D.R. Horton, Inc.

Good morning. Welcome to second quarter 2020 earnings call for G.R. Horton, American's builder, the largest builder in the United States. At this time, all participants are in a 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 on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Vice President, Investor Relations for G.R. Horton.

Thank you, Sherry, and good morning. Welcome to our call to discuss our results for the second quarter of fiscal 2020 in addition to current market conditions. Before we get started, today's call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.O. 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.O. Horton on the date of this conference call, and D.O. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.O. Horton's annual report on Form 10-K and subsequent reports on Form 10-Q, all of which are or will be filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.deerhorton.com, and we plan to file our 10Q 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 Auld, our president and CEO.

Thank you, Jessica, and good morning. Although we are in different locations while practicing social distancing, 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. We'd like to first express our gratitude to our country's dedicated field of healthcare workers and all who are on the front lines caring for our communities. Our thoughts remain with those affected by this pandemic. And before we talk about our second quarter results, I will address current market conditions while we, along with the rest of the world, navigate through the impacts of COVID-19 on the economy and our business operations. Housing market and economic fundamentals were solid throughout most of the second quarter, as interest rates on mortgage loans remained low, new home demand was strong, and there was a limited supply of homes at affordable prices across most of our markets. However, During the latter part of March and into April, the impacts of COVID-19 and related widespread reduction in economic activity across the United States began to negatively affect our business operations as well as the demand for new homes across all of our markets. We experienced increases in sales cancellations and decreases in sales orders in late March and to date in April as compared to the same period last year. In almost all municipalities across the U.S. where social distancing and other restrictions have been implemented, residential construction, lot development, financial services have been designated as essential businesses as part of critical infrastructure. We have continued our operations in those markets where allowed and have made appropriate adjustments to comply with social distancing and other standards as the health, safety of our employees, customers, and trade partners is our number one priority. We believe we are well prepared to operate in this uncertain environment with our experienced operating teams, low leverage, and a strong liquidity position. We plan to maintain our flexible operations and financial position by generating strong cash flows from our home building operations, limiting land acquisition and land development spending, and adjusting our product offerings, incentives, home pricing, sales space, and inventory levels to optimize the return on our inventory investments in each of the communities based on local housing market conditions. Our team delivered a strong second quarter during this unprecedented time for our nation and while making significant adjustments to our operational practices in March. Our consolidated pre-tax income for the quarter increased 34% to $621 million on a 9% increase in revenues to $4.5 billion. Our pre-tax profit margin improved 260 basis points to 13.8%, and our net sales orders increased 20%. Our home building return on inventory for the trailing 12 months ended March 31st was 20.2%, and our consolidated return on equity for the same period was 19.1%. Mike?

Diluted earnings per share for the second quarter of fiscal 2020 increased 40% to $1.30 per share compared to $0.93 per share in the prior year quarter. Net income for the quarter increased 37% to $483 million compared to $351 million. Our second quarter home sales revenues increased 10% to $4.4 billion on 14,539 homes closed up from $4 billion on 13,480 homes closed in the prior year. Our average closing price for the quarter was up 2% from last year to $300,100, 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 second quarter increased 20% to 20,087 homes, and the value of those orders was $6 billion. up 22% from $4.9 billion in the prior year. Our average number of active selling communities increased 1% from the prior year and was flat sequentially. Our average sales price on net sales orders in the second quarter was $299,700, up 2% from the prior year. The cancellation rate for the second quarter was 19%, flat with the same quarter last year. As we disclosed in our preliminary release, our March net sales orders increased 6% from last year to 6,491 homes, and our cancellation rate for the month was 24%. As a result of the pandemic, our sales orders began to decrease in late March and into April, and our cancellations have remained elevated throughout April to date. Although April is not quite over yet, our net sales orders month to date are approximately 11% lower than the same period a year ago. This month to date, net sales trend may not be indicative of the full month of April because a significant number of our sales cancellations typically occur in the final days of each month. However, we have seen an increase in our net sales order volumes in the most recent two weeks compared to the preceding four weeks. Jessica?

Our gross profit margin on home sales revenue in the second quarter was 21.3%, up 30 basis points sequentially from the December quarter, up 200 basis points compared to the prior year, and in line with our expectations. We remain focused on managing the pricing, incentives, and sales pace in each of our communities during this uncertain environment to optimize the return on our inventory investments and adjust to local market conditions and new home demand. If economic conditions remain difficult and the recent decline in new home demand persists, we expect that our gross margins will decline from current levels. Bill?

In the second quarter, home building SG&A expense as a percentage of revenues was 8.3%, down 70 basis points from 9% in the prior year quarter. 55 basis points of the reduction in SG&A this quarter related to a decrease in the liability for our employee deferred compensation plan resulting from the decline in the stock market during the quarter. Our home building SG&A expense as a percentage of revenues is at its lowest point in our history. and we remain focused on controlling our SG&A while ensuring that our infrastructure appropriately supports our business.

Mike. We ended the second quarter with 33,400 homes in inventory. 16,700 of our total homes were unsold, of which 4,700 were completed. We also had 1,900 model homes at the end of the quarter. We are cautiously managing our inventory of homes under construction and relative to demand in each of our communities by controlling our construction starts of unsold homes and closely monitoring the number of unsold completed homes in inventory. At March 31st, our home building lot position consisted of approximately 330,000 lots of which 36% were owned and 64% were controlled through purchase contracts. 32% of our total owned lots are finished and at least 54% of our controlled lots are or will be finished when we purchase them. David?

Our second quarter home building investment in lots, land, and development totaled $1 billion, of which $460 million was for finished lots, $350 million was for land development, and $230 million was for land. Beginning in late March, we have temporarily stopped our purchase of raw land and we are closely managing all finished lot purchases and development spending. We are also working closely with our third-party lot developers, including Four Star, to adjust the timing of our takedown schedules to match current demand levels. Mike?

Four Star, our majority-owned subsidiary, is a publicly traded residential lot manufacturer operating in 50 markets across 21 states. At March 31st, Four Star's lot position consisted of 52,300 lots, of which 35,800 are owned and 16,500 are controlled through purchase contracts. Eighty percent of Four Star's own lots are already under contract with D.R. Horton or subject to a right of first offer under our master supply agreement. Four Star is separately capitalized from D.R. Horton and has approximately $790 million of liquidity. which includes $440 million of unrestricted cash and $350 million of available capacity on its revolving credit facility. During the quarter, Four Star issued $300 million of 5% senior notes due 2028 and repaid $119 million of 3.75% convertible senior notes in cash at maturity. At March 31st, Four Star's net debt-to-capital ratio was 19.5%, and their next senior note maturity is in 2024. With low leverage, ample liquidity, and its relationship with D.R. Horton, Four Star is in a very strong position to navigate through these uncertain economic conditions. Jessica?

Financial services pre-tax income in the second quarter was $24.7 million, with a pre-tax profit margin of 23.6%. compared to $34 million and 33.5% in the prior year quarter. In late March and April, our mortgage company experienced lower pricing and gains on sales of mortgage loans and servicing rights due to disruption in the secondary mortgage market. Many purchasers and servicers have limited their purchases and tightened their credit standards due to liquidity and operational challenges caused by COVID-19 and the uncertainty of the impact of forbearance provisions from the CARES Act. We are closely monitoring developments in the mortgage markets and are prepared to make adjustments in our operations to adapt to further changes in market conditions. For the quarter, 98% of our mortgage company's loan originations related to homes closed by our home building operations, and our mortgage company handled the financing for 67% of our home buyers. FHA and VA loans accounted for 48% of the mortgage company's 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%. First-time homebuyers represented 53% of the closings handled by our mortgage company, reflecting our continued focus on offering homes at affordable price points. David?

DHI Communities is our multifamily rental company focused on suburban garden-style apartments with operations primarily in Texas, Arizona, and Florida. During the quarter, DHI Communities sold an apartment project in Florida for $67 million and recorded a gain on sale of $28.2 million. This was DHI Communities' fourth project sale, and it was the final sale we were expecting this year. DHI Communities has three projects under active construction and one project that was substantially complete at the end of the quarter. We are continuing lease up and construction of these four projects. but are delaying new acquisitions and deferring starting construction on other projects until we have clear visibility into market conditions. DHI Communities assets total $203 million at March 31st.

Bill? Our balanced capital approach focuses on being disciplined, flexible, and opportunistic. Our strong balance sheet, ample liquidity, and low leverage provide us with significant financial flexibility to withstand difficult economic conditions. and we plan to maintain our disciplined approach to investing capital to enhance the long-term value of our company. During the first six months of fiscal 2020, our cash provided by homebuilding operations was $52 million, compared to $216 million of cash used in the prior year period. At March 31st, we had $2 billion of homebuilding liquidity, consisting of $1 billion of unrestricted homebuilding cash and $1 billion of available capacity on our home building revolving credit facility. Our home building leverage improved 370 basis points to 19.2%. The balance of our home building public notes outstanding at the end of the quarter was $1.9 billion, and we have $400 million of senior note maturities in the next 12 months. On March 31st, our stockholders' equity was $10.5 billion, and book value per share was $28.77, up 15% from a year ago. For the trailing 12-month period ended March 31st, our return on equity was 19.1% compared to 17.6% a year ago. During the quarter, we paid cash dividends, $64 million, and our board has declared a quarterly dividend at the same level to be paid in May. We also repurchased 4 million shares of common stock for $197 million. Our outstanding share count was down 3% year over year we plan to cautiously manage our level of share repurchases in the near term to maintain financial flexibility until we have better visibility to future market conditions and our expected operating results. Jessica?

As we mentioned in our press release, we have withdrawn our previously issued fiscal 2020 guidance due to the current uncertainty in the U.S. economy and our business operations resulting from COVID-19. We expect to provide new annual guidance when we have clearer visibility into our business and market conditions. David?

In closing, our results reflect the efforts of our dedicated operational teams who continue to provide homes to families across the United States. We are well positioned to effectively operate in this uncertain environment with our experienced team, industry-leading market share, broad geographic footprint, and diverse product offerings. Our strong balance sheet, ample liquidity, and low leverage provide us with significant financial flexibility. to withstand difficult economic conditions, and we plan to maintain our disciplined approach to investing capital to enhance the long-term value of our company. Thank you to the entire Dior Horton team for your focus and hard work. Your efforts and positive, caring spirit during this unprecedented time have been remarkable. We are proud of your work ethic and creativity in finding ways to safely continue helping our customers close on their much anticipated new homes. This concludes our prepared remarks. We will now host questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question and then recue for additional questions. Our first question is from John Lovallo with Bank of America. Please proceed.

Hey, guys. Thank you for taking my call, and I hope everyone is doing well. First question is, can you just help frame the magnitude of the improvement in order activity over the past two weeks, maybe on a year-over-year basis? I mean, are we talking about kind of down mid-single digits? Is it closer to flat year-over-year? Any color would be helpful.

John, this is Bill. We're not commenting on specific weeks. From week to week, sales, you know, gross sales, CAN activity, net sales can be quite volatile. So, we provided our commentary on a month-to-date basis because we feel like that's the most representative information that we can provide. We did indicate that our cancellation level has remained elevated into April, which obviously affects net sales as well.

Okay, I understand. And then maybe just in terms of the order decline in April, Were there any particular regions that stood out maybe on a positive or on a negative basis? And then in the regions that are starting to open up in some of these states, are you guys doing anything different in preparation there?

Good morning, John. This is Mike. We've seen probably Texas and Florida hold up pretty well, but I would say every market is down and down fairly consistently outside of Texas and Florida. It's been a pretty broad-based impact.

Got it. And then are you guys doing anything different in some of the states that are planning to open early?

Well, fortunately, as we mentioned in our prepared remarks, residential construction has been designated an essential business as part of critical infrastructure. So we really haven't been heavily impacted in terms of shutdowns. The biggest place we would have been impacted is Seattle, since the state of Washington did not – consider residential construction as part of an essential business. The state of Washington was about 3% of our closings in calendar 2019. And then the other areas that have been, you know, quote, shut down for construction has been the Bay Area, New Jersey, and Pennsylvania. And when you combine those with the state of Washington, we're still only around 4% of our closings last year. So really the biggest impact has more been on just the ability to interact with consumers face-to-face. as we want to make sure we comply with social distancing protocols. So a majority of our offices, our sales offices, are by appointment only. Our trades are limited to one trade per job site at a time, among numerous other new operational protocols we've put in place, which has slowed our build cycles and impacted the business. But by and large, the true shutdowns have happened mainly in markets where we don't operate heavily.

Thank you, guys.

Our next question is from Carl Richard with BTIG. Please proceed.

Thanks very much. I hope everyone's safe and well. My first question is on pricing and incentives, and maybe you could talk generally, Abe, or whoever would like to, about generally how you're looking at pricing and incentives now, where you've adjusted, what kinds of price and incentive adjustments you've made, and how consumers are responding to them.

Oh, this is David. We are responding, I guess, community by community. We've kind of reset expectations on absorption, rerun pace. Again, it kind of gets old saying, but to me, it's a flag by flag operation. You've got to maintain a certain level of pace. And we adjust the incentives to maintain that pace. So reality is Texas, Florida have held up better given all the constraints. And really after the shock of the first couple of weeks, our people out there have kind of got a rhythm and figured out how to sell houses. And, you know, all in, from my perspective, things are better than I was concerned they might be.

Thanks, David. And then as a follow-up, can you talk a little bit about construction cycle times, if your supply chain has struggled at all? From a labor flow perspective, we've heard mixed things about labor availability, obviously social distancing making it harder to get houses up. And then, of course, inspection delays, things like that. Maybe what percentage of your cycle times increased if they have in terms of sort of start to see about. Thanks a lot.

Thanks, Carl. This is Mike. We haven't really seen a lot of the cycle time changes coming through in the data yet because these are fairly recent operational changes that we've made in the field, both ourselves and a lot of our governing municipalities with the cadence of inspections. So we'll let you know as we see those trends develop through the quarter what they actually work out to be. I've been very impressed with our teams and their ability to keep each other safe and respond to demand for housing and be out there building with labor. We see a lot of our labor on site wants to work. We've not had a – seeing lots of labor shortages at all. I've not been able to travel like I normally have, so I haven't seen as much coming into this call as I would have in prior calls. But driving the Dallas-Fort Worth markets, I've seen a lot of activity, the trades, a lot of signage around in our neighborhoods and other neighborhoods about maintaining social distancing and seeing a lot of our labor activity being executed with people not heavily congregating in the streets or on the job sites. So I've been very pleased with that. and very pleased with the pace that we've been able to maintain in our communities.

Thanks, Mike.

Our next question is from Stephen Kim with Evercore ISI. Please proceed.

Yeah, thanks a lot, guys. Appreciate all the information, and likewise, hope you guys are staying safe. David, I wanted to follow up on the comment you made about how the tone of business thus far has been a little bit better than you would have initially feared it might be. and your indication that orders improved in the last two weeks prior to the previous or relative to the prior four weeks, is it fair to say that what you have observed is that this increase was not driven by pricing actions but by something else? And if the latter, what do you think that surprising strength was related to?

Yes, Stephen, I, like everybody else, was a news junkie when this thing first broke. And you turn on the president's briefing, and the world's going to end. And so you kind of get hunkered down mentality. And as news has come out more and more and more, you know, it just, you get a sense that it's not going to be as bad as the initial thought might have been. And the, you know, the key, I guess, to me, there's two things that really separate us from everybody else. It's the people we have out there representing the brand, and then it's just the price points. And, you know, People want to be in a house right now. And by being affordable, we have more opportunities to put them in a house than our competitors. So that to me is probably the, the mood of the country seems to have improved significantly over the last 30 days. And our ability to kind of manage the process through systems and communications and just being more comfortable, I think, has given us a lot of opportunity to make things happen. I mean, this is unprecedented times.

No doubt. But it's certainly encouraging that you're seeing what you're seeing, even in advance of many parts of the – well, almost any part of the country really opening up, which I guess began this past weekend. My second question relates to cancellations. In sort of tempering your commentary on the orders and proving you mentioned that cancellations tend to be clustered in the last few days of the month, I was curious if you could give us a sense for roughly how much of the cancellation activity occurs in those last few days. Are we talking like three-quarters of your monthly cancellations occur? Are we talking more like 25%? Just dimensionalize that for us a little bit. And in general, are those cancellations that you have been seeing, the degree to which you have been seeing them already, are they tied to mortgage credit standards tightening, or is it tied to something else as far as you can tell?

I think it's just timing. You know, everybody wants to – our sales agents want to see people close. The buyers want to close. You push through on the credit to get to a closing point, and – In this industry, the majority of people close the last week of the month. When you're bringing everything to the point of closing, things fall out. Whether it's a cancellation or a push to the next month, that tends to happen. The percentage, I don't have any idea. We have been very purposeful in making sure that our buyers in our backlog are going to be in a position to close. Historically, that number may be 15%, 20% the last week. I don't know, maybe a little more. That's just not anything I track. Go ahead, Jessica. Sorry.

And clearly right now, you know, it's always true that more happen at the end of the quarter, but we're anticipating there could be even more right now due to the current uncertainty in the market. Typically the main reason people cancel is because they can't ultimately qualify for the mortgage. So are we going to have some fallout because of tightening credit standards? Potentially. I think the bigger driver right now is just job loss and loss of income certainty. And so there's a lot of buyers that are canceling. because of some sort of impact of COVID-19 that's out of their control. And so I think that's the main driver for us putting that cautionary language in there, is there are still a few more days in April, and we just don't know.

This is a phenomenon we do see every month, and we saw it at the end of March. We did see it at the end of March. So there was definitely a higher level of cans around the last days of the month of March.

And David touched on it before, is that most homebuyers are trying to schedule their home closing towards the end of the calendar month because of the way their prepaids and the escrows are funded, it reduces their out-of-pocket cash requirement. And so the outside realtors often advise that. So we see more of our closings in a given month trying to be scheduled by the buyers and their realtors for the last week of the month. So as you bring those things together at the end of the month, that's when you find out you might have had an outside lender who could not get mortgage taken care of or something happens. A lot pushes all at once. And so That's why we added the language to the press release and to our commentary this morning.

Yeah, that's encouraging. That's very helpful. I mean, I suppose it's encouraging that the credit standards have already tightened, and hopefully they don't tighten a whole lot more from here, which would obviously help. But that's a very great caller. I appreciate it, and good luck with the rest of the quarter.

Thank you, Steve. Our next question is from Alan Ratner with Zellman & Associates. Please proceed.

Hey, good morning, everybody. Thanks for all the info. Glad to hear everyone's doing okay, and congrats on the strong performance so far in this difficult environment. My first question, historically, specs have accounted for, I think, about 70% to 80% of your sales, just in terms of that level of homes that started as a spec home. You might have sold it at various points of the construction. So I guess I'm a little bit curious how your spec starts have been trending. First, I guess, is there any reason to think that that percentage might move lower here, just given some change in strategy that you guys might be imparting on? But the question is, how much are your starts down year over year for April? Because that, I guess in my mind, should be a fairly good leading indicator of what future order activity might look like.

We don't have the April starts month to date number here with us. We can probably follow up with you on that or certainly by the end of the quarter we'll be putting that information out for the starts. But we're managing our spec strategy the same way we always have. It's at a community by community level, measuring demand in that community and looking at what inventory is available today, the construction status of that inventory and seeing what needs to be available for those buyers in that given community. And so that's a very local decision that our teams are making on a daily and weekly basis. It's nothing we're anticipating changing at this point in time. We are obviously looking at what we would call a build job, making sure that that buyer is still committed to the home before we start the house. If there's anything unusual with that house that it wouldn't otherwise be acceptable as a spec, if something happened to that buyer contract, we'd be happy to have that home in inventory to sell to another buyer if need be. That happens from time to time as well.

We would anticipate the 70% to 80% that you referenced not changing. What we have done is slow our starts pace to match the reduction in current demand levels, and we'll continue to make those adjustments community by community.

Got it. Yeah, that's what I was trying to get at is if that slowing of the starts, you know, it's tracking, you know, call it somewhere down 10% to 15% kind of what you're experiencing on the orders or if for some reason – It's coming in lower than that, but you can follow up with me on that if you don't have the data handy. Second question, if I could, just on the mortgage data you guys provided. I'm curious if you have any additional granularity there. We've heard some tightening, specifically on FHA VA, which is about half of your business below certain FICO scores, whether that's 640, 660. I'm not sure if there's a magic cutoff from the investors you're dealing with, but Do you have the percentage of your business that falls below, say, a 660 FICO score? And does the piece of your business that your mortgage company does not capture, the 30% plus, does that profile look any different?

I don't have insight to the outside mortgage company, but when you look at our inside mortgage company, we've been running about a 720 FICO score on average. And even our express buyer has been around 700 to 710. So do we have some buyers that fall in the band you're talking about? Sure. But it's not a large piece. And typically our mortgage company does a fantastic job of when those credit overlays and changes in terms of FICO scores happen, working to figure out a different mortgage product to get that buyer into. So it's not generally 100% fallout, although there can be some fallout.

Got it. That's helpful. Thanks, guys. Good luck. Thank you, Ellen.

Our next question is from Michael Renaud with J.P. Morgan. Please proceed.

Thanks. Good morning, everyone, and congrats on the results so far, and also hope everyone's safe across the DR Horton organization. The first question I had was trying to look at or backtrack think about the April results from a different angle. Obviously, very encouraging in terms of the down 11%, even with perhaps even a higher can rate in the last few days expected. You know, when you think about that relative to, you know, competitor reporting last week in terms of a sharper fall off in April and other companies talking about you know, even more challenging March quarter. So I'm trying to get a sense. I was wondering if you could comment around, you know, how you guys are operating or perhaps how you're positioned, um, that, that has allowed for the better results versus, you know, several of your peers, um, be it, you know, price point, or you had also mentioned, um, you know, that if the current demand level persists, you know, you'd expect gross margins to contract. I'm curious if, you know, the relative outperformance versus some of your peers and some of the stats is driven by, you know, existing, again, price point or, you know, geographic exposure, or if you have made some more aggressive adjustments in your, you know, pricing or incentives. That's my first question.

Thanks, Michael. I completely appreciate the question, and I will say that I am most impressed, as David mentioned before, the teams of people we have out there that are operating, that are empowered to make decisions at the local level, and they're generally operating a business model that has inventory on the ground. It has specs, quick move-in homes that are available, and we're seeing – a buyer come to us that may have been looking for an existing home, and that's a very challenging transaction to make happen today. And so we're seeing some benefit of that and working with our realtor relationships, able to execute against that and bring those buyers to a new home situation where we have inventory on the shelf, ready to go. As David mentioned before, we're generally positioned to be an affordable option for the buyers in the markets. And finally, we're very encouraged. by the level of activity we've seen in the more recent weeks in April, and that there are people out there that want a home and are able to qualify to get in their contract for this home, and very enthusiastic, as we see in watching our social media, as those buyers are super excited about the home they're able to acquire at this point in time.

In terms of incentives, which I think was the other piece of your question, we have started utilizing just the typical incentives we would in a period of market weakness. So generally that will include higher co-broke commissions, more dollars towards closing costs if you use our internal mortgage company, and then just the array of ploys that our marketers come up with in terms of free fridge Friday, throwing in backyard landscaping, a lot of different things that they can just repackage from week to week to where it's not necessarily a bigger hit to gross margin down the road. but it drives buyer urgency to get a different incentive out there from week to week or month to month. So we have started to utilize a slightly higher level of incentive because of the market weakness, but that's what we would typically do in this kind of environment.

And oftentimes that's very helpful to energize and motivate our internal sales agents in their activity and their outreach program. So that's one of the reasons we would generally do activities like that.

No, that's helpful. And, you know, again, clearly, you know, your relative performance is impressive either way you look at it. So congrats on that. I guess the second question, also perhaps along these lines, but from a different angle, is, you know, Four Star, as you alluded to their results in your prepared remarks, you know, they reported last week, you know, one interesting data point that they had was, you know, roughly only about 150 lot deliveries in the month of April or so far in April versus, you know, a rate of 650 to 700 in the February-March months. And so, you know, obviously that kind of points to a much sharper fall off, you know, similar, more similar perhaps to some of the other competitors that I alluded to before in terms of the the fall off in order pace that they had been seeing. So I was just kind of curious. I was hoping perhaps you could reconcile, you know, how your, you know, April results have held up, you know, much better than that. You know, obviously as D.R. Horton is the major, you know, overwhelming customer of Four Star, if they are, If you guys aren't seeing that type of a degree of magnitude of fall off, why has the four-star lot deliveries fallen so much more dramatically?

Sure, Michael. This is Bill. It's really a matter of timing. And as Four Star pointed out on their call, they're working with each of their builder customers. Obviously, we are the majority of their deliveries right now. And it's a matter of sitting down community by community, looking at the inventory levels of lots that the builder currently has, looking at the revised expectations of pace, and then determining the timing of what takedowns need to be adjusted to. And so for the first few weeks post the change of the market conditions, It's really a matter of I think everyone hits the pause button for just a short period of time to reassess. And so pushing out takedowns will most affect the first month. And I think that's where Four Star is. But as we've worked through our adjustments, we would expect that their takedowns would become more steady going forward. And it's going to be community by community, really, as we work our way through this. So there is a timing difference on that. on lot purchases relative to home sales, but ultimately to the extent that we're delivering, we're purchasing most of their lots. So ultimately four stars pace will ultimately, you know, match or start to approximate Horton's after a period of time.

Any of those adjustments and delays related to a change in strike price for those lots, or is it more primarily driven with a degree around, you know, timing of the takedowns?

It's primarily timing. That's the initial adjustment is to adjust to the pace community by community. So it's the vast majority of adjustments are all in timing.

Great. Thank you very much.

Our next question is from Truman Patterson with Wells Fargo. Please proceed.

Hi. Good morning, everybody, and thanks for taking my questions. I'm glad to hear you all are safe and healthy. First, on SG&A, you know, you had a very good number this quarter, great control. Could you just run through the drivers of this? And then also, you know, looking forward, how are you all planning to adjust headcount going forward or whether or not you are planning on adjusting any headcount?

As Bill indicated on the call, the main driver of our year-over-year improvement, SG&A was down 70 basis points. Fifty-five basis points of that was due to a decrease in the liability for our deferred comp plans for our employees resulting from the significant declines in the stock market this quarter. So really only 15 basis points of the improvement was true leverage from the improved volumes we've seen in the market. And then I think Mike or Bill is going to chime in on your other question.

On the headcount stream, I would say that we are continually looking for ways to be as efficient as possible in the business. Right now, we don't have any broad-based layoff or headcount adjustment plans. We're responding to what we see in demand in the marketplace, and we will continue to do that market by market. Our most important asset are the teams and the people that we have out there in the field, and we've done a lot of work over the past year 12, 15 years positioning the company to be prepared for whatever economic situation that we're forced to navigate through. And our people are the most important part of helping us get through all this.

We have in the near term instituted a hiring freeze just during the current market uncertainty.

Truman and I, as you well know, we're a very overhead conscious company and we're at actually the lowest point in our history in terms of SG&A as a percentage of our revenues. And so clearly we know how to manage our overhead relative to our revenues. And as we see where things go on a local basis moving forward, you can count on us to manage it well.

Okay. Okay. And then just jumping over to capital allocation, you know, you guys have a billion in cash, two billion in liquidity. You know, assuming that the market just stays down and, you know, that we'll call it 10% to 15% range moving forward, Do you think you'd be able to, you know, restart the share repurchase in relatively short order? And then also jumping over to the M&A environment, you know, I realize that's probably too soon, but have you seen any increase in, you know, potential deal flow or any kind of distress builders out on the market?

I'll start with the share repurchase question, Truman. As we stated, we are cautiously managing that. It's too early to say exactly when or how we might be able to address that going forward. Base case, we would not expect to repurchase any shares in our third quarter as we assess market conditions and we see how things progress. But we do expect to maintain a balanced capital allocation over the long term, and we are focused on investing in our business, maintaining a strong balance sheet, maintaining a flexible position, and still delivering strong returns to our shareholders.

And then, Truman, to the comment on M&A, I do believe it is still a bit early in the situation to see any opportunities that may present as a result of the most recent market change. But we continue to evaluate opportunities generally with smaller private builders that are complementary to our platform in various markets or product offerings. But we'll continue to evaluate opportunities as they present. It's nice to have the capital to make those decisions to invest in the business.

And I'll just add, you know, even though we're very happy with what we're seeing today, these are uncertain times and nobody really knows what the ultimate impact of all this is going to be. And being in a very liquid, deleveraged, de-risked position, I think will afford a lot of opportunity for, in the event, you know, there is distressed situation out there down the road. So we're looking at liquidity. The leverage has a very strong competitive advantage for us today.

Okay. Thank you all. I appreciate that.

Our next question is from Matthew Boulay with Barclays. Please proceed.

Hey, good morning. Thank you for taking my questions. I hope everyone's well. Thanks for all the detail. So I wanted to ask on the construction labor side and maybe thinking a little more medium term, I think there's sort of a debate out there around, you know, perhaps increasing availability of labor, you know, that could emerge in the coming months as industry volumes come down and, you know, perhaps there's a wider pool of labor just given the unemployment situation we've seen across the market. What are you guys hearing on that front? You know, are you seeing the subs perhaps trying to attract additional labor here? Just how are you thinking about whether that labor tightness we've seen over these past few years will continue? Thank you.

Matthew, as you mentioned, if there's a reduction in the activity level of the industry broadly, that would create more labor available for the remaining starts that are out there. And then obviously if unemployment levels stay at elevated rates, that would create the opportunity to attract more people to the construction trades if they are, as builders, are starting homes. So We've seen adequate supply of labor largely from our long relationships and large market positions. We've not been heavily constrained with our labor, and I expect that going forward we'll continue to be able to partner with those people. And perhaps, you know, with additional labor available to us in a given market, we can create some other efficiencies for us.

Okay, understood. And then... I wanted to follow up on the orders month to date, the down 11%. Any sense of how that shakes out by buyer group, and I guess specifically what you're seeing with the entry-level buyer through all this?

You know, it's really been across the board in terms of reductions in demand, so a little too early for us to parse exactly if there's one buyer type that ultimately is going to be hit harder by the overall impact of what the whole world's going through right now. Right now it has just been broad-based declines in demand across all price points and buyers.

All right. Thanks again, everyone.

Our next question is from Susan McElary with Goldman Sachs. Please proceed. Thank you.

Good morning. Good morning. My first question is just can you talk a little bit to what you're seeing in terms of input costs Have you seen any deflation maybe coming through, or how are you thinking about that as you look over the next few quarters?

Susan, our team has done a really good job of keeping control of the input costs for materials especially. We've seen our stick and brick costs per square foot basically been flat as a percent of the revenue sequentially and year over year this quarter. And so with that, we've been really good. We've got national agreements in place with

significant portion of our manufactured materials that have been able to give us you know very strong pricing in the marketplace but we've not seen any significant deflationary effects come through yet okay thanks and then you know looking a little bit further out perhaps thinking about what's going on on the ground do you expect that there could be a shift or a material shift in your buyer segments and the breakout of the business, and what could that potentially mean as we think about maybe the margins and some of the trajectory on that going forward?

See, we're just going to continue to focus on homes at affordable price points, so that doesn't necessarily only mean entry-level buyers. We want to make sure we have an affordable or at least a value-priced product offering that across our entire family of brands. I think a core piece of our business will always remain the entry-level first-time buyer because there's just such a big population. And clearly, the more affordable you can be, the bigger that pool is of potential buyers. So really, the focus for us isn't necessarily a specific demographic or buyer type. It's just being affordable across multiple price points and product offerings.

Okay, thank you.

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

Good morning. Thanks for taking my questions. First question, just on the lending side, I think, David, you mentioned kind of purposefully managing the backlog with respect to just getting visibility on the ability to close, but at the same time, you know, everyone's pushing and invested in taking it as far along and as close to the finish line as possible. And I think, Jessica, you mentioned that job loss or income uncertainty has been the main driver of cancellation so far. But when we think about the three buckets of kind of broad issues, you've got job loss, you've got income loss or DTI issues, and then you've got the other credit standards. Maybe you'd bucket those slightly differently. But When you think across those, what percentage of your backlog have you been able to actively verify all three of those buckets or all necessary closing conditions at this point?

Yeah, Mike, this is Bill. We're probably not going to have specific percentages on that. We do turn our backlog rather quickly because our backlog conversion rate was over 100% this quarter. So we do see fairly quickly with our spec strategy We're selling homes during the construction process. We're getting to a scheduled closing date probably relatively quickly. And so we're essentially six weeks into this change, this significant change in market conditions. We believe we've probably worked through a very good portion of the backlog. And as we work past the end of the month of April, I think there's another step in that process where we'll see really an appreciable move in terms of scrubbing the backlog after we really get past the month of April, I would say largely, we will have a pretty good feel for where we stand with our backlog because a lot of our contracts in backlog at that point will have been entered more recently, not 100%, but more recently. And buyers who are signing new contracts after the beginning of the pandemic are probably looking at things a little differently than those that were in backlog prior to.

Okay, thanks. And my follow-up question, still on the lending side, when we look at mortgage loans held for sale, those are up over 70% year-on-year on the balance sheet. And clearly, you know, revenues are only running up, you know, 10% for the quarter, potentially lower going forward. So can you explain that differential? Are you effectively underwriting more risk or balance sheeting more risk in order to get loans done today? Or what else explains that move?

No change in those factors, Mike. Our volume increase on the home building side is one factor. Also, our mortgage company is now capturing their capture rate of mortgages in the builder business has increased significantly over the last year or so. And so the mortgage loans held for sale, the mortgage origination volume by our mortgage company is up significantly. much stronger than actually our home building revenues.

Yeah, at this point in April, we've effectively sold all of our March loan originations from the mortgage company. So no change there. Servicing and loans.

So the data point on the capture rate, today their capture rate for the second quarter was 67%. I think that might be the highest quarterly capture rate we've reported for the mortgage company. They've been actively working to capture more of the builder business. So that's been purposeful, and that compares to only a 56% capture rate last year at this time.

Okay, got it. So to be clear, I guess you are not underwriting any loans at this point that would not be eligible or from a practical standpoint can be sold into the secondary market with current standards?

Correct. We're continuing to underwrite virtually everything is agency eligible.

Okay, great. Thank you.

Our next question is from Ken Zimmer with KeyBank Capital Markets. Please proceed.

Good morning, everybody.

Good morning.

Good morning, Ken. So, Jessica, can you guys talk about how many of your orders in 2Q were inter-quarter closings? And if that shifted, and if you have it for April, that would be great. But if you saw something shift in March versus that overall quarterly rate,

I don't have it for the quarter, or I don't have it for March or April specifically, Ken, but for the quarter, we sold and closed 48% of our homes in the same quarter, which was up from 40% sequentially and up from 45% year over year. So, you know, we did have a very strong backlog conversion rate, which is why you would anticipate that to have been more sold and closed in the same quarter this year than last year at this time.

Yep. So the reason I asked that question is, and the trend seems to be that you closed more based on what you just said. Therefore, your pre-build approach, which obviously helps to turn your assets faster, also allows you to compete with the existing market. So my question is, with your 33,400 units under construction, being that you're in 2Q, done with 2Q, historically, you close about 95%, give or take a couple points, of your under construction over the next six months. Therefore, it seems, and your comments don't seem to be that closing is the issue. You haven't really talked about a lot of construction delays, though, Michael. So it seems like, I understand you pulled guidance. So would your concerns more be about margins or... I mean, you have your units under construction, so is it just, David, is it just that the demand might disappear, or, I mean, is it just that it's so wise to not offer guidance and then potentially miss it? Because, I mean, you have these units under construction, and it seems like your closing units you've finished. So where's the real volatility, you think, in your normal cadence of closings disappearing versus margins versus demand fading?

I would just say that this has been an unprecedented event taking place, and we're managing through the process and responding to what we see. So far, I would say it has been a better environment, I think primarily because of the way we are positioned with inventory and with the very creative and creative energized sales force out there. And as we get more clarity, as we get more clarity, I think we will probably share that with you. But, you know, it's just an unprecedented time.

Yeah, no, I think it makes sense. It's just that it seems, though, your closings won't be off that much, given you already have these units under construction and you're still closing a lot of units. And, you know, with your pre-built model, it helps. So totally understand that. Thank you very much for your time.

We have reached the end of our question and answer session. I would like to turn the conference call back over to David Hall for closing remarks.

Thank you, Sherry. We appreciate everyone's time on the call today and look forward to speaking with you again in July. And to the DR Horton team, stay safe, stay strong. You are proving once again you are the best in the industry. Don Horton and the entire executive team, thank you for all you do every day. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.