D.R. Horton, Inc.

Greetings and welcome to the first quarter 2020 earnings conference call for Dr. Horton America's builder the largest builder in the United States at this time We'll participants are in listen only mode a question and answer session will follow the formal presentation If anyone should require operator assistance during the conference, please press star zero and your telephone keypad as a reminder This conference is being recorded. It's not my pleasure to introduce your host Jessica Hansen vice president investor relations pretty are worried. Please go ahead

Thank you Kevin and good morning Welcome to our call to discuss our results for the first quarter of fiscal 2020 Before we get started today's call may include comments that constitute forward-looking statements as defined by the private securities litigation reform act of 1995 although do 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 deal Horton on the day that his conference call and Here Horton does not undertake any obligation to publicly update or revise any forward-looking statements Additional information about issues that could lead to material changes and performances contained in dear Horton's in the report on form 10k Which is filed with the Securities and Exchange Commission This morning's earnings release can be found on our website and investor Horton.com and we plan to file our 10 Q in the next day or two After this call we will post updated investor and supplementary data presentations to our investor relations site on the presentation section Under news and events for your reference now. I will turn the call over to David Alde our president and CEO

Thank you, Jessica and good morning in addition to Jessica I am pleased to be joined on this call by Mike Murray our executive vice president and chief operating officer and Bill Wint our executive vice president and chief financial officer The D.R. Horton team started the year off strong our consolidated pre-tax income for the quarter increased 39% to $523 million on a 14% increase in revenue to $4 billion Our pre-tax profit margin improved 230 basis points to 13% and our net sales orders increased 19% Home building return on inventory for the trailing 12 months into December 31st was .7% and our consolidated return on equity for the same period was .2% These results reflect the strength of our operational teams Our ability to leverage the other one scale across our broad geographic footprint And our product positioning to offer homes at affordable price points across multiple brands We continue to see good demand and a limit to supply homes at affordable prices across our markets while economic fundamentals and financing availability remains strong solid excuse me Our strategic focus is to continue to solid a market share while growing our revenues and profits generating strong annual cash flows and returns and maintaining a flexible financial position With a conservative balance sheet that includes an ample supply of homes lots and lands for growth We are well positioned for the remainder of 2020 and future years Mike

Deluded earnings per share for the first quarter of fiscal 2020 increased 53% To $1.16 per share compared to 76 cents per share in the prior year quarter Net income for the quarter increased 60% to $431 million compared to $287 million Our first quarter results include a tax benefit of $32.9 million related to federal energy efficient homes tax credits that were retroactively reinstated our consolidated free tax income increased 39% to $523 million in the first quarter and our home building free tax income increased 30% to $462 million our first quarter home sales revenues increased 13% to $3.9 billion on 12,959 homes closed up from 3.4 billion dollars on 11,500 homes closed in the prior year our average closing price for the quarter was up 1% from last year to $298,100 and the average size of our homes closed was down 2% Reflecting our ongoing efforts to keep our homes affordable bill

Net sales orders in the first quarter increased 19% 13,126 homes and the value of those orders was three point nine billion dollars up twenty two percent from three point two billion in the prior year Our significant sales price increase over the prior year quarter reflects the moderation and demand that occurred in late calendar 2018 Our average number of active selling communities increased six percent from the prior year and was flat sequentially Our average sales price on net sales orders in the first quarter was $300,900 up three percent from the prior year The cancellation rate for the first quarter was 20% compared to 24% in the same quarter last year

Our gross profit margin on home sales revenue in the first quarter was 21% flat sequentially from the September quarter up 100 basis points compared to the prior quarter and in line with our expectations Based on today's market conditions We currently expect our home sales gross margin in the second quarter to be consistent with the first quarter Subject to possible fluctuations through the product and geographic mix as well as the relative impact of warranty litigation and purchase accounting so

In the first quarter home building SG&A expense as a percentage of revenues was nine point two percent Down 30 basis points from nine point five percent in the prior year quarter We remain focused on controlling our SG&A while ensuring that our infrastructure adequately supports our growth

like We ended the first quarter with 30,000 200 homes in inventory 18,000 400 of our total homes were unsold of which 5,600 were completed Our first quarter home building investments in lots land and development told with 1.3 billion dollars of which 890 million dollars was for purchases of land and finished lots while 410 million dollars was for land development our underwriting criteria and operational expectations for new communities remain consistent At a minimum 20% annual pretext return on inventory and a return of our initial cash within 24 months David

The December 31st our home building lot position consisted of approximately 320,000 lots of which 39 percent were owned and 61 percent were controlled through purchase contracts 33% of our total owned lots are finished and at least 56 percent of our controlled lots are Or will be finished when we purchase them We continue working to increase our lot position being developed by third parties by supporting the growth of four stars national lot manufacturing platform and Expanding our relationship with lot developers across the country our current block portfolio Includes an ample supply of lots for homes at affordable price points and continues to provide a strong competitive advantage Mike

Four-star our majority owned subsidiary is a publicly traded residential lot manufacturer operating in 51 markets across 20 states At December 31st four stars lot position consisted of 44,500 lots of which 32,200 are owned and 12,300 are controlled through purchase contracts 80 percent of four stars own lots are already under contract with Dior Horton were subject to a right of first offer under the master supply agreement during the first quarter of fiscal 2020 four star delivered 2422 lots and is on track to deliver 10,000 lots in fiscal 2020 and generate 800 to 850 million dollars of revenue Four star expects to deliver 12,000 lots and generate 900 million to 1 billion dollars of revenue in fiscal 2021 these expectations are for four stars stand-alone results Four stars separately capitalized from Dior Horton and is committed to maintaining a long-term Net debt to capital ratio of 40 percent or lower at December 31st four stars net debt to capital ratio was nine point seven percent Four stars approximately 720 million dollars of liquidity to fund its continued growth which includes $370 million of unrestricted cash and 350 million dollars of available capacity on its revolving credit facility Four star hosted their quarterly earnings call last Thursday and an updated presentation on their investor site at .fourstar.com That describes four stars unique lot manufacturing model and a significant growth and value creation opportunity Jessica

financial services pre-tax income in the first quarter increased 29 percent to $30.5 million dollars and the pre-tax profit margin was 29.6 percent up from 27.7 percent in the prior year 97 percent of our come of our mortgage companies loan originations during the quarter related to homes closed by our home building operations and our mortgage company handled the financing for 65 percent of our homebuyers FHA and VA loans accounted for 49 percent of the mortgage companies volume Borrowers originating loans with DHI mortgage this quarter had an average FICO score of 720 and an average loan to value ratio of 89 percent First time home buyers represented 50 percent of the closings handled by our mortgage company Reflecting our continued focus on offering homes at affordable price points for entry-level buyers David

DHI communities is our multifamily rental company focused on suburban and garden style of proper apartments with operations primarily in Texas Arizona and Florida During the quarter the HF community sold its third apartment project located in Phoenix for 61.5 million dollars and recognized a gain on sale of 31.2 million dollars The HF community says four projects under active construction and one project that was substantially complete at the end of the quarter The HF community's total assets were 210 million dollars at December 31st bill

Our balance capital approach focuses on being flexible Opportunistic and different our balance sheet strength and operating results are providing increased flexibility And we are utilizing our strong position to enhance the long-term value of the company during the first three months of fiscal 2020 our cash used in home building operations was 178.4 million dollars compared to 396.8 million dollars in the prior year period At December 31st we had 2.6 billion dollars of home building liquidity consisting of 1.2 billion dollars of unrestricted home building cash and 1.4 billion dollars of available capacity on our home building revolving credit facility Our home building leverage improved 370 basis points to 19.5 percent The balance of our home building public notes outstanding at the end of the quarter was 2.4 billion dollars And we have 500 million dollars of senior notes maturing on February 15 Which we plan to repay utilizing cash on hand and our revolving credit facility as necessary At December 31st our stockholders equity was 10.2 billion dollars and book value per share was $27.92 up 14% from a year ago During the quarter we paid cash dividends of six six four point six million dollars We also repurchased three million shares of common stock for 163.1 million dollars resulting in 732.6 million dollars remaining on our stock for purchase authorization at December 31st 2019 Our outstanding share count was down 2% -over-year Jessica

looking forward to the second quarter of fiscal 2020 we expect to generate consolidated revenues in a range of four point two five to four point four billion dollars and Close approximately thirteen thousand eight hundred to fourteen thousand three hundred homes We expect our home sales gross margin in the second quarter to be approximately 21 percent and Homebuilding SG&A in the second quarter to be around nine percent of home building revenues Based on today's market conditions in our first quarter results We now expect to generate consolidated revenues for the full year of eighteen point five to nineteen point one billion dollars and to close between 60,000 and 61,500 homes We expect our income tax rate in the second third and fourth quarters to be between 23 and 24 percent We still expect to generate cash flow from home building operations in excess of 1 billion dollars for the full fiscal year of 2020 And we expect our outstanding share count to be down approximately 2% at the end of the year compared to the end of fiscal 2019 David

In closing our results reflect the strength of our well-established operating platform across the country we are focused on consolidating market share while growing our revenues and profits and generating Hanged our own annual cash flows and returns while maintaining a flexible financial position Our return on equity of eighteen point two percent and our home building return on inventory of eighteen point seven percent demonstrate our consistent focus and efforts We are well positioned to continue this performance with our conservative balance sheet broad geographic footprint affordable product offering across multiple brands Attractive finish lot and land position and most importantly our outstanding experience teams across the country Thank you to the entire deal Horton team for your focus and hard work We are incredibly well positioned to continue growing and improving our operations. This concludes our prepared remarks. We will now host questions

Thank you. We're now beginning to a question and answer session We ask that you please ask one question and one follow-up then return to the queue If you like to be placed in the question queue, please press star one on your telephone keypad Once again, that is star one to be placed in the question queue And we ask you please ask one question and one follow-up then return to the queue Our first question today is coming from the car right car from BT IG. Your line is now live

Thanks more than everybody I Wanted to ask. Hey, I wanted to ask Something you guys often have talked about is the idea of getting your cash back out of your investments and land within two years And with some of your peers moving to some of the products and markets that you serve I'm just curious as to your perspective David on the on the landmark and in general for affordable homes and your ability to continue to To run the model where you're getting cash out in two years

Well the cash out in two years is something we've stayed with through this from the downturn on And I can tell you that that model has worked very well for us And I don't see that changing and as to the the overall market for buying land again it comes back to the people we have embedded in these markets and relationships they have with the land zones and we feel very good about our opportunity to place what we're building through and Through this frost through this this market have seen that happen over and over and over again.

So Great thanks and then on similar lines With the looking like search are going to pick up with with order strong for lots of folks I'm curious as to your perspective on the labor market subs in particular And and what you're seeing and thinking about in terms of the potential for increases in cost there this year as These orders get built out. Thanks so much.

I Think there's always going to be that pressure on the cost side Definitely labor is getting tighter and continues to I think going to restrict a lot of people's ability to deliver houses again, you know, it goes back to the kind of the operating profile we adopted and continue and that is Consistent starts throughout the community expanding the Labor base the efficiency not necessarily just bodies and We feel very good about what we've accomplished. We have a very loyal trade base I think I said on the last go our trades don't have to go trace their paychecks So all of that combines to put us in a great position Is it going to be a problem? I think less so for us than other people Great, thanks so much David

Thank you our next question is coming from John Lovallo from Bank of America Merrill Lynch the light is now live

Hey guys, thank you for taking my questions as well First one on the order ASP over a little bit over three hundred thousand in the quarter That was up pretty nicely year over year And I know you mentioned that there's some normalization off of a challenging period last year But just curious if we kind of break down that number that kind of regional and product mix driven or are you taking pricing? I don't like to like me

Part of it is is regionally driven if you look at our orders this year And the South Central was down two percent in terms of just the mix the overall mix and that's actually our lowest ASP region So we continue to expect just modest sales price increases as we move throughout the year and enough to cover our cost increases But on a -for-like basis, you know nothing significant in the way of price

Okay, that's helpful. And then just curious how you're thinking about the four-star investment if the plan is to kind of continue to dilute your state through issuing equity at a four-star or you now considering or any plan to potentially You know sell down your your actual ownership position

Yes, we're still on track with our plan there John to ultimately De-consolidate four-star we were pleased when they were able to issue their first primary equity offering in September Which diluted our position down from the original 75% here in December. We're sitting at 60 65% we would expect additional equity issuances from four-star over time that Could continue to dilute our position and and then as we've also said all along there's the potential that we could sell some of our shares and at the point in time that we are Ready to do that. We will have a plan in place that will that will complement the the primary equity issuance and And and those two things together would result in further dilution in our ownership position Great. Thanks very much guys

Thank you our next question is coming from Alan Ratner from the Zellman and Associates your line is now live

Hey guys, good morning next quarter and thanks for taking my questions here So first one I think last quarter you guys commented just when you thought about the full year Your best guess at that point would be that gross margins would be kind of similar in that 21% range and you obviously hit that This quarter and two-q guide is similar as well Just first off is there any changing and thinking in terms of the progression and margins through the year obviously very strong sales environment So how should we think about as the year progresses what happens to margin?

I? Think we're going to see consistent margins into the second quarter And then frankly it's as usual this time of the year the spring selling season will really dictate where margins go in Q3 and q4, you know early your early returns on the spring selling season of the Nuri positive So, you know we're confident in giving our guidance of consistent margins in the q2 But we're gonna have to wait and see what happens in the next several weeks

Great. I appreciate that Second question, you know if I look at your homes in inventory that that's been at least on a -over-year basis been trending lower for the last several quarters, I think this quarter you're down about 10% -over-year and Obviously last year was elevated a bit because of the sales this upper sales environment But are you seeing a greater component of sales coming from to be built or have you changed yours? You know your think there's a process at all in terms of the optimal number of specs in her community that would be translating to that type of Decline we're seeing or are you trying to ramp that higher as the spring gets underway

a Couple of things going on with that number Alan one the comparison the prior year. We're actually down 5% We changed the way we report homes in inventory to exclude the model homes. So last year we were Where were we last year like 31 8 31 8 and so this year we're at 30,200 so we're down slightly from last year and last year may have been a bit elevated with the software Sales and operating environment we saw in the fourth calendar quarter of 18 Another thing we've talked about is getting better at turning our housing inventory to drive a higher return with those investment dollars and Then we're also seeing you know the ability to push starts in you know as we're seeing demand come on We're not noticing any kind of a difference in the mix between to be built versus our spec starts You know continuing you know probably an 80 20 consistent approach to that Got it. Okay. That's very helpful.

Thanks a lot

Thank you, my next question is coming from Stephen Kim from ever core isi your light is that life

Thanks very much guys strong quarter. Thanks for all the info first question. I had for you is on the land spend The land spend was a fairly high Relative to our expectations this quarter. I'm talking specifically on the acquisition number of 890 And as you know the percentage of revs that was probably the highest you've seen in six years and given your discipline and given your outlook on the business and your intention to Basically get a return on that spend within 24 months It seems that there's a fair amount of optimism that's in that's implied by that strong land spend So I was wondering if you could talk a little bit more about that Break that down for us at least qualitatively In terms of where was that kind of a strong that strong land spend fairly equally distributed across the country were there certain opportunities that emerged in a particular region or a particular product type that You know garnered a lying share of that if you just talk about the relatively strong way I'm spending in greater detail

Sure, Stephen You know as you know you study our land spend that there is some lumpiness kind of from quarter to quarter and and so You know one quarter just based on the timing of when deals close and when they get ready to go and based on our business plans There can be a bit of lumpiness there one thing I would point out is that over half of our of our land acquisition spend Is is for finished lots and so we continue to to to Dedicate a lot of our spend to finish lots which turn very quickly And and so I would really just attribute I wouldn't say there's necessarily any changes in our plans But I would attribute a bit of this to look a bit of a lumpiness Point out that finish lots are a heavy part of the of the spend but then we do we are optimistic we do see growth Certainly in fiscal 20 and right now we still see a very good You know underlying fundamentals for the business and so we're still actively replenishing our our land and lots of life

And we have to replenish it at a faster rate as we continue to grow our sales and closing space So you've seen our own lot count remain relatively flat for quite some time So it's really just a function of having to replenish at a faster rate

Great Yeah, that's that's helpful the second question relates to the broader Macro environment or rather the the broader environment with respect to housing policy We've seen some interesting moves here as of late we've seen the average DTIs the high DTIs and high LTV lending the curl pertailed or rained back by the the FHFA And yeah, we've also heard the CFPB weigh in here and suggest They're going to move to an APR spread versus the DTI. I was curious as to whether or not you have Looked into this some of what we've heard is that the move to the APR spread would actually be stimulative to entry-level housing top of the dropping rates that would seem to be extremely favorable for your business and I was curious if you had looked at that at all and if you have any view on Whether or not these broader factors may be positive for your business the way it would appear to us

Sure high level I think we'd agree with what you're saying that being said it's it's super early and out there and it's not something That we've spent a lot of time on I'm sure our mortgage company would have a much more detailed response for you But anything, you know that continues to improve mortgage standards and makes it easier for people to get into a house Clearly would be a benefit to our business that being said as David mentioned in his opening Financing availability is still good I mean people that should be buying houses or who are buying houses today and we're not necessarily in favor of people with you know Significantly high DTIs or really low credit scores being in the house because we're very cognizant of what happened Last cycle and we don't want any repeat of that

Thanks a lot

Thank you, our next question is coming from Truman Patterson from Wells Fargo your line is now live

Hi Good morning guys. Let me just throw on a congrats on a good quarter as well so So your guidance is for you know mid to high single digit closing growth you bumped up the high end a little bit But is there anything structurally limiting you from going above the high end of that guidance particularly on the land side? I'm thinking Availability of lots your ability to get lots developed And that also includes you know municipality constraints the lane community openings that might create any kind of gap outs

Yeah, we're really excited about the way this year started off the first quarter and through the first several weeks of January And we have increased our guidance as a result of that You know structurally it's it's a it's a question of the lots that are out in front of us We feel good about the community positioning we have getting some communities open But right now we're not going to increase our guidance based on where we are today in the spring seventh season But you know we will certainly look to to deliver all the homes we can at the best returns we can do in fiscal 20

Okay, okay, so so put another way There's nothing structurally limiting you on the land side from going above that if the markets a bit healthier than what you expect as of today

There's there's a finite number of Homes we can build over the next eight and a half nine months and deliver by September 30th But you know we're comfortable with our guidance range today, and we're just going to have to see You know what the spring is going to give us and you know Where we end up in our inventory positioning in March and into April and May

our guidance already incorporates a higher Inventory turnover than what we did last year So it reflects an improvement in terms of building building selling and closing more houses this year than last year Which is what we continue to be focused on is is those efficiencies in the business? But that is what limits further upside to our current guidance

Okay, okay, and then sticking on on the land side Your option lots jump nicely this quarter. You know as you all continue rotating towards more option land How should we think about where that growth comes from is it primarily through four star? Is it more than even balance between four star and your third party developers? And then any way you can put out a target over the next couple years what you think you can get that? Option land bank as a percentage total up to

You know we're not going to we're not going to set a hard target internally we talk about goals, but that's an internal conversation and It's kind of a balanced program. I think the four-star platform is Getting built out. We're very happy with the progress. We're making there But we are also equally focused on our third party developers and they are they are a part of the dear wooden family and that that pipeline continues to get better and bigger and So it's a collection of the two it primarily just focus you know we're We're treating capital as if it's a precious commodity and we're going to try to treat it better than anybody else in industry

All right, thank you

Thank you our next question is coming from Matthew Boulay from Bartholomew, Iowa

Good morning. Thank you for taking my questions So I wanted to ask on the SG&A side since your guidance implies sort of flat percentage year over year You know although you are growing the top line and kind of managing that inventory positioning Is any reason why we wouldn't see a bit more leverage and you know how should we think about that beyond the next quarter? Thank you

You know if to the extent we're delivering on our closings guidance and showing your mid to high single digit growth and revenue We do expect to see leverage on our SG&A and improvement year over year We're very pleased with the 30 basis points we saw in the first quarter based on what we see today in the volume We see in Q2 we do expect SG&A to be relatively flat with last year in Q2 But but overall we do expect some leverage for the year

Okay, appreciate that and then As you just mentioned I believe to the prior question your guidance for the Q2 closing Does imply kind of a continued uptick on that conversion of your inventory positioning? But you did also mention earlier that labor is kind of not surprisingly getting tighter So can you speak a bit about that balance and you know what exactly are you guys doing? On the ground that that supports that improving efficiency. Thank you

you know it gets back to to me it gets back to relationships with the trade base and For the last I don't know ever since the downturn we've had a steady and consistent Level of production going in our communities and so our trade base has gotten better at building the houses and You know when they're not out there chasing work They can build more houses with what we you know what what I look at is the same labor Same We build more square footage with the same look with the same labor hours, thank you so it's It's a process. It's something we've worked on all the way through this cycle. I Think early on we felt like labor was going to be the constraint on housing And we have done I think a great job of managing the trade base and Making sure that those guys were making money and we were still delivering houses at a reasonable cost

Matt the other thing we look at here, and we watch sort of from a high-level perspective is what our build times are doing in our Process when we start a house till we get it Completed and then closed and we're not seeing those times elongate Which would be real more acute indicators or labor shortages in various markets so the long-standing deep Relationships we have with a lot of the labor suppliers combined with the more efficient Plan set if you will in our communities and focus on the the first time homebuyer and Affordability has driven our ability to continue to turn houses a little bit better And we're going to see a lot of improvement in that metric this year

All right, thank you for the caller and congrats again on the quarter

Okay Thank you. Next question is coming from Michael Reho from JP Morgan your line is now live

Thanks good morning everyone and again from the quarter the first question I had was on the Your outlook for the year for community count and sales pace I believe last quarter you talked about and correct me if I'm wrong, but you'd expect community count Average community count for the year to be up -over-year low single digits. I was wondering if that's still The expectation I believe it's been flat sequentially more or less for the last few quarters But you know, I guess the expectation would be to drift drift upward a little bit And then also on the sales pace you had a nice improvement year over year And I was just curious if that was more driven by market conditions or certain, you know products or geographic mix shifts and and how you think about the next quarter or two

sure, so when we think about community count like It's the hardest one for us to predict quite honestly, which is why we never give formal guidance on it I think our basis would be that we would anticipate it to kick up at some point as we move throughout the year But when that inflection point actually happens is it's hard to call exactly In terms of the sales pace is as we mentioned in the script that does reflect the moderation and demand we saw in late calendar 2018 and So we did have although we generally don't talk about comps We did have a relatively easy comp when you look at that And what our guidance reflects for the year from a closing perspective would infer that our sales and Your every year increase is going to moderate from key one and it'll fluctuate You see three two four in a range that supports that closing growth guidance that we've alluded to

No, that's helpful. Thanks for that. I guess secondly You want a bigger picture kind of piggybacking off an earlier question of owned versus optioned You know maybe said a different way, you know, you're a lot option percentage has Obviously while huge amounts of progress Impressive progress over the last few years now. It's kind of been in that low 60s type of range 60 to 61 62 maybe or the last three four quarters You know that increase over the last few years has been a big big driver of your improved return profile Just trying to get a sense of over the next two or three years You know certainly you're not going to do the same type of Degree of Change on the lot option profile as you have before maybe you'll drift up a little bit You know, I do recall you guys talking about a 70% number perhaps, but maybe now that's not as concrete But you know, how should we think about over the next two or three years the next big lever of Improvement in returns would it be more? from a share repurchasing standpoint Or are there other levers that perhaps we're not thinking about

Am I kids we expect it to be just continued incremental improvement on all fronts We we do expect to continue to and our goal is to continue to push an option percentage upward We're not going to set necessarily an upward target But we do expect to incrementally improve that as four-star grows build that its platform even further That's going to continue to be part of that growth story as well as expanding relationships with with our developers We've already alluded to on this call We're expecting to turn our our housing inventory faster this year And so that's going to be an incremental lever in terms of returns this year And then as as our operations are more efficient and generate more cash that gives us more Flexibility on the capital allocation side and so over the last several years we have you know instituted An increasing level of share repurchases and dividend payouts to shareholders, which is enhanced our ROE And so as we continue to incrementally improve each year I think just one of our levers is going to allow us to continue to incrementally improve both operational returns and returns to shareholders

Great thanks so much Thank

you our next question today is coming from Jack from SIG your line is now live

Hi good morning. I wanted to revisit the pace question a little bit more The one cue here this is I think that probably the high water mark since the crisis on sales pace, and I'm curious the guide Would suggest that you know pace will continue to improve through through the year maybe the slower clip, but The improvement you know looking past year over year with these accounts, but the improvement over the last four or five quarters is that all? Product segmentation or are you seeing lift across all your product types? I'm curious if there's any regional differential That could drive maybe incremental pace improvement through the latter half of this year maybe in the next year

I Think we're seeing Generally increased absorptions at our more affordable price points whether that's the entire community or certain plans within more of the traditional Horton branded communities You know we we we are not heavily exposed to the luxury into the market So we're not Experiencing if there is any lift there or not lift going on there We can't speak to that very well, but across all of our geographies where we're feeling pretty good about the traffic We get about the demand In the most recent quarter and in the quarters leading up to it

And then maybe You know the January trend in the last couple weeks would it be Consistent what we saw in the fiscal first or that build sort of continued in the most recent couple weeks

You know I think we've seen normal seasonality week to week as we've progressed in in January You know it seems like historically people talked about Super Bowl Sunday being the kickoff to the spring selling season and we've noticed the past few years that seems to be starting a little bit earlier And maybe it's because the Cowboys you know didn't make the point out people are buying houses sooner And I think and

the 49ers

Just one more for me you know a couple of jobs like you've got Looks like you're trying to build a team on the single-family rental side You just refresh us on the strategy there and the thoughts own versus build for For others and how you're thinking about the business today

Yeah, we're currently thinking about the business We're still early stages on it And we're trying to to get in and really understand the operations of the business and see where we add the most value to that process Today it's probably more Dipping our toe in the water on the own side But but we are certainly looking at it hard and I've not shut the door on any possibility today

All right, thanks taking the question Thank you, Jim

Thank you. Next question is coming from Ken Zener from Key Bank Capital Market. Your line is now live

Good morning all So You beat your closing guidance. I assume that was on higher Inter-quarter order closings. Can you confirm that and what was the percent for? Inter-quarter order closings in this one Q versus last year

You are correct that we beat that and this quarter It was 40% that we sold and closed in the same quarter, which is slightly higher than we would typically do I don't know that I have I do have last year last year was 37%

Okay, and then Related to that is there any shift in terms of I mean that's where I would expect to see efficiency showing up Talk about if there's anything that you're thinking about in regards to that increase in that percent and talk about the margin spread that your or the trend that you guys have been seeing between the backlog closings specifically the inter-quarter closing units

On the first part can I would say it's pretty much in line with what we would expect Especially with the number of completed specs that we have that allows us the opportunity to sell and close more homes within a quarter So I would expect that trend to continue Last year in the second quarter. We actually sold and closed 45% Homes in the same quarter sold and closed if you look at the Margin differential that stays relatively consistent in that there is a slight differential and a slightly lower margin on Specs than there is build jobs that being said really the only big Differential is on our completed specs that have been completed and unsold for a period of you know multiple months So the earlier we sell it as a spec the tighter that differential is and as a reminder about 80% Of what we close in a quarter started as a spec so when you see that 21% home sales margin We reported this quarter. That's by and large a spec gross margin

Why is that? spec Margin a bit lower First backlog if there's price appreciation. I mean what is that? I mean? What is it that's moving is that you have to discount it that seems? inconsistent with order straight

No, it's that we're underwriting to a return and as we turn our spec housing more quickly than bill jobs We're able to work for a slightly lower gross margin and get an equivalent return in a build job You're actually going to lose the price appreciation if you lock in before you start construction So we like selling more in real time and capturing that margin as we move along the way

a lot of our build job sales are actually Sales of homes that we had planned to start anyway. They were in the production planning process to start They just had not started yet But they were released to sale on the sales floor our average time in in backlog for a customer In a build job is not terribly long because our homes you know generally we're building to an affordable price point homes build Fairly efficiently and so the customer is not sitting for a long period of time going through a large design selection process Lengthy permitting process until we get to start a lot of these homes will be starting You know very soon after they sign the contract So it's a very tight margin differential between it just a traditional spec sale to the marketplace

I Appreciate that and if I could one last question did you guys pull most of your permits in? California to get ahead of the solar mandate. Thank you

You know I don't think so We're responding to the market out there and Certainly the solar mandate is going to increase cost but Pulling a permit and building a house when there's not a market for it Is going to create a whole lot less Return than then pay any additional costs so It's just kind of business issues for us out there

and the solar mandate was we've known about that for several years So we've had the ability to prepare and that's in our underwriting and we knew those costs were coming and is more and more Homes are being built with solar our base case expectation is that those costs will come down

Excellent thank you very much

Thanks, our next question is coming from popcorn from Raymond James your line is now live.

Hey, thanks. Good morning quick question Look our percentage of communities that you were able to raise price on on a same plan basis

But we don't have that information in terms of tracking You know across our neighborhoods, you know We really have empowered our local operators to be looking to meet the market to drive return And that is certainly a function of pace and margin and they're looking to maximize that at every community You know every week every day frankly as looking at what that pace is and that's nothing that we're managing centrally So you know we don't really have the ability to do that color today

when we talk about a lot our revenues per square foot That's a metric people and we've consistently reported and we haven't given that yet today -over-year our revenue per square foot was up about three percent and our stick and brick costs were down about half a percent Sequentially our revenues per square foot and our stick and brick cost per square foot were essentially flat

And switching over to just the multifamily investments Just curious if you could provide any potential quarterly timing of expected sales or closings Or how do you think of potential? Gains on sales from the multifamily division either this year next year. How do you plan on growing that investment going forward?

Sure in terms of timing we expect to close a total of two projects in fiscal 2020 We closed our first one here in q1 We did state that one of our communities is substantially complete and so you know in the process of Stabilizing the the rental situation and marketing it so we would expect to close that one later in fiscal 2020 don't have a specific quarter guide for you on that And then we do expect the investment level in the HCI communities to grow This year we expect it to grow, you know Approximately a hundred percent from the point at the start of the year Over the course of this year as their pipeline is growing and their number of projects will will begin to grow More more more directly over the course of fiscal 2020 which will ultimately Result in some future years, you know delivering more than two a year, but that the lead time the pipeline On those deals is two to three years long So so we're still a couple years out from a significant increase of volume of project sales and DHA communities Super helpful. Thank you

Thanks for that question today's coming from Jay Romani from KBW your line is now live

Thank you with respect to single-family rental and multifamily Do you have any interest of the company have any interest in creating a permanent capital vehicle to hold those assets? In my experience in the REIT sector, you know, the highest valuation is described to continual, you know recurring earnings rather than gain on sale type earnings where You know, it's unpredictable to the market just curious as to your thoughts on that

That's one of the things that we're studying as we as we get further into this business our goals early on has been to ensure that we have a strong efficient operating platform for beginning with multifamily and as we look at the single-family rental space We're looking to do the same thing there and as we get that established we then look to growing the platform and Setting the capital base for it And so as we look at the medium and longer term plans for for setting the capital base for both of those businesses That's certainly something that we will be considering for the longer term

Thanks very much turning to financial leverage was wondering if the total debt to capital at Slightly below 20% is in line with your long-term target or you think there's potentially improvement in that ratio in years to come

Where we are today, we don't expect to to increase our leverage We expect to as we are generating cash and adding to our equity base that our leverage would would not increase from here We could see further decreases our stated maximum leverage is 35% or below But obviously we've got a lot of headroom on that today that that does give us room that in certain certain scenarios We we we would leave ourselves some room to to invest further and increase leverage, but we don't we don't see that in the short run

Thanks very much Thank you, I guess question is coming from Rohit Seth from SunTrust your light is now on

Thanks for taking my question can you give us an update on what's happening with the Freedom Brand any color on that bar segment You

know we continue to work on that Product offering presentation and in a lifestyle it's It's something we're happy with I Think it will be a larger and larger portion of our Deliveries in the in the future it's it's it's a growing demographic and we think we can provide a product and lifestyle that people are going to move into

Would you say are you expecting a ramp in that business in your in your annual guidance or is that annual guys more driven by? That intro bar it's

still the entry-level buyer driving driving the market Freedom brand for us is is part of our long term Meet the needs of as many buyers out there as we can and I think as the market moves it will Become a more and more important part of what we're

doing Understood and then second question on your gross margin guidance 21 percent Can you may break out the cost focus there on you know, what's your labor? cost inflation expectation Material cost and then like

Really just more of the same so it you know modest increases like the labor has stayed in the low single digit percentage range Now that we've kind of cycled through the lumber headwinds that we had Materials we essentially would would expect to be net neutral We always have some categories where costs are going up but our purchasing teams do a fantastic job of finding other categories and To lower our costs and offset what other in whatever increases were not able to Push back on and then land really has been kind of a low to mid single digit percentage increase at least on a on a Per square foot basis and that really is not expected to change either. I mean land land costs are coming down As home prices rise land costs typically follow So really just more of the same in 20 is what we experienced in 19 if you take out You know late calendar 18 and the incentive environment and the lumber costs that we cycled through

Okay, I understand and what is the expectation for tariff the tariff impact or no impact

We've got price protection on on most everything if there is you know a modest Impact from any of the terrorists we've identified ways to offset that

Thank you, and this question is coming from Mark wine trial from Seaport research

Thank you On the you'd mentioned the very positive early returns on spring selling season Was that largely just a reference to strong orders in January or was it other things that color that comment?

The primary thing is the order terms I mean, that's the first read we're getting on on what's coming through and they're coming in at a great Taste that we've expected and we're seeing good seasonal build week to week with that And you know anecdotally we're not hearing about any pushback or or pressure on pricing from the customer side of the marketplace today

Kind of following up on that Obviously is Jessica just mentioned you have a fairly benign cost environment now if As things heat up labor does go higher materials go higher etc Do you have a sense as to what type of pricing power you might have in the current environment? And really I recognize it's always a question of taste versus price, but I guess at some points in time When you try and push price it could have a bigger impact it at other times and certainly we saw that in the last year Or two do you think that we've created a bit more cushion in the environment so that? there would be more leeway on price if Costs start to go up, or do you think we haven't exited that environment?

You know really good about the market conditions We're seeing today and the buyers that are coming in and their urgency to buy So you know I would say we have some cushion to work with in that but but again We're we're not just looking at a margin number it is as a return number as you alluded to before the pace versus price And so driving the community that the plant absorptions we found drive the highest return And then the activity that you get that coming out of buyers seeing activities seeing momentum drives generally some pricing power and some margin expansion Executing at the community level and that's that's really where our focus is and as it's rolling up We've seen pretty consistent margins in the last couple of quarters when we're looking at that in into next quarter We're optimistic about spring, and that's going to tell us where margins ultimately go for this year Okay, great one last one

Where are your thoughts on off-site manufacturing as a way to Potentially mitigate or improve the labor side of things in time

so we have you know a lot of our homes today or Put together with the process roof presses that are manufactured off-site others were doing wall penalizations in certain markets and And it's something we continually evaluate to look at the most efficient from both a time and a cost perspective As to how to deliver the home at the best value to the buyer, so we're always evaluating it We haven't seen a sea change In the economics of that today most of our homes are probably stick framed with trusses Would be probably the broad generalization to say but there are some markets where we still build roots on site Great thank you very very across the country

Thank you our next question is coming from Jamie cameras from what was your line is now live

Hey good morning, I'm just two questions on incentives What are you guys? Doing with incentives now and more importantly, what do you see from your competition?

Pretty stable environment there certainly on a -over-year basis our incentives are down significantly But over the last couple of quarters been pretty stable It's a normal environment where there's usually some level of incentives related to closing costs And and then community by community there could be some specific incentives But but nothing out of the ordinary certainly in our business and really we're seeing a pretty rational Environment across other builders as well not hearing anything of the ordinary.

I'd say the Market is good People are as Bill said performing rationally It it down to be home builder

My second question just talking about what your average lots per community is right now Expecting that trend up just to get the higher -over-year unit closing to talk about the guy

It's slightly trended out here over the last couple of years Jay as our absorptions have improved that does allow our underwriting to Hit our standards and use slightly larger communities So I would say that is incorporated in what we're expecting for fiscal 20 But that's really just been more of the same of what we've experienced each of the last few years Multiple product types and larger communities allows us to drive more absorption. So I don't have our current average lot size or lot count Rough I would say probably 150 200 lots But obviously we've got significant variation in that we've got communities that are 30 lots We've got communities that are a thousand what

some more options some more on there's a big mix there

Thank you our next question is coming from Alex Barron from Housing Research Center your line is now live

Yeah, thanks guys, yes a great quarter they start to the year I Guess I just want to go back a little bit to the to the guidance so the last two quarters orders have been double digits and a little bit off of that was maybe easier comps, but I guess I'm just curious You just you guys just being conservative this early in the spring season Basically giving the single digit or a group guidance or delivery guidance

So Alex and not to be repetitive but really it is a function of Where we sit today the number of houses we have the number of houses we had going into the year We did have a much easier comp this quarter compared to late calendar last year When when the market was completely different of what it is and to remind everyone we heavily incentivized into December And really into the spring to continue Those sales increases that we saw I think we were the only builder in in calendar fourth queue of Had an up Quarter ourselves were up about 3% and that really was just a function of how heavily we incentivized in December to get there So October and November you can read into were very tough months And that led into a good comp this year and 19% up though I mean, it's a good market as Mike's alluded to several times and we feel very good about the market today But we sit here today. We haven't seen the spring going season. We've got five percent fewer houses in the ground So if we're able to push and get a few more starts in and spring stronger than expected there be a little upside Potentially, but so we don't see a whole lot and we did already raise the higher end of our Guidance by about 500 homes

and on balance We're looking at much stronger returns in fiscal 2020 because we're still seeing a good pace even at the guidance level We're seeing a good pace at better margins better returns and a better turn of our inventory This year as well. So we're very pleased with our positioning with with the good market backdrop and with our plan for the year

Got it. And then you mentioned that the best returns come from maintaining sales pace pretty strong So could we read that necessarily to be that you're not speaking to push prices too much to not upset that from sales pace

It depends on the community Alex and it really just depends if we've got another community Replacement community ready to go behind it We're going to most likely push more pace than we are price Because that's the best thing we can do is continue to turn our inventory Generate more revenue and profits in a shorter period of time But if it's in an area of the country where we don't have a replacement community or for whatever reason that community is not replaceable We're going to be more likely to push Price so it's always a balanced community by community

Okay, we see that thanks and good luck Thank you,

thank you. We reach in of our question and answer session I'll turn the floor back over to David for any further closing comments

Thank You Kevin. We appreciate everybody's time on a call today and look forward to speaking to you again in April And to the DL Horton team outstanding first quarter. Thank you for your focus and hard work and We've got a great gear set up. Let's go deliver it

Thank you that does conclude today's teleconference, you may disconnect your line of this time and have a wonderful day We thank you for your participation today