Good morning, and welcome to the Q1 2021 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 brief question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D. R. Horton.
Thank you, Christine, and good morning. Welcome to our call to discuss our results for the Q1 of fiscal 2021. Before we get started, today's call may include comments that constitute forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D. R.
Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward looking statements are based upon information available to D. R. Horton on the date of this conference call, and D. R.
Horton does not undertake any obligation to publicly update or revise any forward looking statements. Additional information about issues that could lead to material changes in performance is contained in D. R. Horton's annual report on Form 10 ks, which is filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.
Drhorton.com, and we plan to file our 10 Q in the next day or 2. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now, I will turn the call over to David Auld, our President and CEO.
Thank you, Jessica, and good morning. I'm pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D. R. Horton team delivered an outstanding Q1, which included a 98% increase in consolidated pretax income to over $1,000,000,000 A 48% increase in revenues to $5,900,000,000 and a 56% increase in net sales orders to 20,418.
Our pre tax profit margin for the quarter improved 440 basis points to 17.4%, while our earnings increased 84% to $2.14 Our homebuilding return on inventory for the trailing 12 months ended December 31 was 28% And our consolidated return on equity for the same period was 24.4%. These results reflect the strength of our homebuilding and financial service Our ability to leverage D. R. Horton's scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands. Housing market conditions remain very strong and our teams are focused on maximizing returns And improving capital efficiency in each of our communities while increasing our market share.
However, we remain cautious Regarding the impact of COVID-nineteen pandemic or other external factors may have on the economy and our operations in the future. We believe our strong balance sheet, liquidity and experienced teams position us very well to operate effectively through changing economic conditions. We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home prices, sales pace and inventory levels To optimize return on our inventory investments, with 42,100 homes in inventory, an ample supply of lots Continued strong sales trends in January. We are well positioned for the spring selling season and the remainder of 2021. Mike?
Earnings for the Q1 of fiscal 2021 increased 84% to $2.14 per diluted share Compared to $1.16 per share in the prior year quarter, net income for the quarter increased 84% to $792,000,000 compared to $431,000,000 Our first quarter home sales revenues increased 48% to $5,700,000,000 on 18,739 homes closed, up from $3,900,000,000 on 12,000 959 Homes Closed in the Prior Year. Our average closing price for the quarter was up 2% from the prior year at $304,100 and the average size of our homes closed was down 2%, reflecting our ongoing efforts to keep our homes affordable. Bill?
Net sales orders in the Q1 increased 56 percent to 20,418 homes and the value of those orders $6,400,000,000 up 62 percent from $3,900,000,000 in the prior year. We sold 7,292 more homes this quarter than the same quarter last year, supporting our plan to achieve further gains in market share and scale during fiscal 2021. Our average number of active selling communities increased 3% from the prior year quarter and was up 1% sequentially. Our average sales price on net sales orders in the Q1 was $314,200 up 4% from the prior year. The cancellation rate for the Q1 was 18%, down from 20% in the prior year quarter.
We are pleased with our sales pace to date in January And have seen the volume improvement we expect as we head into the spring selling season. We remain well positioned for increased demand with our affordable product offerings, lot supply housing inventories. Jessica?
Our gross profit margin on home sales revenue in the Q1 was 24.1%, up 140 basis points sequentially from the September quarter and up 310 basis points compared to the prior year quarter. The sequential increase in our gross margin from September to December exceeded our expectations and reflects the broad strength of the housing market across Almost all of our markets. We continue to see very strong demand and a limited supply of homes, especially at affordable price points, and we still have pricing power and are currently using very few sales incentives. On a per square foot basis, our revenues were up 4% from the prior year quarter, while our stick and brick cost per square foot was down 1.5% and our lot cost per square foot was up 4%. Sequentially, our revenues were flat on a per square foot basis, while our stick and brick cost per square foot decreased 1.5% and our lot costs decreased 1.5%.
Although we didn't see the impact of rising costs in our December quarter, we do expect both our construction and lot costs will increase on a per square foot basis in our homes closed next quarter. With the strength of today's market conditions, we expect to offset these cost pressures with price increases and currently expect our home sales gross margin in the second quarter to be similar to the Q1. We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand. Bill?
In the first quarter, Homebuilding SG and A expense as a percentage of revenues was 7.9%, down 130 basis points from 9.2% in the prior year quarter. The improvement in our SG and A ratio this quarter was better than our expectations and was due to strong leverage driven by our higher than expected volume of homes closed and the increase in our average selling price. Our homebuilding SG and A expense as a percentage of revenues is at its lowest point for our Q1 in our history And we remain focused on controlling our SG and A while ensuring that our infrastructure appropriately supports our business. Mike?
We ended the Q1 with 42,100 homes in inventory, 16,300 of our total homes were unsold, of which 1600 were completed. We also had 1900 model homes at the end of the quarter. Due to our strong sales in the second half of fiscal twenty twenty and the Q1 of fiscal twenty twenty one, our level of unsold and completed unsold homes is lower than in recent years. We have accelerated our pace of home starts across most of our communities the past two quarters to ensure we maintain an adequate number of homes to meet demand. During the Q1, we started 22,800 homes.
We have made good progress increasing our homes in inventory, We expect to increase them further in the Q2 as we enter the spring selling season. At December 31, our homebuilding lot position consisted of approximately 441,000 lots, of which 28% were owned and 72% were controlled through purchase contracts. 30% of our total owned lots are finished and at least 47% of our controlled lots are or will be finished when we purchase them. Our growing and capital efficient lot portfolio continues to provide us a strong competitive position, allowing us
Our first quarter homebuilding investments in lots, land and development Totaled $1,950,000,000 of which $1,130,000,000 was for finished lots, dollars 490,000,000 was for land development And $330,000,000 was to acquire land. Dollars 290,000,000 of our lot purchases in the Q1 were for Forestar.
Bill? Forestar, our majority owned subsidiary is a publicly traded residential lot manufacturer operating in 51 markets across 21 states. Our strategic relationship with Forestar as a well capitalized lot supplier across much of our operating footprint is serving us well and is presenting opportunities for both companies to gain market share. Forestar is delivering on its high growth expectations and now expects to grow its lot deliveries 30% to 35% in fiscal 2021 to a range of 13,500 to 14,000 lots. At December 31, Forestar's lot position increased 74% from a year ago to 77,500 lots, of which 52,300 are owned and 25,200 are controlled through purchase contracts.
67% of Forestar's owned lots already under contract with D. R. Horton or subject to a right of first offer under our master supply agreement. Forestar is separately capitalized from D. R.
Horton and has $580,000,000 of liquidity, which includes $240,000,000 of unrestricted cash and $340,000,000 of available capacity on its revolving credit facility. At December 31, Forestar's net debt to capital ratio was 31.8% and their next senior note maturity is in 2024. With low leverage, ample liquidity and its relationship with D. R. Horton, Forestar is in a very strong position to grow their business and navigate through changing market conditions.
Jessica?
Financial Services pretax income in the Q1 was $84,100,000 with a pretax profit margin of 44.9 percent compared to $30,500,000 29.6 percent in the prior year quarter. Our mortgage company has continued selling the mortgages it originates at strong net We began retaining servicing rights on a portion of our FHA and VA loan originations in the Q3 last year because of lower valuations offered by mortgage servicers due to the uncertainty of the impact of the CARES Act. Servicing values have since improved and we sold a portion of our retained servicing rights during the Q1. We expect to continue retaining some servicing rights prior to selling them to third parties, typically within 6 months of loan origination. For the quarter, 97% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 68% of our homebuyers.
FHA and VA loans accounted for 50% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 7.19 and an average loan to value ratio of 90%. First time homebuyers represented 56% of the closings handled by our mortgage company, up from 50% in the prior year quarter. Mike?
At December 31, Our multifamily rental operations had 4 projects under active construction and an additional 4 projects that are in the lease up phase. These eight projects represent 2,325 multifamily units. Based on our pace of leasing activity, we currently expect to sell 2 projects during the Our multifamily rental assets totaled $294,300,000 at December 31. And as we mentioned on our last call, we are constructing and leasing homes within single family rental communities. After these rental communities are constructed and achieve a stabilized level of leased occupancy, each community is expected to be marketed for sale.
Our single family rental operations are currently reported in our homebuilding segment. During the quarter ended December 31, we completed our first sale of a single family rental community representing 124 homes for $31,800,000 resulting in a gain on sale of $14,000,000 We currently expect one more sale of a single family rental community later this fiscal year. At December 31, our homebuilding fixed assets included $106,600,000 of assets related to our single family rental platform, representing 13 communities totaling 8 90 single family rental homes and owned finished lots. We still expect our total investments in our single and multifamily rental platforms to more than double during fiscal 2021.
Bill? Our balanced capital approach focuses on being disciplined, flexible and opportunistic. During the 3 months ended December, our cash used in Homebuilding operations was $269,200,000 compared to $178,400,000 in the prior year period. At December 31, we had $3,900,000,000 of homebuilding liquidity, consisting of $2,100,000,000 of unrestricted homebuilding cash And $1,800,000,000 of available capacity on our homebuilding revolving credit facilities. We plan to continue maintaining higher homebuilding cash balances than in prior years to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions.
During the quarter, We issued $500,000,000 of 1.4 percent senior notes due in 20.27 and we repaid $400,000,000 of 2.55 Our homebuilding leverage was 17.3% at the end of December with $2,500,000,000 Homebuilding public notes outstanding and no senior note maturities in the next 12 months. At December 31, Our stockholders' equity was $12,500,000,000 and book value per share was $34.33 up 23% from a year ago. For the trailing 12 months into December, our return on equity was 24.4% compared to 18.2% a year ago. During the quarter, we paid cash dividends of $73,000,000 and our Board has declared a quarterly dividend at the same level as last quarter to be paid in February. We repurchased 1,000,000 shares of common stock for $69,800,000 during the quarter and our remaining outstanding share repurchase authorization at December 31st was $466,000,000 Jessica?
In the Q2 of fiscal 2021, based on today's market conditions, We expect to generate consolidated revenues of $6,000,000,000 to $6,200,000,000 and our homes closed to be in a range between 19,000 We expect our home sales gross margin in the 2nd quarter to be similar to the Q1 and our homebuilding SG and A as a percentage of revenues in the second quarter to be approximately the same as the Q1. We anticipate a Financial Services pretax profit margin in the 2nd quarter of 40% to 45%, and we expect our income tax rate to be in a range of 23% to 23.5%. For the full fiscal year of 2021, we now expect consolidated revenues of $25,200,000,000 to $25,800,000,000 and to close between 80,082,000 homes. We expect to generate positive cash flow from our homebuilding operations in fiscal 2021. However, we are not providing specific guidance for our homebuilding cash flow As we prioritize augmenting our housing and land and lot inventories to support higher demand.
After reinvesting in our homebuilding business, Our cash flow priorities include increasing our investment in both our multi and single family rental platforms, maintaining our conservative homebuilding leverage and strong liquidity, paying a dividend and repurchasing shares to keep our outstanding share count flat year over year. David?
In closing, Our results reflect the strength of our experienced operational teams, industry leading market share, broad geographic footprint and diverse product offerings across multiple brands. Our strong balance sheet, ample liquidity and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions and we plan to maintain our disciplined approach to invest in capital to enhance the long term value of our company. Thank you to the entire D. R. Horton team for your focus and hard work.
Your efforts during this time have been remarkable. We are proud of your work ethic and your positive spirit as you continue safely helping our customers close on their much anticipated new homes. This concludes our prepared remarks. We will now
We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re queue and those questions will be addressed time permitting. One moment please while we poll for questions. Thank you. Our first question comes from the line of Carl Reichardt with BTIG.
Please proceed with your question.
Thanks. Good morning, everybody. Happy newish year. I wanted to talk a little about your underlying costs. Thanks for the info on stick and brick and land.
Can you talk a little bit about what you're seeing in the labor market, David? We're starting to hear a little more, a few builders starting to say things are easing, some others are telling us things are tougher. And oftentimes, you'd like To talk about specific trade specific markets, but I'm interested just broadly what your expectations are for the labor shortage beginning to ease or tighten in 2021?
I don't see it being much different than it's been in 2020, at least not for us. We set up and try to drive our communities in the most efficient way, making it the easiest Possible way we can for our trades to get in, get out, get their job done. We've actually, I think, Through this cycle, have been focused on the labor side and have created a lot of efficiency and have expanded our trade base just by Making it easier for them to get in, get out and know what they're doing. 2021, our volume is ramping up. I think that's going to continue to be a challenge, but we feel very good.
I mean, we wouldn't be selling houses if we couldn't build them.
Fair enough. And then I wanted to ask a little bit about the West region, which the growth is slower than the Really significant growth you're seeing in other places and inventory is down sequentially as well. In the meantime, in South Central, you Took more order dollars this quarter than you did last quarter. So I'm curious if you're thinking about shifting capital investment among the different regions as you look into 'twenty one And beyond. Is there a de emphasis happening in the West?
Or is the Sloan is just a function of being out of product and out of communities? Thanks.
The underwriting in the West is much more difficult. Time lines are longer. So through this cycle, our community count That's continued to slip down there. I will tell you, we have one of the best Groups of people in the company in the West region. When we talk about platform, we talk about people, product, price.
And we are certainly have a very strong platform out of West. When the returns in Texas, Florida, Carolinas have been incredible, Everybody competes for capital in this company. So I will say the West It is an area that I personally am going to emphasize this year, and I think you'll see the growth return there.
Carl, for reference, it will be posted after the call, but our West region community count was down 9% year over year and 10%
Our next question comes from the line of John Lovallo with Bank of America Merrill Lynch. Please proceed with your question.
Good morning, guys, and thank you for taking my questions as well. The first one, just on the NAHB had noted that builder respondents were growing More and more concerned with affordability and home price appreciation and also with rates sort of grinding higher. And maybe not Specific to D. R. Horton, but for the industry, I mean, how are you guys thinking about this dynamic?
And do you see any risk to industry wide demand as the spring approaches here?
John, this is Mike. Good morning. We're always focused on affordability. That's something that's Consistent across the platform, and I'm not as well versed to speak to the industry. But in our communities, We're focused on providing the value at whatever price point we're at.
And so whether we have buyers moving up from their current housing situation to a D. R. Horton home We're their 1st time homebuyer with 56% of our buyers in the quarter were 1st time homebuyers. We're focused on providing an affordable home for that buyer that fits in their monthly budget.
We continue to see healthy credit metrics across that buyer group. Our FICO score was 7 19 this quarter. I think on our Express brand standalone, it was almost 7 10. And then as we also mentioned on the call, our average square footage has continued to tick down slightly on a year over year basis. As home prices have risen, But what we typically see is first time buyers want to buy as much home as they can get for their money and they're buying out of need, not a discretionary purchase.
And so if home prices have
And then how are you guys thinking about the potential for increased Environmental regulations under the Biden administration and what this could mean for land development costs and timelines, things of that nature?
Well, I don't think it's going to help affordability, and I believe it's going to extend time. We're well positioned with Owning control over 400,000 lots. Again, we're going to focus on affordability. And As regulations increase, it's going to become more challenging. But given our position and our people, I think we're we can beat that challenge.
Thanks very much guys.
Thanks, John.
Your next question comes from the line of Stephen Kim with Evercore. Please proceed with your question.
Hey, guys. Fun times. It's interesting the way sometimes the builders are trade, it makes it seem like people think you're just the beneficiary of good luck. But I'm reminded about that statement. Luck is what happens when preparation meets opportunity, and you guys have done a great job over the last couple of years preparing for this situation.
And so I wanted to ask you about your comment as to capital allocation because you indicated there that you are Wanting to carry higher cash levels than normal for the foreseeable future. I think you made reference to some uncertainty in the current environment. But arguably, homebuilding is always difficult to predict. And so I'm curious, what is a good rule of thumb for modeling your cash levels going forward. And what are the kind of things that you're looking to fade or dissipate in order to pave the way for you to hold lower cash levels than that?
Sure. Good question, Steve. Just to get to the point in terms of the expected levels, we would expect at each quarter end to maintain at least $1,000,000,000 of homebuilding cash. We expect most quarters to see between $1,500,000,000 $2,000,000,000 And I would say the primary driver behind that shift over the last year as we've been Building a little bit more, it's just our significant increase in volume and scale and activity. We feel like it's prudent to ensure that we have sufficient cushion To manage significant sudden changes in the business to avoid having any potential liquidity Crunch is that just gives us that much more flexibility to respond when we see opportunities in the market.
And so we've seen a number of Significant shifts in our business over the last few years from a sharp increase in interest rates, which decreased demand in late 2018 To the pandemic disruption in the spring of 2020 to then the very significant increase in demand that we saw In the summer of 2020 and ever since. And so from that standpoint, having a bit more cushion, a bit more liquidity To respond whichever direction we need to go in the business, we just feel like it's prudent. I don't see us changing that strategy. I think that just puts us in a very strong and flexible position to respond to market changes.
Okay. Yes. Certainly sounds like we ought to be modeling that on a longer term basis. Okay. Second question relates to the pretty awesome margins you all reported this Quarter.
And I think you just gave guidance as to that margin fairly recently. And so I think a lot of folks are just curious As to what drove the upside in your margin this quarter and paying note to the fact that your guidance for the March quarter Suggested it's more than just a temporary spike. I personally think you're still being conservative, but I'd love to hear what drove the upside surprise in this quarter.
Well, Steve, I'd say the first thing we expected to see this quarter that we did not is we've been seeing cost increases coming into our business Over the last quarter or 2, and we expected to see a bit more of that come through in our closings in Q1, which we did not. That's still coming. We can see it coming through our backlog and we expect to see some of those cost increases start to hit our margins in the coming quarters. That being said, we still have a very strong environment obviously with the Ability to raise prices, very low incentive levels. And so we do expect at this point now with that additional visibility of another quarter To be able to maintain the current margins that we're showing, which obviously are very strong levels.
We've really had price protection on this Higher cycle on the material front and we've seen very neutral impact from materials other than a little bit of headwind from lumber last year. Lumber is starting to pick back up, so that's going into our commentary as well. But really, it's a function of home prices have risen significantly And building product companies have cost inflation as well. And so we are experiencing some increases in material costs We didn't see, as we said, flow through in the December quarter, but we do expect those to start flowing through in the rest of the year.
And I'll just add, our operational teams are doing a great job at controlling costs. Where we see increases, we look for efficiencies To reduce cost. And I mean, to be honest, I think we were a little bit surprised. Our stick and rig per foot Actually, it went down last quarter. That's just a phenomenal job by our people.
Absolutely. Great. Thanks very much guys and best of luck.
Thanks, Steve.
Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Good morning. Congrats on the quarter and thanks for taking the questions. I wanted to ask about the lot position of $441,000 I think you said. It really suggests a material addition during the quarter. I guess, number 1, could you speak at a higher level just around what that signals around your view of the sustainability of housing demand?
And number 2, just The color around the lots you added during the quarter, kind of duration of those lots, lot inflation, if any of that could actually impact 2021? Thank you.
Sure. And Matt, you'll notice that most of that addition to the lot And did come in the form of option lots. We continue to significantly increase our option lot position. We had Noted on our last call that we do expect our own loss to increase modestly and they did kind of get back to a normal level there. But we've been on an ongoing effort To expand our relationships with developers across the country, of course, our relationship with Forestar continues to bear fruit as well.
So a significant portion of the Additions to our lot position through auctions came from our 3rd party developers and our relationship with Forestar. And with the Significant growth we've seen in demand and significant volume increases that we've seen that we certainly want to make sure we stay in Position to maintain. We probably have stepped up our efforts to ensure that we're keeping our pipeline sufficiently out in front of us with the volume we're seeing today.
The volume we see today, Matt, as well as looking forward to more of a medium term, we just don't see a lot of overbuilding, a lot of excess supply in the marketplace relative to Household formation demand. And so we want to maintain, as Bill said, adequate support of inventory For that medium term ban. So that's why you're seeing our controlled lot position increase.
And the fact that we are so heavy optioned It does allow us to be a little more aggressive in tying things up. So it's, again, positioning for the future.
Very capital efficient with the options.
Okay, got it. That's very helpful color. 2nd one, I wanted to ask about ASPs. I think Bill, you might have mentioned or I think you said the order ASPs 314, I think the backlog ASP is right there as well. So I'm just curious, number 1, like for like versus mix, if that's just Perhaps Emerald is getting a lot better.
But then number 2, if I look at the closings and revenue guidance for the year, It seems to suggest that the closing ASPs settle back down a little bit. I'm just wondering if you can reconcile that and just how to think about closing ASPs for the year? Thank you.
Yes, sure. We always see a higher ASP in our backlog than we do in our sales and our closings because higher priced homes Generally, they're bigger and take longer to work their way through. So that's not necessarily unusual. But yes, so with our sales ASP being at 314 this quarter, that's definitely showing a continuation of some price appreciation. And so in the near term, We would expect, I think to probably still see some potential upside.
That being said, our operators and our teams and our people are very focused on providing And so we're going to keep an eye on the price points and the payments that our buyers need to have to afford to move into our homes. And so we never plan for significant price appreciation beyond a quarter or 2, because we always know that at some point we will Make some adjustments in our operations to make sure we keep our price points affordable.
And our ASP per square foot on a year over year basis was up 4%, but sequentially it was actually flat.
And so the guidance doesn't reflect all of that price. It doesn't reflect quite all of that price. It reflects that We would still continue to manage very closely on the affordability.
Okay. Thanks everyone and congrats again.
Thank you.
Our next question comes from the line of Eric Fossard with Cleveland Research. Please proceed with your question.
Good morning.
The increased
delivery number For the year, curious what changed and where that changed and thinking a bit of geography and mix And also the production pace, but just sort of the things that changed that have resulted in you taking a little bit more optimistic on full year deliveries?
I think we've seen consistently strong demand across our footprint, Eric. In addition, as we've gotten the starts up in the Q1, we started almost 23,000 With good visibility to starts for the next couple of quarters and so that gives us more confidence in the number we can deliver for the full year. So just a little more of the year coming into focus with what we're going to be able to accomplish.
We're also seeing A good start to the spring and January, which again, it's about confidence. And we don't want to put a number out there that we don't feel really good about. So we feel really good about that number.
From a production pace and inventory pace, Anything different that you're doing there or have done there to also allow you to get more homes produced?
Anything different, it's we're talking about sustainability and growing the scale of our platform and doing it in a measured approach That allows us to hang on to those increases. So I wouldn't say it's anything different. It's just further execution of the same strategy Of growing our capacity for production, growing our market share market by market and that's what our teams think about every day when they're getting up And going about their jobs is how I get a little better today and grab a little more production capacity in my marketplace.
Great. Thank you.
Thanks, Eric.
Our next Question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys. Good morning. Congrats on the great results. My first question, I was hoping to drill in a bit more on the land side, follow-up to Matt's question earlier. If I'm just kind of looking at the growth in your lot Book and obviously account for all the closings you've had over the last year.
It looks like over 40% of your current lot book or lots controlled have actually Tied up over the last 12 months since the pandemic began. And I'm curious, we hear from a lot of builders, when we underwrite land, we Today's absorption to today's pricing and obviously the current environment makes that a little bit tricky because your margins and your absorptions are at cycle highs. So I'm curious as you look at the composition of the land you've tied up over the last 12 months, could you talk a little bit about how you're thinking about Underwriting to gross margin, to return on inventory, to absorptions, whatever metrics you guys think about internally and how that compares to where you're Generating business today.
Our underwriting really hasn't changed much as we've seen absorptions increase. It does. When we're requiring a 2 year cash back at a 10 a month absorption, you can buy more lots than you can a 5 a month absorption. So we have seen the scale of the deals get a little bigger. But the position that from a pricing and location standpoint, I don't see that we've given up much in the deals we're doing today versus the deals We were doing 2 or 3, 4 years ago.
Scale is bigger. The phase sizes are bigger. Lot prices have been pretty stable. And I think I said this on the last call, when I'm traveling and looking at deals, The deals that we put on the books this quarter were better than most of the deals that we had on the books. So it's very it gives me a lot of confidence and our guys are doing a great job.
So I don't see deterioration in our lot position from a marketability or really even a pricing standpoint.
Got it. That's helpful color. Second question on the closing guidance for the year. I just want to maybe get a little bit more commentary there. So If I look at your 2Q guide, your closings are going to be up just under 40% through the first half of the year.
And for the full year guide, the midpoint, I think, is a 24% increase, which obviously is incredibly strong. But I'm just curious, what's Driving that deceleration in the back half because your backlog is going to be up very strongly. So is this a function of conservatism around cycle times and just The backlog conversions might be a bit lower than years past because of how elevated the backlogs are? Or is there something else that's driving maybe that decel on the back half?
It's really the stage of construction our homes are in, Allen. We have a lot fewer completed specs today than we typically have. And As a result, we're selling and closing fewer homes intra quarter than we typically would. I think that quarter that was in the mid-twenty percent range And typically it's in the high 30s or 40% range. So it's really just a function of the stage of our inventory and we did get, as Mike said, Almost 23,000 homes started this quarter, but a lot of those are still in the early stages of construction.
And so a lot of the homes that will be starting here a little bit later in the year It won't be available for this fiscal year, but they'll put us in a very good position to continue growth in fiscal 2022.
And when you look obviously at the year over year increases, we started to see some very significant year over year increases in Q3 last year. So Q3 and Q4 We're much more significant. So those the year over year increases going forward are naturally not going to necessarily continue at the same pace they are right now, but we're still Expecting a very strong year, very strong year over year increase for fiscal 2021.
Sure. Absolutely. That's helpful. Thanks, guys. Good luck.
Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Thanks. Good morning, everyone, and congrats on the results. First question, I kind of wanted to ask About the underwriting and the gross margins, maybe from another angle and apologies if maybe I'm beating a dead horse here, but With the gross margins at 24%, obviously that's you almost have a very good problem to deal with in Kind of keeping those margins extensively to the extent possible at these levels, which Our kind of rarefied air for you historically. You mentioned earlier that you haven't seen much appreciation in lot prices, lot prices being pretty stable And the deal flow is pretty attractive right now. But if home price appreciation were to moderate, Obviously, today it's in a, let's call it a high single digit type of year over year dynamic on a same store basis.
If that were to moderate more to like a low single digit rate, given where you're underwriting The deals to today, should we expect that gross margin to come in a little bit over the next couple of years? Is that the right way to think about it? Or are there other factors that maybe we're not appreciating?
We really have no insight to gross margin in the next Few years, I mean gross margin really is a function of the market, Mike. We're focused on underwriting to returns. And although we don't See it right now, even if we did see a compression in our gross margins for whatever reason, affordability, interest rates, something that we don't foresee today is an issue, We can still generate very attractive returns on our current land bank, with the efficiencies that David's kind of already Talk to in our business today and our ability to keep turning our houses, but we feel very comfortable with our current lot position that we are going to be able to offset costs going forward and hopefully hang in around this 24% range. But really further than a quarter out, we don't have a whole lot of visibility because we do turn our houses much more quickly I think than the industry by and large. And So we have the best early read on cost and gross margin in the market.
Can't emphasize enough that gross margin is not part of our underwriting Returns is our underwriting hurdle. And certainly, higher gross margins can generate higher returns, But we focus 1st and foremost on hitting returns, hitting our absorptions in each community, and then the market sometimes will give you more margin than
If you look at our average sales price, We are significantly more affordable than most of our peers in the whole building space. And our land portfolio And our operating structures are designed and geared to drive that Affordability. So, are we when I look at the competitive makeup out there, Both of the resale market, which is really today our primary competitor at this price point and Our peers in the industry, it's I mean, we feel very good about our current position and Which allows us to underwrite and execute The positions that we believe will keep us in this range.
Right. No, I appreciate it. I guess secondly, I just wanted to 0 in on SG and A for a moment. The results were significantly better than what you were looking for, I Think by order of about 100 basis points, yet your closings were only modestly Above guidance. So I was wondering, you had mentioned Leverage off of the strong volume, but you really had, instead of 40 basis points, 100 and 40 basis points of year over year leverage.
And additionally, you're expecting SG and A ratio to be flat sequentially versus historically, a little bit better. So just wondering if there was anything specific to the Q1 and I apologize if I missed this earlier, that You benefited this past quarter more on a one time basis or what kind of drove that differential?
Michael, thank you. You touched on part of it. Deliveries were a little bit ahead of what we had guided to. In addition, ASP It's a little higher. We strive as a little more SG and A leverage.
Something Jessica touched on before is the lower level of completed inventory, especially the completed that we're carrying the business today, able to operate the inventory portfolio very efficiently, and That requires less SG and A to maintain and care for those homes while they're sitting completed because we do run those costs Through SG and A. So as we have less of those, we have around 5,000 a year ago, and today we have about 1600. So that's an improvement and a tailwind as well.
And although we guided to flat SG and A sequentially on a year over year basis, it would actually be approximately 40 basis points of leverage, which is Still a pretty nice move. And when we think about it on an annual basis as our SG and A is already at record lows, We're not going to ever just be able to model and say that our SG and A is going to be down more than, say, that on an annual basis. Can we ultimately maybe get there if you continue to see prices driving ASP plays a big role in that? Sure. But right now, we feel like leveraging our SG and A, 40 basis points on a year over year basis is a really nice move.
But nothing one time. Yes, there are some changing conditions and the volume and pricing has Nothing one time in the quarter.
Great. Thanks so much, guys.
Thanks, Mike.
Our next question comes from the line of Nishu Sood with UBS. Please proceed with your question.
Thank you. So, first question I just wanted to ask was around demand trends. A lot of folks are wondering, Demand has been so strong. What's it going to look like when life returns to normal? I mean, clearly, we're far from being back to normal.
But in our last quarter, obviously, vaccine news, there's some hope out there. Is there anything you can you've seen in terms of the Traffic or what folks are looking for, how it's evolving that gives us any insights into how your homebuyers are looking at things?
The demand out there, I think, is really driven by demographics. And I think it has been accelerated Because of the pandemic and people's desire to become or to find a safe environment for their family, I really don't see that Demand issue changing. I mean, it's it accelerated the long term Long term program and it's and it got accelerated and I think it's going to stay. So I mean, we are positioning. We are driving to take advantage of as much of that demand as we can.
And it's Right now today, it's very good out there.
A lot of our floor plans in Michu actually already incorporated flex So depending on what a buyer is looking for today, whether it be a home office, a second home office, a learning space for their kids, Those types of things, we've already always had floor plans that can accommodate that, and we can continue to adjust our start Based on what those homebuyers are potentially looking for and then the things that have always been true are, as people start their families and have Children, they generally want a backyard for their kids. They want good public schools, maybe a garage for their cars. Those things I've always been true that go along with the demographic side of the equation that David was talking to. So I would say other than the acceleration from the pandemic And that's being positioned in the right places with a lot of different floor plans to choose from, no significant change on that front.
Still the strongest demand is at the most affordable price points. And that's been a trend that we've been seeing for quite a while. Obviously, we're very well positioned To take advantage of that, the environment right now with low interest rate, that's accommodated for that as well. And it's certainly a benefit for that demand as well, which Right now, we don't really see that changing much in the near term.
Got you. Got you. Makes sense. So Second question I wanted to ask was around your inventory levels. So demand has been So strong, obviously, you folks have ramped up your starts considerably, but still remains just looking at metric like your inventory against your backlog, Just kind of sizing it, still remains behind where it would be normally.
Are we in a market where demand is Just so strong, it will be difficult to get back to your normal or targeted levels of inventory? Or do you See as the year progresses here, there could be some progress on that even if demand does remain as strong as it has been?
Demand remains at the exact level it is today, it would be very challenging for us to get back to a historical relationship between total inventory and backlog. Demand is that good. We look at our starts capacity neighborhood by neighborhood, week by week, and We are increasing that capacity over time to make sure it's sustainable, and we're doing it With our trade partners in mind. So but while we're doing that, demand continues to expand to absorb that additional capacity we're putting into the marketplace That's the price points we're serving.
Really more focused an issue on homes conversion than backlog conversion. I mean backlog What we're selling and we're going to sell what's out there from a demand perspective and ultimately we'll get the houses We've got the lot position to do it unlike anyone else in the industry. We wouldn't be selling the houses if we didn't have the lots and feel comfortable about our cost structure And what kind of return we are going to generate on those houses. So we are really focused on the houses we have in inventory and how quickly we are turning those and rather than a backlog conversion metric Trying to improve our housing inventory turn and generally we turn that at least 2 times a year. Last year we did a little bit better than that.
This year now with our new guidance, we're reflecting better than 2 times as well.
We talk to our operators all the time about Being disciplined, focused and consistent in your starts in your communities, And that's how we're building capacity to deliver more homes by that execution at the community level.
Got it. Thanks so much.
Our next question comes from the line of Anthony Pettinari with Citi. Please proceed with your question.
Good morning. I'm wondering if
you could talk a little bit about expected seasonality for the year. And given the buyer traffic patterns you've seen, does it lead you to believe you'll see kind of a traditional spring selling season or could demand maybe be more evenly distributed throughout the year? And I think we've heard from others that buyers are visiting homes maybe on what used to be off peak days or off peak hours. Is that something you've seen? Or can you just Comment generally on any kind of changes you've seen in buyer
behavior? Yes. We've certainly seen very different seasonality throughout 2020, Stronger demand through the summer, fall, winter in 2020 than we've seen historically. So we're coming off of some unusually strong periods. With that being said, with what we've seen thus far in January, we're seeing increases in volume that we would expect to see.
It remains to be seen whether we'll still see the same Percentage relationships between our Q2 and Q1 that we've seen historically are not, but right now we just see a very Strong demand environment, definitely some different patterns in buyer behavior than we've seen historically, but feeling good about What we can see going ahead. With a very strong Q1, where we see the same sort of patterns throughout the fiscal year, we historically have seen. I would expect there'd probably be a A bit of flattening of some of the historical patterns, but obviously off to a very good start. And I think The way things are looking right now, we're optimistic about the spring.
Okay. That's helpful. And then it seems like some of your peers are Pushing price and slowing down sales pace given some production constraints. I'm wondering if you're seeing markets where Price increases by competitors are maybe a bit steeper than yours and has that improved your value proposition for customers Or maybe to ask the question another way, do you think your affordability edge is maybe stronger than it was 12 months ago with competitors raising prices or any kind of General comments on the pricing environment?
If you just look at our average sales price, they increase over quarter over quarter over quarter Compared to our competitors, and yes, I would say, our competitive advantage has increased and improved. But again, it really comes down to the ability to deliver the homes. And I think that's where we've gained the largest competitive advantage With the discipline around what we're doing and the focus on efficiency over the last couple of years. It doesn't do any good to sell a house. If any for us, we can't deliver it.
So we're focused on the delivery side of it, Expanding our capacity, becoming more and more efficient through our processes.
Okay. That's helpful. I'll turn it over.
Our next question comes from the line of Jack Senko with Susquehanna. Please proceed with your question.
Hey, good morning.
We talked a lot about returns. We talked about Underwriting, not really focusing on margin. And David, you sound pretty constructive on the land environment. I guess my question would be, Thinking about Horton as this longer term sixty-forty option versus owned mix coming in at 72 this quarter, 72% to do 60%, have the goalposts changed or is it really more of an interim function? That's where the markets kind of brought you in terms of availability of new acquisitions over the last couple of quarters.
Actually, 70s and who 60s. We're going to continue to try to grind that number higher. Ultimately, it comes down to relationships and execution in the field. And that's something we focus on every day. So it's my expectation over time is that we will continue to grind A point here, a point there and drive better and better efficiency, capital efficiency through our business And through our company and ultimately probably the industry.
Okay, great. Thanks. And then looking at the single family Rental sale, it would appear that the gross margins on those 124 homes Was pretty healthy, it may be in excess of the company margin. Am I looking at that the right way or is there something I'm missing? Obviously, you've got Your G and A costs and everything below the line, but just from a purely a margin perspective, it looks like that was a really healthy margin On the sale of those units?
Yes. We're very pleased with that transaction. And we look forward to that Continuing to explore that business, it seems to be attracting a lot of capital and a lot of interest today, and we expect to be able to take advantage of that.
Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question. Thank you and congratulations on the results. My first question is just, I wondered if you could perhaps Quantify a bit more the comments around January, just perhaps framing the magnitude of what you're seeing either sequentially or on a year over year basis for us?
So 3 weeks in, we rarely comment on a single month, much less just a few weeks. So but Suffice it to say, what we generally expect when we get into January is we expect there to be a step up in traffic and volume coming through our weekly sales pace. And so we have seen that. We've seen 3 weeks of weekly sales thus far, and there has been that discernible step up in volume In January versus what we had seen in the December quarter. So we're encouraged by that.
Several years ago, we would The spring selling season to kick in with the Super Bowl effectively at the end of January, early February. The past several years, this year being no exception, We've seen that sales pace accelerate coming out of the holidays after January 1.
Okay, thanks. That's helpful. And my next question is around what you're seeing in terms of some of the suppliers. We've obviously heard that with the ramp in volumes and some of the supply chain issues that those companies are seeing in their own businesses that there's been some constraints, maybe especially in some areas like appliances and windows. Can you just talk to what you're seeing there?
And I guess maybe in some areas, is there anything that you've heard more recently around the issue with some of the semiconductor supplies and some of the issues that they're seeing in those industries?
So really various products are in short supply too. It kind of depends on what market and what We would agree with your sentiments on both windows and appliances. We have had challenges in both of those. Our product partners have been working hard to Our business, so we don't have to push back any closings and we've been very pleased where we have to. We substitute, upgrade and even install other brands if to make sure we're not having to push closings.
I don't know that I have anything specific on semiconductors that I've heard, As of late, but I really would have put windows again as the headliner this quarter. It's probably actually gotten even a little worse than when we said that last quarter.
Got you. Okay. Thank you. Thank you. Thank you.
Due to time constraints, our final And we'll come from the line of Buck Horne with Raymond James. Please proceed with your question.
Hey, thanks for squeezing me in. I appreciate it. I'll try to keep this one quick. Question we get a lot from investors is kind of just where is all this buyer demand coming from? How sustainable is it?
And I'm just curious if you got from a high level Perspective, any evidence of the population migration that seems to be happening around the country? Are you seeing any Noticeable uptick in out of state buyers or out of market buyers versus your historical normal and has that changed at all one way or the other since the pandemic began?
I would say anecdotally, yes. I mean, we continue to see Texas Florida is our 2 strongest states with a lot of diversity, just even within those states. But clearly, there has been a flight in a lot of cases from the coast to Texas, to Florida, to the Carolinas and then from the West Coast into Salt Lake, into Vegas, into Phoenix. And so I think we would expect that trend to continue. And in that regard, really like our positioning, as it pertains to our lot position across the country.
I also like the fact that you don't see existing home inventory levels held for sale at high levels at all. Supply is very tight for homes that are available in the next 60 to 90 days, and that has been a consistent part of our business model for forever. It's to be an alternative to that Used home and provide a customer with a new home on their timeline.
And Buck, you didn't ask this Specific question, but we've had a lot of conversations over the last quarter or so about just the age and for the last however many years about our millennials ever going to buy a home Coming off around 35% of our business in 2019 was to buyers 34 and under. We saw that pretty quickly in the pandemic and through the remainder of fiscal 'twenty and now into 'twenty one, tick up So I think of 42% versus 35% is a pretty big move, and we've seen that settle out We're over 40% of our buyers are 34 and under. I think answering that question that yes, millennials are going to own homes.
Everything we're seeing has been the long term trends That we've been experiencing really coming out of the downturn, COVID accelerated it. And it feels like Right now, that acceleration is kind of the new norm going forward. That's
And just one last one on the single family rental business, just follow-up on that outstanding community trade. I'm just Wondering, you mentioned that you plan to double your investment in the platform over the course of this year. So it sounds like there's quite a bit of Scalable opportunity. How do you think about the total market opportunity for developing single family rentals Within your platform and would you continue on this method of building it yourself, pre leasing it and then Flipping it stabilized or do you would you pre sell some of these or partner with investors ahead of development? How do you envision the Scaling up of that business.
Where we are today with the program is we're still learning the business and the execution side of it. We were very pleased with the first transaction. And as we learn more about the market, we will evaluate various alternatives For how we want to go about scaling it up and ultimately capitalizing it. But we need to know more about what we're doing. We do see a lot of opportunity.
We think there is some portion of the population that will be a great customer For this product that desires a single family lifestyle, but may not for whatever reason, be purchasing a home. And so we want to build up to be in a position to help supply this.
And, Buck, just to clarify, the comment about doubling our investment this year refers to our entire rental platform, both multifamily and single family. For our total assets and the combined platform at the beginning of the year was $330,000,000 So we expect that $330,000,000 to more than double in fiscal 'twenty one.
Got it. Thank you so much and congratulations.
Thanks, Mike.
Thanks. We have reached the end of the question and answer session. Mr. Auld, I would now like to turn the floor back over to you for closing comments.
Thank you, Christine. We appreciate everybody's time on the call today And look forward to speaking with you again with our 2nd quarter results in April. And to the D. R. Horton team, an outstanding Q1.
We're set up to have an unbelievable year. Stay humble, stay hungry and stay focused. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.