D.R. Horton Q1 2025 Earnings Report

D.R. Horton EPS Results

• Actual EPS: $2.61
• Consensus EPS: $2.37
• Beat/Miss: Beat by +$0.24
• One Year Ago EPS: $2.82

D.R. Horton Revenue Results

• Actual Revenue: $7.61 billion
• Expected Revenue: $7.12 billion
• Beat/Miss: Beat by +$492.83 million
• YoY Revenue Growth: -1.50%

D.R. Horton Announcement Details

• Quarter: Q1 2025
• Date: 1/21/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, January 21, 2025
• Conference Call Time: 8:30AM ET

D.R. Horton (NYSE:DHI) operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States. It engages in the acquisition and development of land; and construction and sale of residential homes in 118 markets across 33 states under the names of D.R. Horton, America's Builder, Express Homes, Emerald Homes, and Freedom Homes. The company constructs and sells single-family detached homes; and attached homes, such as townhomes, duplexes, and triplexes. It also provides mortgage financing services; and title insurance policies, and examination and closing services, as well as engages in the residential lot development business. In addition, the company develops, constructs, owns, leases, and sells multi-family and single-family rental properties; and owns non-residential real estate, including ranch land and improvements. It primarily serves homebuyers. D.R. Horton, Inc. was founded in 1978 and is headquartered in Arlington, Texas.

D.R. Horton Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to the First Quarter 2025 Earnings Conference Call for Dior Horton, Horton, America's Builder, the Largest Builder in the United States. 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.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the Q1 of fiscal 2025. Before we get started, today's call includes forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D. R.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

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.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Horton does not undertake any obligation to publicly update or revise any forward looking statements. Additional information about factors 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 few days.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

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. Please note that we have added and updated several slides in our investor presentation to highlight our returns focused strategy and performance. Now, I will turn the call over to Paul Romanowski, our President and CEO.

[Paul Romanowski, CEO & President at D.R. Horton]

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 Weave, our Executive Vice President and Chief Financial Officer. For the Q1, the D. R. Horton team delivered solid results, highlighted by earnings of $2.61 per diluted share.

[Paul Romanowski, CEO & President at D.R. Horton]

Our consolidated pre tax income was $1,100,000,000 on $7,600,000,000 of revenues with a pre tax profit margin of 14.6 percent. We remain focused on enhancing capital efficiency to produce sustainable returns and cash flow. Our homebuilding pre tax return on inventory for the trailing 12 months ended December 31 was 26.7%. Our return on equity was 19.1 percent and return on assets was 13.4%. Our return on assets ranks in the top 15% of all S and P 500 Companies for the past 3, 5 10 year periods.

[Paul Romanowski, CEO & President at D.R. Horton]

During the 3 months ended December 31, we generated consolidated operating cash flow of $647,000,000 and returned $1,200,000,000 to shareholders through share repurchases and dividends. Over the past 12 months, we returned essentially all of the cash we generated to shareholders through repurchases and dividends. Overall, the demographics supporting housing demand remained favorable. And although both new and existing home inventories have increased from historically low levels, the supply of homes at affordable price points is generally still limited. To help spur demand and address affordability, we are continuing to use incentives such as mortgage rate buy downs and we have continued to start and sell more of our smaller floor plans.

[Paul Romanowski, CEO & President at D.R. Horton]

Our local teams have been successful meeting the market with net sales orders this quarter decreasing only slightly from the prior year. We typically experience our seasonally slowest sales demand in the Q1 and our tenured local operators seek to find the right balance of sales pace, pricing, incentives and inventory levels to position each community for optimal returns as we enter the spring. With 53% of our Q1 closings also sold in the same quarter, our sales, incentive levels and gross margin are generally representative of current market conditions. With our focus on affordable product offerings, homes and inventory, continued improvement in our construction cycle times and finished lots available in our pipeline, we are well positioned for the remainder of fiscal 2025. Mike?

[Michael Murray, Executive VP & COO at D.R. Horton]

Earnings for

[Michael Murray, Executive VP & COO at D.R. Horton]

the Q1 of fiscal 2025 decreased 7% to $2.61 per diluted share compared to $2.82 per share in the prior year quarter. Net income for the quarter was $845,000,000 on consolidated revenues of $7,600,000,000 Our first quarter home sales revenues were $7,100,000,000 on 19,000 and 59 homes closed compared to $7,300,000,000 on 19,340 homes closed in the prior year quarter. Our average closing price for the quarter was $374,000 $374,900 down 1% sequentially and roughly flat with the prior year quarter. Bill?

[Bill Wheat, Executive VP & CFO at D.R. Horton]

Our net sales orders for the Q1 decreased 1% from the prior year to 17,837 homes and order value decreased 2% to $6,700,000,000 Our cancellation rate for the quarter was 18% down from 21% sequentially and from 19% in the prior year quarter. Our average number of active selling communities was up 2% sequentially and up 10% year over year. The average price of net sales orders in the Q1 was $373,000 which was down 1% both sequentially and from the prior year quarter. Jessica?

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Our gross profit margin on home sales revenues in the Q1 was 22.7%, down 90 basis points sequentially from the September quarter as expected due to higher incentive costs. On a per square foot basis, home sales revenues and stick and brick costs were both relatively flat sequentially, while lot costs increased approximately 3%. Our incentive costs are expected to increase further on homes closed over the Our incentive costs are expected to increase further on homes closed over the next few months, so we expect our home sales gross margin to be lower in the Q2 compared to the Q1. Our incentive levels and home sales gross margin for the full year of fiscal 2025 will be dependent on the strength of demand during the spring selling season in addition to changes in mortgage interest rates and other market conditions. Phil?

[Bill Wheat, Executive VP & CFO at D.R. Horton]

In the Q1, our homebuilding SG and A expenses increased by 6% from last year and homebuilding SG and A expense as a percentage of revenues was 8.9%, up 60 basis points from the same quarter in the prior year and in line with our expectations. Our increased SG and A costs are primarily due to the expansion of our operating platform. Our employee count is up 8% from a year ago. Our community count is up 10% and our market count has increased 7% to 126 markets in 36 states. The investments we have made in our team and platform position us to execute and sustain our strategic plans to produce strong returns, cash flow and market share gains.

[Bill Wheat, Executive VP & CFO at D.R. Horton]

Paul?

[Paul Romanowski, CEO & President at D.R. Horton]

We started 17,900 homes in the December quarter and ended the quarter with 36,200 homes in inventory, down 15% from a year ago and approximately 1200 homes lower than at the end of September. 25,700 of our homes at December 31 were unsold relatively flat with year end. 10,400 of our unsold homes at quarter end were completed of which 1300 had been completed for greater than 6 months. For homes we closed in the Q1, our construction cycle times improved a few days from the 4th quarter and approximately 3 weeks from a year ago.

[Paul Romanowski, CEO & President at D.R. Horton]

Our improved cycle times position us to turn our housing inventory faster in 2025 and we will continue to manage our homes and inventory and starts pace based on market conditions and to achieve targeted closings by community. Mike?

[Michael Murray, Executive VP & COO at D.R. Horton]

Our homebuilding lot position

[Michael Murray, Executive VP & COO at D.R. Horton]

at December 31 consisted of approximately 640,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others, which enhances our capital efficiency, returns and operational flexibility. Of the homes we closed this quarter, 65 percent were on a lot developed by either Forestar or a third party, up from 62% in the prior year quarter. Our 1st quarter homebuilding investments in lots, land and development totaled $2,400,000,000 of which $1,500,000,000 was for finished lots, dollars 710,000,000 was for land development and $140,000,000 was for land acquisition. Paul?

[Paul Romanowski, CEO & President at D.R. Horton]

In the Q1, our rental operations generated $12,000,000 of pre tax income on $218,000,000 of revenues from the sale of 311 single family rental homes and 504 multifamily rental units. This quarter's rental pre tax profit margin was impacted by recent uncertainty in the capital markets and higher interest rates for purchasers of rental communities. We continue to operate a merchant build model in which we construct and sell purpose built rental communities. Our rental operations provide synergies to our homebuilding operations by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and absorption of our land and lot pipeline. We are focused on improving our operational execution and efficiencies in both our rental businesses.

[Paul Romanowski, CEO & President at D.R. Horton]

During the last several quarters, we have been successful monetizing some of our single family rental communities prior to leasing stabilization. We plan to continue this strategy to improve the capital efficiency and returns of our rental operations. Our rental property inventory at December 31 was $3,000,000,000 which consisted of $728,000,000 of single family rental properties family rental properties and $2,300,000,000 of multifamily rental properties. We expect our total rental inventory to remain around the current level for the next several quarters. Jessica?

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Forestar, our majority owned residential lot development company reported revenues $250,000,000 for the Q1 on 2,333 lots sold with pre tax income of $22,000,000 Forestar's owned and controlled lot position at December 31 was 106,000 lots. 64% of Forestar's owned lots are under contract with or subject to a right of first offer to D. R. Horton. $220,000,000 of our finished lots purchased in the Q1 were from Forestar.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Forestar had approximately $640,000,000 of liquidity at quarter end with a net debt to capital ratio of 29.5%. Our strategic relationship with Forestar is a vital component of our returns focused business model. Forestar's strong separately capitalized balance sheet, growing operating platform and lot supply position them well to capitalize on the shortage of finished lots in the homebuilding industry and to aggregate significant market share over the next several years. Mike?

[Michael Murray, Executive VP & COO at D.R. Horton]

Financial Services earned $49,000,000 of pretax income in the Q1 on $182,000,000 of revenues, resulting in a pretax profit margin of 26.7%. During the Q1, our mortgage company handled the financing for 79% of our homebuyers. Borrowers originating loans with DHI mortgage this quarter at an average FICO score of 724 and an average loan to value ratio of 89%. First time homebuyers represented 60% of the closings handled by our

[Michael Murray, Executive VP & COO at D.R. Horton]

mortgage company this quarter. Bill?

[Bill Wheat, Executive VP & CFO at D.R. Horton]

Our capital allocation strategy is disciplined and balanced to sustain an operating platform that is disciplined and balanced to sustain an operating platform that produces compelling returns and substantial operating cash flows while positioning for growth. We have a strong balance sheet with low leverage and strong liquidity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities. During the 1st 3 months of the year, consolidated cash provided by operations was $647,000,000 We repurchased 6,800,000 shares of common stock during the quarter for $1,100,000,000 which reduced our outstanding share count by 4% from the prior year.

[Bill Wheat, Executive VP & CFO at D.R. Horton]

As our stock price declined during the quarter, we accelerated some of our planned share repurchases for the year. Our remaining share repurchase authorization at December 31 was $2,500,000,000 During the quarter, we also paid cash dividends of $0.40 per share, totaling $129,000,000 and our Board has declared a quarterly dividend at the same level to be paid in February. At December 31, we had $6,500,000,000 of consolidated liquidity consisting of $3,000,000,000 of cash and $3,500,000,000 of available capacity on our credit facilities. Debt at the end of the quarter totaled $5,100,000,000 with $500,000,000 of senior notes maturing in the next 12 months. Our consolidated leverage at December 31 was 17% and we plan to maintain our leverage around 20% over the long term.

[Bill Wheat, Executive VP & CFO at D.R. Horton]

At December 31, our stockholders' equity was $24,900,000,000 and book value per share was $78.53 up 13% from a year ago. For the trailing 12 months ended December 31, our return on equity was 19.1% and our consolidated return on assets was 13.4%. Jessica?

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Looking forward to the Q2, we currently expect to generate consolidated revenues of $7,700,000,000 to $8,200,000,000 and homes closed by our homebuilding operations to be in the range of 20,000 to 20,500 homes. We expect our home sales gross margin for the 2nd quarter to be approximately 21.5% to 22% and our consolidated pre tax profit margin to be in the range of 13.7% to 14.2%. We have added guidance for consolidated pre tax profit margin to provide more meaningful insight to our overall profit expectations. As a result, we no longer plan to provide specific guidance for quarterly homebuilding SG and A percentage or our financial services pretax profit margin. Our results for the full year of fiscal 2025 will still largely be dependent on the strength of the spring.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

For the year, we continue to expect to generate consolidated revenues of approximately $36,000,000,000 to $37,500,000,000 and homes closed by our homebuilding operations to be in the range of 90,000 to 92,000 homes. We now forecast an income tax rate for fiscal 2025 of approximately 24%. Based on our strong financial position, 1st quarter share repurchase activity and our expectation for increased cash flows from operations in fiscal 2025, we now plan to repurchase between $2,600,000,000 $2,800,000,000 of our common stock for the full year. We also continue to expect annual dividend payments of around $500,000,000 Paul?

[Paul Romanowski, CEO & President at D.R. Horton]

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 that sustain our ability to produce strong returns, grow the business and generate substantial cash flows while continuing to aggregate market share. We have significant financial and operational flexibility and we plan to maintain our disciplined approach to capital allocation by providing compelling returns to our shareholders to enhance the long term value of our company. Thank you to the entire Doctor 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.

[Paul Romanowski, CEO & President at D.R. Horton]

We will now host questions.

[Operator]

Thank you. At this time, we'll be conducting a question and answer session. In the interest of time, today we ask that participants limit themselves to one question and one follow-up. And the first question today is coming from John Lovallo from UBS. John, your line is live.

[John Lovallo, Analyst at UBS Group]

Good morning, guys. Thanks for taking my question. Maybe starting off with just the gross margin outlook in the second quarter. So looks like sequentially going from 22.7% to 21.5% to 22%. Can you just help us with some of the moving pieces there?

[John Lovallo, Analyst at UBS Group]

I mean, is that really the expectation of just higher incentive levels? Or is there something that changes sequentially in terms of land, labor and materials?

[Paul Romanowski, CEO & President at D.R. Horton]

Hey, John. Really, it's just a matter of incentive levels and what we're seeing in the market today. We've closed 53% of the or 53% we closed this quarter were sold in the quarter. So we think representative of kind of where we are. And looking throughout the quarter, our margin on closings in December was a little lower than the prior 2 months.

[Paul Romanowski, CEO & President at D.R. Horton]

So based on the visibility we have today, what we're seeing in the market, we do expect a slight step down in margin on closings in our Q2.

[John Lovallo, Analyst at UBS Group]

Understood. And then in terms of deliveries, it looks like you guys beat by about 1,000 units versus the top end, still kind of maintain that 90,000 to 92,000 guide for the full year. How would you kind of characterize that? Was there anything pulled forward into the Q1 that you didn't expect? Or is this more just a little bit of conservatism, just not knowing what lies ahead as we move into the spring?

[Michael Murray, Executive VP & COO at D.R. Horton]

I think we're always a little concerned in the 4th calendar quarter, our 1st fiscal with the sales demand environment. We had the inventory and the teams did a great job of delivering that inventory to closings and putting people in homes. So we're really good about the execution across the board. And we're positioned to continue to deliver homes and we need to sell a fair number of homes this quarter that we're going to close this quarter, but we've got the inventory position to do so.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Yes. I think the beat really just reflects our continued improvement in build times and also the fact that we did sell and close 53% of our homes intra quarter, that's a little bit higher than it typically would be for a December quarter.

[John Lovallo, Analyst at UBS Group]

Makes sense. Thanks guys.

[Operator]

Thank you. The next question is coming from Alan Ratner from Zelman and Associates. Alan, your line is live.

[Alan Ratner, Managing Director at Zelman Partners LLC]

Hey, guys. Good morning. Thanks for the detail so far. First question on the start pace. That's been trending lower here, which I think makes sense given the environment.

[Alan Ratner, Managing Director at Zelman Partners LLC]

But 3 quarters in a row down year over year, just curious how you're thinking about the start pace going forward? Are you thinking about just given the improving cycle times bringing back some component of BTO back in the business? Or do you feel like just given that improving cycle time, you can more appropriately match the starts and sales going forward and still hit that full year guide?

[Paul Romanowski, CEO & President at D.R. Horton]

Yes, Allen, I believe that just the improved cycle times that we have seen have allowed us to carry a lower number of inventory and that's why you've seen that sequential decline in our starts pace. It does allow us to sell earlier in the process because of our ability to turn these homes faster. So it does allow us to pick up a little broader scale on the buyer demographic or demand that's out there. I would expect on a go forward basis that you're going to see our starts be more in line with our sales basis. We just replenish the inventory that we have and start to build as we grow throughout the year.

[Alan Ratner, Managing Director at Zelman Partners LLC]

Okay, great. Second question, we're day 1 here on the new administration, a lot of uncertainty about which direction some of the housing related policies might go in, whether we're talking about tariffs or integration or the future of the GSEs. I'm just curious how you guys are thinking about the next several years in the backdrop and whether you're changing any strategies or doing anything in anticipation of that?

[Paul Romanowski, CEO & President at D.R. Horton]

Alongside everyone else, we're keeping an eye on what will occur. But we've been through a number of changes in administrations before and ultimately we are just focused on what buyers can afford. We're going to continue to open communities and try to price our product as affordably as possible to meet the needs of home buyers. There is a core need for shelter and for homes in our country and we're going to continue to do the best we can to supply it as at an affordable price as we can.

[Alan Ratner, Managing Director at Zelman Partners LLC]

Thanks a lot.

[Operator]

Thank you. The next question is coming from Stephen Kim from Evercore ISI. Stephen, your line is live.

[Stephen Kim, Senior Managing Director at Evercore ISI]

Yes. Thanks very much guys. Appreciate the color. I was really encouraged to see the share repurchases you did this quarter. And it's a tough environment and the cash flow was impressive.

[Stephen Kim, Senior Managing Director at Evercore ISI]

I think you had guided you're guiding now continuing to guide for cash flow above 2024. Can you give us a sense for how you're thinking about cash flow from operations relative to your combined share repurchases and dividends, because that I think might help dial in even a little bit better?

[Paul Romanowski, CEO & President at D.R. Horton]

Sure. As we said in our scripted remarks, we've essentially distributed all of our cash flow from operations over the last 12 months to shareholders through repurchases and dividends. And so that would continue to be our general expectation as the substantial majority of our cash flow will go to repurchases and dividends. So our guide of the $2,600,000,000 to $2,800,000,000 of repurchases and the $500,000,000 of dividends is a good proxy for generally the range of where we would expect our cash flow from operations to be for the year.

[Stephen Kim, Senior Managing Director at Evercore ISI]

Yes, that's impressive. Appreciate that. And then second question relates to your leverage longer term. I think you had indicated that your long term leverage goal is around 20%. Can

[Stephen Kim, Senior Managing Director at Evercore ISI]

you give us a

[Stephen Kim, Senior Managing Director at Evercore ISI]

sense for like what kind of cash balance you guys would typically carry? So in other words, like what kind of net debt to cap do you think is a good target longer term for the company?

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Sure. You're correct on the consolidated leverage target at or below 20%. Net, it's probably closer to approximately a 10%. Cash is going to vary though quarter to quarter. We typically have our heaviest cash balance or highest cash balance at the end of the fiscal year, call it roughly $3,000,000,000 And then the other quarters probably anywhere from $1,000,000,000 to $2,000,000,000

[Stephen Kim, Senior Managing Director at Evercore ISI]

Got you. That's really encouraging. Okay. Thanks a lot guys. Appreciate it.

[Operator]

Thank you. The next question is coming from Carl Reichardt from BTIG. Carl, your line is live.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

Thanks everybody. I want to talk about SG and A for a second. So talk Mike, I think it was you that talked about the growth rate in store count, the growth rate in lots and business at people you've added. We'll start to anniversary those growth rates and you've talked about sort of balancing your pace with margins and returns more so in going forward. So especially because you're not going to be guiding on this anymore, where do you sort of think your target SG and A ought to be?

[Carl Reichardt, Managing Director - Equity Research at BTIG]

And when do you expect to see some better leverage on those SG and A dollars? Is it going to be later this year? I know seasonally it will happen or will we start to see more the next couple of years?

[Bill Wheat, Executive VP & CFO at D.R. Horton]

As we commented, we have made investments. We've expanded our market count, increased our community counts. As you know as well, Carl, we are always focused on being as efficient as we can. So we would expect to see leverage overall in our SG and A. I think today as we look at fiscal 2025, we would expect our homebuilding SG and A percentage probably a little higher than it was in 2024.

[Bill Wheat, Executive VP & CFO at D.R. Horton]

But we certainly expect to leverage those investments as we move beyond 2025 into 2016 in future years. We will be very focused on maintaining as efficient of an infrastructure as we can to support our growth.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

Thank you, Bill. And then, you about what I think 65% or I think you said of your total lot you have with finished lot option contracts from developers. Of the other 35%, can you talk about self developed lots and sort of what I call farmer options versus land banking transactions? And can you talk a little bit comment at all about your perspective on land bank transactions versus doing self development on your own books?

[Michael Murray, Executive VP & COO at D.R. Horton]

I think, Carl, the 65% we talked about at the closings in the quarter were on lots that were developed by a third party or Forestar. So that would be a lot development professional entity that is developing finished lots for us and that comes from deals they source, projects we source and assign to them and enter into buyback contracts kind of runs the gamut there. On the self developed the lots we the homes we closed on lots we self developed, those were all done on our balance sheet. And we continue to explore other accretive ways for capital efficiency and whether that's sort of that call it land banking development services, land banking process, we continue to evaluate and are looking to drive the most efficient capital usage in our lot pipeline.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

We'll use land or lot bankers if we have an excess supply of finished lots that we're not ready for. But in terms of true traditional land development where you don't technically have a lot of risk transfer, we have little to know of that. We're 100% focused on risk transfer in the structures of our contracts.

[Carl Reichardt, Managing Director - Equity Research at BTIG]

Thanks, Jess. Thanks, everyone.

[Operator]

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

[Michael Rehaut, Executive Director at JP Morgan]

Thanks. Good morning, everyone. Congrats on the results. First question, I'd love to circle back to, you had a comment in your prepared remarks around inventory levels. And the comment was supply still generally limited at affordable price points.

[Michael Rehaut, Executive Director at JP Morgan]

I'd love to dial in to that a little bit and see if there's any regional differentiation that you've seen across inventory levels and as a result perhaps which markets or regions that you operate in might be a little stronger versus a little weaker than the corporate average?

[Paul Romanowski, CEO & President at D.R. Horton]

We have seen like has been reported some buildup in the Florida market and certainly in certain of the Florida markets a little more than others. The same in some of the Texas markets, but across generally across the footprint, we feel like inventory is in pretty good shape. We think that we and the other builders being pretty responsible in terms of watching the market and based on what the market brings, sizing their inventory in kind and the resale market is just going to continue to play out as people loosen up and eventually move and put their homes on the market.

[Michael Rehaut, Executive Director at JP Morgan]

Okay.

[Michael Rehaut, Executive Director at JP Morgan]

Appreciate that. I guess secondly, your option lot percentage is 76%. I think you kind of maybe reached over the last year or 2 a high of 80%. I think in the past you've talked about most likely not going below a year's worth of own supply, maybe

[Michael Rehaut, Executive Director at JP Morgan]

you kind of stay in that year to year and

[Michael Rehaut, Executive Director at JP Morgan]

a half range. So as we look forward, I know you're talking still about improving inventory turns or build cycle times. I'm just wondering how you guys think about further improvement on capital efficiency. What are those levers that you look to move? And if there's any rethinking of where that option lot percentage or years owned supply might be able to go over the next 3 to 5 years?

[Paul Romanowski, CEO & President at D.R. Horton]

Well, Mike, we our average is 76% across our operations. We do have markets that it's higher than that and we obviously have markets that it's lower than that as well. So we are still focused on continuing to ensure that we have a good network of 3rd party developers and we're utilizing Forestar as much as we can. So there still is opportunity for some of those markets that are at a lower option percentage to increase that. As Jessica did state earlier, we are very focused on risk transfer.

[Paul Romanowski, CEO & President at D.R. Horton]

And so if we're going to pay for to use a third party to whether it's banking or developing lots, we're balancing what we're paying versus what the risk transfer and the capital efficiency benefits are. And so that's something we do continue to evaluate, as Mike said earlier, and we expect there will be opportunities for us to find ways to get more efficient with our lot pipeline going forward.

[Michael Rehaut, Executive Director at JP Morgan]

Great. Thanks guys. Good luck.

[Paul Romanowski, CEO & President at D.R. Horton]

Thank you.

[Operator]

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

[Matthew Bouley, Managing Director at Barclays]

Good morning, everyone. Thank you for taking the questions. So the closings guidance, I think for the second half implies something like 52,000 homes closed or maybe 30% or so higher than the first half.

[Matthew Bouley, Managing Director at Barclays]

So I think

[Matthew Bouley, Managing Director at Barclays]

it's a little bit greater than normal or at least history. So I just want to get some color around your confidence in that step up in closings. It sounds like better cycle times, as you keep alluding to, for sure, is part of that. But just any other assumptions we should consider that you're making in that kind of step up there? Thank you.

[Paul Romanowski, CEO & President at D.R. Horton]

No, I think we just we feel good about our efficiency today. We feel very good about our position of housing inventory as well as the lot inventory that we need to achieve those numbers. Of course, we're very early in the spring selling season and we need the spring to show up for us and to see the sales. But we believe that our operators are positioned to take advantage of the spring selling season and be in position to deliver on our guide of 92,000 homes for the year.

[Matthew Bouley, Managing Director at Barclays]

Okay, got it. Thank you for that. And then secondly, back on the gross margin, it sounded like the margin exited December a little lower than the prior 2 months, if I heard you correctly. So is that second quarter margin guide assuming that the margin on homes, I guess, sold and closed during Q2 would be similar to December or lower than December? And I guess conceptually at what point would you look to kind of more hold the line on the gross margin?

[Matthew Bouley, Managing Director at Barclays]

Thank you.

[Michael Murray, Executive VP & COO at D.R. Horton]

So we continue to look at traffic and demand we see in the neighborhoods to affect the pricing and the margin. Again, it's about maximizing the returns for us at a community level. But we entered the quarter in a roughly 6% mortgage environment and we exited the quarter in a 7% mortgage environment, which is what we kind of rolled into Q2 with. And we mortgage environment, which is what we kind of rolled into Q2 with. And so that's coloring our margin outlook as well, looking at perhaps being a bit lower than December as we work our way through Q2.

[Michael Murray, Executive VP & COO at D.R. Horton]

But it is the spring and it is historically a better selling season, and we're optimistic about the trends we'll see.

[Matthew Bouley, Managing Director at Barclays]

All right. Thanks guys. Good luck.

[Michael Murray, Executive VP & COO at D.R. Horton]

Thank you.

[Operator]

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

[Shawn Reid, Senior Strategy Consultant at Wells Fargo]

Awesome. Thanks so much. So maybe just to follow-up on the prior question here. Could you guys give us a sense as to what gross margin is embedded in your backlog on houses that you plan to close in the Q2. Kind of just curious for a rough number there.

[Shawn Reid, Senior Strategy Consultant at Wells Fargo]

And then maybe one other number on that point would be any sense as to what the bought down rate is in your backlog. I believe you provided that in past quarters. So just curious if we've got an updated number there.

[Paul Romanowski, CEO & President at D.R. Horton]

Sure. With regard to the margin and backlog, that is one of the key items that we do have visibility to when we're preparing our guide. So our margin and backlog is relatively consistent with the range that we're providing here for Q2. And then in terms of prevailing rate that we're offering in the market today, generally between $4.99 to $5.99 range depending on the product is what's prevailing out there really for the last little while across our sales offices.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

And there's really no meaningful change in that average rate this quarter versus last quarter.

[Shawn Reid, Senior Strategy Consultant at Wells Fargo]

No, that helps. And then maybe more of a higher level question on labor costs and stick and brick costs. It sounds like those are looking to hold in Q2, although correct me if I'm wrong, but maybe could you just talk a little bit more broadly about your ability to manage higher costs on these 2 buckets from some of these exogenous factors we're seeing, whether it's the new administration's tone on remigration or higher material costs on the back of natural disaster rebuild. Just trying to get your rough sense as to sort of how you'd manage through those, should we see inflation in labor and stick and brick? Thanks.

[Paul Romanowski, CEO & President at D.R. Horton]

I think today, we are seeing good access to we have the labor we need and we have the materials we need. And that's what's allowed us to continue to see improvements in our cycle time. And given that, we've been able to hold pretty tight on pricing for both materials and labor. It has yet to play out to see what happens with this administration and what that impact is either through tariffs and or labor if it becomes a little more scarce. But we feel good about our positioning in the markets with our market share and our ability to maintain the labor and the parts and pieces we need and still don't expect to see much inflation in either of those over the next 12 months.

[Shawn Reid, Senior Strategy Consultant at Wells Fargo]

That's helpful. Thanks so much. I'll pass it on.

[Operator]

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

[Eric Bosshard, CEO at Cleveland Research Company]

Good morning. Thanks.

[Eric Bosshard, CEO at Cleveland Research Company]

Two things, if I could.

[Eric Bosshard, CEO at Cleveland Research Company]

First of all, in terms of affordability, I'm curious as you think, looking forward, I think your ASP indicated is down 1%. Is there something more meaningful that you're considering or taking steps towards to address affordability? I know you talked about smaller homes, but is there a need to unlock or an opportunity to unlock demand by doing something more meaningful and changing the product and changing your ASP?

[Michael Murray, Executive VP & COO at D.R. Horton]

Hard to say that we could make a massive swing in the near term from what we're doing. I mean, it's kind of an incremental change neighborhood by neighborhood. You're kind of, I don't want to say locked in, but for the lots that are on the ground and that are approved by the municipalities, oftentimes, they're also approving some product parameters and guidelines that kind of limit our ability to flex significantly within a short, call it, a 6 to 9 month timeframe. Longer term, we continue to evaluate ways to be more efficient and usage of land and development dollars relative to the stick and brake cost it takes to deliver certain number of bedrooms, bathrooms and square footage for a homeowner.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

For data points this quarter on homes we closed, our average square footage was down

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

1% from a year ago, which has been down a low single digit percentage

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

here for the last couple of years. From a year ago, which has been down a low single digit percentage here for the last couple of years. Sequentially, it was relatively flat. And we did see another tick up in the number of attached homes, so call it townhomes and duplexes that we closed. That was roughly 17% of our business, which was up from 15% sequentially.

[Eric Bosshard, CEO at Cleveland Research Company]

Okay. And then secondly, I know as you look forward to the spring selling season, rates were 7%, rates were 6%, rates were 7%. Is your customer behaving differently with rates back at 7%, curious, especially in an environment where it feels like we're a little bit higher for longer, is the consumer responding to incentives the same way? Is traffic the same or is it different this time back at 7?

[Paul Romanowski, CEO & President at D.R. Horton]

We still our best incentive and most impactful to the consumer is utilizing some form of rate buying. And that increased for us throughout the quarter to try and maintain rates that seem to be in at least a comfortable enough place for them to move forward as far as their monthly payment. Still we're successful in achieving what we needed to in the quarter with 53% of the homes closed in the quarter sold in the quarter. So we're able to navigate it through this past quarter. It's still early.

[Paul Romanowski, CEO & President at D.R. Horton]

We're only a couple of weeks into this quarter, but so far been pleased with the traffic levels and with the sales pace that we're seeing in our models. We'll see how that continues. Got a long way to go in the spring selling season.

[Eric Bosshard, CEO at Cleveland Research Company]

Thank you.

[Operator]

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

[Anthony Pettinari, Analyst at Citigroup]

Good morning. I wonder if you can give an update on what you're seeing with consumer debt levels and if you're seeing any real change in sort of availability or ability to qualify? And then when you look at kind of the first true first time buyer versus more of a move, is one group maybe holding up better than

[Anthony Pettinari, Analyst at Citigroup]

the other?

[Paul Romanowski, CEO & President at D.R. Horton]

I would say that today, we've got the levels of traffic in our offices. It's a little easier for that move up buyer to move forward. They just to get to the sale and get to the final determination, certainly that's been a little stronger the last quarter. We haven't seen a significant change in really the debt level or the credit makeup of our buyers because we do sell 59% I think of our buyers through our mortgage company this past quarter were first time homebuyers.

[Paul Romanowski, CEO & President at D.R. Horton]

We live in the world where if we could open up go down on the credit score significantly, it would significantly open up the buyer available to us. But we spend a lot of time in our sales offices working through those credit challenges and our buyers to get them in a position to buy their 1st home.

[Anthony Pettinari, Analyst at Citigroup]

Okay. That's helpful. And then just following up on smaller format homes or products like townhomes or duplexes, understanding it varies by community. Is it possible to talk about sort of how the returns or the gross margin profile of smaller format homes compares with a more traditional offering, if at all?

[Michael Murray, Executive VP & COO at D.R. Horton]

It's very similar actually. If we look at our product and project performances, the margin is going to be very similar. If you're well positioned with the right product, the right price, the right house, whether it's attached or detached, you're going to get similar outcomes in your margin and your returns.

[Anthony Pettinari, Analyst at Citigroup]

Okay.

[Anthony Pettinari, Analyst at Citigroup]

That's helpful.

[Michael Murray, Executive VP & COO at D.R. Horton]

We have some

[Michael Murray, Executive VP & COO at D.R. Horton]

disparity.

[Operator]

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

[Mike Dahl, Managing Director - Equity Research at RBC Capital Markets]

Hey, thanks for taking my questions. I wanted to ask about the pretax margin guidance. I appreciate that going forward you want to frame your business this way. But if I look at it, you're guiding pretax margins at the midpoint down at 280 basis points year on year and gross margins, you're really only guiding down 150 basis points. So can you it seems like there is something else kind of underneath the surface, whether it's on rentals or SG and A or 4 star this quarter specifically in terms of 2Q.

[Mike Dahl, Managing Director - Equity Research at RBC Capital Markets]

So can you help us understand that?

[Paul Romanowski, CEO & President at D.R. Horton]

Sure. Rental margins are lower as we commented on the call that due to the capital markets uncertainty and higher interest rates, buyers of rental properties really over the last year have it's been more challenging for them. So margins in that business have been lower. It's a business that we're continuing to move forward with and would expect that in 2025 we're dealing with some supply out there that is a challenge, but that should alleviate as we move to the latter part of 2025 and into 2026. But I'd say primarily the change in the year over year gross margin beyond the homebuilding change would be in the rental segment.

[Mike Dahl, Managing Director - Equity Research at RBC Capital Markets]

Okay. Got it. So year on year rental revenue and margin down significantly biggest driver?

[Paul Romanowski, CEO & President at D.R. Horton]

Yes.

[Mike Dahl, Managing Director - Equity Research at RBC Capital Markets]

Got

[Mike Dahl, Managing Director - Equity Research at RBC Capital Markets]

it. And then I guess going back to

[Mike Dahl, Managing Director - Equity Research at RBC Capital Markets]

kind of the price versus pace discussion, I guess as you think about it and again you've made a point of that you added some additional slides around the return focus and change the way that you're guiding certain things. So I know you've been return focused for a while, but in the current environment, is that focus actually like shifting you to be a little bit more biased towards let's keep things kind of a little bit actually more kind of price and margin focus versus volume in the near term? How would you say that that's that your views are evolving there?

[Michael Murray, Executive VP & COO at D.R. Horton]

Well, we continue to evaluate the business at a community level. Community by community, our local operators are making decisions based upon both the lot supply they have in a given project or a given submarket relative to demand that they're currently seeing in that market and looking to price and start homes, price those homes and sell those homes at a pace that's going to maximize the margin available at that pace and for what that submarket can absorb. And it's very much again, I know it's repetitive us saying this, but it's very much a community by community build up of what's happening. And we see the best outcomes there and we don't at the corporate level dictate a pace or a margin to the field. We ask them to maximize the returns.

[Michael Murray, Executive VP & COO at D.R. Horton]

And there are times when you lean more heavily into pace to get pace up and then once pace is up, you can oftentimes bring margin up behind the sales momentum to help drive the returns up. But it's a balance that it's probably a lot more art for us than it is science.

[Mike Dahl, Managing Director - Equity Research at RBC Capital Markets]

Okay. I got you. Okay. Thank you.

[Operator]

Thank you. The next question will be from Ken Vanner from Seaport Research Partners. Ken, your line is live.

[Kenneth Zener, Senior Analyst at Seaport Research Partners]

Hello, everybody. Could you and happy to hear. Could you give color around the margin spread between the 47% backlog closings and the 53% spec as well as comment on because you're in 126 markets, most of the builders are top 50 markets or most of their closings. Could you also talk maybe about the margin spread we see between those top 50 markets and your other 76 markets?

[Paul Romanowski, CEO & President at D.R. Horton]

So your first part of your question was between backlog and our spec closings between the sold

[Michael Murray, Executive VP & COO at D.R. Horton]

and closed in the same

[Michael Murray, Executive VP & COO at D.R. Horton]

quarter versus the ones that

[Michael Murray, Executive VP & COO at D.R. Horton]

are sold coming in. Yes. I don't think we have that breakdown. I would say the 37% that were sold prior to the quarter and it's slightly different in interest lower interest rate environment, we're going to be at a higher margin than what we exited the quarter at in December.

[Michael Murray, Executive VP & COO at D.R. Horton]

But I don't have

[Michael Murray, Executive VP & COO at D.R. Horton]

I can't give you any magnitude, Ken. I'm sorry. I don't have that in front

[Michael Murray, Executive VP & COO at D.R. Horton]

of me.

[Kenneth Zener, Senior Analyst at Seaport Research Partners]

Okay. I think in the past you guys talked about a couple of 100 basis points, I mean multi years ago. So I didn't know if that might be

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

a That would have been build to order versus spec.

[Michael Murray, Executive VP & COO at D.R. Horton]

Yes, a little different.

[Kenneth Zener, Senior Analyst at Seaport Research Partners]

Okay. Regional margins, you guys stand out versus many of the peers and having very similar regional margins across your business. Is there any reason we didn't necessarily see more dispersion of margins in your business? Because Florida, Texas, the West, they're all pretty similar in that 60% range LTM.

[Kenneth Zener, Senior Analyst at Seaport Research Partners]

Just curious as to why perhaps we didn't see more of a spike in some markets versus others? Thank you very much.

[Michael Murray, Executive VP & COO at D.R. Horton]

I think not exactly sure, Ken. I think there's just an aggregation of enough markets in each one of our regional groupings that it kind of blends out any specific market differences where the market is performing differently or our execution is different.

[Paul Romanowski, CEO & President at D.R. Horton]

All of our markets are focused on maximizing returns community by community. And so it's a balance between margin and pace and inventory turns. And so, yes, the better the margin, the better returns generally as well. And so that is focused across the board.

[Kenneth Zener, Senior Analyst at Seaport Research Partners]

Thank you.

[Operator]

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

[Rafe Jadrosich, Director - Senior Equity Research Analyst at Bank of America]

Great. Good morning. Thanks for taking my questions. First, I wanted just on the land inflation that you're seeing today. I think you said up 3% quarter over quarter.

[Rafe Jadrosich, Director - Senior Equity Research Analyst at Bank of America]

Can you just run us like what that implies for the year over year trend? And then how do we think about that for remainder of the year? I mean, how does that compare to what you're contracting today? Like are you seeing any relief there that we'll see flow through later on?

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

On a year over year basis, we

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

were up 10%, which we've been up a high single to low double digit year over year for the last at least 4 to 6 quarters. And on a sequential, it has continued to be just a low to mid single digit increase. I think our base case is going forward, it will remain a low to mid single for the foreseeable future. We're not necessarily seeing land prices come down, certainly not development costs when you look at an all in lot cost. But we do think on a year over year basis here at some point over the next couple of quarters that should moderate to a mid to maybe just high single digit.

[Rafe Jadrosich, Director - Senior Equity Research Analyst at Bank of America]

Okay. That's helpful. And then just on the change in the share repurchase outlook, especially like the pace. If you stepped it up in the guidance, can you talk about have you continued that pace of buyback quarter to date? And then how do we think about sort of the pace as we go through the year?

[Rafe Jadrosich, Director - Senior Equity Research Analyst at Bank of America]

Was the step up in buyback in the quarter related to just where the stock price was? Or is there any change in sort of philosophy or strategy in terms of like the pace of capital return relative to free cash flow?

[Paul Romanowski, CEO & President at D.R. Horton]

Yes, no change overall in strategy. We will manage our repurchases within our liquidity availability and our balance sheet targets. But we do have the flexibility within that liquidity to be able to accelerate repurchases when the share price is under some pressure. Obviously, we saw that this quarter and that continued really through the end of the quarter. So we continue to be a bit more aggressive in our repurchases.

[Paul Romanowski, CEO & President at D.R. Horton]

And judging based on where the stock price has been early this quarter, obviously, we're still out in the market. And so we are still being active. I would characterize some of the increase in the Q1 as an acceleration implied by our guide of the $2,600,000,000 to $2,800,000,000 We did increase that guide, but not by the full amount that the acceleration would have occurred in Q1. So we continue to we manage based on our overall plan, what we feel like our liquidity and balance sheet and our cash flow will allow, but we will see it ebb and flow a bit depending on where the valuation of the stock is and when we see some opportunities to take advantage of dips in the stock.

[Rafe Jadrosich, Director - Senior Equity Research Analyst at Bank of America]

Thank you. Appreciate it.

[Operator]

Thank you. The next question will be from Trevor Allison from Wolfe Research. Trevor, your line is live.

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

Hi, good morning. Thank you for taking my questions. First, can you just talk about any differing demand trends geographically Southeast and South Central were 2 weaker regions for you guys on a year over year basis. So perhaps any demand commentary on Texas and Florida would be helpful.

[Bill Wheat, Executive VP & CFO at D.R. Horton]

Yes, I think that as we talked to a little earlier, some of the buildup we've seen in inventory has had some impact on sales. When you look at portions of the Florida market and as well isolated to some of the Texas markets where they saw significant run up in valuations, we've seen some moderation there. But generally, as we enter into the spring, we've been pleased with what we've seen in these 1st few weeks in our sales offices across our footprint.

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

Okay. Thank you. That's helpful. And then second question, understanding it's early and a lot of unknowns, but with the new administration, can you just give us some color on some potential impacts that you think could be possible if we were to see a major change on immigration or then also tariffs on China and Mexico? Just what kind of impact you guys think that could potentially have on you all?

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

Thanks.

[Michael Murray, Executive VP & COO at D.R. Horton]

Hard to foresee what the impact would be, and we're not sure what the change is going to be yet. So we continue to, as Bill said before, prepared to provide an affordable product for our buyers that we can get a homeowner into and qualify for the mortgage. And so we do everything we can to bring that affordability into play. And if there is cost increases, that is not going to be helpful for housing affordability. And I do think housing affordability is a stated goal of the administration.

[Michael Murray, Executive VP & COO at D.R. Horton]

So we're hopeful that they're able to do some things that will help drive affordability.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

And we have had to deal with both immigration changes and tariffs in the past. So it's something that we're familiar with and likely, although it is way too early to say the ultimate outcome, likely it's more regional in nature than something sweeping across our entire footprint, but it remains to be seen.

[Operator]

Thank you. The next question will be from Buck Horn from Raymond James. Buck, your line is live.

[Buck Horne, Managing Director - Equity Research at Raymond James Financial]

Hey, thanks. Good morning. Just one quick one for me. I was wondering if you've seen any inbound or uptick in inbound interest from single family rental investors in some of the longer dated finished unsold inventory? Or would you consider maybe negotiating or doing a bulk deal if SFR investor wanted to come in and take some of that inventory off your hands?

[Paul Romanowski, CEO & President at D.R. Horton]

We have really maintained our single family for rent business as more of a merchant build. We have plenty of opportunity for those buyers to sell into those and that can, as we stated in our prepared remarks, have started to do some of those more on a forward sale ahead of final stabilization. So we have plenty to offer to those buyers. We tend to haven't been heavy at all in selling in bulk our inventory. We're very comfortable with the inventory we have.

[Paul Romanowski, CEO & President at D.R. Horton]

We've largely maintained the number of completed inventory units and that's exactly where we want to be as we enter into the spring selling season. So we feel good about our inventory on both sides of that on the for sale and on a built for rent basis.

[Buck Horne, Managing Director - Equity Research at Raymond James Financial]

Okay, thanks. That's all for me. Thanks. Appreciate it.

[Operator]

The next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Thank you. Good morning, everyone. My first question is on the consumer and the rate environment. If the Fed does cut less than expected or fewer times than expected this year versus say last year, but rates realized some level of stability as a result of that. Do you think that that could be enough to ease some of the uncertainty or some of the fears that are leaving people on the sidelines?

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Or do you think that we actually need to see rates come down to see more of a lift in confidence and activity?

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

I think we'd take rate stability all day long. If we could pick something today, it's much easier to manage our business and drive affordability if we know what the rate is going to be. And I think if rates remain stable for an extended period of time, that's going to get consumers off the fence that need to buy a house. They'll ultimately reset their expectations on what they can afford if they thought rates were going to go lower and they ultimately don't. So, we don't have a base case scenario.

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Nothing in our guidance assumes rate declines as we move throughout the year. Certainly, that would be helpful. But really, we would just take rate stability as a pretty positive as we move throughout the year.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Okay. That's helpful. And then just one last question on the rental side of things. You did mention efforts to realize greater efficiencies and some operational execution there. As you think about eventually improving that margin, how much of that can come from your own efforts versus a shift in the overall market?

[Michael Murray, Executive VP & COO at D.R. Horton]

I think what we're looking at there Susan is the ability to sell some of the projects prior to stabilization from a greater capital efficiency perspective from us. So in terms of we're always looking to control our stick and brick cost and operate efficiently. That's just part of the DNA in homebuilding for sale platform as well as across the rental platform. But to see materially different changes in the financial performance and selling those assets, it takes a fundamental increase in rents, net operating incomes and decrease in cap rates to thoroughly change the valuation on those. We do everything we can to control the cost side, but the efficiency side we're focusing on now is working with some of the buyers of the build to rent communities to sell them earlier in the process prior stabilization.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Okay, that's helpful. Thank you. Good luck with everything.

[Michael Murray, Executive VP & COO at D.R. Horton]

Thank you.

[Operator]

Thank you. The next question will be from Alex Barron from Housing Research Center. Alex, your line is

[Operator]

open.

[Alex Barrón, President at Housing Research Center, LLC]

Thanks everybody and good start to the year. I wanted to ask some of your competitors seem to have a philosophy of trying to sell a certain number of homes and do whatever it takes to get there, even if it means offering super low interest rates. Wondering if you guys have maintained the same approach to the business as you have historically or whether you guys have

[Paul Romanowski, CEO & President at D.R. Horton]

alluded to earlier, it's always a community by community build up. And we're looking for a consistent pace in those communities that allows us to drive a margin and a return community by community. So we aren't making that decision from here. We do rely on our local operators to balance what they need to. They need to be competitive in the market.

[Paul Romanowski, CEO & President at D.R. Horton]

So sometimes we may offer a rate or an incentive beyond where we would hope to, but at the end of the day, we're going to be competitive in the market to achieve the absorptions we need. And when we get on pace, it allows us to drive margin and therefore returns at a higher level. But it's a community by community, market by market daily activity for our operators.

[Alex Barrón, President at Housing Research Center, LLC]

Got it. And then wondering if you can comment on Forestar. It seems like their number of lots sold, I suppose, mostly to you was lower than expected generally, but they seem to maintain the same number for the year. So was that just a timing issue or anything you can comment on that?

[Jessica Hansen, Vice President, Investor Relations at D.R. Horton]

Yes, it was purely timing, Alex. They do expect their lot deliveries to increase throughout the remainder of the year. They had a pretty heavy percentage that they sold to us in Q4, and it was a little bit lighter in Q1, but we would just say that's timing related.

[Alex Barrón, President at Housing Research Center, LLC]

Got it. Thank you so much.

[Operator]

Thank you. The next question will be from Jade Rahmani from KBW. Jade, your line is live.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thank you. Can you comment on the pricing environment that's out there and whether the guidance assumes any price cuts? Because to get to the consolidated revenue guidance it seems like we need to assume somewhat lower average sale prices?

[Paul Romanowski, CEO & President at D.R. Horton]

Our average sales price does reflect the level of incentives from our rate buy downs largely and so that does have some impact on the average selling price. And yes, we've seen slight declines in our net average selling price over the last year. And we do still expect probably a little bit further downward movement in our net average selling price, largely because of the cost of the incentives that we're having to pay in terms of rate buy downs with the rates mortgage rates prevailing in the market being higher at the end of the quarter. We expect those costs to be higher in Q2, which will have an impact on the net ASP.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

So what's a reasonable range for ASP to assume? Would it be around 370,000?

[Paul Romanowski, CEO & President at D.R. Horton]

Yes, we're not guiding to that specifically, but we've seen modest generally sequentially 1% or 2% change, really not expecting much more than that.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thanks a lot.

[Operator]

Thank you. There were no other questions in queue at this time. I will now turn the call back to Paul Romanowski for closing remarks.

[Paul Romanowski, CEO & President at D.R. Horton]

Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our Q2 results in April. Congratulations to the entire D. R. Horton family on producing a solid Q1.

[Paul Romanowski, CEO & President at D.R. Horton]

We are honored to represent you on this call and greatly appreciate all that you do.

[Operator]

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

Participants

Executives

• Jessica Hansen, Vice President, Investor Relations
• Michael Murray, Executive VP & COO
• Bill Wheat, Executive VP & CFO

Analysts

• Paul Romanowski, CEO & President at D.R. Horton
• John Lovallo, Analyst at UBS Group
• Alan Ratner, Managing Director at Zelman Partners LLC
• Stephen Kim, Senior Managing Director at Evercore ISI
• Carl Reichardt, Managing Director - Equity Research at BTIG
• Michael Rehaut, Executive Director at JP Morgan
• Matthew Bouley, Managing Director at Barclays
• Shawn Reid, Senior Strategy Consultant at Wells Fargo
• Eric Bosshard, CEO at Cleveland Research Company
• Anthony Pettinari, Analyst at Citigroup
• Mike Dahl, Managing Director - Equity Research at RBC Capital Markets
• Kenneth Zener, Senior Analyst at Seaport Research Partners
• Rafe Jadrosich, Director - Senior Equity Research Analyst at Bank of America
• Trevor Allinson, Director - Equity Research at Wolfe Research LLC
• Buck Horne, Managing Director - Equity Research at Raymond James Financial
• Susan Maklari, Senior Equity Research Analyst at Goldman Sachs
• Alex Barrón, President at Housing Research Center, LLC
• Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)