D.R. Horton Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to the First Quarter 2024 Earnings Conference Call for D.R. Horton, America's Builder, the largest builder in the United States. [Operator Instructions] I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for DR Horton.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Thank you, Holly, and good morning. Welcome to our call to discuss our financial results for the first quarter of fiscal 2024.

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. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements.

Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K, which was 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 later this week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference.

Now, I will turn the call over to Paul Romanowski, our President and CEO.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer.

For the first quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $2.82 per diluted share. Our consolidated pre-tax income was $1.2 billion on a 6% increase in revenues to $7.7 billion, with a pre-tax profit margin of 16.1%. Our homebuilding return on inventory for the trailing 12 months-ended December 31 was 29%, and our return on equity for the same period was 21.8%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 35% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and demographics supporting housing demand remained favorable.

Early signs for the spring selling season have been encouraging. We will continue to focus on consolidating market share and are well positioned for the spring with 42,600 homes in inventory, and our average construction cycle times returning to more normal levels. We expect our housing inventory turns to improve in fiscal 2024 compared to fiscal 2023, and our ongoing focus on capital efficiency to produce strong homebuilding operating cash flows and consistent returns.

Mike?

[Michael J. Murray, Executive Vice President and Chief Operating Officer at D.R. Horton]

Earnings for the first quarter of fiscal 2024 increased 2% to $2.82 per diluted share compared to $2.76 per share in the prior year quarter. Net income for the quarter was $947 million on consolidated revenues of $7.7 billion. Our first quarter home sales revenues were $7.3 billion on 19,340 homes closed compared to $6.7 billion on 17,340 homes closed in the prior year. Our average closing price for the quarter was $376,200, down 2% sequentially and down 3% from the prior year quarter.

Bill?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

Our net sales orders in the first quarter increased 35% to 18,069 homes, and order value increased 38% from the prior year to $6.8 billion. Our cancellation rate for the quarter was 19%, down from 21% sequentially and down from 27% in the prior year quarter. Our average number of active selling communities was up 2% sequentially and up 14% year-over-year.

The average price of net sales orders in the first quarter was $375,800, down 2% sequentially and up 2% from the prior year quarter. To adjust to changing market conditions during fiscal 2023 and into fiscal 2024, we have increased our use of incentives and reduced home prices and sizes of our home offerings where necessary to provide better affordability to homebuyers.

Based on current market conditions, mortgage rates and continued affordability challenges, we expect our incentive levels to remain elevated in the near-term; our sales volumes to be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share.

Jessica?

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Our gross profit margin on home sales revenues in the first quarter was 22.9%, down 220 basis points sequentially from the September quarter, 100 basis points of the sequential margin decline related to the decrease in the value of hedging instruments we used to offer below market interest rate financing to our homebuyers. While the remainder was primarily due to an increase in incentive levels on homes closed during the quarter.

On a per square foot basis, home sales revenues were down 1.5% in the quarter and lot costs increased 1.5%, while stick and brick costs decreased 1%. As Bill mentioned, we expect our incentive levels to remain elevated in the near-term, but with mortgage rates generally declining from the recent highs, we expect our home sales gross margin in the second quarter to be similar to the first quarter. Our home sales gross margin for the full year of fiscal 2024 will be dependent on the strength of demand and other market conditions during this spring in addition to changes in mortgage interest rates.

Bill?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

Paul?

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

We started 19,900 homes in the December quarter and ended the quarter with 42,600 homes in inventory, down 1% from a year ago and up 1% sequentially. 28,800 of our homes at December 31 were unsold. 9,000 of our total unsold homes were completed, of which 730 had been completed for greater than six months. Our current level of homes in inventory puts us in a strong position for the upcoming spring selling season.

For homes we closed in the first quarter, our construction cycle times continued to improve and we are essentially back to our historical average of roughly four months from start to complete. We will continue to adjust our homes and inventory and starts pace based on market conditions and expect our housing inventory turns to improve in fiscal 2024 as compared to fiscal 2023.

Mike?

[Michael J. Murray, Executive Vice President and Chief Operating Officer at D.R. Horton]

Our homebuilding lot position at December 31 consisted of approximately 607,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. 39% of our total owned lots are finished, and 52% of our controlled lots are or will be finished when we purchase them.

Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our first quarter homebuilding investments in lots, land and development totaled $2.4 billion, up 3% sequentially. Our investments this quarter consisted of $1.4 billion per finished lots, $740 million for land development and $270 million for land acquisition.

Paul?

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

In the first quarter, our rental operations generated $31 million of pre-tax income on $195 million of revenues from the sale of 379 single-family rental homes and 300 multi-family rental units. Our rental property inventory at December 31 was $3 billion, which consisted of $1.4 billion of single-family rental properties and $1.6 billion of multi-family rental properties. We are not providing separate guidance for our rental segment this year due to the uncertainty regarding the timing of closings caused by interest rate volatility and capital market fluctuations. Based on our current pipeline of projects, we expect our rental closings and revenues in the second quarter to exceed the first quarter.

Jessica?

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Forestar, our majority-owned residential lot development company reported revenues of $306 million for the first quarter on 3,150 lots sold with pre-tax income of $51 million. Forestar's owned and controlled lot position at December 31 was 82,400 lots. 61% of Forestar's owned lots are under contract with or subject to a right-of-first offer to D.R. Horton. $270 million of our finished lots purchased in the first quarter were from Forestar.

Forestar had more than $840 million of liquidity at quarter end, with a net debt to capital ratio of 14.9%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots for the homebuilding industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply and relationship with D.R. Horton.

Mike?

[Michael J. Murray, Executive Vice President and Chief Operating Officer at D.R. Horton]

Financial services earned $66 million of pre-tax income in the first quarter on $193 million of revenues, resulting in a pre-tax profit of 34.3%. During the first quarter, essentially all of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 78% of our buyers. FHA and VA loans accounted for 57% of the mortgage company's volume. Borrowers' originating loans with DHI Mortgage this quarter had an average FICO score of 724 and an average loan-to-value ratio of 88%. First-time homebuyers represented 56% of the closings handled by our mortgage company this quarter.

Bill?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

Our balanced capital approach focuses on being disciplined, flexible and opportunistic to support and to sustain an operating platform that produces consistent returns, growth and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions.

During the first three months of the year, our consolidated cash used in operations was $153 million. At December 31, we had $6.4 billion of consolidated liquidity, consisting of $3.3 billion of cash and $3.1 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.3 billion, with no senior note maturities in fiscal 2024. Our consolidated leverage at December 31 was 18.6%, and consolidated leverage, net of cash, was 7.8%.

At December 31, our stockholders' equity was $23.2 billion and book value per share was $69.70, up 19% from a year ago. For the trailing 12 months ended December, our return on equity was 21.8% and our consolidated return on assets was 14.8%. During the quarter, we paid cash dividends of approximately $100 million, and our Board has declared a quarterly dividend at the same level to be paid in February. We repurchased 3.3 million shares of common stock for $398 million during the quarter.

Jessica?

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Although volatility in mortgage rates and changes in economic conditions could significantly impact our business, for the second quarter, we currently expect to generate consolidated revenues at $8.1 billion to $8.3 billion, and homes closed by our homebuilding operations to be in the range of 20,000 homes to 20,500 homes. We expect our home sales gross margin in the second quarter to be approximately 22.6% to 23.1%, and homebuilding SG&A as a percentage of revenues to be in the range of 7.5% to 7.7%.

We anticipate financial services pre-tax profit margin of around 30% to 35% in the second-quarter, and we expect our quarterly income tax rate to be approximately 23.5% to 24%. We are well-positioned to continue consolidating market-share in all of our operations. Our full-year fiscal 2024 revenue, pricing and margins in our homebuilding, rental, financial services and Forestar businesses will be determined by market conditions and the strength of the spring selling season in addition to our efforts to meet demand by balancing pace and price to maximize returns.

For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36 billion to $37.3 billion and expect to homes closed by our homebuilding operations to be in the range of 87,000 homes to 90,000 homes. We expect to generate approximately $3 billion of cash flow from our homebuilding operations. We also plan to repurchase approximately $1.5 billion of our common stock to continue reducing our outstanding share count in addition to annual dividend payments of around $400 million.

Finally, we now expect an income tax rate for fiscal 2024 of approximately 24%. We remain focused on balancing our cash flow utilization priorities to grow our operations, pay an increased dividend and consistently repurchase shares, while maintaining strong liquidity and conservative leverage.

Paul?

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth and cash flow while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis.

Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors and real estate agents for your continued focus and hard work.

This concludes our prepared remarks. We will now host questions.

Questions and Answers

[Operator]

Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is coming from Stephen Kim with Evercore ISI.

[Stephen Kim, Analyst at Evercore ISI]

Yeah. Thanks very much guys. Appreciate it, and thanks for all your commentary. I guess just to start off with, could you clarify? I think you mentioned at the beginning of the call abou100 basis points of the gross margin was affected by hedging related to, I think, you said rate buydowns. And in your guide for 2Q, can you also just clarify like what -- I thought I heard you said 20,000 closings to 20,500 closings and $8.1 billion to $8.3 billion in consolidated revenues. Just want to make sure I heard those right.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Yes, Steve. That's correct. For the second quarter, $8.1 billion to $8.3 billion of consolidated revenues and closings of 20,000 homes to 20,500 homes. And in terms of home sales gross margin, you're also correct that 100 basis points, the impact was due to the rate buydowns that we've been offering and adjustments we had to make to that position during the quarter on a sequential basis. But what we've guided to for Q2 versus Q1 is relatively flat in terms of a 22.6% to 23.1% gross margin in Q2 versus the 22.9% that we posted this quarter.

[Stephen Kim, Analyst at Evercore ISI]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

Steve, this quarter is the first time that, that amount has been significant at all. It's essentially adjusting the valuation of our hedging positions that we have in place to offer our programmatic rate buydowns across the country. And it's typically a very small move either up or down, but this quarter, given the significant volatility in rates during the quarter, mortgage rates moved up to 8% in November and then dropped sharply in December. Those hedging positions had to be adjusted to reflect that. So it was an unusual situation this quarter. Generally, we don't plan for any significant move one-way or the other.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

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

[Stephen Kim, Analyst at Evercore ISI]

Got you. Okay. That's really helpful. I'm sure there's going to be more questions about the guide, but I wanted to talk about your capital allocation. And in particular I guess, I know that the mantra for D.R. Horton over the last several years now has been about consistency and predictability and reliability and that sort of thing. And you've done a great job there. But as I think about your overall, your cash position, it looks like you have sufficient cash currently. You've got another $3 billion coming. I think maybe a little less than $2 billion is spoken for with buybacks and dividends. I was curious about -- curious about that extra $1 million. And I'm curious how land investment factors into that and rental? So those are the two other big pieces it would seem.

So I guess, when I look at your land, your land supply has been coming down for -- had been coming down for a number of years. But now for about three years, your land in year supply has been flat. I was wondering, do you think you can bring down that land investment down further? Or is this kind of the level that you think that we're going to be seeing in the future? And then in rental, can you give us a sense for what you think the growth in the rental inventory may be over the course of the next year?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Stephen Kim, Analyst at Evercore ISI]

In the rental inventory?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

In the rental inventory, we'll probably invest in some during fiscal '24 to grow that platform. It's getting closer to a good sustainable volume that will produce consistent revenues and profits quarter-to-quarter, but it's still in the growth mode.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

And in terms of this overall capital allocation, as you already alluded to, we did guide to the $1.5 billion of common stock. We've got the annual dividend payments of $400 million. We also have a sizable debt maturity that's very early in fiscal '25, $500 million in October. So, too early to say what we're going to do with that and we're very focused on maintaining conservative leverage and we'll see as we get closer, but that is something we're going to be prepared to potentially pay out a cash if we don't feel like the market is right to go refi that.

[Stephen Kim, Analyst at Evercore ISI]

Great. Thanks very much, guys.

[Operator]

Your next question is coming from Carl Reichardt with BTIG.

[Carl Reichardt, Analyst at BTIG Research]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

Sure. Yeah. The first factor this quarter, we point to our 14% increase in our average selling communities. So that's obviously a significant increase, and our SG&A is up 14% this quarter year-over-year as well. So, that's a bigger move than we've had in a while that's positioning us to be able to provide the increased guidance and you have seen our market count increase over the last several years. Obviously, we expect in time to achieve some leverage on that.

And as we grow our revenues, we would expect our SG&A to come back down to historic levels. But I think we've got a couple of quarters here where we're really going to see our SG&A a little bit higher as a percentage of revenue. It's primarily driven by that. This quarter, we have one additional factor. And really, it's just a timing factor in terms of the impact of equity and stock-based comp. We typically have an amount that, that we incur and typically in our second quarter or third quarter, but the timing of some grants this year were a little bit earlier into our first quarter. And so there is an amount of roughly $13 million that it was incurred in Q1 in this quarter that typically would be a Q2 or Q3 event.

[Carl Reichardt, Analyst at BTIG Research]

Okay. That's small. So it's different this year. Okay. Thank you for that. And then I have a bigger picture question for Paul. So, obviously, the biggest news that we've seen in the business for a while is this large acquisition by an offshore player of a domestic homebuilder. And historically long ago, Horton was a fairly significant acquirer of public companies and other private companies and still here and there. We've seen you look at some deals.

Paul, can you talk a little bit about your -- from your perspective, what do you think whether or not acquisitions or something that Horton would consider historically? I know you've done and more recently, you've talked about doing most of your growth greenfield. I'd just like to know, given current conditions, where you sit on this sort of big picture? Thanks so much.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Yes, Carl. We still, today, look at -- continually look at acquisitions. And for us, we're more interested in the smaller, tuck-in builders that may add to our market share in an existing market or give us some entry. But we do always have that opportunity to greenfield those. I don't see on the horizon a significant large acquisition. Certainly, the acquisition that you're referring to make some sense. We speak to scale a lot in market share and then make some sense to us. But, today, we're going to continue to look at those as they come available, but no significant shift in what you've seen us do over the last couple of years.

[Carl Reichardt, Analyst at BTIG Research]

Appreciate it. Thanks, Paul.

[Operator]

Your next question for today is coming from John Lovallo with UBS.

[John Lovallo, Analyst at UBS Group]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

Well, it starts with, we sold homes with an increased level of incentives while rates were higher during Q1 and some of those closed in December, but there are still a number of them that will be closing in Q2. And so far on a core basis, we still are entering the quarter a little bit lower margin than what the average presents. And so that's -- but obviously rates have dropped. And so those incentive costs are a bit lower in the later sales. And so, on balance, we expect we should be able to hold margins around the current levels, excluding the hedging going forward.

[John Lovallo, Analyst at UBS Group]

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

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Really, it's pretty similar to what we said last quarter that was the year-over-year comps. And so we still were up low double-digits on a year-over-year basis and it did continue to have a little bit of geographic mix. But I would say, stripping out geography, our lot costs on a year-over-year basis probably are at high single-digit. And until we cycle in entire year, it probably stays that way and then it would moderate in terms of year-over-year because it's certainly less than that on a sequential basis.

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

1.5% on a sequential basis.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Yes.

[John Lovallo, Analyst at UBS Group]

Got it. Thank you, guys.

[Operator]

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

[Joseph Ahlersmeyer, Analyst at Deutsche Bank Aktiengesellschaft]

Hey. Good morning, everybody. If you just humor me for maybe a couple more on the gross margin, could you just talk about the actual P&L impact of that charge, whether it was something that hit deductions from revenue or if it was just a hit the COGS?

And then, similarly, on what you're expecting going forward, I guess it makes sense, you're not expecting it, given rates have kind of stabilized. But is there a way to think about the sensitivity based on what you've still got out there notionally, like if we had another 50 basis points to 100 basis points drop, would you have another 100 basis point impact from here?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

There were two very significant movements in interest rates in the quarter. They went up significantly in the middle of the quarter and they came down significantly to the end of the quarter. Kind of a very unique dynamic that we have not experienced, that's what led to the mark-to-market adjustment being more severe than it's been in prior quarters.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

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

[Joseph Ahlersmeyer, Analyst at Deutsche Bank Aktiengesellschaft]

That's all very helpful. Thanks for the transparency there. As a follow up, thinking about the outlook for materials, either inflation or deflation. Can you just speak to what's in your 2Q guide? And then maybe just generally, if we're looking at starts rising and your volumes obviously growing, how should we think about the competition for materials perhaps driving inflation again in those?

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

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

[Joseph Ahlersmeyer, Analyst at Deutsche Bank Aktiengesellschaft]

All right. Thanks, everybody. Good luck.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Thanks, Joe.

[Operator]

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

[Michael Rehaut, Analyst at J.P. Morgan]

All right. Thanks for taking my question. Good morning, everyone. I wanted just to circle back for a moment on SG&A. And I think, Bill, you talked about the main drivers of the higher or negative leverage, I guess, you could say to being community count and the stock comp. You're going to see a similar type of negative leverage impact on the second quarter. Would you expect that to kind of flatten out? Everything else equal, it seems to imply. You said that maybe in the first couple of quarters, you're going to see this impact. And that should kind of run through by the time we get to the back half. Or is this more of a '25 event. And as part of this question, I'm also curious if higher sales incentives outside broker commissions has impacted this at all, or if you could remind us if that's the portion that's in the COGS?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

A little headwind on the community count market growth, but a little tailwind in Q2 on the equity comp position recognizing that in Q1 versus Q2.

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Michael Rehaut, Analyst at J.P. Morgan]

Right. No, that's fair. That makes sense as well. Appreciate that. Secondly, not to beat a dead horse, but I do. You kind of made a comment on the gross margins, Bill, and I don't know if you misspoke or it would kind of make sense to us if indeed you did not misspeak. But I think you said at one point, we would expect gross margins to get back to the 1Q levels excluding the hedging impact. That would kind of make sense to us to the extent that in the last couple of months, rates have come down and your current orders would include less expensive rate buydown than, let's say, a couple of months ago. And I think you're kind of saying 2Q is currently being impacted by some of the carryover from 1Q. I just wanted to make sure I heard that right or how to think about where gross margins are today on orders taken in mid-January, let's say, versus a couple of months ago?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Michael Rehaut, Analyst at J.P. Morgan]

Right. So basically, what you're saying is beginning of the quarter at the low-end, perhaps a little bit below the low-end of that range, that would imply towards the end of the quarter at the higher end or perhaps a little bit above the high-end of that range, is that fair?

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

And we still sell a large portion of our homes inter-quarter. So, 35% and 40% is our kind of historical average. And so those are being sold now and as we look through the quarter and into the spring selling season. So certainly, as the spring selling season emerges and continues, it's going to give us better visibility as we look towards the end of this quarter and into 3Q.

[Michael Rehaut, Analyst at J.P. Morgan]

Right. Appreciate it. Thank you.

[Operator]

Your next question is coming from Truman Patterson with Wolfe Research.

[Truman Patterson, Analyst at Wolfe Research]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Truman, I think that as we look at this today, it's still very early. And for us, consistency of activity has been important. So we haven't made any significant changes in our incentives. If the market gives us to us and we continue to see the early encouragement that we are, then we'll respond to the market in time. If rates continue to stay up and we'll need to lift, lift our rate offerings like we've done in the past and will fluctuate as those rates move, still has been our best incentive is the rate buydown and consistency of rate, consistency of payment to our buyers as they shop in market.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

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

[Truman Patterson, Analyst at Wolfe Research]

Makes total sense. And with that, you all bumped your closings guidance a little bit to about 89,000 around there. That's well above the prior peak of, we'll call it 83,000 back in 2022 when they were all of the supply chain issues and constraints. Could you just help us get a little more comfortable with that level of growth kind of based on today's labor pool, lot availability? I'm really trying to understand constraints today and maybe what level of closings would really create bottlenecks in the construction process, not asking about demand or anything along those lines?

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

We've been very focused on creating a quarter-to-quarter consistent starts plan, where we're feeding our neighborhoods with lots that are available in front of us and making sure we have those lots supplied and secured to us. At the same time, we've made a tremendous amount of progress reducing our cycle times and coming back to sort of our historical norms of around four months from starting a home to completion. And so that's giving us much greater flexibility going into this year.

With the strong finished lot position we currently have, combined with the reduced cycle times, we are able to reduce our homes in inventory and still deliver a closings target that's going to be at or in excess of our two times beginning of the year housing turns. So, we really feel good about what's happened there. As to what the upside, topside is for -- where the bottlenecks would come in, hard to speculate on where that would be. We feel really good about our lot position neighborhood by neighborhood, and the trade partnerships that we have and the supplier relationships that we have. They've been very supportive of us.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

Great point. Truman, and that when we think about overall industry constraints, finished lots are going to continue to be an issue in terms of builders being able to put more houses on the ground today. It's not getting any easier to put a finished lot on the ground and so we continue to have a focus on building on our lot position and our relationships with third-party developers to make sure we're positioned for growth. But when we think about the biggest constraints in the industry overall, it definitely starts with finished lots.

[Truman Patterson, Analyst at Wolfe Research]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Thank you, Truman.

[Operator]

Your next question is coming from Eric Bosshard with Cleveland Research Company.

[Eric Bosshard, Analyst at Cleveland Research]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

I think it's pretty consistent across the board. We're feeling really good across all of our offerings. I mean, as you know, 55% to 56% of our deliveries have been the first-time homebuyers. That's generally where we've kind of geared our neighborhoods that we're positioning and the product that we're positioning with that. I think 70% of our deliveries were at $400,000 or less, which for us is maintaining a focus on affordability and a payment that works for people in their monthly budget. Hence, we've used the interest rate buydowns quite a bit. But feel really good coming out in January does not make a quarter or a spring selling season, but we're very encouraged by the early trends in January and are excited for what the spring is going to hold.

[Eric Bosshard, Analyst at Cleveland Research]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

I think we have made adjustments as the market has shifted over the last 12 months to 18 months and feel comfortable with our trajectory and the product offering that we have. Certainly, as you look across our communities, they're going to trend inside of the product offering that we have based on rate and monthly payment environment, whether that means that they're buying up in size or down in size. But we feel like we have a good offering across our markets and we'll continue to stay as we need to respond to monthly payment and interest rates and provide affordable opportunities across all of our platform.

[Eric Bosshard, Analyst at Cleveland Research]

Great. Thank you.

[Operator]

Your next question for today is coming from Alan Ratner with Zelman & Associates.

[Alan Ratner, Analyst at Zelman & Associates]

Hey, guys. Good morning. Thanks for all the details so far. Couple of questions on kind of the spec versus build-to-order dynamic in the industry right now. You guys being a spec builder, I think had a pretty, pretty strong advantage during the pandemic. Obviously, resale inventory was incredibly tight. The extended cycle times as well, I'm sure was hard to manage from your side, kind of gave you an advantage versus the BTO guys in terms of the consumer experience.

So, I guess my question is now that cycle times seem to be improving across the industry, resale inventory is ticking, a little bit higher. Are you thinking about that dynamic any differently? Are you may be contemplating selling earlier in the construction process again, whereas before you were maybe waiting for homes to get closer to completion? Are you seeing more competition from build-to-order builders that have kind of shrunk in their construction cycle times? Any commentary on that would be great.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

I think, today, we are still seeing people looking for closing with certainty of close date and in that 30-day to 60-day timeframe based on their ability to lock in interest rates. And so I don't know that we've seen much significant shift from the build-to-order builders being able to deliver a pre-sale into those timeframes. We are very comfortable with our inventory position both in a total homes and in a completed home scenario. It's continued to play into the shortness of resale inventory across our markets, and I don't expect a significant change for us. We're going to continue to stay focused on inventory sales and consistent production community to community.

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

The timing of that sale has been able to move up earlier in our stage of construction just because we have gotten back to our historical norms of months of delivery rounds.

[Alan Ratner, Analyst at Zelman & Associates]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

We're allowing -- we're not restricting the sale of homes. Seasonally, you'll see the completed spec inventory, completed home inventory tick up through the fall and be positioned that we have houses available for quick deliveries beginning in January for the spring selling season. So, we're able to deliver the homes that people are coming in and needing in 30 or 60 days. At the same time with the compressed cycle times, as Paul mentioned, we are very comfortable selling and locking a rate in for a buyer earlier in the production process than we were a year ago for sure.

[Alan Ratner, Analyst at Zelman & Associates]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

No, you've described it exactly. We typically will buy those forward commitment pools really for the next few weeks of deliveries essentially is the plan. We're not going out very far, but it is few weeks. And so that's when we say a very sudden sharp change in rates can present some exposure there, but it has not occurred in the past. But the circumstances this quarter were pretty unusual in terms of the significance and suddenness of the right moves.

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

And at the end of the quarter, we always to have to mark-to-market the value at the end of the quarter. So that's always a factor there as well.

[Alan Ratner, Analyst at Zelman & Associates]

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

[Operator]

Your next question for today is coming from Anthony Pettinari with Citi.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Certainly, I think that with the change in the capital markets, that demand environment became much choppier last year. But we still had institutional buyers that were anxious to get the product we were delivering to the market and they continue to be so. We delivered projects in the first quarter. We expect to deliver more in the second quarter and then throughout the year with the pipeline that's there. I mean, for us, it's a strategy to help us derisk land positions and more rapidly monetize our land portfolio. And so we've still seen good demand for the product, good demand on the rentals and the lease-ups when we're taking the stabilization process on and continue to expect that to become a growing part of our business.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

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

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

We'll probably, call it roughly 10% sequentially in terms of the take rate on that buydowns. So, we were in the 70s and now we'd be in the 80% range of the buyers that utilize our mortgage company. So the 60% you said was on our overall business. So, say, 60% to roughly 70% of buyers took that this quarter.

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

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

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Okay. That's helpful. I'll turn it over.

[Operator]

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

[Kenneth Zener, Analyst at Seaport Global Securities]

Good morning, everybody.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Good morning, Ken.

[Kenneth Zener, Analyst at Seaport Global Securities]

I wonder with the industry, everybody likes to focus on the income statement, right? So the gross margins obviously been a focus today. However, your initial comments were about inventory turns, which together gets you returns on inventory. Because you pick up volume for the year modestly and all we see is one quarter forward guidance. Is it fair to say that your guide's internal metrics are generating the same or higher ROIs than you had started the year at? I know you kept the $3 billion cash flow at the same. But I'm just trying to understand, we see one part of the business, but not necessarily the output of the other.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Sure. Yeah. I mean, our returns are in line with our plans and our divisions are out there executing on their plans, their start plans week-to-week, month-to month and delivered the homes than we expected to this quarter, plus a few 100 more. And so as we enter the spring, we're continuing with that and very consistent with our expectations from an inventory turn standpoint and a return on our assets or investments in inventory.

[Kenneth Zener, Analyst at Seaport Global Securities]

Right. So, you talked about improving cycle times, obviously, part of that stuff. Do you see -- when you started 20,000 -- last three years, starts have been 14,000, 25,000, all over the place. Can you talk to that level? I mean, do you see some degree of, let me use the word, seasonality or what's kind of affecting that? Is it orders? Or is it just a plan that you have to reach your closings, A? And then B, what do you expect your inventory units to be at the end of the year given your underlying assumptions right now? Thank you very much.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

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

[Bill Wheat, Executive Vice President and Chief Financial Officer at D.R. Horton]

As we consistently look to position ourselves to grow, we would certainly love, but want to position ourselves to grow in fiscal '25 over fiscal '24. So, we would expect our inventory at the end of the year to be a little higher than it was at the start of the year with the expectation of turning it a little more than two times in fiscal '25.

[Kenneth Zener, Analyst at Seaport Global Securities]

Thank you.

[Operator]

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

[Susan Maklari, Analyst at The Goldman Sachs Group]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

I think, Susan, that we're continually looking to provide affordable homes that hit a payment, that's going to work in the monthly budget for our buyers. And that is what's oftentimes overlooked, especially by, in the smaller markets, a lot of the builders that are currently existing, have capital constraints on what they are able to build and start. And so they are looking generally to maximize revenue per lot or margin per lot and go with the lower volume. And so they're leaving that first-time homebuyer, that family that needs a more affordable home kind of not really their target. So that's the target customer we seek out and we see good results when we go into a new market, greenfield a new market and focus on the affordable price points.

[Susan Maklari, Analyst at The Goldman Sachs Group]

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

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Susan, for the size and scale of our business today and the volume that we have in terms of just our constant production of inventory, the cash balance we have on the balance sheet today is in the range of where we'd like to be. So, cash across our business segments and availability under our credit facilities. We would like to maintain the current level. And as we scale up over time, we'd incrementally increase that level over time. With our plans this year and our guidance on share repurchase in fiscal '24, we are increasing our share repurchase by 25% this year from $1.2 billion to $1.5 billion. And that's just part of our plan to be consistent with our distributions to shareholders as well and increased our dividend this year as well, expect to spend $400 million on dividends this year. And so that is an increase over last year. And our plan would be to -- as we continue to scale the business, continue to be able to increase incrementally those repurchases and dividend levels.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay. Thank you, and good luck.

[Operator]

Your next question for today is coming from Rafe Jadrosich at Bank of America.

[Rafe Jadrosich, Analyst at Bank of America Securities]

Hi. Good morning. It's Rafe. Thanks for taking my question. Just on the outlook that per improvement and build cycles in 2024, can you talk about where your build cycles are now where they were last quarter? How much do you think that can improve? And then, like, what gets you there from a supply chain perspective?

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

We will take [Phonetic] over four months this quarter, Rafe. And when we think about our historical norm, it really is right at that four months in terms of start to complete and then there is an additional time from complete to close. That's down from seven months a year ago, so a very substantial improvement in terms of year-over-year basis. Sequentially, it improved by about 10 days. So when we think about further improvements from here, they're not large moves. They are just continued improvements on average where hopefully we can get below four months. But that's not something that we expect to drive from four months to two months.

[Rafe Jadrosich, Analyst at Bank of America Securities]

Got it. Thank you. That's helpful. And then I just wanted to follow-up on the comment that you are seeing encouraging signs as we head into the spring season. Can you just give a little bit more color on what you're seeing? Is that better homebuyer traffic or conversion. And do you think that's just driven by sort of the headline rate number that that's coming coming down? Just want to understand what you're seeing that that's encouraging in the market.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

I think there's lots of reasons people are out looking for houses, but ultimately, they need a house and we're seeing good traffic and good convergence early in the spring. And so we have set of operating plan for the year. And so far, we feel really good about how the market is responding to that.

[Operator]

Your next question is coming from Matthew Bouley with Barclays.

[Unidentified Participant, at D.R. Horton]

Hey. In terms of the land market, are you seeing a pickup in land development into 2024? I know that you said that things can kind of get a little bit more cautious as demand increases. How are you thinking about land development costs and lot costs moving higher and kind of offsetting that?

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

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

[Unidentified Participant, at D.R. Horton]

Okay. Thank you. And then just kind of switching over to affordability aside from rate buydowns, is there anything else that buyers have been kind of responsive to as far as like the levers that you have to kind of make the payment work for them? Or has there been a type with any sort of change to those strategies?

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

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

[Jessica Hansen, Senior Vice President, Communications and People at D.R. Horton]

So, our square footage was down again about 3% year-over-year. It was relatively flat sequentially, but we would expect just continued gradual moves down from a mix shift perspective in terms of average square footage.

[Unidentified Participant, at D.R. Horton]

Thank you very much.

[Operator]

We have reached the end of the question-and-answer session. And I will now turn the call over to Paul Romanowski for closing remarks.

[Paul Romanowski, President and Chief Executive Officer at D.R. Horton]

Thank you, Holly. We appreciate everyone's time on the call today and look forward to speaking with you again to share our second quarter results in April. Congratulations to the entire D.R. Horton family on producing a solid first quarter. We're proud to represent you on this call, and appreciate all that you do.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Jessica Hansen, Senior Vice President, Communications and People
• Paul Romanowski, President and Chief Executive Officer
• Michael J. Murray, Executive Vice President and Chief Operating Officer
• Bill Wheat, Executive Vice President and Chief Financial Officer

Analysts

• Stephen Kim, Evercore ISI
• Carl Reichardt, BTIG Research
• John Lovallo, UBS Group AG
• Joseph Ahlersmeyer, Deutsche Bank Aktiengesellschaft
• Michael Rehaut, J.P. Morgan
• Truman Patterson, Wolfe Research
• Eric Bosshard, Cleveland Research
• Alan Ratner, Zelman & Associates
• Anthony Pettinari, Smith Barney Citigroup
• Kenneth Zener, Seaport Global Securities
• Susan Maklari, The Goldman Sachs Group, Inc.
• Rafe Jadrosich, Bank of America Securities
• Unidentified Participant