Good afternoon, everyone. Matthew Bouley, Barclays US Home Building and Building Products Analyst. very happy to continue the afternoon here with the team from D.R. Horton. We've got Jessica Hansen, VP of IR, and Michael Murray, COO of D.R. Horton. We're going to begin in a second, but as always, we're going to run through our ARS questions first and get the good stuff. If you wouldn't mind starting with our first question for the audience, which you can answer on your, on your clickers in front of you. Number one, do you currently own D.R. Horton? Overweight, market weight, underweight, or no? Okay, we've got an audience of new investors.
A lot of opportunity.
Here we go. Next question, please. Anyone? Blank? Yes or no? Team, it's, the question is blank. Okay. If this doesn't work, we'll go right into it. There we go. General bias towards D.R. Horton right now, positive, negative, or neutral? Okay. Generally biased positive, although I had that wrong. Biased negative, excuse me. I thought neutral was in the middle. Next question, please. Through cycle EPS growth for D.R. Horton will be above, in line with, or below peers. The audience sees above or in line with. Next question, please. What should D.R. Horton do with excess cash? Bolt-ons, larger M&A, share repo, dividends, debt paydown, or internal investment.
I might have bet on that one.
Share repo. Okay. Loud and clear. Next question. What multiple of 2023 earnings should Horton trade, ranging from less than 10 to higher than 21? This question wasn't for homebuilders normally.
Not homebuilders today. Maybe a few years from now.
Yeah, maybe, yeah, 20 years ago. Of course. Well. Generally 15 or less. Next question. Most significant headwind facing Horton today, core growth, margins, capital deployment, or execution/strategy.
I'd probably take a bet on that one too.
What's your answer?
Don't answer.
Oh.
Oh, growth right now.
Okay.
Okay. I would have bet wrong.
I would have thought too also. Next question, please. Does ESG play a role in your decision regarding Horton? Yes, positive, yes, negative, no, or no, but no in the future.
We did publish our inaugural report, if anyone's interested and hasn't seen it. It's out on our investor site.
We have opportunity for people to use that. Okay. Michael, Jessica, thank you both for being here. Much appreciated. Kind of starting with the elephant in the room around demand. I mean, there's clearly been some optimism in the early year for new home construction. You know, you guys kind of kicked that off with your earnings results in late January there. Just kind of curious if you kind of update us, you know, how you're thinking about this, the way this market is evolving here, you know, in light of what we've been seeing with interest rates year to date.
Well, so far, we like the way the year is unfolding. You know, we mentioned in January, we like the first few weeks of the year sales trend, and that's continued. You know, we've seen a moderation of the cancellations. Our net sales have been really good and in line or a little better than the seasonal uptick we normally see from the December quarter into spring. By and large, we're positively biased on where spring is. Obviously, all that's occurred prior to the past five days of interest rate movements. There may be a little bit of headwind with that coming forward, but we've dealt with much worse movements in the past.
Got it. Okay. Yeah, I think your prior guide was for, I mean while your normal seasonality for Q2 is a 50% sequential uptick.
Right.
In orders, effectively tracking in line with or a little better than that. Okay. I mean, obviously things have changed in the past week, right? We've repriced monetary policy expectations. You know, we talk about cancellations perhaps getting, you know, better at the end of last year. Do you think we're past the peak in cancellations or when you see a kind of a quick move in rates like this, you know, with your type of buyer and your type of product, you know, is the expectation that, hey, look, you know, we could see kind of a resurgence here if rates continue at this level?
I think we've been able to compress our build times a little bit on more recent starts, and we're seeing a shorter time window from when we sell a home with the spec inventory we have today to when we close it, so there's less opportunity for fallout. Buyers are much more interested in buying a home and lock into an interest rate within the next 60 to 90 days. So that interest rate volatility really isn't affecting our backlog today.
Got it. Okay, that's helpful. When you talk about this seasonal uptick in demand, it sort of begs the question on, you know, what's happening with incentives and home prices and all that, right? I mean, some of your peers have spoke about a reduction in incentives year to date. You know, how are you guys thinking about just your own products and, you know, pricing and incentives with the seasonal uptick? Go ahead.
We're gonna continue to meet the market. We're not in control of how the next few months unfolds and what happens in the interest rate environment. We're gonna do what we need to do, and our local operators are empowered to, on a community by community basis, make the best decision to maximize returns on the inventory that they're carrying in that community. Although, you know, we'd like to believe that maybe this quarter could be our low point for gross margin, I know another builder or maybe two have talked about that as being the case. We generally sell and close intra-quarter 35%-40% of our homes. We don't have visibility to that until we get into the quarter.
We have guided step down in our gross margin of 20%-21% for Q2, which would be down from 23.9% that we had in the December quarter. Could that be a low? It could be, but it also may not be, depending on how the spring continues to unfold and the interest rate environment we find ourselves in.
Got it. When you talk about how this year has started, you know, not to be too short-term, but in terms of this uptick in activity, simple question is, you know, was it as simple as rates coming down that drove that? The turning of the calendar, you know, what do you think has kind of led to this?
Any reduction in rates is going to be helpful.
Yeah.
I think the best thing was stability in rates that we saw and gave buyers a chance to recalibrate their expectations and have some confidence when they went to the market to determine how they're going to solve their housing need. Certainly we've seen it the past few years that over Christmas time, I think people do a lot of online shopping and looking at houses, and then by the time January gets there, they go in the models, and they're ready to sign a contract. They've eliminated the choices, and they're ready to be sold, and they want to get into a house this year.
Yep. Got it. You know, back to my incentive question, I heard you loud and clear on sort of what you've been doing. I mean, what do you think it would take, you know, to actually see that reduction in incentives? Is it true kind of stabilization in rates do you really need to see? Is it as simple as that? Is it just kind of looking at the rate environment or, you know, to what degree does it have to do with your own inventory position, right? You know, your own kind of need to, you know, clear out some of what you have under construction.
Well, the great news is we have a lot of inventory ready for delivery right at the time of the year when people are coming in the models wanting to buy.
Mm-hmm.
We're really excited about that. We were very rapid in the fall to try to find the market and understand in every community what it takes to drive interest, traffic and qualification for buyers to be able to buy homes. As we started rebuilding momentum and that we're able to pull back a little bit on the incentive levels and try to lock in the buyers with some momentum on pricing as well.
Got it. Okay. you know, you've got some builders, some of your peers that have, you know, obviously people have enacted different strategies around pricing in these past few months. I think with the general expectation/hope that if the demand is there in the spring, you know, we can do this or that with price. If we take the assumption that, you know, some builders may get more aggressive on pricing into the spring, What are you guys seeing? Number one, are you seeing any of that kind of competition on the ground merging? Number two, kind of how do you react to, you know, what some peers may be doing?
I think builders by and large, have been really rational this cycle. Really what we continue to see is there's just not an excess supply out there, and that we feel like we're the best positioned with our completed spec inventory because as Mike was alluding to, the buyer that's in the market today wants a home, and they want a home quickly, and they want that certainty of interest rate. If there are builders that are out trying to go, you know, do things aggressively with price, particularly on the build to order side, I don't know that it makes much of a difference, because we don't see buyers in the market today that really want to wait six, seven, eight months when they don't know what that rate will look like, when the home's ultimately completed.
I think we continue to believe we're in a very strong competitive position in that regard. By and large, we haven't seen anything irrational transpiring. I think builders are in a much better shape this cycle, for numerous reasons.
Well, there's not excess lot supply anywhere either. Nobody's sitting on a big lot bank anywhere or even in titled lots not developed yet. Still a constraint on supply to the marketplace.
Just given the constraints on affordability, for your own product, I'm curious maybe by brands, like Horton Express, all that. You know, what are you doing besides just price and incentives to kind of manage affordability? Are you finding that people are, you know, receptive to smaller square footage offerings and things like that? Or, just, you know, what might you be doing to actually drive a little bit of that?
The levers are going to be to start back houses that are a little bit smaller, you know, maybe a four-bedroom, but a smaller four-bedroom, rather than replacing it with that 1,800 sq ft, we go with 1,700 sq ft. Can make some improvements on the margin considering these specifications in the various homes. Product size is the most immediate lever. You know, longer term, shifting to smaller lots helps with some of the development costs and reducing, you know, the land impact per house, and more attached product. People are going to more townhomes as entry-level buyers.
Right. Thinking about your inventory positioning and you know what you're doing with spec into the spring, and starts, frankly, D.R. Horton's a big cruise ship, right? You got to manage down at the local level. I'm going to ask it across the whole business. You know, you see potential improvement in demand to begin this year. You know, are you continuing to match starts with sales? Do you actually hit the gas pedal a little bit more on starts? You know, kind of, you know, what's your thinking generally around where you want to be inventory-wise here?
Generally, we're going to look at every community differently and every one of our division operators. As you said, it's decentralized. It's going to make a decision based upon their lot supply in a given project or sub-market, the production capacity of that area, and then what they believe the demand makes the most sense at. Whatever the limiter is is going to determine what the start space is. Right now, if over the fall we saw a lot of cancellations, sales may have been a broad limiter. As that's changed a bit and we've seen stronger sales demands, that limiter may back off a little bit, and we'll be pressing into what production capacity is and then where the lot supply is. We go cap ourselves.
It's kind of a week-to-week process that's managed locally, but everybody has a plan, and they're working to execute it every day.
Right. Got it. You know, as you mentioned, what's going on with lots and there's, you know, sort of this, lack of finished lots out there. You know, as builder orders have come down and, you know, typically you might see, you know, some reaction in the land market. How are you guys, you know, seeing that land market evolve here and, you know, what's happening with both kind of finished and unfinished lot prices?
The land prices continue to be very sticky. That's generally always the case. They tend to follow home prices up very quickly. As home prices adjust, it takes a little bit longer for the land market to truly adjust. I think it goes back to what Mike was saying earlier. There's just not an excess supply of finished lots out there. Right now there's really not a need for, you know, broad-based reductions in finished lot costs. We are being very selective, particularly on the raw land front right now as we go through this market transition. We've cut back on our raw land purchases significantly from where they've been over the last couple of years. We're gonna continue to buy finished lots where, you know, we always get the ability to re-underwrite.
Once we have something under control, before we bring in our balance sheet, we're gonna look at it again in today's market conditions. What do we think we can sell the house for? What's it gonna cost us to build? Does this still make sense? If it doesn't, we go back to the land developer and have a conversation about either, you know, changing the takedown schedule or doing something from a cost perspective. I would say the easiest adjustment to get is just on the takedowns. If we don't need as many lots as quickly as we ultimately did, generally that's a pretty easy concession to get from the developer. If D.R. Horton's not gonna be able to follow through on a transaction and make it pencil, there's generally not that many other builders standing in line behind us that can.
That does put us in a strong position. And we look at our lot developers as partners and people that we need to run a capital-efficient, you know, long-term business. We'll continue to adjust our pipeline as necessary. We have walked deals that haven't made sense. By and large, we've kept most of our portfolio intact.
Got it. You know, back to the gross margin side, you know, I know you guys don't quantify incentives the way others do. Curious if you can kind of just, you know, ballpark between, you know, what we've seen with, you know, order ASP and, you know, kind of what type of pressure might you be seeing on the gross margin side at this point, you know, relative to, you know, where might you be seeing some relief on, you know, lumber and other construction costs?
Yeah. We've certainly seen pressure on margin through the incentives. You know, both, the biggest incentive we've gone with is generally the interest rate buydowns, trying to hit the affordability on the payment side. We've also adjusted price in some markets where we needed to bring it back in line and drive traffic to get people to focus on the communities. You know, where we're seeing cost relief, certainly lumber is cost relief. It just takes a while for those reliefs to come through inventory, especially with our elongated build time that we experienced last year. Those lower lumber prices have yet to really materialize in a meaningful way in our deliveries.
Right. you know, on that incentive side, in terms of elasticity between rate buydowns and, you know, drawing that to base price reductions.
Mm-hmm.
What do you find with your buyer, you know, is actually driving, you know, elasticity? Where are you actually seeing results?
Probably more the rate buydown more than anything else. It's driving into that payment that makes sense for somebody. They're not able to conceptualize what the home price really is. How do you make it tangible to them? That's in the form of the payment. That's what they qualify for. That's part of their budget every month. That's what they're paying in rent today. How do they work around that number? That's been the biggest incentive we've utilized.
Yeah. What are you seeing on the cycle time side year to date? Starting to see any improvement yet or just still sticky?
We're seeing some improvement on more recent starts, but the homes that we're delivering today were started, you know, eight, nine months ago, and so we're still seeing long average time from start to close. You know, we need to get that back to 180 days, and we need to turn our housing inventory. That's the focus this year, pulling back starts, trying to get the production machine unsnarled and then moving through in a more consistent fashion.
Right. If cycle times do come down, you know, what's kind of the implication to your sales-based strategy? Is it the kind of thing where, you know, you kind of, you know, let pace run a little hot for a period or, you know, is it the type of thing where you still wanna, you know, really manage, you know, your sales?
It's gonna be that balance I talked about before, the three limiters driving for the best return, as Jessica mentioned, in a given community. You know, if we can take more pace without sacrificing margin, and we can drive a better return, we'll certainly try to do that. If it becomes a production issue, that becomes a gating factor, we're gonna adjust to make sure that that's not gonna become another rat in a snake. We don't wanna live through that. It's frustrating for us, frustrating for our customers and our trades for sure.
If our build time has improved and we have certainty of that and believe that it's sustainable, I think the answer is somewhere in the middle.
Yeah.
Yes, we'd feel more comfortable releasing more homes for sale, whereas if you go back over the last year and a half, we had a lot of restrictions in place because we didn't have that certainty of our construction cycle.
You know, as you mentioned, don't wanna get too far ahead of ourselves talking about gross margins and, you know, you guys, you know, purposely speak to what your visibility is, right? You know, think about just historically and, you know, structurally, the margins kind of ran around that 20% level.
Mm-hmm.
You guys were, you know, the strategy, at least from my perspective, was a lot of volume through running it through a 20% gross margin. How do you think about where the margin may settle? You know, where do you feel like the structural profitability of this business may be, you know, coming out of this housing?
Historically, that 20% margin, 10% overhead, 10% pre-tax margin. I think we have an opportunity to demonstrate a higher pre-tax margin than the 10% going forward. As we see our various operations in different markets where we've attained adequate market scale or even, you know, significant share, we're able to drive a higher efficiency, a better operating margin in each one of those individuals. As we continue to aggregate market share across the platform, I expect that we'll see a sustained higher operating margin than the 10%. I mean, we just did 20% of one quarter last year. We're probably not gonna do that going forward on a regular basis, but I do think higher than 10% should be where we start thinking about the operating margin.
Right. I'm not gonna try to lead too much with this question. You know, your starting point was a 30% gross margin. Rates moved very quickly.
Yes.
You had a lot of inventory under production. You can imagine why pricing and incentives needs to move quickly in that type of scenario. Here we are today, you know, you're getting closer to the 20%. At what point do you feel like you wanna limit that margin decline, right? Is there a point where, you know, high teen, something like that? Is there kind of a bar where you say, "Okay, you know, that's it. We're not gonna continue to just press hard on pricing and incentives." How do you think about that?
It's still gonna be dependent community by community, because if it's a high velocity community with low overhead, we might be very comfortable running it at a mid to high teens gross margin versus 20%. If it's a slower absorption community, that's where to generate an acceptable return, we need to garner a little bit better gross margin. We don't ever sit in Texas at our corporate office and say, we're gonna stop selling houses because our average gross margin has gone to X. We continue to maximize returns, and the way we do that is compensating our division presidents and our region presidents to based on the pre-tax profits they generate and the return on inventory for whatever inventory investment we've allocated to them.
Then really the gross margin falls out to whatever it falls out to based on their cumulative activity, at the local level to maximize returns.
Got it. Okay. That's helpful. If I zoom into the very near term, I think your Q2 guide, something like a 300 basis point sequential decline. In gross margins, I mean, what are the puts and takes in that? Is that just entirely, you know, price incentives or, you know, lands? What, what's
It's primarily driven on price incentives and what we felt we had visibility to at December. As Jessica mentioned, 35%-40% of our deliveries in a given quarter are sold in that quarter. We only know roughly 60% of our deliveries, what price and incentive structures influence those. Based on where, you know, sales trends have been, you know, that's been an encouraging sign, and that does translate through ultimately to margin and pricing and incentive levels.
Right. Understood. You know, as we get, you know, to your next quarter at the end of April, when you report, you know, obviously you guys have kind of given a soft guide, in my words, in terms of the full year. You know, as you, as you kind of have that visibility to the spring selling season, you know, what do you think it will take for you guys to feel more comfortable about, you know, providing that full set of guidance you typically would?
Yeah, that's a hard one. Bill and I have lengthy conversations every quarter on what we need to say from a guidance perspective. I'd tell you it's just visibility and our confidence in the visibility because it's one thing to miss street consensus. It's another thing for us to miss our own internal guidance that we've chosen to provide publicly. We'll just have to be more confident in the range of our outcomes. Really, I think the reason we haven't given much in the way of annual guidance to date is because it's such a wide range. At some point, you know, a wide range isn't worth anything, and it may cause more confusion versus less. We'll see how we're doing as it takes. Bracketing, you know, maybe revenues and closings.
I wouldn't say we're sitting here today saying we can for sure do that yet.
Next three months are pretty important.
Absolutely. Yep. Understood, yeah. The slight positive to down mid-teens. Yep, understood. Okay. With a few minutes to go, I want to check with our large audience to see if anyone has a question for Michael or Jessica. I will continue then. The, you know, the rental business, you continue to scale that up pretty meaningfully. You know, I ask this question every year and it gets bigger every year. You know, what's your kind of take today on, you know, as you've now spent a lot of time, you know, doing a lot of work on understanding this market and where you guys wanna be positioned in that. You know, how meaningful of a, of a business can the, you know, both the multifamily and single family rental businesses be?
Right now, it's grown well. We really like the positioning we have. We have a little over 8,000 homes in various stages of construction through completion in purpose-built rental-only communities. We're seeing really good demand on the investor group and the capital pools that are looking for the exposure to U.S. residential real estate that can be managed in a way that's as efficient as an apartment complex from a management perspective. We really like the way we see that. We're now working our way through the capitalization of that business. The team did a great job putting a billion-dollar revolving credit facility in place, unlike anything in the rental development business out there.
We feel like that's a first step in the process, and now we're gonna continue to look at how that business is capitalized and where it grows to. You know, ultimately, I don't know where the tech's gonna top out at. I do think the rate of growth is gonna be decelerating as we've gotten to more of a critical scale and projects working in almost all of our markets, so that we're not looking to expand the footprint as much. It's just gonna be replacing it. The need for additional capital will be decelerating.
We've been working towards giving incremental disclosures towards that business. The street can start to model it more on a unit basis like our for-sale side of the business, because we're not quite there yet from a scale perspective. We do expect our rental platform to be a very consistent and strong generator of both revenues and profits eventually on a pretty consistent quarter to quarter to quarter basis. You can actually give us credit for that earnings stream. I think you could argue that nobody in the industry has maybe gotten paid for to date, what they've done on the single family for rent side of the platform. We wanna make sure we keep giving the disclosure and as much guidance as we can on that front, so you can see that consistent earnings stream that's coming.
Right. I mean, just given what we've seen on the home buyer side in the first, you know, six or seven weeks of the year, have you seen any trends in terms of that institutional demand, you know, changing, or is that just a much more of a kind of a slower moving, you know, ship of demand?
January, February is a better time than December.
Okay.
Nobody's focused on the institutional side in December doing anything.
Okay.
Seeing some good interest right now. Very encouraged by that.
Okay. Got it. I think on the share repurchase side, the guide is for a similar dollar volume. Correct me if I'm wrong. You know, your net debt-to-capital is at all-time lows. You know, cycle debts come down a little, maybe you get a little whip off the balance sheet. I don't think you gave a guide on land spend for the year, but presumably it's lower. Although some net income's lower, too. Before I talk myself into circles here. You know, where do you wanna be from a net debt-to-capital perspective? In light of that, you know, what type of share repurchase do you think you can do?
Very low leverage is something that we've been focused on for a while, and we are attaining that. You know, we had $700 million maturing this year. We paid off, you know, was it $300 million last week? Another $400 million to go in the summertime. You know, what's left in our debt stack, we have nothing next year. Everything's got a 1 handle on the coupon rate, so it's really hard to think about refinancing any of that $700 million with where the rates would be today. At some point, you know, I would expect that we'd not be opposed to putting a little more debt back on. By and large, we like the low leverage ratio. We like the flexibility it affords.
In terms of committing to a share repurchase number, if we are able to do some other things, then perhaps that would be the best use of that additional cash. We're gonna commit to what we feel like we can really do within our control of the business before we go any further.
Got it. kind of higher level on the, you know, customer segment side, you guys have a, you know, pretty diverse exposure between entry-level and sort of the first move up. you know, what are you seeing either through the second half of last year or even into sort of year to date in terms of just buyer segments? You know, where do you think the, you know, sort of greatest depth of demand is, you know, amongst your exposures?
Yeah, I think we've been really pleased with our commentary about January and now updating through today has really been that it has been broad-based improvement across our product portfolio and really across our geographies. So that's a really big positive. If you look at and slice and dice how we want price points out there in new existing homes, month supply, it's still generally the lowest at the most affordable price point. I think over the long term, we still very much believe in having the lion's share of our business be for that entry-level first time, first time move-up buyer, because the lower the price point we can deliver houses at, the bigger the piece of the overall market that we can continue to aggregate and consolidate. That's gonna continue to be our focus.
Okay. I think with that, we ran through our, I think, 30 minutes very quickly. Jessica Hansen, Michael Murray.
Thank you.
Thanks for being here.
Thanks, Matt. Thank you.
Thank you.