still at 725. And with the low level of inventory and available homes to purchase out there, you know, we still see strong buyer demographic and demand and we've remained pretty consistent. We have seen fluctuation in rates, but they've really not been significant enough to have any meaningful impact on our backlog and people's ability to qualify.

Jessica Hansen:

Thanks, Matt.

Michael Rehaut:

Thanks. Good morning, everyone. Just wanted to drill down, if possible a little bit on the demand trends over the last couple of months. And I know you don't typically go too far down the rabbit hole in terms of month-to-month, but obviously with the change in rates, with some of the concerns in the market, any kind of January, February, March, April type of progression. We've heard that for example, March -- I'm sorry March and April maybe are a little bit more moderate than what we saw in February. I'd love your take on just how the demand trends, how the sales pace has come in through the door maybe versus your expectations and if incentives in the marketplace have changed at all around that.

Michael Rehaut:

Great. Thanks, Bill. Appreciate that. And I guess just maybe along those lines in terms of the impact of higher rates at points, it seems like if you go back to your guidance last quarter, there was a little bit of surprise that maybe the out quarter for gross margins was a little less than people were looking for and it kind of went back to the higher level of rates and incentives seen in three -- in the calendar third quarter. Wondering, obviously, you haven't given guidance for the fourth quarter, but all else equal, if perhaps you're having some of the delayed impact of perhaps higher incentives, perhaps more costly incentives, and I know there's some warehouse buying and delaying of an impact on the incentive front from the mortgage rate buydowns. If we were to stay at these levels just from the standpoint basically of the buydowns being maybe a little more expensive, all else equal, would that impact be more on your fiscal fourth quarter than your third quarter?

Michael Rehaut:

But I think just to make sure we understand then, to the extent that rates have -- rates have risen and the cost of those mortgage rate buydowns become more expensive, you feel like a lot of that is already reflected in 2Q and 3Q?

Michael Rehaut:

Great. Thanks so much. Appreciate it.

Operator:

Thank you. Your next question is coming from Eric Bosshard from CRC. Eric, your line is live. Please go ahead.

Jessica Hansen:

I'm assuming you're talking on a sequential basis?

Jessica Hansen:

Yeah, so a little bit of it was just core inclusive of just a very modest pickup on the incentive front in terms of the forward commitments and the interest rate buydown because you'll see when we put out our supplemental guidance, that kind of core margins up about 20 basis points. And then we also had a little bit less of an impact on warranty and litigation this quarter. Those are the two kind of biggest pieces of why there was a sequential increase.

Paul Romanowski:

Currently, we're not doing anything significantly different. We're responding to the rates and the customers that are in front of us at the time. And they are reacting very positively to the incentive offerings that our teams have crafted for the various neighbourhoods we have out there. So no, we're not seeing anything with the current range -- range of rates we've been dealing with right now. We feel like it's sort of -- I won't say business as usual in this crazy volatile world we're in. But right now, we feel pretty steady, pretty good about where things are.

Operator:

Thank you. Your next question is coming from Sam Reid from Wells Fargo. Sam, your line is live. Please go ahead.

Paul Romanowski:

Yes, Sam, we're pleased to be back at what we deem our historical norm, and you bring up a good point, we are building a more efficient house and it's been an extreme focus of us to try and pull labor and man hours out-of-the home to reach affordable and maintain affordability. We're always going to believe there's upside for improvement in our business. And so we continue to stay focused on our inventory turns and the opportunity to reduce cycle times and be more efficient in the construction process where we can. We're going to continue to strive for that. We're not counting on significant reductions from here. We got back to this place and we'll continue to focus on doing everything we can to drive it down further.

Jessica Hansen:

Yeah, it continues to be primarily geographic when you look at our price points. The South Central and the Southeast, which are two of our lower price point markets in terms of average sales price has been a slightly lower percentage of our mix for a couple of quarters now and that continued this quarter.

Operator:

Thank you. Your next question is coming from Alan Ratner from Zelman and Associates. Alan, your line is live. Please go ahead.

Paul Romanowski:

I still think it's a very limited amount of inventory that's available in the marketplace, especially at our price point -- affordable price point. That coupled with some of the interest rate incentives that we're able to offer that for the most part existing home offerings don't provide, we're able to solve the affordability problem a little better than some of the existing home sales would be able to do. But we haven't seen a significant impact on our sales pace to date.

Paul Romanowski:

Yeah, Alan, I mean, we think this is going to take some time to play out. You know we work very closely with the brokerage community, and we'll continue to do so regardless of what direction this takes. I think you are going to see some restructuring, certainly in terms of commissions and it will have some impact, I believe, on the number of realtors that stay active through the market. But we are going to continue to stay close to the realtor community, communicate with them. This is still an emotional buy for people. And we're also going to stay focused on our digital presence and ability to make sure that we are ahead of the curve in terms of reaching customers through whatever form it takes over the next couple of years.

Operator:

Thank you. Your next question is coming from Collin Verron from Jefferies. Colin, your line is live. Please go ahead.

Bill Wheat:

Yeah, I think our expectation is we'll continue to see moderate increases, I think that low single-digit percentage continuing is in our current, what we can see in our current pipeline.

Bill Wheat:

So, I think we continue to look for ways to be more efficient and more capital-efficient in our lot portfolio. 77% is a very controlled number position right now and we're looking at 62% of our deliveries were on lots that were actually developed by third-parties or Forestar. So, we're continuing to expand those relationships and seek opportunities to buy more lots from third-parties. I'm not going to put a ceiling on to how far we can take that, but we've made a lot of progress. And when you've had a lot of success, incremental success takes a lot more work, but that's what we do every day.

Bill Wheat:

Thank you.

Jade Rahmani:

Thank you. Are you seeing any changes in terms of investor appetite for single-family rentals and multi-family leaving aside the issue of interest rates? We've seen Blackstone, for example, make a couple of quite large acquisitions, wondering what the tone is from the investors you sell to?

Jade Rahmani:

And a follow-up would be, a lot of these investors are looking for scale in their capital deployment. You've already done some large deals. Are you seeing on average the size of deals you're looking at increase?

Jade Rahmani:

Thank you.

Operator:

Thank you. Your next question is coming from Mike Dahl from RBC Capital Markets. Mike, your line is live. Please go ahead.

Paul Romanowski:

You know, it's really a matter of communities, community size and timing of those closings and we're going to be selective through the process, but we have projects that are done and we're going to go ahead and monetize those and put them into the market. Not seeing the margins where we would like to see them, but that's relative, that's just tied to cap rates and interest rates. But no real significant shift that we're going to see in terms of up or down and it's going to be a little lumpy as we look through the quarters because we're selling whole communities at a time. It's not one at a time.

Jessica Hansen:

No, I mean, we really think about it, Mike, as last quarter was somewhat of an anomaly. We're not going to say one-time. I mean, it could happen again, but it was highly unusual in terms of the rate move going up and down so quickly and the timing in which that happened and then a move close to quarter end. And so this quarter when we say minimal impact, I mean, we've talked about outside of Q1, it's been no more than a plus or minus 10 basis point move from a gross margin perspective. And so, hopefully, that will be the case going forward as well, and you won't see a repeat of what happened in Q1.

Operator:

Thank you. Your next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live. Please go ahead.

Jessica Hansen:

I'll start with lumber and then I'll leave that up and down on other categories to Paul and Mike, they're probably better or worse than I am. Lumber is still less than half what it was at its peak back in March of '22, but it has started to increase since December, which would be kind of a typical seasonal trend. So hopefully, we're not going to be talking about lumber in terms of big swings in our closings. And most of our year-over-year stick and brick decline is still from lumber, but in terms of sequential moves going forward, we expect it to be relatively modest.

Susan Maklari:

Okay. All right. That's helpful. And then you guided your SG&A to be about 7% for the third quarter, which is still really low in there even as you're making those investments. Can you just talk about the puts and takes into the SG&A as we think about not just the third quarter, but even looking out? Any thoughts there?

Susan Maklari:

Okay. That's great. Thank you. Good luck.

Operator:

Thank you. Your next question is coming from Kenneth Zener from Seaport Research Partners. Kenneth, your line is live. Please go ahead.

Bill Wheat:

Good morning.

Kenneth Zener:

All right. Margin stability up 52% of closings intra-quarter orders. Why was it higher specifically? It looks to be, again, I could make my own narrative, but I want to hear it specifically. And then what was the margin spread between those 52% intra-q versus the ones that were naturally coming out of backlog?

Kenneth Zener:

Okay. So you're getting, yeah, we'll follow-up on the margin backlog versus intra-q, is that correct?

Kenneth Zener:

Okay. And then Paul I think you kind of talked about your markets in Florida not being affected by the rise in inventory we're seeing in coastal markets and/or a higher cost of ownership related to insurance. Could we maybe isolate that comment to a place like Central Texas, I think Austin? I know you're building in Buda, not Austin per se. But we are seeing inventory go up in Central Texas, you don't have right the coastal issues. Is this still that you have homes that are affordable and in demand? So you're seeing the same dynamics you talked about there where we're kind of excluding coastal conditions? Thank you.

Kenneth Zener:

Right. Appreciate it. And I guess, Jessica, you said 3% on land. Could you split that between land you developed and land you're buying finished?

Kenneth Zener:

Talk to you guys later. Thank you.

Rafe Jadrosich:

Hi, good morning. Thanks for -- thanks for taking my questions. Just first on the fiscal third quarter gross margin outlook for flat to slightly up. Just how do we think about the assumptions for the stick and brick per square foot, net pricing and land inflation that's baked into that guidance? And then specifically on land inflation, just the lot cost is flat quarter-over-quarter. What are you seeing in terms of land inflation for land that's contracted today?

Rafe Jadrosich:

Thank you. That's very helpful. And then on the further rate buydowns, the forward commitments that you all have, how long do those go out? Are those months, are those weeks? So the recent move in rates, it hasn't impacted the rates that you are offering yet. When will that start to be kind of offered to the homebuyer? Like how long of forward commitment do you have?

Rafe Jadrosich:

Thank you. That's helpful.

Alex Barron:

Yeah, thanks guys and great job in the quarter. Yeah, I was just curious around land development costs. I mean, you guys are developing, I mean using a lot more land options and stuff, but are land development costs expected to impact margin for you guys in the near term or do you feel that's going to be more absorbed by whoever is developing the land for you?

Alex Barron:

Got it. And I guess you already touched a bit on the rental business, but I was just curious if the margins we saw this quarter, do you expect that's going to be sort of more what they're going to look like in the future or not necessarily?

Alex Barron:

Got it. Okay. Well, good luck. Thanks.

Bill Wheat:

Thank you.

Jay McCanless:

Thanks. Good morning, everyone. So on that rental guidance you talked about for 3Q, is that guidance based on projects that already have financing in place? Or is that just the schedule of what you think might close during the quarter?

Jay McCanless:

Okay. And then the other question I had is, I don't want to make too much of this if it's not a big deal, but it does seem like you're going from maybe an aggressive selling pace during the COVID years now to trying to gain market share leadership through more communities. I guess, how far along do you think you are in that transition? And I think kind of to Su's question also, what is that ultimately going to mean for SG&A going forward if you are starting to staff up and bring more people on to support a larger organization?

Jay McCanless:

Okay. And I guess how far along do you think you are maybe in the process of trying to get bigger from a community count standpoint?

Jay McCanless:

Okay. Great. Thanks for fitting me in.

Operator:

Thank you. I would now like to turn the floor back to Paul Romanowski for closing remarks.

Operator:

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Operator:

Good morning and welcome to the First Quarter 2024 Earnings Conference Call for D.R. Horton, America's Builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Paul J. Romanowski:

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. For the first quarter the D.R. Horton chain delivered solid results highlighted by earnings of $2.82 per diluted share. Our consolidated pretax income was $1.2 billion on a 6% increase in revenues to $7.7 billion, with a pretax profit margin of 16.1%. Our home building return on inventory for the trailing 12 months ended December 31st was 29% and our return on equity for the same period was 21.8%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 35% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and demographics supporting housing demand remain favorable. Early signs for the Spring selling season have been encouraging. We will continue to focus on consolidating market share and are well positioned for the Spring with 42,600 homes in inventory and our average construction cycle times returning to more normal levels. We expect our housing inventory terms to improve in fiscal 2024 compared to fiscal 2023 and our ongoing focus on capital efficiency to produce strong home building operating cash flows and consistent returns. Mike?

Bill W. Wheat:

Our net sales orders in the first quarter increased 35% to 18,069 homes, and order value increased 38% from the prior year to $6.8 billion. Our cancellation rate for the quarter was 19%, down from 21% sequentially and down from 27% in the prior year quarter. Our average number of active selling communities was up 2% sequentially and up 14% year-over-year. The average price of net sales orders in the first quarter was $375,800, down 2% sequentially and up 2% from the prior year quarter. To adjust to changing market conditions during fiscal 2023 and into fiscal 2024, we have increased our use of incentives and reduced home prices and sizes of our home offerings where necessary to provide better affordability to home buyers. Based on current market conditions, mortgage rates, and continued affordability challenges, we expect our incentive levels to remain elevated in the near-term. Our sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Jessica?

Bill W. Wheat:

In the first quarter, our home building SG&A expenses increased by 14% from last year and home building SG&A expense as a percentage of revenues was 8.3%, up 50 basis points from the same quarter in the prior year, due primarily to expansion of our operations to support future growth and an increase in equity and stock market-based compensation expense. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul?

Michael J. Murray:

Our home building lot position at December 31st consisted of approximately 607,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. 39% of our total owned lots are finished and 52% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our first quarter home building investments in lots, land, and development totaled $2.4 billion, up 3% sequentially. Our investments this quarter consisted of $1.4 billion per finished lots, $740 million for land development, and $270 million for land acquisition. Paul?

Jessica Hansen:

Forestar, our majority owned residential lot development company, reported revenues of $306 million for the first quarter on 3,150 lots sold with pretax income of $51 million. Forestar’s owned and controlled lot position at December 31st was 82,400 lots. 61% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $270 million of our finished lots purchased in the first quarter were from Forestar Forestar had more than $840 million of liquidity at quarter end with a net debt to capital ratio of 14.9%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots for the home building industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply, and relationship with D.R. Horton. Mike.

Bill W. Wheat:

Our balanced capital approach focuses on being disciplined, flexible, and opportunistic to support and to sustain an operating platform that produces consistent returns, growth, and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions. During the first three months of the year, our consolidated cash used in operations was $153 million. At December 31st, we had $6.4 billion of consolidated liquidity consisting of $3.3 billion of cash and $3.1 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.3 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at December 31st was 18.6% and consolidated leverage net of cash was 7.8%. At December 31st, our stockholder's equity was $23.2 billion, and book value per share was $69.70, up 19% from a year ago. For the trailing 12 months ended December, our return on equity was 21.8%, and our consolidated return on assets was 14.8%. During the quarter, we paid cash dividends of approximately $100 million, and our Board has declared a quarterly dividend at the same level to be paid in February. We repurchased 3.3 million shares of common stock for $398 million during the quarter. Jessica.

Paul J. Romanowski:

In closing, our results and position reflect our experienced teams, industry leading market share, broad geographic footprint, and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth, and cash flow while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued focus and hard work. This concludes our prepared remarks. We will now host questions.

Stephen Kim:

Yeah, thanks very much, guys. Appreciate it, and thanks for all your commentary. I guess, just to start off with, could you clarify, I think you mentioned at the beginning of the call about 100 basis points of the gross margin was affected by hedging related to I think you said rate buy downs. And in your guide for 2Q, can you also just clarify like what -- I thought I heard you said 20,000 to 20,500 closings and $8.1 billion to $8.3 billion in consolidated revenue, just want to make sure I heard those right?

Stephen Kim:

Gotcha. And that 100 basis points, is that something that you have done in the past, is that a number that compares I guess, can you give us some sense of what that number has been over the last couple of quarters?

Jessica Hansen:

And if you were to exclude that charge, we would have landed in the gross margin that we had guided to for the quarter, that was really the reason that we came in below.

Michael J. Murray:

Steve, when we look at our land position, we feel that the forward one year's roughly supply of land that we own is important to maintain the production velocity in our neighborhoods. Bringing that down significantly is going to be incremental because it's going to be with more developers providing finished lots for us versus self-development. And I think we're back up to 76% controlled which is up from where it's been in the past few quarters. So we're going to continue to incrementally look to control more land and acquire lots that are being finished by others, but we will still need to maintain a supply of land on our balance sheet, lots primarily on our balance sheet to feed the production.

Michael J. Murray:

And the rental inventory, we'll probably invest in some during fiscal 2024 to grow that platform. It's getting closer to a good sustainable volume that will produce consistent revenues and profits quarter-to-quarter, but it's still in the growth mode.

Stephen Kim:

Great. Thanks very much, guys.

Carl Reichardt:

Good morning, everybody. I want to talk about SG&A for a second. Bill, can you talk about the basis points associated with the incentive comp this quarter? And then you talked about it being also ahead of some growth you're planning. Can you talk a little bit about community count expansion and whether or not this also might be related to some of the new markets you've entered more recently? Thanks.

Carl Reichardt:

Okay. That's small. So it's different this year. Okay, thank you for that. And then I have a bigger picture question for Paul. So obviously, the biggest news that we've seen in the business for a while is a large acquisition by an offshore player of a domestic homebuilder. And historically, long ago, Horton was a fairly significant acquirer of public companies and other private companies and still here and there. We've seen you look at some deals. Paul, can you talk a little bit about from your perspective, what do you think -- whether or not acquisitions are something that Horton would consider historically, I know you've done it more recently, you've talked about doing most of your growth greenfield. I'd just like to know, given current conditions where you sit on this sort of big picture? Thanks so much.

Carl Reichardt:

Appreciate it, thanks Paul.

John Lovallo:

Good morning guys, thank you for taking my questions as well. The first one here is it seems like the first quarter gross margin at least relative to your expectations was impacted by that 100 basis points of hedging that seemingly was not contemplated in the initial guide. So I guess the question is, why would the 2Q gross margin be flattish sequentially if that hit is not expected to repeat and rates have come in a bit?

John Lovallo:

Okay, got it. And then I think last quarter, lot costs were up 10% or 11% year-over-year, but I think there's some geographic mix that was in there and maybe it normalized to up sort of mid-single digits if you kind of accounted for that mix. I mean, how did lot cost trend in the quarter and how are you thinking about that in 2Q?

Bill W. Wheat:

Yes. 1.5% on a sequential basis.

Operator:

Your next question is coming from Joe Ahlersmeyer with Deutsche Bank.

Bill W. Wheat:

Joe, the charge -- the amount of the charge was $65 million approximately, and that's basically what hit during the quarter. In terms of our position, outstanding. We believe that our position is -- reflects the current market and the valuation adjustment in the December quarter takes care of all of it. There's always some sensitivity. We always have some hedging position outstanding. And so anytime there is a significant sudden change in rates that can leave some exposure there obviously, the opposite side of that is the benefits to the business. When rates drop, obviously, that improves affordability and improves our ability to sell at a price point in the core business. And so what this hedging position allows us to do is offer below market rates on a consistent basis on a broad basis across our business. And like we said, we try to manage that as best as we can, but in a period of significant sudden volatility, there can be some exposure to the position.

Jessica Hansen:

And that $65 million mark-to-market is in cost of goods sold, whereas the just standard routine interest rate offering does net against revenue and flows through our ASP. But the $65 million specifically is in cost of goods.

Paul J. Romanowski:

Yes, we're seeing some relative flatness in our cost side of the business and would expect to see similar all things stay consistent through the next quarter. Certainly, with the encouraging signs early in to January, it's possible that we see some increase in starts from all of our peers. That could put pressure on labor and on materials, which could cause some headwinds or some increase in the cost side.

Operator:

Your next question for today is coming from Michael Rehaut with J.P. Morgan.

Bill W. Wheat:

Yes, the last part first. Yes, our broker commissions are in and our gross margins are in our cost of goods sold. So that's not part of the equation. And I think your general commentary there is fair. We only provide specific SG&A guidance one quarter out. But generally, our expectation over the longer term is that we would get back to a similar SG&A level as last year and beyond. So I think it is a phenomenon here for a couple of quarters where we're guiding a little bit higher than last year.

Bill W. Wheat:

And we're also -- also ASP is down year-over-year. And so it's always a little bit more of a headwind on a percentage basis for SG&A when ASPs are down.

Bill W. Wheat:

Yes. We provided guidance one quarter out so we've guided to 22.6% to 23.1%. So essentially straddling the GAAP margin that we reported in Q1. Coming into Q2, the closings that we will have early in the quarter are at the -- probably the low end of that range, maybe even a little below that. But then later in the quarter, margins are improving because of the cost of buy downs after rates have dropped is lower. And so -- but on average, that's -- we believe that, that will balance out to a margin in the 22.6% to 23.1% range. What will occur after that we can't really comment. It's really going to be a matter of what’s the strength of the Spring selling season, what does demand look like through the Spring and what happens with mortgage rates. And so -- but on average, that's where we believe things will fall for margins in Q2.

Bill W. Wheat:

I think on balance it's going to balance out to 22.6% to 23.1%.

Michael Rehaut:

Great, appreciate it. Thank you.

Truman Patterson:

Hey, good morning everyone. Not to beat a dead horse here, but I just want to understand kind of your old philosophy and some near-term dynamics with rates coming below, a little bit below 7%. I realize there's this hedging noise, but have you all been able to kind of pull back on core incentives, if you will, the past several weeks or is this much more taking kind of a bit of a wait-and-see approach, I think you mentioned a good rebound early in the year, are you taking a wait-and-see approach, so you're not disrupting kind of demand or the momentum ahead of the Spring selling season?

Jessica Hansen:

And all of that continues to be managed market by market, community by community based on what our local operators are seeing and believe it's the best to drive the strongest returns. I mean, even with a little bit of giveback in our gross margin, our improved cycle times and what we're going to turn this year in terms of inventory is way more important to our bottom line and the returns we're going to generate than giving up a little bit of gross margin and still being at roughly 23%.

Michael J. Murray:

We've been very focused on creating a quarter-to-quarter consistent starts plan where we're feeding our neighborhoods with lots that are available in front of us and making sure we have those lots supplied and secured to us. At the same time, we've made a tremendous amount of progress reducing our cycle times and coming back to sort of our historical norms of around four months from starting a home to completion. And so that's giving us much greater flexibility going into this year with the strong finished lot position we currently have, combined with the reduced cycle times, we're able to reduce our homes in inventory and still deliver a closing target that's going to be at or in excess of our two times beginning of the year housing terms. So we really feel good about what's happened there. As to what the upside top side is where the bottlenecks would come in, hard to speculate on where that would be. We feel really good about our lot position, neighborhood by neighborhood and the trade partnerships that we have and the supplier relationships that we have, they've been very supportive of us.

Truman Patterson:

Perfect. Thank you all and good luck in the coming year.

Eric Bosshard:

Good morning. Curious if you can provide a little bit of perspective. You talked about favorable trends into the Spring and 56% first time. Just as you look across the business, in terms of where you're seeing relative strength in regards to price points and product where things are above average and where things are below average?

Eric Bosshard:

From a product perspective or price point perspective with lower rates, do you think differently than you did 90 days ago in terms of focus on affordability or do you think about expanding a bit more what you're doing?

Eric Bosshard:

Great, thank you.

Alan Ratner:

Hey guys, good morning. Thanks for all the details so far. I got some questions on kind of the spec versus build to order dynamic in the industry right now. You guys being a spec builder, I think, had a pretty strong advantage during the pandemic. Obviously, resale inventory was incredibly tight. The extended cycle time as well, I'm sure it was hard to manage from your side. Kind of gave you an advantage versus the BTO guys in terms of the consumer experience. So I guess my question is now that cycle times seem to be improving across the industry, resale inventory is ticking a little bit higher. Are you thinking about that dynamic any differently, are you maybe contemplating selling earlier in the construction process again, whereas before you were maybe waiting for homes to get closer to completion, are you seeing more competition from build-to-order builders that have kind of shrunk in their construction cycle times, any commentary on that would be great?

Michael J. Murray:

Even with the decline in existing home sales, they're still three to four times larger of a market transaction volume than new home sales. So we've always tried to position ourselves to compete against those homes rather than just other new home providers.

Alan Ratner:

Got it. But in terms of your sales strategy, I mean, I look at your completed spec count, it's been ticking a little bit higher here more recently. Is that still kind of the strategy to hold these homes off until you're maybe a month or two from completion to allow the buyer to lock in that rate or are you maybe thinking about kind of pulling that forward a little bit?

Alan Ratner:

Okay, got you. One last quick one, if I could. Just going back to the charge on the hedge, I just want to better understand this, like we have heard from other builders in the past situations where they would buy kind of forward commitment pools and when rates pull back sharply in a short period of time, those pools would kind of go unused because the market kind of fell below wherever that pool was. Is that kind of what's going on with you guys or are the mechanics of this much different, I'm just trying to wrap my arms around that better?

Jessica Hansen:

And it was really restructuring so it could be used, not that we weren't going to fulfill the pool. We just had to restructure it so it was usable.

Alan Ratner:

So it sounds like this is an industry phenomenon, not necessarily an important phenomenon, but obviously, we'll learn more about that in the next few weeks. But I appreciate that. Thank you.

Anthony Pettinari:

Hi, good morning. There was an earlier question on the large builder acquisition we saw last week. I guess we also saw a large acquisition in SFR. And I'm just wondering if you could talk about how institutional demand for build-to-rent homes has been trending, maybe relative to earlier expectations. Do you expect that to grow as a portion of your homebuilding operations and just maybe the impact of that business in this kind of rate environment?

Anthony Pettinari:

Okay, that's helpful. And then just last quarter, I think 60% of your buyers took some form of a buy down and you were offering 6.25 on a conventional loan. Just wondering if you can update where that stands coming out of fiscal 1Q and I guess you talked about this earlier a bit but do you think about kind of a rate level where buy-downs maybe stop becoming kind of the chief incentive mechanism or where incentives start to shift back to more kind of traditional ones?

Paul J. Romanowski:

And the use of those rate buy downs is not just new to us over the last 12 months. We've been 24-plus months utilizing that incentive. So I believe on a go-forward basis, staying competitive to not only the new home market, but especially to the resale market for us, and the ability to have a lower monthly payment for same cost of home is advantageous. So we have no plan in the near-term to stop utilizing it even if we see rates shift down.

Operator:

Your next question is coming from Ken Zener with Seaport Research Partners.

Paul J. Romanowski:

Good morning Ken.

Bill W. Wheat:

Sure, yes. I mean our returns are in line with our plans, and our divisions are out there executing on their plans, their start plans week-to-week, month-to-month and deliver the homes that we expected to this quarter, plus a few hundred more. And so as we enter the Spring, we're continuing with that and very consistent with our expectations from an inventory turn standpoint and a return on our assets, our investments in inventory.

Paul J. Romanowski:

Yes, Ken, as you look at our past year plus starts space, it has been inconsistent and a lot of that has been in response to the market, in response to the elongation of cycle times and then further reduction of cycle times. As you look at our inventory today and our guide to basically turn a little more than two times that inventory, we can expect to see consistent and sustainable starts expansion over the next few quarters. We want to maintain the level of inventory that we have and be in a position as we respond to the Spring selling season to stay consistent with our starts, but we do need to grow our starts consistently quarter-to-quarter over the remainder of the year.

Kenneth Zener:

Thank you.

Susan Maklari:

Thank you. Good morning everyone. I wanted to talk a bit more about thinking of the competitive dynamics on the ground. As you think about some of the smaller new home markets that you have recently entered and the potential for more existing home turnover to perhaps come through as we move through the year, any thoughts on what those competitive dynamics could mean for you in various markets and perhaps how you're positioned relative to that?

Susan Maklari:

Okay, that's helpful. And then thinking about the cash generation and the balance sheet, what -- as things have normalized, what level of cash, I guess you're comfortable holding on the balance sheet today, and how do you think about the potential for perhaps increasing the buybacks or allocating capital as some of the other growth initiatives that you have out there as you continue to bolster the balance sheet?

Susan Maklari:

Okay, thank you and good luck.

Unidentified Analyst :

Hi, good morning. It is Reese. Thanks for taking my questions. Just on the outlook that for an improvement in build cycles in 2024, can you talk about where your build cycles are now where they were last quarter, how much do you think that can improve, and then like what gets you there from a supply chain perspective?

Unidentified Analyst :

Got it, thank you. That's helpful. And then I just wanted to follow up on the comment that you're seeing encouraging signs as we head into the Spring season. Can you just give a little bit more color on what you're seeing, is that better home buyer traffic or conversion, and do you think that's just driven by sort of the headline rate number that's coming down, just want to understand what you're seeing that's encouraging in the market.

Operator:

Your next question is coming from Matthew Bouley with Barclays.

Paul J. Romanowski:

For us, we are set in terms of our consistent delivery of loss into our starts plan. And so that plan is in place for us as we look 12 months out. We have not seen much reduction in development costs and wouldn't expect with the shortness of lots across the industry that we're going to see, and we're not anticipating much reduction in either the labor side or the supply side, product side of the components that go into developing lots. But we have a plan that we have stuck to and are consistent with, we feel good about our lot position in the near term and as we look next year or two out.

Michael J. Murray:

Product selection, generally, they'll buy a smaller home to make the payment work. And sometimes that's within an existing neighborhood or moving to a different neighborhood that's offering a smaller set of plans.

Unidentified Analyst :

Thank you very much.

Paul J. Romanowski:

Thank you, Holly. 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're proud to represent you on this call and appreciate all that you do.

Operator:

Good morning and welcome to the fourth quarter 2023 earnings conference call for D.R. Horton, America's Builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions]. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

David Auld:

Thank you, Jessica. And good morning. I am pleased to also be joined on this call by Paul Romanowski, our President and Chief Executive Officer; Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. When we talk about our results, I'd like to congratulate Paul on his well-deserved promotion to CEO that was effective October 1. We have been preparing for this transition internally for quite some time. We are positioning our leadership throughout the company for the future, and I will still be actively involved as executive vice chair of board of directors. Our executive team remains in place with the same individuals and Paul has the support of our executive, region, and division leadership. He is a proven leader who has been successful throughout his group. Now on to our results. The D.R. Horton team finished the year with solid fourth quarter results, highlighted by earnings of $4.45 per diluted share. Our consolidated pre-tax income was $2 billion on a 9% increase in revenues to $10.5 billion, with a pre-tax profit margin of 19.2%. For the year, earnings per diluted share was $13.82 and our consolidated pre-tax income was $6.3 billion on a 6% increase in revenues to $35.5 million, with a pre-tax profit margin of 17.8%. We closed a record 91,204 homes and apartments this year in our homebuilding and rental operations. Our cash flow from operations for 2023 was $4.3 billion. Our homebuilding return on inventory for the year was 29.7% and our return on equity was 22.7%. Despite continued high mortgage rates and inflationary pressures, our net sales orders increased 39% from the prior-year quarter. As a result, both new and existing homes at affordable price points is limited and demographics supporting housing demand remain favorable. We are focused on consolidating market share by supplying more homes at affordable price points to meet homebuyer demand, while maximizing the returns and capital efficiency in each of our communities. With improvements in both labor capacity and availability of materials, our cycle times are decreasing, positioning us to improve our housing inventory turns. We are well-positioned with our experienced operators, affordable product offerings, flexible lot supply, and strong capital and liquidity positions to generate strong cash flows and produce consistent returns. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, including returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Paul?

Michael Murray:

Our net sales orders in the fourth quarter increased 39% to 18,939 homes and order value increased 34% from the prior year to $7.3 billion. Our cancellation rate for the quarter was 21%, up from 18% sequentially and down from 32% in the prior-year quarter. Our average number of active selling communities was up 2% sequentially and up 10% from the prior year. The average price of net sales orders in the fourth quarter was $383,100, up 1% sequentially and down 4% from the prior-year quarter. To adjust to changing market conditions and higher mortgage rates, we have increased our use of incentives and are reducing the size of our homes where possible to provide better affordability for our homebuyers. We expect to continue utilizing a higher level of incentives in fiscal 2024, particularly rate buydowns in the current interest rate environment. Our sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Bill?

Jessica Hansen:

In the fourth quarter, our homebuilding SG&A expenses increased by 2% from last year and homebuilding SG&A expense as a percentage of revenues was 6.6%, down 10 basis points from the same quarter in the prior year. For the year, homebuilding SG&A was 7.1% of revenues, up 30 basis points from fiscal 2022. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul?

Michael Murray:

Our homebuilding lot position at September 30th consisted of approximately 568,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 35% of our total owned lots are finished and 54% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our fourth quarter homebuilding investments in lots, land, and development totaled $2.3 billion, up 7% sequentially. Our current quarter investments consisted of $1.5 billion for finished lots, $580 million for land development and $290 million for land acquisition. For the year, our homebuilding investments in lots, land, and development totaled $8 billion, up 6% from fiscal 2022. Paul?

Bill Wheat:

Forestar, our majority-owned residential lot development company, reported revenues of $550 million for the fourth quarter on 4,986 lots sold with pre-tax income of $95 million. For the full year, Forestar delivered 14,040 lines, generating $1.4 billion of revenues and $222 million of pre-tax income with a pre-tax profit margin of 15.4%. Forestar's owned and controlled lot position at September 30th was 79,200 lots. 60% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $410 million of our finished lots purchased in the fourth quarter were from Forestar. Forestar had approximately $1 billion of liquidity at year-end with a net debt-to-capital ratio of 5.5%. Forestar is uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry and to consolidate significant market share over the next few years, with its strong balance sheet, lot supply and relationship with D.R. Horton. Mike?

Bill Wheat:

Our balanced capital approach is disciplined, flexible, and opportunistic to support our operating platform and produce consistent returns, growth and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions. During fiscal 2023, our consolidated cash provided by operations was $4.3 billion, and our cash provided by homebuilding operations was $3.1 billion. Over the past five years, our homebuilding operations have generated $9.6 billion of cash flow. At September 30th, we had $7.5 billion of consolidated liquidity, consisting of $3.9 billion of cash and $3.6 billion of available capacity on our credit facilities. We repaid $400 million of senior notes this quarter, and our debt at September 30th totaled $5.1 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at September 30th was 18.3% and consolidated leverage net of cash was 5.1%. At September 30th, our stockholders' equity was $22.7 billion and book value per share was $67.78, up 20% from a year ago. For the year, our return on equity was 22.7%. During the quarter, we paid cash dividends of $84 million for a total of $341 million of dividends paid during the year. We repurchased 3.5 million shares of common stock for $423 million during the quarter. And for the year, we repurchased 11.1 million shares for $1.2 billion, which reduced our outstanding share count by 3% from the prior year-end. In October, our Board of Directors authorized the repurchase of up to $1.5 billion of our common stock, replacing our previous authorization. Based on our strong financial position and cash flow, our board also increased our quarterly cash dividend by 20% to $0.30 per share. Jessica?

David Auld :

In closing, our results and position reflect our experienced teams, industry-leading market share, and broad geographic footprint across 118 markets. Our strong balance sheet, liquidity and loan leverage provide us with significant financial flexibility to meet changing market conditions and continue aggregating market share. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, while consistently returning capital to our shareholders through both dividends and share repurchases. Thank you to the entire D.R. Horton team for your focus and our work. Due to your efforts, we just completed our 22nd consecutive year as the largest and strongest builder in the United States, and we look forward to working together to improve our operations and provide homeownership opportunities to more American families during 2024. With my transition to executive vice chair, this will be my last public earnings call. It has been an honor and a privilege to represent and report on the D.R. Horton team's remarkable efforts for the past 10 years. Thank you all again. This concludes our prepared remarks. We will now host questions.

John Lovallo:

First question is just on the gross margin in the quarter of 25.1%. That was well above your expectations, above, I believe, 23.5% to 24%. Despite what seems like a greater use of incentives and perhaps even a higher cost of incentives, can you just help us kind of work through some of the puts and takes on gross margin in the quarter versus your expectations?

John Lovallo:

Maybe sticking with gross margin. As we look forward into the first quarter, the 23.7% to 24.2%, if we think about the sequential decline that's implied in there, it sounds like there's going to be higher incentives and, again, maybe a little bit of higher costs. You mentioned that the lumber benefit might be through. What are the other sort of puts and takes that we should consider in that sequential margin?

Operator:

Your next question is coming from Stephen Kim from Evercore.

Bill Wheat:

We are able with our improved cycle times. We are seeing improved inventory turns and our assumption next year is that we will see some further improvement in cycle times and inventory turns. So we are able to operate with a relatively lower level of homebuilding inventory. However, we're also guiding to a volume increase. And so, I don't necessarily expect an absolute decrease in our homes and inventory, but we do expect to be turning it faster. So that's definitely a contributing factor to the cash flow.

Bill Wheat:

Or it's just an improvement in our turns of our land assets. So, yes, primarily from profits that's resulting from the improved turns.

Paul Romanowski:

The average rate can move quite a bit through the quarter, but we tend to stay about 1 to 1.25 points below market at any given time. And today, we're offering on an FHA government loans, roughly in the 5.99% rate and, on a conventional 6.25%, which is right in that range of 1.25, 1.5 below today.

Paul Romanowski:

About 60% of our total closings are used with some form of a rate buy-down. And so, a big percentage of – and the most successful incentive we have seen has been to impact that monthly cost of homeownership through some form of rate buy down.

Paul Romanowski:

I'm going to say probably in the 6-ish range.

Joe Ahlersmeyer:

Congrats on executing so well this year. I appreciate also the effort to give the visibility for the full year here. I just wanted to talk maybe about those inventory turns a little bit further. Your guidance for closing suggests something above 2 times on your current homes and inventory level. I know that's an important threshold for you guys. Just wondering maybe then what the starts look like over the next couple of quarters to make sure that you deliver on that closing guidance in the back half, but also sort of gear up for growth again in 2025, while maintaining that 2x target, how the starts could look?

Joe Ahlersmeyer:

Thinking about your return on inventory on a trailing basis, it has been normalizing, of course. But where do you think that can settle out if you've got headwinds maybe on the profitability side from land and incentives, the tailwinds from that production efficiency. Could we actually sort of settle out here in the high 20s? Is that realistic?

Operator:

Your next question is coming from Carl Reichardt from BTIG.

Michael Murray:

Don't probably have a good breakdown of deliveries by market, stratified by market size or recent entrants, but we do expect to see probably a rotation to smaller home footprints and introduction of smaller plans where we can get municipality approvals. Again, just to maintain the affordability, I think we will see that we're going to continue to roll with starts, but the compressed cycle times that we've gotten out of our construction process is going to allow us to deliver a lot more homes on fewer homes carried in inventory at any given quarter end date.

Carl Reichardt:

Just as a follow-up, I know you're not guiding on the rental business in 2024, it's becoming a bigger portion of PTI and obviously taking up some balance sheet. From an institutional investor perspective on both multifamily and single family, how has that appetite fared for the projects you're selling at stabilized occupancy? Obviously, spreads have come in there, but there's also a lot of capital, I would guess, chasing both asset classes. So I'm just sort of curious what you're seeing from those customers.

Operator:

Your next question is coming from Mike Rehaut from J.P. Morgan.

Jessica Hansen:

Great question, Mike. We expected it. We do talk about always positioning ourselves for growth, and you typically hear us talk about plus or minus 10% is how we're going to position the company. If you look at how we're exiting 2023 though and our guide for fiscal 2024 closing, it does already assume our typical 2 times housing turn, actually a little bit better than that at the high end. So 2.04 times to 2.11 times would be our guide. And so, it's already incorporating our improvement in cycle times. And if we continue to be able to have success with that throughout the year, we'll consider that in what we talk about publicly in terms of what we're able to deliver for fiscal 2024. But as we sit here in November, that's a realistic expectation for closing with the visibility that we have today. It's not necessarily that we've seen a big falloff in demand. Obviously, our sales were up very strong. And so, it's more a function of the houses we have in inventory and our cycle times.

Mike Rehaut:

I guess also just wanted to circle back. You had mentioned with regard to sticks and bricks, 6% lot inflation. Is that something that has been accelerating, I guess, not just sticks and bricks, but maybe just more broadly, where is a lot as well as construction cost inflation for the fourth quarter on a year-over-year basis? And how do you expect that to play out in 2024 based on current trends? And would that require some amount of price appreciation to offset, let's say, to maintain your fiscal – your first quarter gross margins?

Jessica Hansen:

Carl asked about geographic mix, but that's a good point here in terms of just our reported average sales price. We are continuing to shift, as we said in our prepared remarks, to more and more of our smaller floor plans to address affordability issues in the market. So we could have some downward pressure on price that's solely just a function of product mix.

Matthew Bouley:

Just given all the, of course, interest rate volatility these past several weeks, I'm curious. Number one, given what you're doing with rate buy-downs, are you finding that sales pace is reacting quickly to these sort of numbing moves in interest rates? That's number one. And number two, I guess, just any color on your own sales pace into October and November, how you're kind of thinking about seasonality of orders here in the first quarter?

Jessica Hansen:

We're also going into the seasonally slowest time of the year. So November and December typically are the slowest sales months as you get to the holidays. So, we're going to continue to focus ourselves on meeting the market, but not making any drastic adjustments to our business plan, and we're going to wait and see how the spring unfolds and make sure that we're continuing to start houses going into the spring.

Michael Murray:

I think we will see probably margins compress a bit on those multifamily sales just if interest rates have come up and cap rates tend to come up. The question of how much supply is out there is really specific to a given project in a given submarket that that project serves. And our team has done a great job of looking at those submarkets when we made the decision to move forward with the projects, cognizant of what was available in the marketplace, both ahead of us and behind us from a supply perspective. So we feel pretty good about being able to deliver into a healthy demand environment. We're still seeing good lease-ups in our rental properties, in line with expectations. So we're very encouraged by that.

Alan Ratner:

First off, congrats to Paul and David, and good luck with the transition. Second, I think the topic that we get the most questions on are the sustainability of the rate buydowns that you guys are offering and the industry is offering right now. I guess my question to you, and I hear through – I listened through some of your comments on the puts and takes on margin and lot cost inflation starting to accelerate and maybe stick and brick costs also inflecting higher again after being a good guide this year. Is there a point where you look at your margin, which, obviously, it's very healthy today, but a point where it becomes harder to continue buying down that rate 100 basis points, 150 basis points, and what is that threshold for you?

Jessica Hansen:

And we're going into the year with a very strong start. We did say that our gross margins are expected to decline in Q1, but we're coming off a 25.1% in Q4, which is below the peaks that we achieved last year. But it's still a very healthy gross margin that gives us some room to meet the market and maximize returns and still post very healthy returns.

Paul Romanowski:

I think anytime you see rates like they have been in the capital markets, a bit in flux, then we're going to see some headwinds from our developers, from less capitalized builders. And it will create some opportunities, but we feel like we've got a good plan and open communications with our vendors, our trades and our lot suppliers to continue to work through those processes.

Anthony Pettinari:

Congratulations on the transition to David and Paul. I'm wondering, understanding your entire offering is fairly affordable, I'm wondering if there's a specific buyer type you're seeing as kind of best positioned to weather higher for longer rates. Are your move-up buyers meaningfully outperforming first-time buyers? Are you seeing more buyers move down market to more affordable offerings? I'm just wondering what you're seeing there and if you're making any sort of strategic shifts to target a different mix of buyers.

Jessica Hansen:

And we still really like over half of our business being first-time homebuyers because despite what's happening with interest rates, those buyers need a place to live. They don't already own a home, so they're not a discretionary buyer. They're in the market looking at buy versus rent opportunities. So, if we can stay competitive with the rental market on that front, we're going to continue to capture first-time homebuyer market share.

Michael Murray:

I think 12 months ago, we were facing two big issues. We were still trying to solve the production supply chain challenges and our cycle times were very elongated. So we had a hard time determining exactly what homes we're going to finish and deliver. And that was also a big interaction with the rate buy-down process because we can only buy rates down for certain forward amount of time in a cost-effective manner, and so being able to pinpoint when those homes would deliver into the buy-down environment. You touched on the second point with the rates. Yes, we start facing some rate uncertainty and increases, but we have been able to manage through that over the past 12 months, and the team has delivered a really strong year.

Ken Zener:

I'd like to take a step back just to bridge three CEOs, if we could here. So it was 10 years ago – David, congratulations – that you got on the call. At the time – and it's going to be about margins. Don talked about at the time 20-10-10, so 20% gross margin, 2 turns. David, as we all recall, when you came on shortly thereafter, Express, obviously, a great product. And you guys pulled gross margins down to – guidance in the 19%, 21% focusing on asset turns, consistent with Don's comments, and it's been great. Now, Paul, I certainly want to give you a chance to give your fingerprints on this. Could you comment on those prior – well, CEOs' comments, why it's different today and perhaps tie that into your to top rising comments on your exposure to non-top 50 markets. That's my first question.

David Auld:

Ken, I was going to try to stay off this Q&A. Everything – you go back 45-year history, the goal of the company is to be the low-cost provider of affordable housing and create opportunities for first-time homebuyers to get in a home. And everything we've done through those years has been to position the company a little bit better and a little bit stronger. And the awakening of 2008, 2009 and 2010, I think, created a discipline in operations that made the transition from margin to return pretty much an industry standard today. You listen to other builder calls and everybody is talking about returns, cash flow, deleveraging and derisking their land pipeline. I don't see that changing. The industry has matured, the market share consolidation by the publics, the difficulty of putting lots on the ground, the difficulty of building houses, restrictions on capital, all of those things are forcing a discipline on the industry and allowing the – what I think the national builders to gain market share quarter after quarter after quarter after quarter. So our internal focus is going to continue to be project by project, driving improvements to efficiency, simplifying product, making it – even as overall individual component price increases, the availability of housing to the first-time homebuyer continues to be there. So that's our goal. That's all we think about every day. And I think, earlier, somebody said something about sustainable. Everything we do, if it's not sustainable, we leave it in the trash pile and move on. So scalable, sustainable, consistent, and transparent. That's this team that's built alignment throughout our company, and I don't see that changing. Paul will do things differently than I do. He's taller than I am. That's a good thing. Coming down the ladder, I feel very good about the position we're in. Never been as well-positioned as a company.

Jessica Hansen:

So to the first part of your question, we're over 60% of the houses that we're closing today were developed this past fiscal year on a lot developed by a third party. So the 54% is kind of a minimum that we would expect to take down finished because in a lot of cases, as you likely recall, industry practices for – we have hundreds of land professionals across the country that are very good at what they do. So they'll go out, source the land, negotiate it with the land seller, put it under contract and then we'll go find a third-party developer. So in a lot of cases, some of that stuff and the other 45% that we maybe today has not identified who's going to develop it. By the time we bring it on our balance sheet, it will be from a third party. And then in terms of the markets where we're buying more finished lots versus not, do you expect that to skew?

Ken Zener:

Thank you very much. Thank you, David.

Operator:

Your next question is coming from Susan Maklari from Goldman Sachs.

Jessica Hansen:

On a year-over-year basis, Sue, yes. I think we would expect – as we look at fiscal 2024, we've driven a lot of increased absorption out of our communities for quite some time now. And so we're shifting to some of that growth now coming from just incremental community count and continuing to expand our footprint. So I think mid to high single is a good base case. We don't specifically guide the community count for a reason. It's pretty hard to predict just because there are so many moving pieces to communities coming on and offline, but I do think that's a reasonable base case assumption that we'll obviously update as we move throughout the year if necessary.

Bill Wheat:

It's been the goal of ours to consistently repurchase shares over time and grow that over time. And so, this is just another step in that progression. And in the business, as we see I'd say, increased visibility and confidence in our ability to generate cash flow into fiscal 2024. That's given us a little more certainty around being able to guide a little more specifically to that growth than we have in the past. As Mike said earlier, a year ago, we were concerned about our production capacity and how quickly we could actually deliver homes. We have more certainty around that today. And so, with that, that gives us more visibility around our cash flow. And so, repurchases, dividends, distributions to shareholders are an important part of our of our capital allocation. And so, as we're guiding to $3 billion of homebuilding cash flow with $1.5 billion of that going to share repurchase, another $400 million going to dividends, that's obviously a very important part of our capital allocation.

Rafe Jadrosich:

I wanted to just follow up on the comments on the lot cost outlook, up 11% year-over-year in the fourth quarter. Is there something that's driving that higher near term? Or is that sort of the run rate we should be expecting as we go into fiscal 2024?

Rafe Jadrosich:

On the rental outlook, there are some signs that rents are coming down. And as you mentioned earlier, cost of capital is higher. How do you think about incremental investments in rental in this current rate environment? Is there a level of rates where you pull back? And if demand is weaker, like how do you handle what you've invested there? Like, would you sell at retail or just continue to rent them out? Just how could you handle that in different rate environments?

Michael Murray:

The strategic value of the platform for us to be a very good multifamily developer is significant as a land user. Being a residential developer, we've done that for a long time. And now going into the multifamily development side, we become a better buyer of land parcels and a better partner for land sellers. And so, strategically, it's a business we're going to stay in, going to continue to scale that business, but we will be opportunistic and responsive to market conditions with what we do.

Jade Rahmani:

Not sure if this was stated earlier, but could you get the percentage of your buyers that are taking some kind of mortgage buy down or interest rate incentive? And secondly, what percentage are taking the full-term buy down?

Jade Rahmani:

On the rental business, could you talk to a rough ballpark of exit cap rates that – or acquisition cap rates that the purchases of your development assets are looking to achieve?

Paul Romanowski:

And we have been very conservative in our underwriting and expectations for our single-family rental business and making sure that we feel good about it as a for-sale position as well as a for-rent, and underwriting it to the lowest of those guidelines for our operators, so that we aren't stretching on cap rates that are all driven potentially by interest environment.

Michael Dahl:

Congrats, Paul. Congrats, David. I wanted to ask a follow-up about margin, and I appreciate you're not giving full guidance and you're thinking about returns, not margins, but some of the qualitative comments around expectations for maybe a little bit of downward pressure on price, obviously, some potential just mix, outright price pressure, then the added incentives, the lot costs, it sounds like you're bracing for further margin declines beyond 1Q. Is that fair? Or is there any order of magnitude that you can help us with on some of the other moving pieces that you're contemplating around margins beyond 1Q?

David Auld:

Mike, I'm pretty optimistic. We've never been positioned to execute from a product location, lot supply and have gained efficiency through the last two or three years that I think we'll continue on. So I think 2024 is going to be a good year given a lack of some catastrophic event. So it's just – ultimately, in this business, it's about who can produce houses the most efficient at the lower cost and drive the best returns. And we have never been positioned as a company to do that better than we are right now.

Bill Wheat:

As we did comment earlier, our pipeline of multifamily deals is growing, and we expect higher deliveries on multifamily. So I do expect our investments on the multifamily side of rental to show an increase in fiscal 2024. The single-family side, I think, is uncertain as to whether that will grow or not. It's going to – we're evaluating that in market conditions and where the rate environment is, as Mike and Paul commented earlier, but do expect some offset on the multifamily side.

Operator:

Thank you. This does conclude today's Q&A session. I would now like to hand the floor back to Paul Romanowski for closing remarks.

Operator:

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Operator:

Good morning, and welcome to the Third Quarter 2023 Earnings Conference Call for D.R. Horton, America's Builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton.

David Auld:

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice Presidents and Co-Chief Operating Officers; and Bill Wheat, our Executive Vice President and Chief Financial Officer. For the third quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $3.90 per diluted share. Our consolidated pre-tax income was $1.8 billion on an 11% increase in revenues to $9.7 billion, with a pre-tax profit margin of 18.3%. Our homebuilding return on inventory for the trailing 12 months ended June 30 was 31.8%, and our return on equity for the same period was 24.3%. Despite continued high mortgage rates and inflationary pressures, our net sales orders increased 37% from the prior-year quarter, as the supply of both new home and existing homes at affordable price points is limited and demographics supporting housing demand remain favorable. We are focused on consolidating market share by supplying more homes to meet homebuyer demand, while maximizing the returns and capital efficiency each of -- in each of our communities. With improvements in both labor capacity and availability of materials, our cycle times are decreasing, positioning us to release homes for sale earlier in the construction cycle. We are pleased that we were able to increase our homebuilding starts to 22,900 homes this quarter, which was supported by a 6% sequential increase in our active selling communities. Our homebuilding operating margins are lower than the record high margins we reported last year due to cost inflation and pricing adjustments and incentives we implemented to address homebuyer affordability challenges caused by higher mortgage rates. However, our margins improved sequentially from the March to June quarter as home prices and incentives have stabilized and some reductions in construction costs are now being realized in our homes closed. We are well-positioned with our experienced operators, diverse product offerings, flexible lot supply, and strong capital and liquidity position to produce and sustain consistent returns, growth and cash flow. We will maintain our disciplined approach to investing capital to enhance the long-term value of our company, including returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Paul?

Mike Murray:

Our net sales orders in the third quarter increased 37% to 22,879 homes, and order value increased 26% from the prior year to $8.7 billion. Our cancellation rate for the quarter was 18%, flat sequentially and down from 24% in the prior-year quarter. Our average number of active selling communities was up 6% sequentially and up 8% year-over-year. The average price of net sales orders in the third quarter was $381,100, up 2% sequentially and down 8% from the prior-year quarter. To adjust to changing market conditions and higher mortgage rates over the past year, we increased our use of incentives and reduced the sizes of our homes to provide better affordability to homebuyers. Although home prices and incentives have begun to stabilize, we expect to continue utilizing a higher level of incentives as compared to last year. Our sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Bill?

Jessica Hansen:

In the third quarter, our homebuilding SG&A expenses increased by 6% from last year and homebuilding SG&A expense as a percentage of revenues was 6.7%, up 10 basis points from the same quarter in the prior year. Fiscal year-to-date homebuilding SG&A was 7.2% of revenues, up 30 basis points from the same period last year as we've maintained the capacity of our platform to grow market share. Paul?

Mike Murray:

Our homebuilding lot position at June 30 consisted of approximately 555,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 34% of our total owned lots are finished and 53% of our controlled lots are or will be finished when we purchase them. Our capital-efficient and flexible lot portfolio is a key to our strong competitive position. Our third quarter homebuilding investments in lots, land and development totaled $2.2 billion, up 25% from the prior-year quarter and 27% sequentially. Our current quarter investments consisted of $1.2 billion for finished lots, $700 million for land development, and $290 million for land acquisition. Paul?

Bill Wheat:

Forestar, our majority-owned residential lot development company, reported total revenues of $369 million for the third quarter on 3,812 lots sold with pre-tax income of $62 million. Forestar's owned and controlled lot position at June 30 was 73,000 lots. 57% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $270 million of our finished lots purchased in the third quarter were from Forestar. Forestar is separately capitalized from D.R. Horton and had more than $780 million of liquidity at quarter-end, with a net debt to capital ratio of 19.1%. Forestar is uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply and relationship with D.R. Horton. Mike?

Bill Wheat:

Our balanced capital approach focuses on being disciplined, flexible and opportunistic to support and to sustain an operating platform that produces consistent returns, growth and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions. During the first nine months of the year, our cash provided by homebuilding operations was $2.1 billion and our consolidated cash provided by operations was $2.3 billion. At June 30, we had $4.6 billion of homebuilding liquidity, consisting of $2.6 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. Homebuilding debt at June 30 totaled $2.7 billion, which includes $400 million of senior notes that we redeemed early in July. Our homebuilding leverage was 11.1% at the end of June and homebuilding leverage net of cash was 0.7%. Our consolidated leverage at June 30 was 22%, and consolidated leverage net of cash was 11.2%. At June 30, our stockholders' equity was $21.7 billion, and book value per share was $64.03, up 23% from a year ago. For the trailing 12 months ended June, our return on equity was 24.3%. During the quarter, we paid cash dividends of $85 million and our Board has declared a quarterly dividend at the same level as last quarter to be paid in August. We repurchased 3.1 million shares of common stock for $343 million during the quarter for a total of 7.7 million shares repurchased fiscal year-to-date for $764 million. Jessica?

David Auld:

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint and diverse product offerings. All of these are key components of our operating platform to sustain our ability to produce consistent returns, growth and cash flow, while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton team for your continued focus and hard work. This concludes our prepared remarks. We will now host questions.

Stephen Kim:

Thanks very much guys. Impressive quarter once again. So, congratulations on that. I wanted to talk about your construction -- your pace of construction and your goals going forward. You talked about growing your starts this quarter versus last quarter. But when we just look back maybe a year, year and a half ago, there were a couple of quarters where you started even more. You started about 25,000 units a quarter. I wanted to get a sense from you as to whether or not you feel like that's a level that you could achieve in the near term, and if not why not? And then also if you could talk about whether seasonality is going to be a factor we should be thinking about with respect to your starts cadence?

Stephen Kim:

Okay. So, it sounds like I didn't really get a sense for whether 25,000 is a significant figure in your mind. And why is that a level that we couldn't achieve or revisit? Simply because it wasn't that long ago where you actually did that for, like I said, two quarters in a row. And then also if I could tack on a second question about your rental platform. You did give some guidance regarding [revs] (ph) being higher, but margins being lower relative to -- in 4Q relative to 3Q. Could you talk about your plans for rental inventory in dollars carried on the balance sheet? Where should we be thinking you're going to take that level of investment, which I think is $3.3 billion, if I'm not mistaken, right now? Is that going to grow meaningfully as we look into 2024 and beyond, or is that a level that you feel comfortable with, maybe even begin to harvest some of that? Thanks.

Mike Murray:

Hey, Stephen. So, we expect that the margin on the fourth quarter closings in the rental segment will probably have a lower profit margin, largely on the basis of a mix of projects that are delivering between Q3 and then into Q4. A lot of it's on a cost basis difference between those homes that were built at different times and when they're delivering.

Stephen Kim:

Okay. Great. Thanks very much, guys.

Joe Ahlersmeyer:

Thanks, and good quarter, guys.

Joe Ahlersmeyer:

I wanted to follow up on the community count. That's up about 9% year-to-date, calendar year-to-date that is. And I'm just wondering is there anything in there that we should consider that's more temporary in nature? I'm not going to straight-line that release or anything that sequential number, but should we expect that to go down into the back half, or are we going to sustain those levels? And then I have a follow-up.

Joe Ahlersmeyer:

Makes sense. And just thinking about the homes and inventory number, that was actually sequentially flattish the last couple quarters, even as you did grow those communities. So, is it right to think that maybe this is part of returning to higher levels of inventory unit turnover? Or should we expect that the total homes and inventory will sort of catch up on a lag as you continue to grow starts?

David Auld:

That is a -- going back to the start question, that is a factor in our start pace is making sure that we have the capacity to continue to deliver these houses in a more -- in a faster and more efficient way. It all flows together so that we can actually deliver more houses with fewer homes and inventory quarter-to-quarter, quarter-to-quarter.

Operator:

Thank you. The next question is coming from John Lovallo from UBS. John, your line is live.

Paul Romanowski:

Yeah. Thanks, John. I think we are seeing more normal seasonality this year in terms of just demand traffic patterns. And so, I think our base expectations would be that orders would show a bit closer to normal seasonality going forward. But to our approach in trying to be as consistent as we can and providing starts pace and a consistent level of inventory, we're still a short supply of inventory out there in the existing home market and in the new home market. We're going to make sure we've got enough homes out there to capture whatever demand there may be. And so, our hope would be, over the longer term, we could see a bit more consistency there. But there still is a natural seasonality and an ebb-and-flow to consumer demand that I think is getting back to a more normal level.

John Lovallo:

That makes sense. Okay. And then maybe just a bigger picture question. If we look at 2019, D.R. Horton delivered 57,000 homes, in that ballpark, versus the -- close to 83,000 homes expected this year. Industry-wide single-family starts were pretty similar in 2019 to what's expected today. Obviously, Horton and the publics have been gaining share for years, but this is close to a 45%, 50% jump since 2019. So, I guess, the question is, how sustainable are these gains? How important is your build strategy to this performance? And maybe how important is the lack of existing home inventory just to overall homebuilder success today?

John Lovallo:

Thank you very much.

Carl Reichardt:

Thanks. Good morning, everybody. Bill, you mentioned stick and brick down 4% per foot, I think, year-on-year. Could you break that out in terms of what materials are helping most, obviously, lumber and then labor? And the reason I ask is, I'm assuming that we're starting to see some leverage from the single-family and multi-family rental platform. Part of the reason you're trying to grow that business is to add scale in your markets to lower overall construction costs. So, I'm wondering if that's starting to help there.

Carl Reichardt:

Okay. Thank you, Bill. And then David, the private builders we're talking to, we've seen sort of -- you mentioned normal seasonality to a slower market maybe than they had expected starting the summer. I don't know if that's just the particular vagaries of being small and private. They can't -- harder to buydowns, more capital constraints to do higher-end. But you purchased a private during the quarter and you've got presence in a lot of markets where the smaller privates really make up the bulk of your competitors, in some cases, all of them. Has there been much movement in terms of interest willingness or need to sell among the privates right now, just given what they're facing relative to what the publics have advantage-wise? Thanks.

Jessica Hansen:

Excited about the most recent [indiscernible] Truland in terms of already having been one of our largest lot developers in our Gulf Coast region. And so, we picked up Truland's homebuilding operations, but Nathan Cox and his team will continue to be a key component in terms of developing lots to us and for us in the Gulf Coast.

Carl Reichardt:

Great. I appreciate it. Thanks all.

Operator:

Thank you. The next question is coming from Mike Rehaut from JPMorgan. Mike, your line is live.

Jessica Hansen:

Sure, Mike. So, I mean, we're not in this for quarterly results. We're in this for the long term and to build as much shareholder value as we can over the long term. So, quarter to quarter to quarter, as you've heard David say over and over, we're focused on being consistent, and, as we've talked about, it's all tied to our starts pace. So, we're not managing to a sales number in Q4. If the market's there and our cycle times continue to improve, we might be able to see a little bit better than normal seasonality. If the market were to weaken for some reason or we don't get as many homes started ultimately, it could be less than normal seasonality. Right now, we feel like we're positioned to increase our starts slightly from where we were in Q3. And also, as we've talked about, our construction cycle times have continued to improve and our flag count has grown. So, we feel like we're very well-positioned. But frankly, we're more focused on positioning for '24 at this point than we are worried about Q4. I mean, we're going to finish out the year very strong and generate strong returns and continue to add to book value and position ourselves to go do the same in 2024.

Bill Wheat:

Sure, Mike. As we're looking to fiscal '24, we're -- and we've talked about this before. We always try to position ourselves with our lot position, with our homes and inventory so that we are in a position to deliver close to a double-digit growth, high-single, 10% type growth. And so, that's what we're doing again, is positioning our inventory so that we're in the position there in the market that we see today. I think it's there for us if we can get our lot positions and our homes in inventory ready for that. And with improved cycle times, that helps us improve our inventory turnover. And I think we focus a lot more on our inventory turn, our inventory conversion than we do backlog. Backlog is just really just a factor of when we choose to sign a sales contract on a home. We focus on our starts pace, what homes we have in inventory, and then we adjust when we're going to release those for sale based on when we have confidence that we can deliver that home. So, every home we start, we will close. And if we're turning those faster, then that will improve the inventory turnover and improve -- honestly, improves your visibility to see what our closings are going to be as well. So it's really about our starts pace, our inventory positioning, and then how efficiently can we turn that.

Mike Rehaut:

Great. Thanks so much.

Operator:

Thank you. The next question is coming from Matthew Bouley from Barclays. Matthew, your line is live.

Mike Murray:

What we're seeing today in the closings are lots that were contracted and acquired quite some time ago and coming through. So, we're not seeing a lot of cost pressure coming through. Going forward, along with the lot scarcity, we're expecting to see lot costs coming through in forward margins at a higher level. There has certainly been inflation in land and in lot development costs and in finished lot prices. So, we expect to see that, but that's factored into our guidance and the way we're planning for the business next year.

Paul Romanowski:

Yeah. The rate buydown for us has been an effective incentive and to help us provide, as we've improved our cycle time as well, a certainty of close date and a certainty of home payment. And we have stayed roughly a point below the market, and we'll have to measure that as we move forward depending on where rates move, whether that be up or down. But we have found it to be our -- one of our most effective incentives, and we have been consistent in that execution and we'll continue to explore that as the interest rates move on a go-forward basis.

Operator:

Thank you. The next question is coming from Eric Bosshard from Cleveland Research Company. Eric, your line is live.

Bill Wheat:

Yeah, Eric, it's -- what we have visibility to is basically what's in our backlog and what's been in our recent sales, and then, we certainly have visibility to what our recent cost levels have been. So, we've been seeing the costs on our more recent starts be lower. So, we've got some visibility to what that could produce. So, right now, as we look at our recent backlog in sales, we see a sequential modest improvement in margin up to kind of the high-23%-s to 24% range in Q4. You used the word stabilization. Last quarter, we used that word quite a bit. And so, we -- and we're still seeing that. And so, I think we are kind of settling into a more stable period here in terms of our costs, and demand has been pretty steady as well. So, I think we certainly don't see a trajectory in margin forever upward, but the modest improvement into the coming quarter looks like a pretty sustainable level here in the near-to-medium term.

Eric Bosshard:

Within this, you mentioned a moment ago, buying rates down a point below market has been a silver bullet or something that's been a catalyst for consumers to go ahead and sign a contract. I'm curious if you're seeing that's just the way it's going to be, or if you're seeing consumers becoming more comfortable with the reality in the days of a 3% mortgage are long gone. I guess, what I'm trying to figure out is, can you get away with buying down rates less now? Are you seeing consumers a bit less sensitive? Or is this the medium-term reality that we should expect?

Jessica Hansen:

It was still on a majority of the homes we closed in the third quarter, but it was at a lower percentage than it was in Q2 in terms of the number of buyers utilizing that incentive.

Operator:

Thank you. The next question is coming from Ken Zener from Seaport Research Partners. Ken, your line is live.

David Auld:

Good morning, Ken.

Jessica Hansen:

Sure. I'll start, Ken, and then I'm sure Mike or someone is going to chime in on the true ops piece of it. But in terms of the 53% that we said in our scripted remarks of our option lots that we expect to be purchase-finished, that's just at a point in time. So that's where we've already determined who's going to develop those lots for us, and we know we're going to take them down as a finished lot. That's by no means a ceiling. We're now closing 60%-plus of our houses quarter-to-quarter on a lot purchased from a third-party developer. And so, we -- in the normal course of business, we'll contract with a land seller as D.R. Horton, put the option [on the] (ph) contract and then we'll go find a land developer. So, the 53% is more of a floor than necessarily a ceiling.

Bill Wheat:

And Ken, to circle back to your initial comment about capital and cash flow and percentage of cash flows relative to our earnings, we are seeing a big improvement in that this year, and that's what we're expecting to see this year. I would tell you that, that big move is being driven primarily by the improvement in our cycle times -- by our construction cycle times. We don't have as much capital tied up per home in our homes in inventory, because we're turning those faster. Definitely, our land shift over many years has been a component of that over time. But this year, specifically, it's more about our homes and inventory turnover improving.

Paul Romanowski:

Yeah. I think on the lot development question, we have talented teams across our platform. And there are instances where it's important to us in our starts pace is we have to have a lot on the ground. And so, controlling that process and being good at producing that lot is a talent that we're going to retain, and we have to continue to exercise that in order to do so. And some deals just make more sense for us to develop from a timing perspective and/or structure and/or size. And so, we're going to make that decision community-by-community across the platform. In terms of our absorption per community, I just -- I think that you've seen some larger communities that may be a portion of that impacting sales and positioning of those communities to drive more efficient activity, both on the construction and sales side.

Ken Zener:

Thank you.

Mike Dahl:

Good morning. Thanks for taking my questions. A couple of follow-ups on the rental side. So, there was a pretty well-publicized deal between yourselves and a large SFR company. Within the quarter and the guide, any color you can provide on how much of that deal already closed in 3Q? And whether or not the increase in the guide for the year reflects the full closing of that, or if there's going to be some carryover into fiscal '24?

Mike Dahl:

Okay, got it. And I guess a follow-up there, so without the specifics. Given the total units you are now guiding to and the inventory that you've outlined, you will close a significant portion of your existing inventory in 4Q. And so, I fully understand that this is a growth part of your business for the next couple of years. But just circling back to a question, I think, earlier on the call around specifics on '24, should we be thinking that you've kind of pulled forward the timing of when some of that inventory you might have expected to close in terms of closing in '23 versus '24, so maybe it's a little lower in '24, or are you really in a position where even with this increased guide, you can keep growing in '24 off that?

Mike Dahl:

Okay, great. Thank you.

Alan Ratner:

Hey, guys. Good morning. So, very impressive progress on the cycle times and the cost front. I'm guessing what we are seeing now is probably somewhat of a lagged effect of the big pull back in starts the industry saw late last year and the negotiating power you had over the trades at that time and, of course, the pull back in lumber. You are not the only ones ramping your start pace now. I think we are hearing similar messages from most of your larger competitors. Maybe some of that is at the expense of the smaller privates, but I think it is clear the industry start pace is going to be accelerating here for the next handful of quarters at least. So, what are your thoughts on the sustainability of the progress you have made on cycle times and costs heading into '24? And more specifically, what are you seeing from your trades? Are they ramping their headcount in anticipation of an accelerating start pace going forward? Are they seeing more capacity out there that would support this type of growth without cost inflation following?

Alan Ratner:

Got it. Appreciate the thoughts there. Second, Jessica, you mentioned earlier that while you're still offering mortgage rate buydowns on the majority of closings, it did tick a little bit lower quarter-over-quarter in terms of the share of closings that had those buydowns. I was curious if you -- a, if you had that specific data you could share with us? But, b, are you seeing any sensitivity to demand in the communities maybe where you are dialing back those buydowns? On one hand, the buydowns are probably putting you guys in such a strong competitive advantage versus the resale market. But on the other hand, with inventory as tight as it is and demand seemingly pretty strong, it would seem like you should have some ability to pull back on those without impacting demand too much. I'm just curious the interplay between that.

Alan Ratner:

Great. Appreciate the color. Thanks, guys.

Truman Patterson:

Hey, good morning, everyone. Thanks for fitting me in. First, this has been touched on a little bit earlier in the call, but just trying to get a big picture overview of the banking environment and what it means for Horton. Has the banking environment currently negatively impacted your developer partners kind of outside of 4 Star, their ability to access capital for future projects? For smaller private builders, are you actually seeing them kind of pull back on spec construction, land deals, et cetera?

Truman Patterson:

Perfect. Thank you. And then, you all have discussed previously about rotating to smaller square footage offerings to combat affordability. Any way you can help us think about -- are you seeing consumers actually prefer these smaller square footage homes over the past six months? Or based on the offerings that you have out there, are consumers still kind of preferring the larger square footage homes?

Truman Patterson:

All right. Thank you, and good luck in '24.

Operator:

Thank you. And the next question is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live.

Paul Romanowski:

Yeah, we are -- today down that 30 days puts us at about five-and-a-half months in our current cycle time, which is still slightly above our historical averages. And so, we see a trend towards -- more towards our normalized and consistent cycle times. That's going to depend on labor availability and our ability to continue to aggregate that labor. As you see start space increase across the country, we could certainly see some pressure on that, but feel comfortable in our position and with the trade capacity that we have in labor out in the markets today.

Rafe Jadrosich:

Thank you. That's helpful. So there's still more opportunity. And then, just on the rental profit outlook for the fourth quarter, the guidance is units will be up quite a bit, but you're thinking about rental profits being down. Should we think about gross margins there being lower than kind of core homebuilding longer term? Is there any dynamic that's driving that margin kind of cadence short-term, or is this something we should be thinking about it longer-term?

Rafe Jadrosich:

Great. Very helpful. Thanks.

David Auld:

Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter results in November. And finally, congratulations to the entire D.R. Horton family on producing a solid third quarter. Continue to compete, win every day. Thank you.

Operator:

Good morning, and welcome to the Second Quarter 2023 Earnings Conference Call for D.R. Horton Americas Builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R Horton.

David Auld:

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice Presidents and Co-Chief Operating Officers; and Bill Wheat, our Executive Vice President and Chief Financial Officer. We are excited to announce that we recently closed our [1 millionth] home a first for any homebuilder. We are both humbled and proud to have been a part of a million families achieving their dream of home ownership over the past 45 years. For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $2.73 per diluted share. Our consolidated pre-tax income was $1.2 billion on $8 billion in revenues with a pre-tax profit margin of 15.6%. Our homebuilding return on inventory for the trailing 12 months ended March 31 was 35.1%. And our consolidated return-on-equity for the same period was 27.2%. Spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter. Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions. Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited and demographics supporting housing demand remain favorable. We are well-positioned to navigate changing market conditions with our experienced operators, affordable product offerings, flexible lot supply and great trade and supplier relationships. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility. We will continue to focus on managing our product offerings, incentives, home prices, sales pace and inventory levels to meet the market, consolidate market-share, optimize returns and generate increased operating cash flow. Mike?

Paul Romanowski:

Our net sales orders in the second quarter decreased 5% to 23,142 homes and order value decreased 11% from the prior year to $8.6 billion. Our cancellation rate for the quarter was 18%, up from 16% in the prior year quarter, but down 27% sequentially. Our average number of active selling communities was up 3%, both sequentially and year-over-year. The average sales price of net sales orders in the second quarter was $372,900, down 7% from the prior year quarter and up 1% sequentially. To adjust the change in market conditions and higher mortgage rates, we have continued offering incentives and reducing the prices and sizes of our homes where necessary to provide better affordability to homebuyers and to optimize the returns on our inventory investments. We expect to continue offering a similar level of incentives throughout 2023 and we are seeing indications that our average sales price and incentive levels are beginning to stabilize. Our sales volume in the third quarter and for the rest of the year will depend on the continued strength of the Spring selling season and general market conditions, which can be significantly affected by changes in mortgage rates and other economic factors. We will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Bill?

Jessica Hansen:

In the second quarter, our homebuilding SG&A expenses increased by 8% from last year, and homebuilding SG&A expense as a percentage of revenues was 7.3%, up 50 basis points from the same quarter in the prior year. We are controlling our SG&A while ensuring our platform adequately supports our business. Paul?

Mike Murray:

Our homebuilding lot position at March 31 consisted of approximately 547,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 32% of our total owned lots are finished and 53% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. We are actively managing our investments in lots, land and development based on current market conditions. During the quarter, our homebuilding segment incurred $900,000 of inventory impairments and wrote off $13 million of option deposits and due diligence costs related to land and lot purchase contracts. We expect our level of option cost write-offs remain somewhat elevated in fiscal 2023 as we continue to manage our lot portfolio through changing market conditions. Our second quarter homebuilding investments in lots, land and development totaled $1.7 million, down 19% from the prior year quarter and flat sequentially. Our current quarter investments consisted of $980 million for finished lots, $590 million for land development and $150 million for land acquisition. Bill?

Mike Murray:

Our rental operations generated $224 million of revenues during the second quarter from the sale of 721 single-family rental homes, earning pretax income of $35 million. Our rental property inventory at March 31 was $3.3 billion, which included approximately $2.1 billion of single-family rental properties and $1.2 billion of multifamily rental properties. We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 as our platform matures and expands across more markets. For the third quarter, we expect our rental revenues to be similar to our first and second quarters. Paul?

Bill Wheat:

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. We are committed to maintaining a strong balance sheet with low leverage and significant liquidity, which provides us the flexibility to adjust to changing market conditions. During the first six months of the year, our cash provided by both our consolidated and homebuilding operations was $1.5 billion. At March 31, we had $4.4 billion of homebuilding liquidity consisting of $2.4 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. We repaid $300 million of 4.75% senior notes in February at maturity and we have $400 million of senior notes that will mature in August. Our homebuilding leverage was 11.5% at the end of March, and homebuilding leverage net of cash was 1.5%. Our consolidated leverage at March 31 was 22.4%, and consolidated leverage net of cash was 12.3%. At March 31, our stockholders' equity was $20.7 billion, and book value per share was $60.73, up 27% from a year ago. For the trailing 12 months ended March, our return on equity was 27.2%. During the quarter, we paid cash dividends of $85.6 million, and our Board has declared a quarterly dividend at the same level as last quarter to be paid in May. We repurchased 3.2 million shares of common stock for $303 million during the quarter for a total of 4.5 million shares repurchased fiscal year-to-date for $421 million. Subsequent to quarter end, our Board authorized the repurchase of up to $1 billion of our common stock, replacing our prior authorization. The new authorization has no expiration date. Jessica?

David Auld:

In closing, our results and position reflect our experienced teams industry-leading market share, broad geographic footprint and diverse product offerings. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions and continue aggregating market share. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton team for your continued focus and hard work. And a special thank you from Don Horton, our Founder and Executive Chairman, to the countless D.R. Horton employees and trade partners over the past 45 years. We participate in the countless D.R. Horton -- we participated in and contributed to our journey to build, sell and close 1 million homes. This concludes our prepared remarks. We will now host questions.

John Lovallo:

Good morning, guys and thank you for taking my questions. The first one is, to the extent you can comment on April trends, I mean it sounds like from what we can gather from March checks in April has trended along pretty nicely. And along those same lines, if we think about the third quarter, typical absorption declining, call it, 10% sequentially. Is that a reasonable way as a starting point as we move into the third quarter here? Or how are you thinking about that?

John Lovallo:

Makes sense. And then just given the demand is holding up reasonably well, do you think there could be somewhat of an industry, I don't want to say land grab, but more of a push towards companies going out and trying to buy more land as maybe expectations reset a bit more positively to you ahead looking into 2024?

John Lovallo:

Got it. Thanks very much guys.

Stephen Kim:

Thanks very much guys. I got to start off with a comment, which is that if you do the high end of your guide for closings this year, effectively, you'll have had pretty stable closings in '21, '22 and '23, which is a pretty remarkable achievement given the volatility in the adverse environment we saw late last year. So congrats to you guys on that. Now regarding the -- I wanted to talk about market share. One of the things that we've seen as -- I see as an emerging trend is that builders such as yourselves are going to be able to gain share, particularly from some of your private guys who are more dependent upon regional and local banks. So I wanted to ask you whether you think that a lot of the strength that you've been seeing recently is -- can be attributed to market share gains, and if so, does that mean that you can continue to see your volumes to rebound without seeing a commensurate rise in overall costs, which was a theme that people were wrestling with over the last few months?

Stephen Kim:

Great. That's encouraging. Appreciate that. Second question relates to what degree you're able to ratchet back incentives looking ahead? I know you sort of talked about a stable environment, and I get that. But I also know that you are probably going to be adjusting what sort of product you put out to market. I would guess that probably has a little bit more of a value orientation. And I'm curious as to whether you anticipate over the medium term that you will be able to ratchet back your incentives as you roll out some more inherently affordable product by design?

Jessica Hansen:

And as with everything, we're not directing anything globally nationwide, community by community, market by market, our local operators are making those decisions to maximize returns at the local level.

Operator:

Your next question for today is coming from Carl Reichardt at BTIG.

David Auld:

Carl, it's less, it's about positioning. We like the way we're positioned out there and then driving stability. So consistency, stability, flag count, I'm not sure that we saw significant improvement. But again, it's a part of the overall contributor, so.

Carl Reichardt:

Okay. Thanks Jess. And then on supply chain, you mentioned -- or sorry, on the cycle times, you mentioned down 12 days. And I'm curious if that was just really all supply chain improvement or, to some extent, sort of mix and moving down to quicker homes to turn? And then are you expecting additional improvement in the back half of the year in that metric?